Wednesday, December 08, 2004

Lenovo - IBM deal

IBM has sold its PC production to a Chinese, state-controlled company called Lenovo (originally Legend) for 1.25 billion dollars. Half of the amount is paid immediately as cash, the other (smaller) half is paid by Lenovo's stocks. It's pretty amazing and it would have been hard to imagine 20 years ago.

IBM is a company with a long tradition. Incidentally, the Czechoslovak branch of IBM was nationalized (i.e. stolen by the communists) after the World War II, and it became a pathetic company called Kancelarske stroje, n.p. This company (the name means "Business Machines, National Company") was an excellent example of the technological inferiority of socialism: its products could have been compared to the Western products 15 years earlier. After the Velvet revolution, this gap immediately disappeared - and the very new technology penetrated through most levels of the Czechoslovak society.

In the early 1980s, IBM became the pioneer of the PC production - and in some sense, it was then viewed as a monopoly - maybe even more than Microsoft is viewed as having monopoly in the operating systems today. But capitalism is a very dynamical system. IBM made some errors - for example, a significant portion of its profit went exactly to Microsoft because Microsoft was more "clever" in making some deals (I am talking about the money from having MS-DOS on the IBM PCs).

I am mentioning this example of IBM exactly because of some accusations against Microsoft that are completely misled. Microsoft is not a safe company with a permanent monopoly: it continues to be the software leader only because it keeps on doing a very good job. But it faces various types of competition - other commercial and semi-commercial systems (Apple and Linux) but also various competitors that appear on the Internet. These other companies have all the rights to compete with Microsoft, and it is perfectly conceivable that Google Inc. will become the universal leader of the software industry in 5 years, for example. All such things can happen in capitalism - they have happened many times.

Back to the IBM story.

Today, IBM's revenue is slightly less than 100 billion dollars per year; roughly 10 billion dollars is the profit, but the PC branch generates virtually no profit (or a negative one). So it's not shocking that they are happy to sell it for 1.25 billion dollars. The Chinese finally became the "predators" and acquired a rather valuable brand.

What about the future of Lenovo? I am not sure, but still, I am rather skeptical. It's hard to imagine that Lenovo will keep the western markets. It seems easier and safer to buy a Dell computer than a Lenovo computer - Lenovo's headquarters are about 10 timezones away after all. China's recent growth has been great, but honestly speaking, it has still been a growth controlled by the Western companies. Can they keep the technological standards and make enough progress? Who knows. Lenovo may also follow the example of Kancelarske stroje, n.p. ;-)

They will have to rely on the Asian markets, especially China itself. Their advantage is that the people with nationalist emotions will prefer a Chinese brand - and Lenovo is a Chinese brand. However, I am not sure about these emotions. The more you go to the East, the more the regular customers know or think that the West - and America in particular - is the leader in technology that can be trusted.


  1. I have always had some questions regarding previous Eastern Block countries?

    First, why was computing not taken up by the Eastern Block? I mean, as communism is essentially about planning, one of the obvious things to do with computers is solve large linear programming problems (economics utility equations).

    Secondly, Why are so many previously Eastern Block countries voting in Socialist and even Post Communist parties back in power?

    Finally, what should Western Europe be doing to reintergrate Europe as a whole?

    An amateur mathematician.

  2. Dear zelah,

    I am not sure whether some of your questions are just rhetorical ones, or whether they are serious questions. ;-)

    The Soviet bloc did not take over the production and development of advanced technologies because it was running a system that does not work and cannot work, and this system is called socialism.

    While it's true that socialism *needed* calculations to improve the planning - to replace the free market that calculates these things automatically - the need itself does not guarantee that advanced computers will emerge out of nothing. ;-)

    Advanced computers, much like more or less everything else on the market, can only appear if there are forces that stimulate their production, research, and development. The main force that can do it is the "invisible hand" of the free market. A planned economy simply cannot do it because it has no mechanisms to put the right people on the right places, and make them do the right things. There is no competition in socialism and the directors of the computer companies have very little interest to do things better because they would get almost nothing if their companies had better results.

    Technology is making progress in the West because the people who develop it have financial interest to do it - because they will be better off if they develop something new - because they will be able and allowed to sell it, and they will be able to protect their know-how and their capital.

    Your question really indicates that this is probably the first time when you hear that socialism does not work, is not it? ;-)

    Second. I don't think that too many Eastern European countries are voting the communists or socialists back to power: except for Belarus, these countries are almost just like the Western ones: sometimes they vote for the Left, sometimes they vote for the Right. It just happens that the Left has had a big tradition of 40+ years of government, and many of these socialist parties today are continuations of the old post-communist parties. But in reality, they're not too much different from the Western socialist parties, except for the trivial difference that the democratic culture was interrupted for 40+ years which made many things worse.

