HP and Xerox – Interesting Bedfellows and Implications to Traditional Relationships

Randy Dazo
Jun 5, 2019

What I love about this industry is that it never gets boring. This week, HP Inc. and Xerox Corporation have announced an expansion of the companies’ existing business relationship. Xerox will now source from HP certain A4 and entry-level A3 products with the majority running on Xerox’s ConnectKey controller software platform, in addition Xerox will supply toner to HP for these and other products. The sourced printers will be based primarily on the laser printing technology HP acquired from Samsung in 2017. Furthermore, the companies have agreed to partner in the Device as a Service (DaaS) market. Xerox will become a DaaS specialist in HP’s Partner First program in the U.S. Xerox’s service capabilities and customer reach in the small to midsize business market, combined with HP’s award-winning DaaS PC offerings, will allow both companies to meet a wider range of customer needs. Xerox will be authorized to sell HP PCs, displays and accessories to its commercial customers through DaaS. HP will also make Xerox’s cloud-based content management platform DocuShare Flex available on its commercial PCs distributed in the U.S.

Earlier this year there was speculation surrounding a possible acquisition of Xerox by HP, and it is unclear whether this new expansion became the result of those negotiations. HP has recently acquired Samsung and is surely continuing to work through the ROI of that investment, scaling the business to where it needs to be as a laser manufacturer. Interestingly, one valuable piece of Xerox, Global Imaging System (GIS), was brought into the organization under Xerox Business Solutions (XBS) back in January of this year, to perhaps aid the value of selling the overall Xerox organization, as an alternative to selling its most valuable pieces and parts. Could this be the start of a fresh liaison or another strategic move in the manufacturing chess game that is the office equipment industry?

In the not so distant past, a very public fallout between Xerox and Fuji Xerox (FX) over the once pending sale in 2018 was broken by the Xerox investment board because of the disagreement of the sale price originally struck by the former Xerox president and FX was making headlines. As we assess today, an almost entirely new Xerox management team took over to transform the company, stating they would continue working with FX as a manufacturing partner, however Xerox has in the past, worked with other ODM’s and will continue to seek out other manufacturing alternatives. At the same time, Xerox and FX continue to have pending litigation over the original acquisition agreement that still has not been resolved.

Before HP acquired Samsung, Samsung was the number two supplier of laser engines (Canon is still #1) in the world, supplying engines to many other brands including Xerox. These were mostly on their lower end A4 devices and select models to fill gaps in Xerox’s product portfolio. When it comes to manufacturing, it is all about scale and distribution to keep the factories flowing and to get the best pricing based on volume. Regarding HP’s investment of Samsung, HP needs to continue Samsung’s ODM relationships in order to maintain competitive pricing and profitability until HP’s A3 branded products take hold in the market as well as for its A4 business to remain a float, as HP slowly brings its new Samsung A4 HP Laser brand to market, which HP just launched in certain markets this year.

Simultaneously, we speculate what Canon may be thinking about this strategic play. Up until now, Samsung ODM arrangements had been weaning and Canon probably didn’t think HP/Samsung could/would sustain the scale to remain price competitive and a threat long term in the market. With this strategic announcement, this scale helps keep the Samsung factories going, lessening the pressure for HP to get their branded products to market. Therefore the Xerox/HP relationship in turn helps put HP in a more formidable manufacturing position. Similarly, FX undoubtedly didn’t know what substantial ODM could supply Xerox with devices, therefor calling their bluff. After all Xerox, in all probability, shopped around to the other traditional Japan and Chinese manufacturers that may not have the interest, scale and quality requirements. It is interesting that Xerox would end up working with the only other American company for partnership. Certainly, this creates a more tenuous environment with current long-standing partnerships of Canon/HP and FX/Xerox.

What is the upside for Xerox as they seemingly got a pretty good deal from HP? Currently many of the Samsung devices are still manufactured in China, so there are not (today) any tariff benefits with switching partners. Honestly, Xerox is in a very interesting and potentially powerful negotiating position which could also be a strategic play to motivate either HP or FX to make the next move.  According to Steve Bandrowczak, President and COO of Xerox Corporation in an interview right after the announcement, “Xerox is maintaining and continuing to drive its plans and strategic initiatives for the company; drive revenue, re-energize innovation, focus on cash flow and optimize operations, and this announcement was part of the strategic decision making.”  Mr. Bandrowczak continued with iterating the long history it has had with both Fuji Xerox and Samsung/HP and that Xerox had been sourcing engines from Samsung for many years.  “Fuji Xerox is a huge supplier of devices to Xerox and will continue to source from them but at the same time, the Samsung/HP relationship solves some of our sourcing initiatives along with other benefits that came with the HP partnership. For instance, the Xerox and HP relationship will provide us access to HP PCs and Notebooks that helps us with our IT Services, Device as a Service strategy (DaaS).  Along with that, HP PCs (in the U.S.) will come bundled with Xerox DocuShare Flex, our document management software, that helps expand our offerings within the intelligent office. Other decisions in the agreement allow us to manufacturer toner for these HP engines, which helps with our revenue and profitability.  Overall, it was a good deal and partnering decision,”  Mr. Bandrowczak said.  At this time HP did not have any further comments other than the announcement.

Who needs Xerox more, HP or FX with both needing scale and manufacturing to maintain competitive pricing for their own products? Both are strong organizations; however, this gap is substantial for any factory to fill as there are not many new vendors knocking at their doors to manufacture devices in a flat market. At the same time Xerox’s stock price is in the $30-dollar range today which is much more than the negotiated price they and FX struck over a year ago. The chess game continues to be in play and the pieces are set for anyone to make the next move. Who that will be is still to be determined in this curious but fascinating industry we are in.

 

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