Advanced Computing in the Age of AI | Wednesday, December 6, 2023

Lenovo Aims High For Systems Expansion 

Now that Lenovo Group has completed the takeover of the X86 server business from IBM, the company can talk a little more specifically about how it hopes to expand its take in the systems space and its aspirations going forward. The combined Lenovo X86 server business and IBM's System x division gives Lenovo a credible chance of taking on market leaders Hewlett-Packard and Dell and to take on upstarts like Cisco Systems, Quanta, Inspur, Sugon, and others.

Lenovo is eager to compete in the X86 server business, much as it was a decade ago when it acquired IBM's PC business and was a distant third behind HP and Dell in that computing segment. Adalio Sanchez, senior vice president of enterprise systems at Lenovo and the former general manager of IBM's System x division, sat down with EnterpriseTech to talk about the markets Lenovo will attack and how it sees the competition lining up.

When Lenovo looks at the server market, it looks at it a little differently from the way that Intel does. Intel carves the server space up by broad industry segments, including Web and cloud, supercomputing, enterprise, and telecommunications as the broadest segments. Lenovo, thanks to the System x business, looks at it the way that IBM did, more by product category than by industry segment. This is due in part to history and in part to the fact that it is hard to make some of these industry distinctions, as Intel has itself admitted. When a telco sets up a cloud or a cloud runs HPC workloads for an enterprise, what industry segment is it in? This, says Sanchez, is why IBM has looked at the X86 server business by product category, not by industry.

Generally speaking, the server business is a $43 billion market, growing at somewhere between 2 percent and 4 percent, depending on the quarter. At IBM, which was more than twice the size of the global systems business and dominated by services (more than half of Big Blue's revenues) and software, the X86 hardware business represented something on the order of 4 percent to 5 percent of overall revenues, it just cannot get the same kind of attention as the other hardware units. The IBM System x business that Lenovo will control by the end of this year (some countries are still closing the mergers) is shaped like the market at large, with a higher percentage of revenues coming from high-end systems and blade or modular systems.

About 15 percent of the revenues in the X86 server business come from big boxes with four, eight, or more sockets, with blade and modular systems accounting for about 20 percent of the revenue pie. Density optimized machines (like the iDataPlex and NextScale lines) drive about 10 percent of sales, and the remaining 55 percent comes from workhorse one-socket or two-socket machines in rack or tower form factors. IBM was heavy on the racks and Lenovo, before the acquisition, was heavy on the towers.

"IBM has a portfolio model, and it is a very strong model for them and they are just trying to cover the waterfront," Sanchez explained to EnterpriseTech. "That's the good side. The bad side is that I never got the same level of airtime that I will now get at Lenovo because System x was not services or software. In the Lenovo world, hardware is their core, they are not a software business, and we are much better aligned to partner in the ecosystem, whether it is Microsoft or VMware or Red Hat or some of the other hardware providers in the market. We now have the freedom and flexibility to partner. The server business is the mainframe of Lenovo, if you will. In that it is the highest margin business that the company has and it is one of the next two pillars of growth for the company. We become extremely strategic for the company's future and we are going to get more investment, and unlike my competitors, who are all trying to become like IBM, creating their own software stacks and trying to compete, we are not. We are Switzerland now."

Scale in the supply chain

Serendipity plays a big role in success, and it can be as important as careful planning, and it was not without a certain amount of mirth that Sanchez pointed out that October, when IBM and Lenovo announced the System x deal was closing, was also the same month that HP decided to split its PC and printing business separate from its enterprise business, where it sells servers, software, storage, switching, and services.

"The number one competitor in this space is going in the opposite direction, and they are losing scale in the channel and scale in the supply chain. And so it is a good time for us," says Sanchez.

A decade ago, Lenovo bought IBM's struggling PC business and has turned it into a real contender, and that sets a precedent for what Lenovo can do in the server space. And with Lenovo being a much lower-cost manufacturer of hardware and having leverage with Intel because of its large presence in PCs – just like rivals Hewlett-Packard and Dell now and unlike IBM's System x business for the last decade – Lenovo has a chance to take on HP and Dell in the compute portion of the datacenter.

Lenovo has its own PC factory in Shenzhen, China and this will be merged with the IBM server factory nearby. Lenovo also has a plant in Hungary and will be relocating an IBM manufacturing facility in Quadalajara, Mexico and splitting it between a Lenovo plant in Monterrey, Mexico and Greensboro, North Carolina. Lenovo has other plants in Beijing, Shanghai, and Huiyang in China but these do not make servers; a PC plant in Brazil in São Paulo.

Hyperscale and HPC

One of the big targets that Lenovo is going to aim for is the hyperscale datacenters – markets where HP and Dell among the big OEMs and Quanta among the big ODMs as well as companies that span these categories like Supermicro have all had their successes. To get definitions straight: When Sanchez is talking about the hyperscale segment, he means top-tier cloud software providers, with either a commercial or consumer bent and with a desire to have either custom or semi-custom iron. All but the largest of the hyperscale companies buy from either the tier one server makers or original design manufacturers whom these tier ones emulate for parts of their product lines.

"When we were inside of IBM, we did not have the cost structure and we did not have the permission to go after those customers from a margin perspective," Sanchez explained. "With Lenovo's motherboard making and vertical manufacturing capabilities, we now have the cost structure to go after that space. We have a team dedicated to that space and to build that business as we go forward. I like to say that we can be an OEM/ODM, and we will have more scale and leverage than the other players. We already do quite well in China as IBM and as Lenovo, so collectively we have a pretty good presence there."

Cloud and HPC in its myriad forms (including traditional supercomputing and data analytics) are the two fastest growing segments of the X86 market, and Lenovo is obviously very keen on these. Cloud is growing in the middle teens percentages per year, and HPC is in the range of 8 to 9 percent, according to Sanchez, who is citing figures from IDC.

Many of the design teams and HPC application experts in financial services, oil and gas, and other segments that worked at IBM were brought over to Lenovo. And Lenovo will be driving the volume of sales for IBM's General Parallel File System (GPFS) and various Platform Computing workload management and messaging software as well. And now the System x division will be now free to support the Lustre clustered file system more enthusiastically than IBM could in the past. Sanchez says that Lenovo is not giving up on the high-end, capability segment of the supercomputing segment, but that the reach of the Lenovo channel will now give the combined X86 server operation a chance to chase the departmental and workgroup part of the HPC market that represents the volume of systems and revenues in that space.

There is another target market that Lenovo could go after: The proprietary systems like those sold by IBM, as most X86 vendors still do from time to time? Sanchez says that IBM is still Lenovo's biggest server customer and is not interested in disrupting that business – any more than the System x unit inside of IBM would chase after System z mainframe or Power Systems customers to try to move them to Linux or Windows machines. "To the extent that customers have made the decision to move off legacy platforms, I want to capture that business, no doubt," he says, adding that the bigger opportunity for Lenovo is to try to capture a bigger slice of the X86 system market that represents 80 percent or so of overall sales, not the 20 percent that is on other processor architectures and operating systems other than Linux and Windows.