Xerox and HP: Unlikely Bedfellows?

On June 4, you might have been confused or disoriented when you read this headline: “HP and Xerox Expand Business Relationship.” Your likely first thought was that these companies are long-standing competitors, but of course, there is more to it. The most striking revelation in the announcement, which included several other notable developments, was that HP would be supplying Xerox “certain A4 and entry-level A3 products with the majority running on Xerox’s award-winning ConnectKey controller software” and that the machines will be based primarily on the laser printing technology HP acquired from Samsung in 2017 – which also happens to be the basis for HP’s A3 and A4 “contractual channel” (i.e. BTA) printer/MFP product line.

These two print and copy giants have a business relationship — not a relationship either party sought, but a seller/buyer relationship that came as part of HP’s acquisition of Samsung printing business last year. How’s that you say? Samsung’s printing operation has been an OEM design and manufacturing partner for many low- and mid-range Xerox office multifunction units such as the WorkCentre family —  essentially the “other” Xerox source for printer/MFP design and manufacturing besides Fuji Xerox. OK, so they have a business relationship and the point of the announcement is to reveal that the two companies are expanding that relationship. That’s interesting,  you say, but …

How did we get here?

But yes, the two firms are still everyday competitors. How did these two competitors get to a place where they are actually “expanding that relationship”? Major changes in corporate strategies in both companies brought us to this point. Let’s recap:

• In September 2016, HP revealed it had made a deal with Samsung Electronics to acquire its Printing business – which included full design, manufacturing, IP and distribution assets for Samsung’s line of printers and MFPs – and also included inheriting Samsung’s print/MFP OEM customer portfolio, the most prominent of which was Xerox. At the time, it appeared logical that being an OEM customer of HP-made printers and MFPs – while competing in the same market segments – would be an untenable position and force Xerox to seek another OEM partner to satisfy its future print/MFP platform needs. So, when the deal closed in 2017, HP officially established a “business relationship” with Xerox while also introducing a full line of new Samsung-sourced A3 and A4 printers and MFPs, powered by a major marketing push to establish the new product lines in the traditional BTA dealer channel – the same channel where Xerox holds a significant market position. Essentially they were competitors bound by a legacy contract while simultaneously engaged in a traditional seller-buyer business relationship for many of the same engine and design platforms. Awkward.
• In February 2018, Xerox and its other major long-time OEM source for printer/MFP design, manufacturing, IP, and distribution assets – Fuji Xerox – announced that Fuji Xerox was acquiring Xerox, a $6.1 billion transaction that was immediately – and successfully (initially anyway) – challenged in court by several major Xerox shareholders including Carl Icahn. The “merger” devolved into a bizarre and very public – and sometimes personal — corporate fistfight between Xerox investors and its management, which led to the wholesale removal and replacement of most of Xerox’s senior management and a majority of the members of its Board of Directors. We won’t recap more of this melodrama here – we’ve already written about it and we know you also read it.

It is now the summer of 2019, and the “merger” fistfight is slowly grinding along in a myriad of unresolved lawsuits and other legal moves as both Fuji and Xerox try to find a way to settle this ugliness to their advantage. However, a few things seemed clear:

• Xerox allows a contractual relationship with Fuji for printers/MFPs and related IP to expire. Xerox also says it has OEM sourcing options available to it other than Fuji for printer/MFP products, signaling that Fuji’s days as a major OEM supplier to Xerox are over.
• The merger is essentially a dead issue. Fuji won’t be acquiring Xerox and Xerox has aggressively reorganized itself and touted itself as the “new” Xerox while openly discussing a range of new possible products and market initiatives. It even announced the acquisition of two dealers.
• Further, Xerox said it can begin sourcing OEM products from other vendors, which it intends to sell direct to customers in Fuji Xerox’s primary Asia-Pacific region.

For HP and Xerox, despite the obviously awkward business relationship the two firms found themselves in, both had compelling reasons to at least maintain the status quo – and find a way to live with the difficulties presented by the relationship and make the best of it. It’s kind of like dealing with your in-laws: sometimes situations with them are irritating, and maybe they are not your favorite people, but you suck it up because you have to have a decent relationship with them for the overall good of all concerned.

Difficult choices

The conventional wisdom at the time (principally mine – wrong again) was to envision the following:

Considering the bad blood, Xerox would not be sourcing new printer/MFP hardware from Fuji. Considering that HP, an ever-present and dangerous competitor, was now launching an all-out assault on the BTA channel, a move that is a direct threat to Xerox’s market share in that channel, Xerox would not source its next generation printer/MFP hardware from either Fuji or HP.

