May 1, 2014
Yesterday HP announced that it will be entering into a “non-equity joint venture” (think big strategic contract of some kind with a lot of details still in flight) to address the large-scale web services providers. Under the agreement, Foxcon will design and manufacture and HP will be the primary sales channel for new servers targeted at hyper scale web service providers. The new servers will be branded HP but will not be part of the current ProLiant line of enterprise servers, and HP will deliver additional services along with hardware sales.
The motivation is simple underneath all the rhetoric. HP has been hard-pressed to make decent margins selling high-volume low-cost and no-frills servers to web service providers, and has been increasingly pressured by low-cost providers. Add to that the issue of customization, which these high-volume customers can easily get from smaller and more agile Asian ODMs and you have a strategic problem. Having worked at HP for four years I can testify to the fact that HP, a company maniacal about quality but encumbered with an effective but rigid set of processes around bringing new products to market, has difficulty rapidly turning around a custom design, and has a cost structure that makes it difficult to profitably compete for deals with margins that are probably in the mid-teens.
Enter the Hon Hai Precision Industry Co, more commonly known as Foxcon. A longtime HP partner and widely acknowledged as one of the most efficient and agile manufacturing companies in the world, Foxcon brings to the table the complementary strengths to match HP – agile design, tightly integrated with its manufacturing capabilities.
Who does what?
Under the agreement, HP will transfer engineering responsibilities for these yet to be named servers to Foxcon and HP will sell them and provide services. The operating assumption is that there is a market for additional services to many of the service providers who are not as completely independent as Google, Amazon or Baidu. Both parties will then, in some fashion probably never to be communicated publicly, split the loot.
Just about everybody except HP’s competitors who have been relying on the world’s largest server company’s entrenched process rigidity and margin constraints as a competitive edge. Life will get more difficult for competitors who compete on price alone, and with Foxcon’s engineering holding out the promise of rapid turns for custom designs, the competitive advantage of fast-turn design capabilities is blunted. Potential customers in the high-volume web services world will have a world-class duo of providers who can probably bid product, including customized designs, at prices previously only obtainable from smaller ODMs.
What does this mean for HP’s ProLiant customers?
In a nutshell, not a lot for the next few years. HP is being pretty parsimonious with any details about pricing, margins or minimum volumes required, but my guess is that initially they will be looking for people with minimum order quantities in the 10,000 and up range, with good visibility to multi-year product volumes. As they refine the process the threshold may drop, at which point HP will have to address the possible friction between this business and their high-volume lower-cost ProLiant business.