IBM sought a China partnership, not just a sale

In July 2003, Sam Palmisano, the chief executive of IBM, traveled to Beijing to explore the sale of the company's personal computer business. But he did not start by making the usual visit with executives of IBM's preferred partner, Lenovo, China's largest personal computer maker.

Instead, Palmisano first engaged in a bit of old-fashioned courtship. Before formally approaching Lenovo, he sought permission from the parents, by meeting privately with a senior Chinese government official in charge of economic and technology policy.

IBM was not merely looking to sell its PC business, Palmisano told the official, but had bigger aspirations of creating a global enterprise, with IBM contributing technology, management, marketing and distribution.

The idea, Palmisano explained, would be to build a modern and truly international Chinese-owned corporation. The move, he added, would demonstrate China's desire to take that next step toward economic maturity by investing abroad instead of merely serving as a manufacturing hub for the rest of the world.

The senior Chinese government official, Palmisano recalled, responded, "That is the future model for where we see China headed."

Inside IBM, the issue of whether to stay in the personal computer business has been debated for a decade. But the road to the Lenovo deal, according to IBM executives, began in 2000, shortly after Palmisano became the company's president and chief operating officer. He ordered an extensive review of the PC business and decided to stop selling IBM PC's through retail stores.

At about that time, IBM approached Lenovo for the first time, according to a person close to Lenovo, seeking to sell its PC business for $3 billion to $4 billion. At the time, IBM had let its investment bankers know that if an attractive offer came up for the PC business, it would certainly consider a sale. But IBM executives say that any discussion in 2000 was probably a prospecting overture by an outside adviser representing the company.

In May 2002, Palmisano directed John Joyce, then IBM's chief financial officer, to meet with Lenovo's senior management to sound out the company's interest in establishing a business relationship. Lenovo, according to IBM executives, was intrigued and had long been exploring ways to increase its international presence.

More than a year later, at the meeting in Beijing, the government official told Palmisano that a few years earlier the Chinese authorities would have been involved in such talks. But times had changed, the official said, and Lenovo and IBM could negotiate by themselves.

By October 2003, IBM resumed discussions with Lenovo. In March, Palmisano went to Beijing to meet with Lenovo's founder, Liu Chuanzhi, as well as its president, Yang Yuanqing, and the chief financial officer, Mary Ma. That was when Palmisano fully described what he had in mind. "I put it all on the table," he said.

Lenovo was definitely interested, though any such deal would be complicated. Many of the essential elements of the deal were hammered out over eight days in June, in a hotel near Raleigh, N.C., where IBM's PC business is based. The principal negotiators

included Joyce, who now heads IBM's services business, Stephen Ward Jr., an IBM executive who will become chief executive of the Lenovo PC business, and Yang.

There were other interested bidders, including one from an American buyout firm whose offer remained on the table until the end. And the Lenovo deal could have fallen apart. But apparently the Chinese option was the only one seriously pursued by IBM.

"There were simpler transactions we could have done," Palmisano said, adding, "What we wanted was not a divestiture, but this strategic relationship with Lenovo and China."

The sale of IBM's personal computer business to Lenovo for $1.75 billion, announced last Tuesday, is "a three-dimensional deal," Palmisano said. The sale provides IBM with a path to leave a business that is large but not profitable. It is also the latest step in IBM's shift toward services, software and specialized hardware technology from mainframes to microprocessors for computer game consoles, all of which promise higher profits than the fiercely competitive PC business.

Yet the most intriguing, and potentially most important, dimension of the deal for the company is that it is IBM's China card. The new Lenovo, folding in the IBM personal computer business, will be China's fifth-largest company, with $12.5 billion in sales in 2003, and the Chinese government will remain a big shareholder. IBM is eager to help China with its industrial policy of moving up the economic ladder, by building the high-technology engine rooms to power modern corporations and government institutions with IBM services and software.

The deal is not expected to face any regulatory hurdles. Although there is a requirement, dating back to the era of the cold war, for review of possible national security implications, officials in Washington told IBM executives in advance of the announcement that clearing it would not be a problem.

The pact could give IBM "an extremely important leg up in China," Laura Conigliaro, an analyst with Goldman, Sachs, whose investment banking arm advised Lenovo, wrote in a report last week. "Ultimately, this is the single most valuable benefit to IBM from this transaction."

The payoff for IBM, if any, will come gradually. The Lenovo deal, in which IBM will take an 18.9 percent stake in the Chinese company, is a sign of IBM's commitment to China. IBM is placing 10,000 of its employees, its brand for five years and some its prestige in Lenovo's hands. There is a lot more at stake than the $1.25 billion in cash and stock Lenovo is paying, and $500 million in debt obligations it will assume.

In China, IBM is using a variation of the globalization formula that has worked well for it in Japan, Europe and elsewhere. IBM patiently nurtures close ties with the government and becomes a premier employer and a stellar corporate citizen--so much so that it is eventually regarded more like a local company than an outsider.

