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The internal Cisco memo details in excruciating detail the exact toll that a PC divestiture the HP’s former strategy to wield its mind-boggling $70 billion supply chain as a weapon to drive down margins in an attempt to weaken HP rivals like Cisco.
The HP networking team has repeatedly stated its plan to leverage the worldwide HP supply chain to go after what it has called Cisco's 80 percent margins with a networking product line it has proclaimed as having double the performance at a 30 percent to 40 percent cost savings compared to Cisco.
The memo, however, sheds light on just how big an impact Cisco expects a PC spinoff will have on the rest of HP's hardware businesses, including networking.
"Divesting PCs will negatively impact server and other hardware competitiveness and profitability due to massively reduced purchasing power that the PC unit volumes generate in memory (where HP represents 25 percent of all purchases) and processors (17 percent of x86 processors)," according to the Cisco document.
Cisco expects the PC spinoff to set the stage for what it calls an "unclear future" for HP's networking business. Specifically the memo says that former HP CEO Leo Apotheker's attempt to move HP from a "commodity hardware player to a value player has created uncertainty for the [HP] networking business." The memo says the "loss of purchasing power and the ability to price lower as part of a larger campus bundle will make it difficult for HP to continue its low-margin strategy and 'Almost Good Enough' messaging" in the networking battle with Cisco.
Cisco maintains that HP is "unlikely to transition to a value player in networking, given the significant R&D investment required," proclaiming: "This lack of differentiation, combined with HP's weakened brand, will make it difficult for HP to compete in networking."
The Cisco attack comes with HP touting networking market share gains against Cisco. In July, HP cited a report by Dell’Oro Group, a Redwood City, Calif.-based market research firm, showing HP gained 2.5 percentage points worldwide for Layer 2/Layer 3 Ethernet switching revenue market share in the first quarter of 2011, while Cisco’s share fell 5.8 points in the same period. HP also pointed to a 2.5 percent gain in routers and a 2.2-point increase in WLAN revenue market share over the same period, while Cisco’s share declined by 3.1 points in routers and 0.4 points in WLAN, according to the Dell'Oro Group numbers.
Cisco sees a "post-PC HP" under attack from all sides. "We expect 'post-PC' HP to come under competitive pressure from low-cost manufacturers (for example, Dell and various Chinese companies)," the memo states."At the high end, focused technology and architectural leaders like Cisco and EMC will continue to out-invest HP by a wide margin to deliver product innovation."
"At the same time, HP will have a hard time winning share against established players in custom and packaged applications (for example, IBM, Oracle and SAP) outside specific product and vertical niches where it has some presence today,” added Cisco.
NEXT: Partner Applauds Cisco's Aggressive Stance
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