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Chris Murphy
Chris Murphy
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Global CIO: Instead of 'China Out,' 3Com Goes In With HP

3Com tried to take on the world using China as its base. Easier said than done

3Com tried to take on the world using a "China out" strategy. It planned to bulk up its cash and polish its products and reputation by selling networking gear in China's booming enterprise IT market. It would use that base to expand out, particularly into other emerging markets.

Instead, 3Com's being acquired by Hewlett-Packard for $2.7 billion. In the call announcing announcing HP’s acquisition plan, Dave Donatelli, HP's general manager for enterprise servers and networking, touted 3Com's success in grabbing a 32% share of China's ethernet switching market, with "300 of the top 500 companies in China as customers." He added:

"They also possess what I term a 21st century global operating model -- the ability to design around the world and market their products everywhere."

Now put 3Com's "China out" strategy in the context of what Peter Sondergaard, Gartner's global head of research, said last month when forecasting IT spending next year and beyond. Sondergaard suggests that the growing importance of emerging markets as buyers of IT will weaken U.S. influence:

"On a regional basis, emerging regions will resume strong growth. By 2012, the accelerated IT spending and culturally different approach to IT in these economies will directly influence product features, service structures, and the overall IT industry. Silicon Valley will not be in the driver's seat anymore."

Much of the debate around the future of the U.S. IT industry and of U.S. IT careers, focuses on high wage versus low wage countries. It remains a major factor. But the other long term risk for the U.S. enterprise IT industry is the power and influence of other countries' domestic markets.

Will IT companies in China or India or other parts of Asia better understand those growing markets' needs, and use that knowledge to leapfrog the innovation of U.S. vendors? 3Com hoped to do that. Will established vendors need to locate ever-more R&D in those countries to capture local industry knowledge, as well as lower costs? HP is doing that, with this acquisition. It's a question of not just where code's written, but where it's conceived and turned into a global company. Will the next Oracle or Cisco or Salesforce be founded in China or India, because that's where the most dynamic end users of IT are, and where the fastest growth is?

The "China out" strategy will be a challenge to U.S. IT vendors. Yet 3Com also shows that strategy isn't easily executed, even by a company that's captured sizable share of one market in China.

For one, 3Com hasn't been immune from the global IT slowdown. The relative strength of China's economy did help it limit revenue declines in the quarter ended Aug. 31 to a 15% drop from the prior year--down 13% in China, and down almost 24% to the rest of the world. By comparison, at worldwide networking leader Cisco, sales for the quarter ended July 25 were down just under 18% from the prior year. HP's storage and server group revenue fell 23%.

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