    But you should not think that socialism has returned to Eastern Europe. Slovakia is run by a right-wing government, and there are many examples like that. In the Czech Republic, the right-wing ODS is the clear runner to win any next elections.

    Also, in Eastern Europe, you have roughly 15-20 percent of people who literally support the return of the old communist powers - mostly because these people think that their lives were better under socialism. It's just a fact that there are people who have these feelings, and some of them have reasons. Some people were not successful under capitalism and they would prefer the protection of the socialist state. Some people had advantages in communism because they or their relatives were powerful in the communist hierarchy. And finally, some people just happen to be very left-wing people who naturally support communism. Such people exist in the West, too - be sure. If a communist-style party with a long tradition appeared in the USA and if there were proportionality system, they would also get 10 percent or more.

    Third. I think that Europe is already integrated enough, and more than it ever was. What do you mean by "reintegrating Europe"?


  3. Hi Lubos,

    My first question was a "trick". I was really interested in knowing if you were a Liberal (European Tradition) or a Conservative.

    Your second answer was quite interesting! I hope that these new capitalist countries will be able to stay the course! Especially with ideas like flat taxes!

    But your third answer was perplexing. It was code for intergrating Europe via the EEC. Are you an EEC hater?

    An amateur mathematician.

  4. Hey Zelah!

    Your first trick was smart. ;-) Yes, I am not a socialist.

    My estimate is that Eastern Europe will be doing well - probably better than what would be good for the people like me! :-) But of course, on the other hand, I want my old homeland and others to be better off.

    Third: the flat and nearly flat taxes in Eastern Europe have been very successful - see the examples of Estonia, partially Slovakia, and more or less Russia where the flat(ter) taxes increased the revenue and strengthened the economy.

    Chaotic, complicated, overly progressive tax systems are discouraging and they open loopholes for those who always want to pay less than those who just naturally pay the appropriate fraction of their income and profit.

    The USA themselves need a much simpler tax code, instead of the current one that grew to 60,000 pages. It has grown even during Bush's first term, from 40,000 pages. Fair tax is a serious proposal that must be looked at.

    I am not a EU hater. I always supported a unified European market. In fact, I also think that euro was a good idea for Europe - unlike our Czech president whom I otherwise support. And finally, I always preferred Czechia and Slovakia to be a part of this Europe, of course. These dreams have come true, I think, and there is nothing much left to be gained by continuing integration. I don't have to fill in non-EU papers at the Heathrow Airport in London anymore. Europe is suddenly accessible, and it's great. It could still be better if Czechia became a member of the American Union, instead of the EU, but the EU is fair enough. ;-)

    I don't like the idea that other decisions will be moved to Brussels from the national states. Unlike free trade, democracy does not really work at a supernatural level. This was proved in the recent elections to the EU Parliament. There has been enough integration. I support Bulgaria, Romania, and perhaps others to join the EU in 2009. However, further integration is not welcome. There are signs that such integration could lead to limitations of the national cultures - like reduction of the importance of the Czech language - and no doubt, I oppose these trends.

    I am not happy with the EU constitution, and it is probable that in a referendum, I would oppose the EU constitution, too. These portions of the unification really remind many of us of the Soviet Union. I don't think that unification of the governments is desirable.

    Best wishes

  5. a. IBM did not get a PC monopoly because it was then under the same kind of anti-trust scrutiny that Microsoft is in now; and so Microsoft kept the right to license DOS to other manufacturers.

    b. It would also seem safer to buy a Ford than to buy a Toyota, whose headquarters are nine or ten timezones away (and a car costs 10-50 times as much as a PC), and not to buy Sony, Panasonic, Samsung, etc. - as with Lenovo.

  6. Hi Arun!

    a. A scrutiny is irrelevant and it - fortunately - does not affect business of these companies too much. The primary error of IBM in the 1980s was that they allowed all other companies to combine their PC out of the same components. Note that Microsoft is very careful to make such things less possible; once Microsoft allowed others to essentially copy Windows & Office "by parts", it would probably become another dying company or a company that would have to move into another "field".

    Moreover, IBM would probably have earned nothing if they blocked Microsoft from giving MS-DOS to others. Such a blockage would probably be expensive - Microsoft would have to agree with these exclusive contracts, and of course Microsoft would demand some compensation for such an exclusivity.

    b. Fair enough. But Toyota has been around since 1935 and commercially produced since 1947. Lenovo is an unknown trademark. This makes a difference.

  7. One more trivial difference: Lenovo is a Chinese company, not a Japanese company as your examples. This makes the timezone difference more relevant, I guess.

  8. For a complete understanding of the evils of socialism, insofar as economics is concerned, please see George Reisman's Capitalism , a treatise on economics. Link. Please see Chapter 8.

    It is quite simply the handbook of economic freedom and the underlying economic implication of the vision of America...