Can Lenovo turn around IBM's x86 business and win in the enterprise?

Lenovo has stated it will turn its acquisition of IBM’s x86 server business into a $5bn profitable business within 12 months.

Through the $2.1bn deal – expected to be closed on 1 October 2014 – the Chinese PC giant will take over the global team of the IBM x86 server business, which will be organised under Lenovo’s Enterprise Business Group.

Former IBM server chief Adalio Sanchez – who led the x86 server business at IBM – will become senior vice-president of enterprise systems, reporting to Gerry Smith, Lenovo’s president for the North America region.

Lenovo has big plans for the enterprise market, according to Smith.

"Over time, we will compete vigorously across every sector, using our manufacturing scale and operational excellence to repeat the success we have had with PCs," he said.

Among the areas the company will need to address is the decline in IBM’s x86 server revenue, as a result of its competitors aggressively targeting customers since the deal was announced in January.

As Computer Weekly previously reported, Gartner's figures for the second quarter of 2014 show HP achieved 7.3% year-on-year growth to achieve a 34.7% server revenue share for the three-month period. Meanwhile, IBM saw its server revenue shrink by 14.9% for the same quarter.

The company will also need to address the range of enterprise services it offers to customers globally. 

While it has 17 four-hour response centres in the UK, there are only three across the whole of the southern hemisphere, and none in Africa or India. This could be a risk to global businesses that require fast turnaround on their Lenovo servers in these regions.

Commenting on the limited geographic spread of four-hour support contracts, Smith said: "IBM’s services team is the best in the business. Customers will be able to leverage the IBM support structure. The same service they get today, they will get around the globe."

Another issue for datacentre managers is long-term server support contracts, which is far from clear. 

While it is possible to buy five years of extended warranties on rival HP ProLiant and Dell PowerEdge x86 server families, head of server and storage at Lenovo UK Tom Goodwin said at a recent briefing: "We will support existing Lenovo ThinkServer and xServers for 18 months." 

Clearly this is a gap Lenovo will need to address if it wishes to be successful in the enterprise, where servers may have a lifespan of three years or more.

The general consensus among analysts is Lenovo will repeat the success it had with the 2005 acquisition of the IBM PC business and aggressively grow its marketshare. However, it may be challenged in selling the technical merits of more expensive commodity servers from the IBM x86 server portfolio.

In the Enterprise Workloads on The IBM X6 Portfolio report published earlier this year, IDC analyst Jed Scaramella noted the IBM x86 server platform falls in the higher end of the x86 systems market, which has been traditionally dominated by lower-cost servers. 

"Some customers still perceive a price premium with four-socket servers, where much of the rationale on x86 server procurement still centres on capital expenditure," he said. 

"IBM will have to demonstrate the operational efficiencies and business benefits that a higher-end x86 system can deliver versus a low-cost volume server."

With Lenovo taking over this product range, it will have to prove these products still justify a premium over its own ThinkServer family.

For competitors such as Dell and HP, this deal could mean stronger competition in SME environments

Giorgio Nebuloni, IDC

With IBM’s team of System x engineers, developers and support personnel moving to Lenovo, analyst TBR said in April that the team – combined with efficiencies and scale – would enable the business to quickly become a credible and competitive force in the datacentre. 

"The success of a similar transition between IBM and Lenovo in 2005 suggests the two suppliers will once again drive synergies for the 2014 x86 server transition, resulting in improved acquisition costs, on-going product quality and strong services and support that come together to create increased value for customers," the analyst noted.

Yet its success will depend on how quickly Lenovo is able to win business outside the core Chinese market.

The company will also be taking over IBM’s Flex and x86-based PureFlex integrated systems. Further, it will resell IBM’s entry and mid-range Storwize storage product family, Linear Tape Open (LTO) products, IBM Flash storage arrays and elements of IBM’s system software portfolio, including SmartCloud, General Parallel File System and Platform Computing system.

All of this points to high-end, enterprise computing, with potentially high price tags. This is unless Lenovo can somehow change the dynamics of the enterprise server market dramatically and sell cheap enterprise-class computing.

Arguably, it is in the small and medium-sized enterprise (SME) market which offers the most potential for Lenovo, and most closely fits with the success it has had with ThinkPad laptops, when it acquired the IBM PC business. 

In an article covering the announcement of the IBM x86 server acquisition, Europe research manager for servers at IDC Giorgio Nebuloni noted: "For competitors such as Dell and HP, this deal could mean stronger competition in SME environments, where IBM had been less aggressive in the past, especially given that Lenovo has experience in building and growing an acquired business in the form of IBM's PC business."

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