TechnoStorm

HP needs a bold vision, not a makeover

ON Nov 20, CEO Meg Whitman will unveil the results of Hewlett-Packard's fiscal 4Q ending October. For nearly two months, HP has been "managing expectations" and warning investors and analysts that results are not going to be pretty. Once the world's largest information technology company, HP has been struggling in the post-PC era. Just last month, its six-year reign as the world's biggest PC maker ended when China's Lenovo emerged as global leader in the segment.

The latest spate of bad news follows the previous quarter's results — a US$8.9 billion loss — as it continues to restructure and scale down operations amidst falling revenues in a challenging environment.

HP is essentially a PC, printer, server, software and services company, and here is the company's problem — in its old core computing business, HP has seen customers migrate to smartphones and tablets. The firm, which controls 50% of the inkjet and laser printer market, has seen the ubiquity of mobile devices and cheap cloud storage lead to lower use of printers and inks. Clearly, HP has been taken to the cleaners by the likes of Apple, Samsung and Google. In servers, software and services, it hasn't been able to effectively compete with companies such as IBM, Oracle and Cisco in selling to businesses.

HP's once high-flying stock is down 73% in the two years since Mark Hurd was ousted as CEO following revelations that he had an inappropriate relationship with a part-time contractor at the firm.

On Nov 7, HP's stock plunged to US$13.69, or the lowest since the bursting of the tech bubble more than 12 years ago. Its stock has been in a tailspin since early October when Whitman warned that profits over the next fiscal year are not likely to come anywhere close to meeting many analysts' more optimistic expectations of an early turnaround. HP's sales have fallen for four consecutive quarters and analysts now project two more quarter-on-quarter falls before business starts to stabilise. Most turnaround expectations have been pushed back to 1Q2014.

Caught flat footed

To be sure, few tech companies have the history of venerable HP. It was set up in a California garage and grew from a scientific equipment and calculator maker to become the world's largest information technology firm. Jean-Louise Gasee, a former Apple executive and one-time nemesis of Steve Jobs, recalled recently that HP, which first entered the arena with its "programmable calculators", ended up dominating the desktop computing market in the 1970s. Its mini computers left old-name rivals such as Wang, Olivetti, Tektronix and Seiko in the dust.

But years later, when Jobs and Steve Wozniak developed the first real "personal" computer that they dubbed "Apple" in a garage not far from where David Packard and John Hewlett had themselves started HP, the original Silicon Valley firm was caught flat footed. Having been knocked from its perch atop the desktop computing business, HP returned to its computing roots in the late 1990s when it bought the then faltering Compaq, which catapulted it to the top of the PC business again.

Yet, within years, history was repeating itself. As computing shifted from desktop to mobile via smartphones and tablets, HP ignored iPhones and iPads as passing fads. The company that had been one of the most innovative in the sector once again missed a seminal shift in technology.

Ironically, HP was once the early King of "mobile computing". Its early programmable portable calculators were seen as revolutionary products that placed computing power in the pockets, yet along the way, it lost the mobile plot. Who can forget the early personal digital assistants or PDAs from the HP-Compaq combination or the iPaq device 12 years ago, which went through various iterations before the concept was abruptly abandoned.

In 2002, under CEO Carly Fiorina, HP also jumped in early on the MP3 music player bandwagon by asking Job's Apple to make an iPod exclusively for its consumer clientele. Apple, which was struggling to stay profitable at the time, was happy to comply.

In 2007, soon after Apple launched its iconic iPhone, HP paid US$1.2 billion to buy Palm, which was then run by iPod creator Jon Rubinstein. Yet instead of giving the Apple alumnus some time to compete with his former colleagues, HP pulled the plug from underneath Palm and has since written off its entire investment in the PDA maker. Moreover, instead of using Palm's much-admired WebOS for its tablet offerings, HP has abandoned the software.

Whitman, who took over as HP's CEO 14 months ago following a failed run as the Republican candidate for the post of California's governor, has conceded that the firm has a significant problem at hand — it stems from the fact that for many people in India, China and Indonesia, the first device they use to surf the Internet or receive and send emails on is not a desktop PC or laptop, but increasingly a smartphone.

