OM in the News: Lenovo Vertically Integrates, While Competitors Outsource

China’s Lenovo didn’t sell outside that nation until 2005, when it shocked the high-tech world by buying the laptop unit of IBM. Now it is shocking the PC world again by vertically integrating.”Three years ago the whole industry was saying everyone should outsource, that’s the future,” says Lenovo’s supply chain VP in The Wall Street Journal (July 9, 2012). But Lenovo “came to the conclusion that even though all our other competitors are going in the other direction…we can move faster if we’re more vertically integrated.” After poring over charts and analyses of the costs and benefits of in-house manufacturing the company decided to increase the company’s in-house manufacturing to 50% from less than 30%.

“Selling PCs is like selling fresh fruit,” says Lenovo’s CEO. “The speed of innovation is very fast, so you must know how to keep up with the pace, control inventory, to match supply with demand and handle very fast turnover.” The firm gained a tremendous amount of share during the industry’s disk drive shortage crisis when Thai factories flooded “because of the speed of our supply chain,” he said. Lenovo saw its market share climb above 14% in the fourth quarter as it shipped 13 million computers. H-P, the top computer vendor by unit sales for the past five years, saw its market share that quarter drop to 16% from 18%.

Lenovo’s Beijing factory, which assembles desktop computers and servers, resembles thousands of others across China. Robotic arms are in constant motion, moving parts and pieces around. Rows of blue uniformed workers pop parts into place as computers make their way down the line. The factory can churn out about 25,000 machines in a day. The difference: The facility, its equipment and its employees are all part of Lenovo. It is one of 8 company-owned factories around the world with 3 more to be built in China and Brazil.

Discussion questions:

1. What are the advantages and disadvantages of vertical integration for PC makers?

2. What challenge are all PC makers facing in this decade?