"We don't have any special deal with the Chinese government or any other government really," Palmisano explained last week over lunch at IBM headquarters. "It's a much more subtle, more sophisticated approach. It is that if you become ingrained in their agenda and become truly local and help them advance, then your opportunities are enlarged.

IBM is no newcomer to China. It set up a business there 20 years ago, and there are now 4,200 IBM employees in China. In 1995, the company opened a research laboratory, which now employs 150 Chinese scientists. Five years ago, IBM established a Chinese software development lab, which today has 500 engineers working on Linux projects alone. (IBM is the leading corporate supporter of Linux, a free operating system that is an alternative to Microsoft Windows.)

With the Lenovo deal, IBM is forging even closer links with China. While there were other offers for its PC business, Palmisano pushed hard for this deal--more a bridge to another economy than a simple sell-off.

Palmisano, 53, who became chief executive in 2002, is the leader of a generation of executives groomed to run a corporation that is based in the United States but gets the majority of its revenue abroad, as IBM does today. Traveling extensively is part of the regimen, as are stints of living abroad.

Palmisano managed IBM's large business in Japan in the early 1990s. He traveled extensively in Asia, including China, and continues to do so as chief executive. He makes three or four trips a year to China on business, and last summer he spent two weeks traveling across the country with his four children. "It was so they could get a feel for the Chinese culture and what's going on there," he said. "China is going to be such a huge influence in the world in their lives."

IBM's departure from the personal computer industry, Palmisano insisted, does not mean that the PC business is a bad one. But it does signal that it is no longer crucial to IBM's strategy of emphasizing services, software and server computers for corporate customers.

In an e-mail message to employees last week, Palmisano explained how the company's strategy and the PC business had parted ways. Today, there are two ways to create long-term value for information technology customers and shareholders, he wrote: "Invest heavily in R&D and be the high-value innovation provider for enterprises, or differentiate by leveraging vast economies of scale, high volumes and price."

IBM is choosing the first path, and has decided that the PC business is inevitably on the second path.

This also bears on the general subject, although I think we can all agree Arnaud doesn't understand the need for a lower tax climate in the U.S...and that is only just barely restraining the spending of the Government!:

Insight on the News - Commentary
Issue: 12/13/04

Rubber checks that don't bounce
By Arnaud de Borchgrave

Foreigners put up 90 percent of the $2 billion required every day to make sure Uncle Sam's checks don't bounce. The profligate uncle thus can write checks that are accepted as payment as long as they are never cashed. This sleight-of-hand shell game is what keeps the international monetary system from imploding. Shakedown rackets and Ponzi schemes are usually less transparent.

American foreign creditors now hold an estimated $11 trillion in U.S. "paper," or 43 percent of the superpower's privately held national debt, up from 30 percent since Mr. Bush became the 43rd president. China, Japan and Saudi Arabia are among the biggest dollar stakeholders, and they have seen their assets fall 35 percent against the Euro and 24 percent against the yen.

The Bush administration pooh-poohs any connection between tax cuts coupled with soaring deficits, from the federal budget to the national debt, and an insatiable appetite to borrow and spend. What about the $3 trillion surplus left by the Clinton administration that is now a projected $5 trillion to $7 trillion deficit? Nothing to worry about, we are told, because there is a plan to halve it without so much as a small war tax to make us finally understand "we're a country at war," as Mr. Bush keeps telling us.

The $220 billion cost of Afghanistan and Iraq this far has not changed any minds in the White House that the pre-war tax cuts must be maintained. More borrowing should do the trick. The more U.S. bonds and T-bills are sold abroad, the less need to curb the ravenous appetite for foreign goods. Thus, the United States can have its cake and eat it too.

The $420 billion defense budget, almost more than the rest of the world spends on its armed forces, will top half a trillion dollars before the end of Mr. Bush's second term, and social programs will keep pace, all without tax increases. The United States is expected to borrow $670 billion this year, according to estimates made last week by the Organization for Economic Cooperation and Development (OECD). The 10 Nobel laureates whose recent open letter urged a dose of fiscal restraint to curb current manifestations of "fiscal irresponsibility" were dismissed as eggheads talking through their mortarboards.

London's prestigious Economist thought the situation was alarming enough to put "The Disappearing Dollar" on its cover this week. It showed a dollar bill as a leaf on a tree, half eaten by a worm.

Foreign central banks, the major purchasers of U.S. securities, are spooked. Either they stand idly by and watch the value of their reserves continue to plummet - or they begin moving them into euros, or a basket of several currencies. Saudi Arabia has sold some U.S. paper for cash to go into new projects in the kingdom. China (with $515 billion) and Japan ($720 billion) have switched steadily out of dollars throughout 2004.

The Bank for International Settlements reported over the weekend dollar-denominated deposits fell to 61.5 percent of total deposits by OPEC members in the second quarter of 2004 - from 75 percent in the third quarter of 2001. Euro-denominated deposits rose to 20 percent from 12 percent over the same period.