As Huawei, ZTE, Lenovo, HTC, Nokia, Samsung and others flood the low-end markets in China and other developing countries with smartphones that are given away for free by telcos, there is little incentive for occasional users of PCs to own one. They can do almost everything on a smartphone that was traditionally done on PCs. "HP must offer a smartphone because in many countries of the world, that is your first computing device," says Whitman.

Tablets

But don't hold your breath for HP-branded smartphones over the next 14 months. Whitman readily conceded that HP won't have one available until 2014, at the very earliest. It is rolling out tablets, though, just to make sure that the world knows HP is still in the tablet game. The ElitePad 900, a Windows 8-based business tablet, is likely to start shipping in January.

HP has decided it can't compete with Apple's iPads, Amazon's latest versions of Kindle Fire, which are still not available in Southeast Asia, or Samsung's Galaxy Tab in the tablet space. Media reports have mentioned that while it plans to stay away from iPad-like gadgets for consumers, HP has a tablet/laptop convertible in the pipeline dubbed the Envy X2, aimed at people who want the utility of a laptop but have been feeling the gravitational pull of a sleek tablet.

Little wonder then that investors are clamouring for the breakup of the sprawling company that they believe has become too big and unwieldy. It does not seem to be able to navigate the rough waters against nimble competitors such as Lenovo or Taiwan's Acer in emerging markets and the likes of Dell in more developed markets as well as in the enterprise space.

In a recent report, Swiss investment bank UBS argued that HP would be far better splitting its PC and printers business from the entity that sells software, services, servers and other hardware. Essentially, that's what Whitman's predecessor Leo Apotheker wanted to do but she reversed that decision within weeks of taking helm. Her rationale: If it sold its low-margin PCs and printers business, HP would no longer have the economies of scale in some of its other core businesses such as servers, which would be priced out of the market by cheaper competitors.

By selling a suite of products and services to its enterprise customers — such as desktop and laptop PCs, printers, servers, software, services and other gear — HP gets a larger share of the IT managers' budget. For their part, UBS analysts argued that while HP might lose purchasing power in such a breakup, it will gain "focus" and "branding power", a notion that Whitman dismisses.

Though HP's board and Whitman are against a breakup, if the stock continues to do poorly, analysts say their hands may be forced by long-suffering activist investors who have seen the value of their investments plunge 55% since Whitman took over.

More than a year into the job, Whitman concedes there are "no silver bullets" for a quick rebound. An HP recovery, she said recently, would take years, not a few months or a few quarters. Her detractors say she is just trying "manage expectations" and save her own skin.

Executional miscues

Clearly, HP lacks a grand vision. As CEO, Whitman has been far too focused on preventing the firm from falling off the cliff rather than giving it a strategic direction to battle IBM, Oracle and Cisco in the enterprise space or Apple, Samsung and Google in the consumer segment. For her part, Whitman has been trying to warn her critics that getting rid of her won't get HP back on track. The firm has had six CEOs over the past six years, including two interim CEOs. The last three CEOs — Fiorina, Hurd and Apotheker — had all been booted out by the board. The CEO churn is "the single biggest challenge facing HP," she told analysts last month because it "has caused multiple inconsistent strategic choices" and "significant executional miscues".

Last month, HP announced it would lay off 29,000 staffers, or 8% of its workforce. Over the past seven years, the acquisitive HP has announced layoffs totalling more than 75,000 staffers. One analyst who has been tracking HP layoffs since the tech bubble in 1999 has noted that his arithmetic tallies more than 110,000 announced layoffs.

Years of cost cutting and layoffs have slashed HP to its bones. Top management has been gutted as CEOs come and go through the revolving door while its plunging share price has nullified share options through which HP traditionally rewarded its executives. As its profits shrink, HP has slashed expenditure on research and development to boost bottom lines, which in turn has left it with far fewer breakthrough products and services to woo customers with.

Before the global financial crisis, HP had nearly US$6 billion in net cash. Today, it has net debts of US$15 billion, which makes it difficult to compete against cashed-up players such as IBM, Oracle, Cisco or indeed even Apple and Samsung. Investors have already discounted more bad news from Whitman on Nov 20. What they are waiting to hear from her is not how she will stem the losses or enhance revenues in some areas but a bold vision of where the company will be in five or 10 years.

This story first appeared in

The Edge Singapore weekly edition of Nov 12-18, 2012.

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