So today System x has changed hands from IBM to Lenovo. The team hasn’t skipped a beat in its product introductions, which show a continued commitment to high-end, highly integrated products. There has been no change in System x’s strategy either, although its departure and arrival s going to have a deep effect on both parents. The business has declined in the last few quarters however (see Figure).
We attended a presentation from System x boss Adalio Sanchez, who is taking the 7.5k team across to Lenovo. It gave us a chance to think about the challenges and opportunities Lenovo will face before it can challenge Dell and HP for leadership of the x86 server market.
Lenovo has taken all of IBM’s x86 assets
Almost all of IBM’s connections with x86 servers have been severed today. It has signed agreement to provide hardware maintenance for 5 years to add to the PC maintenance business it still carries out or Lenovo and it will continue to produce versions of its software for x86 Linux and Windows of course. Lenovo has even taking the top-of-rack network products originally coming into IBM through the acquisition of Blade Networks in 2010 and now owns the x86 Flex System, while IBM keeps the hybrid x86/Power and all-Power based systems. IBM will resell its StorWize arrays back the other way, although we note that Lenovo also has an existing OEM agreement with EMC to develop.
It’s remarkable that IBM has given up most of its CIandIS offerings, although Adalio said it was a pre-condition of Lenovo’s acquisition. At best IBM is now a part-player like Cisco, EMC and VMware in VCE or Cisco and NetApp in FlexPod. Then again Power Systems and System z are the most integrated of all server brands. I’d argue that by pursuing converged systems HP, Dell, Cisco and others are actually trying to emulate IBM with their highly integrated x86 offerings.
Having taken IBM’s PC division back in 2006, Lenovo now has all of IBM’s x86 one-time assets. For IBM the profitability of System x was too low to tolerate, especially given its long-stated aim of reaching an earnings per share of $20 in 2015. For Lenovo the new business will almost certainly have the highest profitability of all of its businesses.
The Challenges and Opportunities
If Lenovo already owned System x it would have had a 5.5% market share of the x86 server market in the year to the end of June 2014 – in third position a long way behind HP and Dell, but only just ahead of Cisco (see Figure). It will need to consolidate the position quickly as another quarter of decline we see it demoted to fourth.
Worldwide there are 3 main DRAM producers – Samsung, SK Hynix and Micron. As PC market leader and acquirer of Motorola’s mobile device business from Google (also back in January) Lenovo should be able to enjoy much better volume discounts than IBM.
It also has potential advantages of its dual nationality – surely American enough to retain most of its US business, but Chinese enough not to be shut out of Russia.
Adalio is planning a major push for business in Brasil, China and Russia.
At a national level there is still a lot of work to do – System x has 160 entities which have to change hands starting with the US today.
There’s lots of work to do in System x’s channel strategy. Adalio notes that in the US the parents are both present in the 4 major distributors. It’s a very different story around the world. Lenovo is very strong in PC channels, but System x was weaker than HP and possibly even Dell in server specialist ones.
Lenovo has a significant opportunity to ship lower priced servers than IBM was able to do, especially in BRIC countries. It can also produce a more modular – almost ODM style – servers to compete more strongly in Cloud Service Providers. I don’t think its products fit at the moment, but it might even replace SuperMicro as IBM SoftLayer’s supplier in time.
Adalio told us that everybody wants to be System x’s friend now. However the most important initial step for System x is to stem the inevitable fall in business created by the uncertainties of the acquisition and to come out fighting against HP, Dell and other x86 server suppliers, all of whom have been wooing its customers and channel trying to gain from the hiatus.
Further Reading
More on the transfer from IBM to Lenovo
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