HP Is Trying A Brave New Strategy To Grab Market Share Away From IBM

HP Is Trying A Brave New Strategy To 

Grab Market Share Away From IBM

HP CEO Meg Whitman is trying a daring new idea to grab more business in the server industry while its biggest competitor, IBM, is wobbly in that market.

HP will create a new line of inexpensive servers with the Chinese company known for building iPhones, iPads and other consumer devices: Foxconn, the companies announced today.

Although Foxconn is known for its relationship with Apple, it has also been a contract manufacturer for HP's consumer products for years. So this isn't a new relationship.

This move is an interesting way to battle a harsh trend for server-makers.

The issue is cloud computing. It's threatening the biggest server-makers in a bunch of ways. Big Internet providers like Facebook, Amazon, Microsoft and Google build their own servers, instead of buying them from server-makers like HP or IBM.

Facebook also gives its server designs away for free and has created an entire eco-system of Chinese manufacturers that build inexpensive, powerful computers made to its design.

Microsoft is one of the companies building servers based on Facebook's designs because, by making a few tweaks of its own, those custom-designed servers cost up to 40% less and use 15% less energy, Sanjeev Khanna, a senior director at Microsoft said during a conference in Taiwan last month, reports Taiwan's Central News Agency.

Cloud computing is a double whammy for server makers. Not only are the big Internet companies building their own, enterprises are buying fewer of them, too. With cloud computing, they rent the computing power

HP and IBM are by far the two biggest server manufacturers, with HP at 27% and IBM at 26% of the worldwide market, according to market researcher IDC.

IBM's hardware business, especially its server unit, has been particularly hard hit. In IBM's last quarter, its low-end unit declined 18% and its high-end server unit, Power Systems, was down 22% from the year-prior period.

So IBM is shifting away from low-end servers and investing more in cloud-computing services. It agreed to sell the low-end unit for $2.3 billion in January, although its unclear when that sale will close.

HP offers cloud-computing services, too, but Whitman has decided to go the reverse route.

With this Foxconn deal, she's doubling down on the low-end server business at a time when revenue has been shrinking across the market even while the number of units sold has grown, IDC reports.

For the full year 2013, worldwide server revenue decreased 4.4% to $49.7 billion when compared to 2012, while worldwide unit shipments increased 3.2% to 9.0 million units, a record high, IDC says.

Meanwhile, revenue for the build-your-own part of the server business was up 47% in the fourth quarter, IDC says.

Foxconn has been looking to enter this low-end server business and cash in like other Chinese manufacturers, The Wall Street Journal reported.

So, rather than having another Chinese competitor, Whitman jumped in and created a partner. She's banking that Foxconn's assembly skills, coupled with HP's engineering skills, can squeeze out a decent profit.

In February, when asked about the Lenovo sale during the quarterly conference call, Whitman told Wall Street analysts:

Lenovo announced they are buying IBM'S x86 server business from top to bottom ... that creates an opportunity for us because ... So we are all over it. ... In the long-term obviously, Lenovo is going to be a powerful competitor and we aim to be well set up by the time the deal is done to compete really aggressively.