HP’s ProCurve Engineers Might be Biggest Losers in 3Com Acquisition

I will have a longer post tomorrow on HP’s acquisition of 3Com for $2.7 billion, but my first reaction, I will readily admit, was befuddlement.

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.

9 responses to “HP’s ProCurve Engineers Might be Biggest Losers in 3Com Acquisition

  1. HAHAHAHA, You were always a 3com hater, I have held onto 3com since I bought it after the Bain fallout, MUHAHAHAHAHAH!!!!!!!! GFYS🙂

    • I don’t hate 3Com. I just don’t see 3Com as a game-changing acquisition for HP in the enterprise-networking market or in the converged data center. By the time the issues with product overlap are addressed, HP’s overall market share relative to Cisco will not have changed much.

      More than ever, I am convinced this acquisition was driven by long-term cost considerations. In 3Com, HP gets a Chinese engineering team that will cost substantially less than US-based engineers. Moreover, product quality probably will not suffer. That’s what drove this deal.

      Other than the lower cost of 3Com engineering, and the potentially improved margins resulting from product sales, what game-changing product or technology does 3Com provide to HP?

  2. You make those reasons sound like they’re not a big deal. Having a similar product that’s been constantly gaining market share is a huge thing for HP in the long term. When it’s time for an upgrade, they’ll be looking to HP – these are likely to be clients for life. Additionally, gaining ADDITIONAL market share in china is a lot easier for 3com than it is for HP since 3com already has great penetration. Once again, HP has a name that will bring in more clients now that they’ve teamed up and will allow them to sell to those ‘clients for life’ that will likely expand with china’s ever-expanding growth.

    Lastly, I want to point out that your posts often spoke of 3com as if they weren’t a worthwhile company to invest in. CLEARLY you were mistaken.

  3. The general tone was, without Huawei 3com is worthless. WRONG!

    • Thanks for putting words in my mouth, but I can do that on my own.

      3Com isn’t worthless without Huawei — the engineering it got from that relationship has value — but obviously it isn’t worth nearly as much as it was worth when it had Huawei’s channels and powerful connections in China. The Huawei relationship is dead now. I’m not sure HP can establish the same connections in China that Huawei had.

      Maintaining post-Huawei market share and growth in China isn’t 3Com’s problem now. I’ts HP’s.

  4. I don’t disagree that engineering jobs continue to move offshore. The Yahoo alumni groups for the major network players are full of such comments by displaced U.S. engineers.

    I do disagree with your observation regarding the impact of the former Huawei relationship. 3Com acquired Huawei’s share of H3C at the end of 2006. The product suite that led to 3Com surpassing Cisco’s market share in China was developed by the H3C engineers after that date, and sold through H3C’s own channel. Many engineers may have begun their careers with Huawei, but they continued to work for H3C after the 3Com acquisition, and will do so after the HP acquisition.

    Finally, while I agree with the strengths of Juiper’s hardware and Junos, I think you might also want to dig into H3C’s strengths.

    Network World was certainly intrigued by H3C last year when they launched one of their current products.

    http://www.networkworld.com/reviews/2009/042009-3com-switch-test.html

    According to 3Com’s technical marketing, what HP will be acquiring is a data center to edge switch portfolio that offers:

    * A Total Cost of Ownership (TCO) that is 34% to 40% lower than Cisco in a Campus LAN configuration.

    * Verified interoperability with Cisco products across a broad range of switch and router features and protocols.

    * A fully enabled single operating system across all platforms without the requirement to purchase expensive feature sets to deploy additional functionality.

    * An operating system that is similar to Cisco IOS™ in its structure and command set to minimize an operations staff’s learning curve, and to support dual-vendor environments.

    * Single pane network management of resources, services and users, and full FCAPS functionality, whilst supporting over 1,500 Cisco and third party devices.

    * A switch portfolio that the industry research firm In-Stat found to be up to 60% more energy efficient than competitors’ similar class products.

    Whether HP will be able to execute with their acquired products is yet to be known, but I do think that Cisco is going to have to try harder to maintain their current market share. Unlike Enterasys, Force10, Extreme Networks, etc., HP is not a niche player. They have the branding and relationships to challenge Cisco on their own turf.

    • Fair comment.

      HP has an excellent opportunity to displace Cisco in a large number of enterprise accounts. Whether it happens will depend on how well HP executes and how focused Cisco remains on its core markets. The jury is out on both counts.

      Your IP address resolves to a 3Com domain. In the interest of full disclosure, are you a 3Com employee? That, in itself, wouldn’t detract from your arguments, but I always believe transparency is good policy.

  5. I disagree that “HP purchased 3Com at least as much for its low-cost Chinese R&D as for its product portfolio”. I agree that “HP has an excellent opportunity to displace Cisco in a large number of enterprise accounts”.
    Disclosure: we have done a (small) consulting job for 3 Com. We have done projects for many other vendors. We have not worked for Cisco.

    So, on with the story…

    The 3Com (incl H3C) product range is extensive. There is a HUGE thirst in the market for an alternative to Cisco. A challenger would have to start with a decent portfolio, with few holes in it. The only other portfolios that cover the entire Cisco spectrum of routers and switches belong(ed) to Nortel Enterprise (now Avaya) and Alcatel-Lucent (ex-Xylan plus some OEM and home-grown stuff; with the fantastic Timetra gear at the top-end). Juniper does cover the top end of the range extremely well too.

    If someone seriously wanted to go to market to become the ‘Avis’ to Cisco’s ‘Hertz’, they could hope to get 20% then 30% then 40% of the worldwide switch and router market on consecutive years starting now. Besides good product (which all the above-named companies have) they would need a presence in the Enterprise market – either a sales force, or channel partners, or both.

    HP clearly has Enterprise presence. (Nortel struggled; Alcatel-Lucent and Juniper still struggle with that). With ProCurve, HP proved they could grab a good slice of the SME market from Cisco. Adding the H3C range gives them products for the Enterprise market – both in the Data Centre, which everyone talks about; and, if they have the stomach for a fight, in the rest of the network.

    If HP’s intention with H3C is purely to defend the data centre against Cisco, they’ll probably fail in the end, as Cisco has them surrounded. But if its intention is to take advantage of the hunger in the market for an alternative, then they have the very real capability to turn this into a 2-horse race.

    • Yes, the market could use an enterprise-networking alternative to Cisco. There’s no question that a lot of enterprise customers would like more and better options when shopping for their next refresh of network infrastructure.

      Still, you must admit, there is considerable overlap in the HP ProCurve and 3Com product portfolios. As I look at the situation today, I still believe the large team of Chinese engineers at 3Com was appealing to HP. One of the ways HP can win in the enterprise is to develop lower-cost products than Cisco and to sell them to enterprise customers at lower prices. In that context, 3Com’s Chinese engineering clearly was attractive to HP. I don’t see how we can argue otherwise without ignoring certain macroeconomic realities that have become obvious to us all during the past few years.

      Basically, a lot of switches, especially those in the wiring closet, are becoming commodified. HP saw the trend, no question. If it can produce a good-enough switch in China at a lower cost than those produced in America, it stands to gain some market share while mitigating margin loss, particularly during a period when buyers are looking for savings and cost reductions wherever possible.

      Cisco is rejigging its China strategy, too. When one considers any vendor’s China strategy, one should examine it not just in a sales-to-China context. China demands “technology transfer” of companies that do business there, and technology transfer invariably includes an accompanying transfer of labor. I know we tend to look at technology market wars as a vendor-against-vendor struggle, but I think this issue is bigger than that, and it will have major repercussions.

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