Clarity on HP’s PC Business

Hewlett-Packard continues to contemplate how it should divest its Personal Systems Group (PSG), a $40-billion business dedicated overwhelmingly to sales of personal computers.  Although HP hasn’t communicated as effectively as it should have done, current indications are that the company will spin off its PC business as a standalone entity rather than sell it to a third party.

That said, the situation remains fluid. HP might yet choose to sell the business, even though Todd Bradley, PSG chieftain, seems adamant that it should be a separate company that he should lead. HP hasn’t been consistent or predictable lately on mobile hardware or PCs, though, so nothing is carved in stone.

Not a PC Manufacturer

No matter what it decides to do, the media should be clearer on exactly what HP will be spinning off or selling. I’ve seen it misreported repeatedly that HP will be selling or spinning off its “PC manufacturing arm” or its “PC manufacturing business.”

That’s wrong. As knowledgeable observers know, HP doesn’t manufacture PCs. Increasingly, it doesn’t even design them in any meaningful way, which is more than partly why HP finds itself in the current dilemma of deciding whether to spin off or sell a wafer-thin-margin business.

HP’s PSG business brands, markets, and sells PCs. But — and this is important to note — it doesn’t manufacture them. The manufacturing of the PCs is done by original design manufacturers (ODMs), most of which originated in Taiwan but now have operations in China and many others countries. These ODMs increasingly provide a lot more than contract manufacturing. They also provide design services that are increasingly sophisticated.

Brand is the Value

A dirty little secret your favorite PC vendor (Apple excluded) doesn’t want you to know is that it doesn’t really do any PC innovation these days. The PC-creation process today operates more along these lines: brand-name PC vendor goes to Taiwan to visit ODMs, which demonstrate a range of their latest personal-computing prototypes, from which the brand-name vendor chooses some designs and perhaps suggests some modifications. Then the products are put through the manufacturing process and ultimately reach market under the vendor’s brand.

That’s roughly how it works. HP doesn’t manufacture PCs. It does scant PC design and innovation, too. If you think carefully about the value that is delivered in the PC-creation process, HP provides its brand, its marketing, and its sales channels. Its value — and hence its margins — are dependent on the premiums its brand can bestow and the volumes its channel can deliver . Essentially, an HP PC is no different from any other PC designed and manufactured by ODMs that provide PCs for the entire industry.

HP and others allowed ODMs to assume a greater share of PC value creation — far beyond simple manufacturing — because they were trying to cut costs. You might recall that cost cutting was  a prominent feature of the lean-and-mean Mark Hurd regime at HP. As a result, innovation suffered, and not just in PCs.

Inevitable Outcome

In that context, it’s important to note that HP’s divestment of its low-margin PC business, regardless of whether it’s sold outright or spun off as a standalone entity, has been a long time coming.

Considering the history and the decisions that were made, one could even say it was inevitable.

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