Sunday, July 21, 2024

Lenovo: The Surprising Advantage of Doing Your Own Manufacturing

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Lenovo is getting a lot of credit this week for bucking the trend to outsource manufacturing. This likely speaks more to the problem of confirmation bias with the folks that did outsource than it does to any other human factor, but outsourcing manufacturing for the PC industry appears to have been a bad idea.

At the core of this idea was that the firm was outsourced to could then produce at higher volumes, providing economies of scale they could then pass on to the outsourcing company, which would have none of the overhead (plants/labor) on the books to deal with.

This company could then maintain a relatively thin staff of designers, marketing, and sales. But little did these firms know that, strategically, this was a going out of business strategy. And Lenovo, which owns the old ThinkPad brand, was both the first major warning and likely one of the biggest beneficiaries.

The Problem with Outsourcing

Outsourcing was a major hardware trend in the late ‘90s and it seemed to hit all the buckets. Remove a lot of capital assets and employees from the books, focus on just the fun parts of designing and selling PCs, while placing all the ugly parts of actually building them and managing the huge supply chain in someone else’s hands.

Like dominoes manufacturing shifted from US companies like IBM and HP to firms mostly in Taiwan, like Acer and Asus. These companies became known as ODMs and gained massive manufacturing economies of scale.

However, it turned out that while this was tactically very smart it was strategically stupid. Once these firms had this massive manufacturing capability they decided they wanted to do the “fun part,” and Asus and Acer started selling at lower prices direct. Suddenly they became the fastest growing PC companies while the firms that outsourced either got out of the PC business (IBM) or saw their own growth stall (pretty much everyone else).

In the emerging world of BYOD suddenly firms that used to be ODMS were becoming kings. And the old kings of technology appeared to be shifting to other businesses and abandoning the PC market they could no longer compete well in.

Lenovo’s Spin

But Lenovo was the most interesting in this group. China’s Lenovo had massive manufacturing capability but had difficulty getting the ODM deals and so thought up a different path.

They decided to buy into the market by picking up IBM’s PC division. In fact they appeared to be the only emerging company that read the Microsoft book and took the Microsoft secret formula for success (a formula Microsoft itself has appeared to have forgotten) and applied it successfully to their own product.

You see what Microsoft did initially to become powerful was leverage IBM’s resources to gain fast entry into the business space at scale. By buying the IBM PC Company and getting the Think brand, Lenovo was immediately considered, at least with regard to these branded products, an IBM peer and IBM itself helped create that image.

As Lenovo moves up-market with servers, much as the PC vendors regretted their moves with Acer and Asus, IBM may find the sale of their PC division to have been tactically smart but strategically foolish as well.

On the consumer side, Lenovo struggled outside of China. It did attempt to buy Packard Bell but was out-maneuvered by Acer, which bought Gateway and used Gateway’s option to steal Packard Bell from under Lenovo.

This points out that their strategy was solid but they didn’t yet have a strong enough team (it was split at the time) to make the critical moves necessary to out execute Acer. Since then Lenovo has consolidated leadership and the end result has been massive growth in an otherwise slowing market.

Wrapping Up: Strategy is Important

We live in a corporate world where executives often focus so tightly on quarterly results they lose track of strategic problems. This is in fact the reason why so few mega companies make it more than two decades.

At IBM’s centennial event a few years back Sam Palmisano said that only a handful of companies around when IBM was founded were around when the firm turned 50, and only a handful made it from 50 to the centennial event.

Outsourcing manufacturing turned out to be a very bad strategic idea and Lenovo is the latest poster child of why this was the case. They leveraged their manufacturing capability into becoming the only new enterprise class PC company in the last decade and they are, coincidentally, also the fastest growing.

It is interesting to note that while IBM is arguably the most strategic company in the technology space – they train their executives to think this way – the decision to sell off the PC division was made by Louis Gerstner, who was the external CEO they hired to turn the company around. Turn around executives, by nature, are tactical thinkers because they have to focus on keeping the lights on.

In the end Lenovo’s success goes to the core of strategic thinking, and is representative of a country that is becoming a showcase of strategic thinking. But it also, I think, showcases again the problem of confirmation bias. Because long after Asus and Acer became problems, folks have never admitted that outsourcing manufacturing in the first place was a really bad idea. I think it is time to do that. Congratulations to Lenovo for clearly getting this one right.

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