EMC’s deal with Lenovo is about China, not Cisco

By Tim Stammers, Senior Analyst, IT Infrastructure, Ovum

EMC has struck a deal with Chinese PC and server maker Lenovo. The most important elements of the deal are that Lenovo will resell EMC storage products in China, and EMC will provide Lenovo with technical help developing Lenovo’s x86 servers. The arrangement is likely to provide EMC with improved access to the Chinese market, and has parallels with EMC’s formerly successful resale arrangement with Dell.

It does not pose an immediate threat to EMC’s alliance with Cisco, because although Cisco and Lenovo both sell servers, they do so in very different market sectors. Neither is there an immediate threat in the fact that EMC has linked the Lenovo deal to its already publicized plan to transform its disk arrays into combined server-and-storage devices. That plan is indistinct, and Ovum believes that EMC’s move towards servers will be gradual at most, in order to protect its alliance with Cisco.

Lenovo will open China for EMC

Gaining a large channel to market via a partnership with a giant such as Lenovo would be very useful in any country, but it is especially helpful in China. This is not just because of the importance of establishing a position in the world’s second largest and still growing economy. It is also because in China, local representation of an overseas company’s products is even more useful than in Western countries. As in other Asian countries, business in China is not completed in the same way that it is in the West. Furthering the appeal of EMC products in China, Lenovo will rebrand them as its own offerings. The deal echoes many others in which western businesses have traded technology for access to developing markets.

EMC’s experience with Dell will be useful

In 2001 when EMC signed a deal to allow enable Dell to resell EMC storage products, there was speculation that the arrangement would be stymied by channel conflicts between the two companies. However, over the next few years, EMC and Dell proved their critics wrong, and the arrangement flourished. At its peak, Dell accounted for around 14% of EMC’s revenues, and a third of the sales of its mid-range disk arrays. Lenovo and Dell are different companies, but clearly EMC will bring as much of the Dell experience as possible to its new partnership.

Dell and EMC began to part ways in 2008, when Dell made itself a direct rival to EMC, by buying storage maker EqualLogic. Consequently, Dell and EMC’s resale arrangement was wound down over the next couple of years. Dell’s original motivation for the deal was to allow it to compete better with its server rivals HP and IBM. Until it began reselling EMC products, Dell could not fully match HP and IBM’s ability to offer customers both storage and servers, from a single supplier. Much of Lenovo’s motivation for its deal with EMC is the same, but now it is Lenovo using EMC to strengthen itself against Dell, as well as against IBM and HP.

Dell split from EMC by buying EqualLogic (and later, another storage supplier, Compellent) because it wanted to control its own storage destiny, and profit margins. In a few years’ time, Lenovo could make the same move. In the meantime, EMC has the opportunity to boost its revenues via Lenovo’s sale of its products, and indirectly gain more experience of the Chinese market. It also has the chance to build an installed base in that country. Even though EMC’s products will carry Lenovo badges, customers will be aware of their origin, as they were with Dell’s re-badged EMC products.

EMC was already set to become some form of server rival to Cisco

EMC became closely allied to Cisco in 2009, when the two began selling ready-assembled data center building blocks. Called vBlocks, these combine Cisco’s network and server products with EMC’s storage systems, and EMC subsidiary VMware’s virtualization software. Now, EMC’s plan to help Lenovo develop x86 servers may appear to represent EMC partly turning its back on Cisco. However Cisco and Lenovo servers sell in different market sectors.

Cisco’s sophisticated blade servers feature networking and other high-end features, while Lenovo’s servers are low-end devices. This will change, as Lenovo is clearly hoping that EMC’s technology input will help it move upmarket. But the change will take time, and before it happens, EMC itself will have become a server competitor to Cisco, in one form or another.

EMC’s plan to provide server technology to Lenovo may surprise some people because EMC apparently has no experience selling servers. However, the company’s disk arrays are simply specialized x86 servers. This fact was demonstrated in May 2012, when EMC declared that within the next two years, some of its disk arrays will be able to host virtualized third-party applications. Those boxes will then compete with Cisco’s servers, in at least some applications. Currently it is not clear which applications those will be. It is a strong possibility that they will consist only of a subset of applications, which for latency reasons are best hosted in the same device as the storage they access.

The new deal with Lenovo simply introduces an extra element to that plan, as EMC says it will embed Lenovo servers within some of its disk arrays. Given that EMC will be providing Lenovo with technical help developing x86 servers, and not the other way around, it does not appear that Lenovo will make a significant contribution to EMC’s efforts to make its arrays host applications, at least not in the short term.

EMC’s partnership with Cisco is not exclusive and it will continue

EMC and Cisco have demonstrated that their alliance does not prevent them from partnering with other companies to produce rival products to EMC and Cisco’s vBlocks. Cisco has made significant contribution to the efforts of EMC’s storage rival NetApp to create a data center building block called the FlexPod, which is NetApp’s answer to the vBlock. EMC reached out to Cisco’s rivals when it created the VSPEX building block. While the VSPEX is aimed down-market of the vBlock, it allows customers to choose server and networking gear made by Cisco rivals such as IBM, HP, and Dell.

But the EMC and Cisco alliance is itself producing results. Last month EMC said vBlock revenue run-rate is on track to reach a very respectable $1bn per year during 2012. That followed EMC’s prediction in January that vBlock revenue growth would average 20% or more per year until 2016. It is possible that EMC would like to eventually become independent of Cisco, or at least have that option.

However developing equivalent server technology to that currently offered by Cisco would not be a trivial task, and would take time. If EMC does take this path, it will do so carefully. At the beginning of the relationship with Cisco, EMC CEO Joe Tucci said publicly that an important part of such alliances is to signal any important moves to partners, clearly and in good time. Ovum suspects that EMC will follow its own advice.

 

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