HPE to offload remaining stake in Chinese joint venture H3C
Nothing to do with Washington and Beijing butting heads, says US giant
HPE intends to sell its remaining interest in China-based joint venture H3C, despite professing itself pleased by growth in the Chinese market just a few months ago.
H3C is a provider of IT equipment in China, including HPE servers, storage and associated technical services. It is 49 percent owned by HPE, with the remainder owned by China-based IT services company Unisplendour Corporation, following a deal in which HPE sold it a controlling share in 2015 for an estimated $2.3 billion.
That deal contained an agreement that HPE could put to Unisplendour all of the remaining shares of H3C in exchange for a cash sum equivalent to 15 times the company’s previous 12 months of post-tax profits, with a deadline of October 31 last year. HPE extended the agreement to December 31, but has now decided to exercise that right, according to a Form 8-K filed with the US Securities and Exchange Commission (SEC) today.
HPE confirmed to The Register that it plans to sell its stake in H3C to Unisplendour.
“Our joint venture in H3C Technologies Co. has served HPE well for many years, producing financial benefits for our business and our shareholders while enabling us to accelerate the digital transformations of customers throughout China and around the globe,” it said in an email.
“With the expiration of our financial put option, the time is right for us to evolve the financial structure of our partnership with H3C during a period in which the entire IT industry is shifting rapidly.”
However, HPE added that its relationship with H3C was still important, and it intended to continue the commercial partnership between the two companies, stating: “We will continue to do business in China through both direct sales and through the channel, and we remain committed to serving our Chinese customers and team members.”
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We asked HPE whether the decision to sell was linked in any way to the strained relations between politicians in the US and China, with Washington placing export restrictions on advanced semiconductor technologies and sanctioning some Chinese technology companies.
In response, HPE reiterated that it was the looming expiration of the put option in its agreement with Unisplendour which drove the decision.
This seems at odds with HPE's position in October during an analyst securities meeting (PDF) where it said it captured “tremendous value from China… through our joint venture structure H3C.”
Chief Financial Officer Tarek Robbiati told analysts that “China remains at the top of the list of the largest and fastest growing IT markets in the world,” and that “we are participating in that through our H3C joint venture”.
H3C is a strong player in a fragmented market, he said, and has “expanded its share in the China market by 6 percentage points in just the past four years and has delivered substantial profits to its shareholders such as ourselves.”
However, one of H3C’s businesses - New H3C Semiconductor Technologies Co. Ltd – was added to the US government’s Entity List in November 2021. This requires US organizations to obtain a specific license to export or transfer technology to listed entities.
At the time, this was one of several companies listed because they were suspected by Washington of supplying technology to the Chinese military, something that HPE denied.
Since then relations between the US and China have soured even further, with Washington cracking down hard on the supply of advanced technology into the Chinese market.
HPE said it will provide further updates as it “completes milestones” to transition from HPE’s existing ownership and financial-based relationship with H3C to its new commercial relationship.
Omdia Datacenter, Compute & amp; Networking principal analyst Manoj Sukumaran commented: "The news of HPE's disinvestment is surprising to me as HPE had mentioned few times in their last two earnings calls that China market is important for them and H3C business is doing really well.
"However, this goes in line with the disinvestments global entities are making in China over the past several months. Berkshire Hathaway is reducing its stake in BYD, Softbank is reducing stake in Alibaba, and Naspers is also reducing [its]stake in Tencent.
"HPE's partner Tsinghua Holdings is very aggressive in investing in silicon companies & fabs in China and driving domestic technology developments. H3C is also a key equipment supplier to many governments projects in China and its subsidiary New H3C Semiconductor was in the list of entities blacklisted by the US government.
"There is greater push from the Chinese government to use home grown technology (CPU and other silicon) in servers, and H3C has many server SKUs with CPUs from companies like Loongson, Phytium, Hygon and Zhaoxin. I expect this all these would have create a conflict of interest for HPE in the current geopolitical situation, and it would have prompted them to exit the partnership." ®