“The enemy of my enemy is my friend”

Chinese (and Arabic) proverb

EMC’s announcement that it struck an OEM deal with Lenovo, and will be forming a JV with the Chinese PC maker, signals the next chapter in EMC’s expansion into server markets generally and China specifically.  Joe Tucci was in Beijing earlier this morning to announce the relationship which involves three components:

1. Joint development in servers. EMC and Lenovo will form a server technology development program that is a two-way street. EMC will provide enerineering expertise to Lenovo for X86 systems (remember the old AViiON line from Data General—EMC still has a handful of server experts on staff) and EMC will integrate Lenovo servers into existing and future storage products (appliances, etc).
2. Lenovo will resell EMC storage products. Initially Lenovo will resell VNXe according to sources and over time it will add additional products and co-brand them through a deeper OEM relationship. The go to market will initially be in mainland China and expand over time. EMC storage will be the default offering for Lenovo servers.
3. Levovo and EMC will form a NAS products joint venture aimed at SMBs. EMC is providing Iomega IP and Lenovo is putting up the cash. Lenovo will own 51% of the JV according to sources.

What’s The Angle on this Deal?

EMC has its hands in servers and continues to find ways to attack IBM, HP and Dell strongholds. EMC’s ownership of VMware puts it in the driver’s seat for software-based servers (i.e. virtual servers). It’s where all the disruption and growth occurs in the market. While not directly participating in the server hardware business, EMC influences the market through VMware and its VCE JV with Cicso, VMware and Intel. By aligning with Lenovo it supports the server business of a company that can compete with EMC’s traditional foes while at the same time replacing the Dell business with a partner that doesn’t have storage IP. Notably, the Lenovo deal won’t be anywhere as close to the size of Dell but over time it will certainly grow.

EMC is restructuring its storage portfolio to focus on growth. On EMC’s earnings call last week, company executives announced that product revenue grew a mere 3%. However the company was quick to point out that its low-end Iomega products were a drag on the business. EMC originally purchased Iomega to get supply chain leverage for disk drive purchases but given supply constraints over the past six months that hasn’t provided any bottom line benefit.

On the earnings call, EMC provided a new category metric around “Network Storage,” which grew 9%. Network storage comprises: Scale out file (Isilon), scale out block (presumably VMAX), Unified storage and BRS (i.e. backup). These are the new, cool, high growth product areas and the category excludes the low end Iomega drag.

China and the Channel. EMC has totally re-invented itself in the channel and is far more channel-friendly than ten years ago. However the company still struggles within the SMB space. Despite strong low end product announcements like the VNXe, SMB-focused companies such as Overland Data, NETGEAR, QNAP and Drobo have DNA that is programmed for SMB storage—EMC’s isn’t. This move nicely expands EMC’s channel and China distribution. Lenovo already has more than 10% server market share in China. EMC has a multi-hundred million-dollar business in China that could easily grow to $1B in the mid-term.

Lenovo gets instant engineering talent and storage IP. This is a great move for Lenovo. Remember when Dell didn’t own its own IP? That’s Lenovo today. By partnering with EMC it gets access to great engineering talent in Massachusetts and China and Iomega storage IP, brand and channel.

The Gelsinger Factor. It looks to me like this deal had Pat Gelsinger’s fingerprints all over it. Gelsinger, the former Intel exec, probably knows Lenovo well as it is a big buyer of Intel products. In one of his last major acts before he takes over VMware, he rationalizes the storage products portfolio and re-focuses the mother ship on high growth opportunities—i.e. hot products and BRIC + 13 countries of which “C” is the biggest opportunity.  As well, he probably preserves and even improves EMC’s supply chain leverage both via the JV and because EMC buys lots of white box servers today for its appliances. Over time you’ll see more appliances based on Lenovo servers. What’s next? Maybe a deal to package and distribute VMware licenses.

The Final Analysis. EMC, as a $20B+ company, is starting to act like one. It’s doing big deals with multi-nationals like Lenovo, buying companies and driving the enterprise agenda through VMware. This move helps launch a new server competitor that could be a thorn in the side of EMC’s traditional combatants, which constricts cash flows and dulls their ability to invest in core storage businesses. At the same time it opens up new distribution channels, sheds underperforming products and preserves – even improves – supply chain leverage. Low risk. Potentially high reward. No brainer.