HP’s a Chinese Company?

As HP continues its post-acquisition assimilation and integration of 3Com, the latter’s China-based H3C, which bloomed from 3Com’s former joint venture with Huawei, has remained practically untouched.

While managers and employees at HP ProCurve and at 3Com’s U.S. offices anxiously speculated on how the integration would affect them, H3C’s leaders and followers weren’t nearly as troubled.  In China, Hong Kong, and Macau, H3C will continue to exist as, well, H3C for an unspecified period. It’s uppermost executive leadership, headlined by Shusheng Zheng, remains intact and wields considerable clout.

There are at least a few reasons why H3C has emerged unscathed. Consider that it runs a vital piece of the low-cost, networking R&D that HP plans to leverage in its ambitious plan to pulverize the margins of Cisco Systems. Consider, too, that H3C retains, as HP will happily tell you, a significant installed base of customers and market share in China. Finally, give some thought to H3C’s interesting status as a Chinese company, which might be the most important consideration of all.

Many of you will know that I’ve been sounding an alarm for a while about China’s nationalist mercantilism and its policies and regulations pursuant to “indigenous innovation.” With its government-controlled capitalism, China has come to a couple big realizations: it wants to evolve far beyond its initial role as low-cost electronics manufacturer to the world, and it wants to establish world-leading companies in key technology-intensive industries. It wants to do much else besides, but those two goals are near the top of the priority list.

Concomitant with those goals is China’s growing realization that demand from its own market is increasingly important relative to market demand from the U.S. and Europe. The financial crisis that afflicted the U.S. and Europe has hastened that transition, but the shift probably was inevitable. The old paradigm, in which America borrowed money and China made goods that Americans then purchased, had become untenable. American consumers don’t have the disposable income to keep that shell game going indefinitely.

So, as American and European markets and corporations become “less indispensable,” in the words of author Ian Bremmer, China recognizes that its plans for world domination in target industries rest on how well its companies do at home rather than how well they do abroad. The Chinese market has become the central battleground.

HP knows it, too. It bought 3Com, through its ownership of H3C, as a Chinese company with an American facade. HP wants H3C to remain a Chinese company, because benefits accrue from that status. Chinese companies receive special dispensation and preferential treatment from China’s government.

Such is definitely the case for encryption-related information-security products, including firewalls, antispam appliances, and backup and recovery systems. For those products, China requires technology vendors to provide encryption keys to be certified for government procurement projects. Liu Jingwei, associate research manager for China at Springboard Research, explained Chinas’s reasoning to ZDNet Asia:

“First, as a major economic power, China has increasingly realized that it has to keep tight control of national information security, rather than rely on ‘uncertified’ foreign products which may impose security loopholes.”

A second and perhaps more important reason, he added, is that the country has “introduced a series of measures in government procurement to promote locally-developed innovations” since the global economic crisis. The new regulations are consistent with the government’s previous actions to foster local innovation, said Liu.

Meanwhile, Chinese companies are exempt from the requirement. Fortunately for HP, at least for as long as it leaves H3C untouched, it qualifies as a Chinese company. In the same ZDNet Asia article from which the above quote was excerpted, we find this aside:

Citing the official Web site of the China Information Security Certification Center, Liu added that 67 security products from 22 companies have since been certified between August 2009 and April 2010. All these companies, he noted, are local vendors with the exception of H3C. H3C is considered a local vendor with historic ties to Huawei and the Chinese government, but is in reality a wholly-owned subsidiary of Hewlett-Packard following HP’s acquisition of 3Com.

Historic ties to the Chinese government? How will HP maintain them? Is that even possible, and at what price? It will be interesting to see how this story plays out. The implications will be far-reaching for HP and its competitors.

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