Commentary: HP's Woes Are Deeper Than the Downturn

When Hewlett-Packard Co. (HWP ) Chief Executive Carleton S. Fiorina warned investors in January that revenues would grow only around 5% for the first half of 2001, she was among the first CEOs to cite an economic slump as the culprit. Since then, she has regularly trotted out that old tried-and-true CEO villain: If it weren't for the weak economy, we'd be doing much better.

But all is not well at HP. Many analysts considered Fiorina's projections earlier in the year that HP would turn in 15% growth over the top. Since pulling back in January, Fiorina has lowered the bar again. On Apr. 18, citing a slowdown in consumer spending in Europe and elsewhere, she said sales would shrink 2% to 4% in the quarter ending Apr. 30. She also said HP would likely show no growth for the next two quarters. Says Salomon Smith Barney analyst John B. Jones: "Her credibility hasn't gotten any better."

Lost in the deluge of bad news that has hit virtually every company in the tech sector is one salient truth: HP should be doing much better than it is. Even if the economy was still humming, HP would still be facing big structural, cultural, and product problems. And fast-moving rivals like Dell (DELL ), EMC (EMC ), and Sun (SUNW ) would be zooming even further ahead of HP. "This should have been an opportunity for HP to play catch-up," says Salomon's Jones.

Of course, a weak economy is nothing to be trifled with. Says HP spokesperson Suzette Stephens: "We've been ahead of the curve, unlike many of our competitors, who were taken by surprise." But HP's problems are more basic. A top concern at HP is Fiorina's sweeping year-old reorganization. In place of a 60-year-old decentralized approach, she split HP into three product development groups: for printers, computers, and digital appliances. She also split sales and marketing into three groups: for consumers, corporate markets, and consulting services.

CONFUSION REIGNS. In theory, the reorganization plan should help HP become an e-business powerhouse. In practice, it has caused mostly confusion and gridlock. "It's beyond my ability to communicate our frustration," says one computer reseller who has struggled for two months to get HP to work out a customized configuration for one of its new servers. "It's painful to watch them screw up million-dollar deals." Indeed, the level of confusion among HP units appears at times to be spinning out of control. A company that sells Net-related hardware that works with HP gear reports going on a customer call at which 16 HP staffers showed up. "The customer asked who in the room was from HP--and then said only three could stay."

Beyond those structural problems, Fiorina's tenure has so far done little to improve HP's share in still fast-growing markets. The biggest problem is in corporate computing. Sales of its Unix servers grew just 6% last quarter, and its top-of-the-line Superdome server seems to be shaping up as a superbomb. Analysts say the server is technically fine, and, given HP's big customer base, should have been a sure thing. But with HP's sales and distribution efforts in flux, rivals including market leader Sun Microsystems Inc. and resurgent IBM (IBM ) are taking share from HP. As a result, they will be better positioned than HP to grow when the economy does turn around.

And what of Fiorina's promise to fire up HP's invention engines? Many of HP's top sellers--from its $299 Photosmart 315 digital camera to its $500,000-plus XP512 data storage product--are made by partners. HP adds some software, but its main contribution is its brand name and distribution networks. "They're trying very hard to innovate, but it's hard to find much success," says Lyra Research Inc. President Charles LeCompte.

After Fiorina blamed a drop in consumer spending in Europe for the Apr. 18 preannouncement, many analysts and rivals were baffled. "Both Compaq and Dell have grown at a pretty good rate," says Rob Walker, chief operating officer of the European division of Compaq Computer Corp. (CPQ ), which saw PC sales grow 14% in the first quarter. "That's why we are a bit mystified by their statements." The question is whether Fiorina's mysterious remarks may be hiding a far more troubling reality.

By Peter Burrows

With William Echikson in Brussels

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