3Com no longer has a relationship with Huawei, will experience declining market share in China, and is pursuing a “China Out” strategy to compensate for lost business in that country. It also has a tarnished enterprise brand in North America, which probably will lead HP to retire the 3Com name completely.
So I thought about it. HP must have had a reason to pursue this acquisition.
Then, all of a sudden, it hit me. I remembered a Forbes feature article published online in the middle of October,”Cisco’s Threat From China,” and I realized that Mark Hurd’s HP is all about cost controls, preferably sharp and sustained cost reductions.
Look, HP could have obtained better routing technology, greater routing market share, and superior core data-center switching from an acquisition of Juniper Networks.
Then again, an acquisition of Juniper would have cost HP about six times (or more) what it paid for 3Com. That was considered too high a price, I’m sure, by Hurd and his bean counters.
Besides, 3Com offered something that no other enterprise-networking vendor could provide to HP. Quoting from that Forbes feature article:
Most of 3Com’s 6,000 employees, 52% of its $1.3 billion in revenue and nearly all of its research and development staff are in China. While 3Com has only a 3% slice of the networking gear market worldwide, it controls a third of China’s market–just a few percentage points less than Cisco.
Forget about the revenue from China. That’s under siege now that 3Com doesn’t have Huawei as its H3C partner. What’s important here is that most of 3Com’s employees, and all its research and development, are based in China. I’ll have harder numbers tomorrow, but my conservative calculations suggest that a fully loaded Chinese networking engineer probably costs about a fifth the price of his American counterpart.
What hasn’t been mentioned by HP, or by the business press, is that there is significant overlap between the HP and 3Com product portfolios everywhere but in the data-center core, where 3Com has the H3C S12500 . Before this deal, HP even targeted 3Com heavily in its competitive-marketing programs.
All of which brings me to what I suspect is the essential truth about HP’s acquisition of 3Com. When you look at the cold, hard facts, it’s difficult not to conclude that HP purchased 3Com at least as much for its low-cost Chinese R&D as for its product portfolio, which features extensive overlap with HP’s own ProCurve products.
The big losers in this deal might not be Cisco, or Juniper, but HP ProCurve engineers in the USA.