HP's PC Spinoff Plan Still Up in the Air

Hewlett-Packard Co. (HP), the world's largest PC supplier, stunned the world with its Mid-August announcement of a plan to spin off its PC unit, leaving hardware partners and distributors worried about the future of the industry and their places in it. HP chairman Ray Lane recently confirmed, however, that the spinoff plan has not yet been finalized.

Lane indicated during a recent interview with foreign news agencies that HP might keep the PC unit under its own umbrella. "I am lobbying, and I don't have to lobby very hard, to call it the HP PC business,” he said. “Call it HP. It will be a sister company. It still has to carry the HP name, in my opinion. The customers want to see the HP name. The name change is 50% of the issue. What else are you going to call it?"

In September the company talked about possible future plans for its PC division in an effort to pacify its anxious partners and investors, saying that if the PC business is spun off into a standalone company it will be a valuable organization with a market value of US$40 billion. However, Lane said, explaining the company's ambivalence, "If we don't make that decision, it's because … we can't offer a better proposition to customers and investors. If we can't, it stays inside HP."

While still considering the options for its PC spinoff, HP has already completed another part of its business restructuring plan, announcing that it has divided its webOS business into two parts inside the company, merging the software business into the Office of Strategy and Technology and the hardware business into the Personal Systems Group.

Relieving Taiwanese PC Makers
The delay and ambivalence of HP's spinoff plan has made the company's Taiwanese contract suppliers, including Compal Electronics Inc., Inventec Corp., and Quanta Comptuer Inc., heave sighs of relief. Most relieved is the Hon Hai Group, the world's largest electronic contract manufacturer, which invested heavily in building up a large notebook PC manufacturing base in Chongqing, western China in the beginning of 2009 partly in response to the deployment of HP's PC business there.

The Chongqing manufacturing base is scheduled to go operational next year with an annual capacity of 20 million notebook PCs worth over RMB200 billion (US$29.28 billion). As part of its development plan, Hon Hai has also been building industry chains for notebook PCs, software development services, integrated circuits, digital appliances, mobile communications, solar energy, LEDs, auto electronics, next-generation monitors, medical instruments, and animation in Chongqing. HP's abandonment of its PC business would undermine these grand investment plans.

The business ties between HP and Hon Hai are even closer than most people think. According to Goldman Sachs, 70-80% of the desktop PCs and 25-30% of the notebook PCs that HP orders this year will be supplied by Hon Hai, whose PCs alone are estimated to contribute 14-18% of Hon Hai's 2011 revenue.

Goldman Sachs also estimates that notebook PCs supplied to HP will contribute 30-35% of Inventec's overall revenue this year, and 20-25% of Quanta's.

Another Reason for Delay
Among the most aggressive bidders for HP's PC unit was China's Lenovo, which reportedly hungered for the unit ever since the proposed spinoff plan was announced. The Chinese PC brand, whose acquisition of IBM's PC unit in 2005 helped put it among the world's top three PC brands, obviously hoped to duplicate that success and further strengthen its position in the global market.

HP rejected Lenovo, however, partly because it did not want to see two American PC brands fall into a Chinese company's hands and partly because, according to market observers, the deal would potentially involve national security reviews. Therefore, even though HP has not yet ruled out the possibility of disposing of its PC unit, Lenovo is unlikely to be on its list of preferred buyers.

Industry insiders reported that Samsung Electronics was another potential buyer, and that the Korean firm, which ranks among world's top-10 PC brands by market share, had for some time shown a keen interest in acquiring HP's PC department, with HP responding positively to the possible deal.

After several days of internal meetings, however, Samsung gave up the acquisition for two reasons: Firstly, industry insiders noted, the Korean company also does contract manufacturing of PC parts for other brands and would likely offend its customers by merging HP's PC business into its own organization. Secondly, Samsung's management would also find it difficult to integrate HP's resources into its existing PC business and continue operating the world-leading brand successfully.

Competing in Emerging Markets
Although whether HP will split off or sell its PC business unit remains to be seen, institutional investors believe that Taiwan's PC industry should prepare itself further for possible changes in the global PC market, and that the most effective way to do that right now is to speed up the development of emerging markets. This is especially important in view of the increasingly uncertain macroeconomic outlook in the U.S. and Europe.

Some of the island's PC suppliers are well into the development of emerging markets. Acer Inc. and Asustek Computer Inc., for example, have stepped up their deployment in China and other Asia-Pacific countries to tap strong local consumer demand for notebook PCs.

A report by the International Data Corp. (IDC) indicates that in the second quarter of this year, Acer outpaced HP to take the position of fourth-largest notebook PC brand in the Chinese market. Acer was helped by its acquisition, several years ago, of the Founder Group, a Chinese PC vendor.

Despite the flagging market in Europe and the U.S., Asustek's CEO, David Chang, says that his company is still hopeful of gaining growth momentum in emerging markets this year. Asustek's share of the Indonesian market, for example, has shot up to 8%, from just 2% early last year. In addition to Southeast Asia, the company is also focusing on Latin American markets like Brazil in a bid to secure sustainable growth.

Diversifying from PCs into emerging technologies such as cloud computing is also seen as a means of sustaining development in the coming post-PC era. Quanta and Asustek, among others, are developing cloud computing-based hardware so as to reduce their dependence on lower-margin PC manufacturing.