I was shocked when I read the news about the rumor that the Chinese company Lenovo is likely to remove the 'IBM' logo from all Thinkpad laptops. (The logo "Thinkpad" will still be kept). Indeed today's PC industry is experiencing a dramatic change.  As IBM has transformed its core businesses from traditional PC hardware to offering integrated I.T. solutions and companies like DELL is struggling to maintain its postiion in the PC selling industry, it is worth considering the rational behind the changing trend in global PC industry.

Cost Factors

The set of cost factors taken into account can be complex, but these can be grouped into three broad categories for better understanding. These are: production costs, depreciation, and logistics costs. These cost dynamics often conflict; for instance, depreciation costs can be reduced by air shipment, but this increases logistics costs. The decision about where to locate requires optimization across these cost factors.

Production cost

Production costs are the direct costs involved in manufacturing, including land, labor, materials and utilities. Assembly operations, whether PCs, printed circuit boards, hard disk drives, or semiconductors, tend to be labor intensive, although there are degrees of automation in each o those activities. Labor costs are becoming a bigger share of PC production costs as PC prices decline in concert with falling components prices. To illustrate, for a $2000 PC (in the early 1990s), assembly costs were $50, or 2.5% of total costs. On a $1000 PC (the typical price today), if assembly costs are still around $50, that figure now represents 5% of the total (Curry and Kenney, 1999). Therefore, reducing assembly costs now has a bigger relative impact on overall costs, so there is more pressure to take advantage of lower-cost labor or to improve labor productivity.

Depreciation cost

Some parts of the PC have extremely high rates of innovation. Moore’s Law is well known, and reflects the rapid improvement in semiconductor performance, driving microprocessors, DRAM and various other chips. Similar performance gains are seen in hard disk drives. PCs incorporate ongoing innovation in components, and thus also have a high rate of depreciation. Depreciation costs are reduced by increasing inventory turnover within the plant and distribution channel, and also by reducing the time that products spend in transit from one location to another.

Logistics costs

It is possible to minimize depreciation costs, and to take advantage of low cost production locations by using air shipment, which can reach anywhere in the world in a few days. However, air shipment is much more expensive than shipment by truck o  by sea. Whether it is viable to ship by air depends on the value of the item relative to the cost of shipping it. The actual cost of air shipment is determined by weight or volume of the shipment, and distance shipped. Another factor is the availability and cost of shipping services. Semiconductors, disk drives, and even laptops can be shipped by air, as their value is very high relative to their size and weight.  Desktop PCs, motherboards, and some other components and peripherals might be shipped by air as well, but the shipping cost relative to value is higher.

Market Access

Selling PCs in a national or regional market generally requires a local presence. Vendors need to understand local market preferences and tailor products to local demand, as well as to provide local sales and marketing, distribution, and customer support services. In many markets, these functions are carried out by a local sales office, or through distribution and service agreements with local partners. In other markets, it is necessary to have more a more extensive presence to compete with local vendors or to surmount various trade barriers.

The cost of selling in a national market depends on the level of tariffs, taxes and various nontariff barriers. If tariffs are high, it may not be competitive to export to a country if there are other vendors producing locally. Some non-tariff barriers also require a local presence to circumvent. For instance, government agencies may not be willing to buy imported products if locally-made alternatives are available. PC makers are likely to simply bypass small markets with high costs of market access.

Remaining ideas

While undertaking production in the local area, the quality issue in the eyes of local consumers is becoming a problem. Although being a Chinese person, I will be more inclined to say that Lenovo still has a long way to go. There has been many cases in which Chinese consumers complained about the decreased quality of IBM laptops after the global giant sold its PC business to Lenovo. This reveals the ongoing debate in the business world i.e. quality v.s. cost.  On the other hand, cultural issues must be taken into account. It could be argued here that the reason why Dell is less successful in China than in the West is largely attributed to the shopping behaviour of the Chinese. Put it simply, Chinese people still have doubt in mind regarding online shopping, "try it out" before making the purchasing decision is common. In some rural areas, the poor I.T infrastructure may even prevent people from undertaking enjoyable online shopping experience (Things are changing though)

Dell's chosen location in Xianmen, known as Marco, is because it is close to the rich cities in the south, including HongKong. However, Dell forgot that the large size of the country and the growing number of PC and laptop dealers in major cities and provinces have offered too many low cost and time-saving alternatives. Some Chinese just don't have the patience to wait for Dell to delivery from Marco to their home. Instead, going to a local shop, experience the product and then take it back home is more favourable. Althought e-commerce is growing in China, selling the equipment that allow people to connect to the Internet online has some difficulities. Dell's online direct marketing model is facing challenge, whether or not to follow the footstep of IBM by moving to the "soft" aspect of I.T.is Mr Dell's choice, or could it be a matter of time.

No more IBM logo??? Think they'll lose lotsa customers then...cos i think most ppl buy Thinkpad cos of the IBM branding...well...we'll see...btw, nice blog u have here...keep it up....