Networking skills

HP's China deal extracts harmony from awkwardness

Hewlett-Packard (HP) has found a way to extract harmony from an awkward situation in China. Selling a controlling 51 per cent stake in its Chinese data-networking business, H3C, to a state-owned company looks like a partial retreat from an unwelcoming market. But the US tech giant now has a powerful ally with deep ties to the government. Rivals from Cisco and Microsoft should consider striking similar deals.

HP's $2.3-billion sale of part of H3C comes at a thorny time in Sino-US relations. Beijing has been beefing up the country's cybersecurity legislation and curbing the country's reliance of foreign tech companies. The number of foreign tech brands approved for certain government purchases has fallen by a third since 2012, Reuters has reported. The US government on May 19 charged Chinese nationals for stealing secrets from two US tech companies. Western contenders from IBM and Cisco have been affected by the chill, the latter reporting a 19 per cent annual drop in its China revenue in the quarter ending January.

Things are unlikely to get better for foreign tech companies, so bringing in local help looks wise. Rather than exiting altogether, HP will stay on as the partner of Tsinghua Holdings, the state-owned asset management arm of the prestigious Tsinghua University. HP's ownership of the newly combined H3C venture, now the second largest enterprise hardware provider in China, may be reduced, but the company still has the right to nominate members of the board and appoint the chairman. Being H3C's distributor outside of China gives HP options if successful new products result.

This joint venture may be a blueprint for Western tech companies operating in China. Chipmaker Intel invested $1.5 billion in another Tsinghua subsidiary for a 20 per cent stake last September. Sharing technology and giving up control can prove messy. But compared with being slowly squeezed out, it looks like a reasonable second best.