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
But "China out" also presented 3Com with cash flow challenges. 3Com, which is still headquartered in the U.S., wasn't making money outside of China--or what the company refers to in its SEC filing as "Rest of World." And investing the cash flow from its successful Chinese operations to fund global expansion faced certain restrictions imposed by the Chinese government and 3Com's lenders. 3Com, in its latest quarterly SEC filing, spelled out the potential difficulty that caused:

"In Rest of World we currently do not generate positive cash flow and are experiencing adverse impacts from the global economic slowdown. As a result of these factors, we intend to more aggressively and prudently manage cash and monitor discretionary cash spending, especially in periods prior to receipt of any available and permitted annual dividend payments from China."

In going more global, 3Com faced the problem of scale--hiring enough sales people and building enough partnerships to move the revenue needle. In the conference call Donatelli was asked why 3Com products had more than 30% share in China, yet gained such limited acceptance worldwide. Donatelli responded:

"I think if you talk to them and in our discussions with them, you hear very consistently their challenge is having this scale in the go to market space. So the ability to show up in enough deals on a global basis is really what has held them back. ... Of course, when you look at HP, we have huge global distribution both through distribution partners, as well as on a direct sales force basis. We obviously have a huge services presence. So again, that is why we think this is such a great marriage, is we are marrying what are great products with a great global distribution and services and partner arm to really bring these to market together."

So "China out" is turning instead to moving inside HP. For HP, buying 3Com gives the company more talent in China, along with a complementary networking product lineup and market share in one of the world's key markets. 3Com's R&D center in China, with more than 2,400 engineers, will "fuel innovation and offers a compelling total cost of ownership advantage," Donatelli said. Lower wages are still a critical part of the global IT equation, along with an understanding of the Chinese enterprise IT market.

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That loops back to the idea from Gartner's Sondergaard that emerging markets are a growing force in shaping enterprise IT features and inventing new products. Successful vendors will build teams in emerging markets who aren't low-cost order takers, but leaders with the influence to shape new products that are sold around the world. Who's in the driver's seat then? More important is which companies are positioned to go along for the ride as emerging markets accelerate.

Ultimately, 3Com wasn't able to take on the world with its strategy of using China as its base of sales and development. But it's by no means the last we'll see of the "China out" strategy in enterprise IT.

Global CIO small globe Chris Murphy is editor of InformationWeek.

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