Asia as a whole has accumulated $2.2 trillion in foreign reserves. The U.S. trade deficit with China, now nearing $150 billion for 2004, grows alarmingly from year to year. Wal-Mart alone imports $18 billion worth of Chinese-made goods for its stores. When China and India can compete across the entire spectrum of high-tech networking jobs, globalization begins to lose its allure. China's sidewalk moneychangers are betting the renminbi (RMB) is now a stronger currency than the dollar. Chinese companies are luring Chinese American executive talent from U.S. multinational corporations with higher compensation packages.

Seemingly unconcerned, the Bush administration says the external deficit has little to do with conspicuous consumption and much to do with the sluggish economies in Europe and Japan. Fast buck economists - or reckless high rollers - argue the disappearing dollar could be the answer to all of the administration's problems, as it will automatically shrink the U.S. deficit. And the more the dollar falls, they explain, the more expensive European and Japanese goods become, choking off their exports to America and boosting now much cheaper U.S. exports.

But such a laissez-faire policy - besides poisoning anew trans-Atlantic and trans-Pacific relations - will only encourage the dollar stakeholders all over the world to unload ever faster. The dollar is expected to shrink an additional 30 percent during the Bush 43B mandate. This could then be the biggest default in history, wiping out anyone holding dollar assets, and burying the dollar as a global reserve currency.

The Europeans blame intemperate U.S. borrowing and meager household savings. They know the more the dollar drops, the more claudicant their economies.

A run on the dollar would knock the props from under American global alliances and further erode what little support the United States has left for defeating the insurgents in Iraq and midwifing a democratically elected government. The only victor in such a tragic denouement would be Osama bin Laden and his global network of extremist troublemakers and terrorist destroyers.

In his last video, just before the Nov. 2 elections, bin Laden referred to religiously inspired Arab volunteers with whom he fought the Soviet occupation of Afghanistan in a war he says, "bled Russia for ten years, until it went bankrupt and was forced to withdraw in defeat."

Bin Laden clearly believes he can do it again. "So we are continuing this policy of bleeding America to the point of bankruptcy," he said, speaking without his habitual automatic weapon in the picture.

A horizon of endless deficits and a dollar with the buoyancy of a lead balloon is a recipe that can only please the countless millions who wish us ill.

Arnaud de Borchgrave is editor at large of The Washington Times and of United Press International.

I frankly don't know what's on that list these days

No surprise at all, somehow doesn't stop you from telling us it's all for the better though does it.

...because I don't sell anything to anybody overseas. When I run out of customers in this city, I'll look into the surrounding states. I have 50 of those to go before I start worrying about overseas customers.

I don't think you could be any more lame, considering you're on here constantly stumping for IBM and other sellouts that are putting countries like China ahead of the US. Read the CEO of IBM's comments at the top of this thread again, and then try to tell me that making China his #1 customer isn't his ultimate desire. He'll gladly move his headquarters to Peking if it means more money for him, they don't call themselves "International" BM for nothing. They were helping the Nazis too but you could apparently care less.

Eagle, if "isolating" worked, Castro and Kim the Nutcase would be gone. Instead they are 2 of the last remaining communist regimes.

They have no power, and aren't getting any either. They are isolated, and lack almost every modern comfort and technological advantage. Yet you try to tell us something is wrong, that it isn't working, and pumping US capital into them for their own betterment instead of ours is the way to go.

I spent the morning and afternoon in the room where President Bush was conducting his Economic Conference. He certainly has an ambitious second-term agenda. What did you do today, Eagle? You figure I was invited to that because of my communist ties?

Quit changing the subject. I have no idea if you were there or what you may have been doing, but if people like you, who want to build up the Chinese government with gifts like the IBM PC corporation less than 5 years after they forced our plane down over international waters, have anything to do with the future of this country we don't stand a chance. You could obviously care less, so long as you got your picture taken on Capitol Hill.

More pathetic excuses from you, Microsoft, what does that have to do with anything we're talking about? The Chicoms don't build supercomputers with Windows, and if they did I wouldn't want them to have anything but illegal copies anyway. Microsoft isn't giving jack sh!t away to them either, what in the hell are you talking about Danger? Is Microsoft who is giving free supercomputer software away to the Chinese? No they are not, but if they were I'd be riding their @$$ just like I'm riding IBM's. So explain, what the hell are you talking about, saying this is all somehow Microsoft's fault that IBM is giving all this tech away to the Chicoms. I don't have jack sh!t to do with them either, I just want to hear how you think you can blame all IBM's long time traitorous actions on M$. It's the most pitiful excuse I can think of.

So who should be selling out the Chinese next, because of their US competition? Should Ford sell out, because they can't compete with GMC? Should John Deere, because they can't compete with Catipillar? You gonna blame General Electric, when Viacom goes Red, and accuse guys like me of working for GE when they call you on it? Is that what you want, our country being bought out by the Chicom governement? Well that's what you're right here defending.

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