China says 'yes' to HP-Compaq merger

With HP-Compaq merger mania hitting fever pitch in the US, there's at least one place where people think it's an excellent idea - China.

Sixty-seven per cent of respondents to a Gartner poll of channel dealers in China thought the merger would be good for the industry, nearly twice the figure for the Asia-Pacific region as a whole.

HP has a long history in the People's Republic - last year it celebrated the twentieth anniversary of its Beijing office, which opened shortly before Compaq was founded. HP's Beijing office was the first such collaboration between the People's Republic and a foreign corporation, following visits by David Packard to China in 1977 and 1979.

Despite this early promise, HP has fallen behind its rivals in many sections of the Chinese computer market, which is set to surpass Japan next year to become the world's second biggest, with 13 million sales, according to IDC.

The merger would at least give it scale in China. Based on past sales, the merged company would rise into the ranks of the top five PC vendors in the country, which is currently dominated by local companies Founder, Great Wall, Lang Chao and Legend. IBM is the only multinational company in Gartner's top five list.

Still, being in the top five won't solve HP and Compaq's real problem, which is lack of sales growth and lack of profitability. Scale itself is worth nothing unless you can deliver economies of scale, which will mean heavy cost-cutting from the merged entity.

Neither HP nor Compaq has been able to compete with the local manufacturers, according to Gartner vice president of hardware platforms, Ian Bertram. "How long can they keep that position? Local players have been very strong on price, and in an emerging market price is a big lever," he said.

The other market leader in this area is Dell, which only has a 4.6 per cent market share according to IDC, but is making significant inroads, with double digit growth.

Bertram added: "It will take some hefty cuts for them to deliver those economies of scale. It's now time for them to stand up and deliver."

However, the HP proposition of a "one-stop" solution, offering installation and support services as a package with the actual PC and server boxes, is a compelling one for China, Bertram said, increasingly so as the market gets more used to outsourcing IT services.

There's a lot of support for this. Interestingly, one of HP's biggest contract wins is as a systems integrator, deploying the first ever full implementation of i2's supply chain management integration system.

Qiao Song, senior vice president at the company which installed the system, said: "We are impressed by& HP's wealth of knowledge and skills in consulting." He went on to praise the company's "renowned support and expertise".

And who was this company praising HP to the hilt? None other than Legend, leading PC manufacturer in China.