If those suppositions were true, that left a very short list of possible alternative OEM suppliers – who were not also significant competitors in the BTA dealer channel.  In our assessment, that left only OKI and Brother as possible OEM printer/MFP hardware partners with native engine technology and a relatively low profile in the BTA channel. However, changing OEM platform sources is not a trivial task and likely results in high switching costs, increased complexity and development risks, and the long lead-time necessary to switch OEM suppliers.

Anybody who has worked in product development in this industry knows that as a rule of thumb, work begins on the next generation of products before or at about the same time as you launch the generation that has just finished its development cycle. This is because it usually takes at least 18 months — and can take more than two years — to develop a new engine and matching controller family starting with a clean sheet of paper. In this industry, a two-year-old printer or MFP model is getting long in the tooth. If HP wanted to (without knowing the details of the existing contract between the Samsung printer operation and Xerox), it could have refused to continue to work with Xerox – an important competitor — on developing the next generation of machines succeeding the models currently in the market, forcing Xerox to start from scratch with a new OEM supplier. The announcement this week tells us that at least for now, HP remains as a critical supplier to Xerox of a number of current and next-generation printer and MFP models.

Why would HP decide to continue to supply Xerox with a range of printer and MFP models?

1. Terms in the existing contract regarding continued supply were mandated and unlikely to be successfully challenged in any legal forum.
2. Helping Xerox develop and produce new models gives HP full knowledge of Xerox’s product strategy – a competitive advantage in possible head-to-head comparisons.
3. Producing a significant volume of A3 and A4 machines for Xerox, which are based on the same engine platform and other design elements as their own branded models, helps HP achieve necessary scale and cost targets in running the former Samsung manufacturing operations.
4. Maybe Xerox has something of value to offer HP?

We are betting on No. 3.

With HP now secure as a key OEM supplier, that is, um, good news for Xerox (better than switching vendors).

The wide-ranging agreement encompassed a lot more than the A3/A4 OEM hardware sourcing agreement – with potential market and revenue benefits for both Xerox and HP.

What HP gets from its OEM agreement with Xerox

Element                                                                Benefit

What Xerox gets from its agreements with HP

Element                                                                Benefit

A prepared release announcing the expanded relationship included statements from both HP and Xerox management. “This announcement broadens our portfolio of products, software and services, expands the reach of DocuShare Flex, increases productivity in our toner facilities, strengthens ConnectKey’s position in our printer family, and makes us a formidable player in the IT Solutions business especially with the small to midsize business we know so well,” said Steve Bandrowczak, President and Chief Operations Officer, Xerox. For its part, HP’s Enrique Lores, President, Imaging and Printing, stated “This arrangement is an extension of our existing relationship and creates incremental opportunities for HP in several important areas. … It further demonstrates the strength of HP’s differentiated IP and portfolio and positions the business for growth over time in both office printing and DaaS.” The release stated that the companies will announce release dates for the relevant A4 and entry-level A3 printers closer to product launches. Xerox said it expects to begin offering HP DaaS to U.S. customers in the second half of 2019.

Our take

Xerox’s divorce from Fuji Xerox and its engine capabilities left the company with few realistic OEM options to keep pace with the competitive demands of the print/copy engine hardware development and production game. From a business perspective, the only sane choice was to stay with its existing OEM partner – formerly Samsung, now HP – despite HP’s obvious conflict of interest in the relationship. It appears that Xerox did the best it could under the situation: the company was able to work with HP to sell its sophisticated EA toner for use in HP engines and add HP as a VAR for its DocuShare Flex application, while Xerox added enhanced solutions selling abilities through its authorization to market HP’s DaaS and PCs. In both cases, the cross-selling makes the two companies better positioned as more complete solutions providers and drives incremental revenues by capitalizing on proprietary in-house technology and production assets.

There are any number of competitors-as-a-supplier instances among participants in a variety of vertical industries. In this case, the A3/A4 OEM agreement served as a foundation piece for these long-time competitors to hammer out a mutually beneficial buyer/seller relationship. That said, it is notable that the announcement refrained from characterizing the agreement using the (overused anyway) “partner” or  “partnership.”  I am glad they did – it would have made digesting the press release much more difficult and disingenuous. Sometimes you have to make a deal with the devil and hope it works out.