Now that the federal government has given its approval for IBM to sell off its x86 server business to Lenovo, the Chinese firm has a considerably challenge ahead of it in becoming a global technology player.
Lenovo broke into the U.S. market with the purchase of IBM's PC business in 2005. For a while, it seemed like Lenovo was fading out, but a dedication to hardware design and solid products have made it the top-selling notebook vendor worldwide.
It had a little help; HP imploded and is slowly getting its act together under CEO Meg Whitman. Dell went through a lengthy process of trying to go private that shook confidence in the company. Both companies are doing better now than before but they have lost a lot of ground to Lenovo in the process.
It's unlikely Lenovo will get the same benefit for its server business. HP and Dell are back on the ball, mostly. Lenovo's ace in the hole, though, is IBM. Already IBM sells Lenovo hardware to its clients, which has been a big boost to Lenovo. Having clients and servers just makes for package deals.
However, there is likely to be some uncertainty around Lenovo. Some people may not be keep on buying servers from a Chinese vendor. That's why the DoJ held up the deal in the first place. And the change of ownership isn't guaranteed to be smooth.
"In the near term, I'd argue that this deal creates opportunity for Dell and HP. This is because any uncertainty among partners and customers with regard to technology roadmap, support, etc. creates a potential stress point in the market which could drive some change in brand. This is particularly true in the public sector where buying American technology is a priority," Matt Eastwood, a research vice president with IDC told me via e-mail.
But, he added that once the dust settles on the deal, Lenovo "will give HP and Dell fits in the broader market. This is because Lenovo will focus much more energy on the high volume rack and tower market where IBM never really did because of margin concerns. So Lenovo, as a high volume, low margin competitor, has the opportunity to reshape the server market."
I know for a fact that Lenovo has been able to compete with Dell and HP on price because it can go lower on margin for the purpose of winning business. HP and Dell have set a bottom margin of around 5% for their laptops, while Lenovo is willing to go as low as 2% to get the deal. And it worked. If they do that with servers, HP and Dell are in for a world of hurt.
Plus, there is a secret weapon up Lenovo's sleeve (besides IBM): smartphones. Lenovo exited the smartphone market in 2008 to focus on PCs, then re-entered it in 2012 and quickly became the number one vendor in mainland China. Plus, it purchased the Motorola business from Google this past January for $2.91 billion (after Google paid $12 billion for it, although that was to get the patents). Plus, it launched a tablet line, running Android, this past April. It's too early to say what's become of that.
Lenovo, through IBM Global Services, will be in a position to offer firms clients, servers, tablets and smartphones in one package deal, something no other vendor will have. And unlike Samsung, they don't hate Google and Android and they aren't flailing around with a failed alternative OS. That has the potential to be very, very potent.