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STRATEGIC LOSSES?

INTERNATIONAL BUSINESS MACHINES CORP.'S personal-computer division plans to expand manufacturing operations in Mexico and Brazil, while analysts question whether the U.S. technology firm should be in the computer-making business at all. Even CEO Lou Gerstner is looking for new ways for his company to approach the PC market.

Miguel de Lascurain, IBM's PC vice president for Latin America, says that the company is looking to manufacture more products in the region, starting with laptops and more servers in Brazil. The Guadalajara, Mexico, plant produces the majority of the company's Thinkpad portable computers, including all those destined for U.S. sales. In Brazil, the firm makes server lines for Mercosur Both are slated for expansion. Says De Lascurain: "You can't be a full-solution provider unless you stay in the desktop and server market. It's not a high-margin business, but it is strategic."

The PC business better be very strategic because Big Blue is racking up a lot of red ink. Worldwide, its PC manufacturing--including portable, desktop and network server machines--reported US$1 billion in losses last year and another $89 million during the first quarter of 1999. In Latin America, IBM's PC revenues were flat last year and the company remained a distant second behind regional leader Compaq. De Lascurain expects revenues to remain flat this year.

No information is available on profits in Latin America, but many suspect Big Blue's margins are under siege. Dataquest analyst Luis Anavitarte says, "IBM was heavily affected by white box manufacturers." ("White box" is the term for the low-cost, nonbranded computers that have become popular in the region at the expense of market leaders.)

As computers become commodities, critics question why a technology and service giant like IBM would stay in the manufacturing business. At least two investment firms, Merrill Lynch and PaineWebber, are lobbying CEO Lou Gerstner to cut loose IBM'S PC division as a way to raise profits and increase the share price. Seemingly heading in that direction, Gerstner favors selling the firm's technology on open markets rather than just boxing it inside IBM-branded computers.

To that end, IBM recently penned a $16 billion, seven-year deal in which it will supply competitor Dell Computer with data storage disc drives and other computer parts. Along with the pact came much speculation that the company will eventually outsource its PC making to Dell. In Mexico, IBM already contracts out a large portion of the PC assembly process. Watch for that practice to increase as a way to allow Big Blue to stay in the "strategic" business without the big losses.
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Author:Stinson, Douglass
Publication:Latin Trade
Date:Jul 1, 1999
Words:428
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