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Mercury News’ columnist got it wrong. Headline should be: HP Grows Up ( … with corporate real estate playing role) June 2, 2010

Posted by Bob Cook in Company Case Studies, Financial Planning & Analysis, Profession of Corporate Real Estate, Silicon Valley.
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Today, Columnist Chris O’Brien lambasts HP for finding success – not from innovating like Apple or Google – but from implementing a “ruthless, brutally effective strategy” that he playfully characterizes as “Buy a company. Cut costs. Trim employees. Repeat.” His column was prompted by HP’s latest layoff announcement.

HP should, however, in fact, be lauded for maturing into a well-run enterprise that can successfully compete in a complex world where success – especially for a large company – requires more than just coming up with the latest and greatest. It requires business acumen, discipline, and management – something that has been missing from the many great product-focused, geekdom companies that are now R.I.P. in the Silicon Valley graveyard. Think (and weep, ’cause it was great in many ways): Sun Microsystems.

HP is showing an alternative way for a tech company to succeed – and to do it long term. It’s a way to build an enduring enterprise – a way away from the self-limiting strategy pursued by most tech companies and which I’ll playfully characterize as: “Design breakthrough product. Develop cult following. Sell before competitor catches up. Repeat first three steps as many times a possible, then (inevitably)…. Blink. Hiccup. Crash.”

HP has become a corporate juggenaut by realizing, under the five-year leadership of CEO Mark Hurd, that success requires the careful management of resources: capital, people, assets, infrastructure. The last of these is partially the domain the HP real estate group which is clearly busy with initiatives like the consolidation of HP’s data centers and which is proving its worth to the enterprise.

According to HP’s latest 10-K, of 77 million square feet of space, fully 10 million square feet had been vacated – probably significantly helping on-going P&L, albeit with some large one-time negative hits for write-offs and reserves. While only three million square feet had been sublet such that this vacated space continues to drain cash, once those unneeded leases burn off, the cash flow savings will become as permanent as are the P&L savings already in place. Having said that, subletting three million square feet is no small feat. (Pun intended.) Moreover, let me tell you, vacating 10 million square feet is an even bigger feat. (Yep, pun intended, again.) You might think, “what’s so hard about moving out of real estate”, but it must have involved thousands of decisions, hundreds of presentations, and dozens of approvals to decide which sites to vacate, when to do it, how to do it, who should should pay for it and who should profit from it.

As companies like HP become mature enterprises – managed by professional managers who leave product design and marketing to others and see their job as managing the enterprise – corporate real estate departments become more important. To manage an enterprise is to manage the company’s infrastructure – both hard (e.g. real estate, IT systems) and soft (e.g. culture) – and corporate real estate plays a central role in this area. Products come and go. People come and go. Infrastructure endures.

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In the headlines: Suicides and Chinese corporate real estate May 27, 2010

Posted by Bob Cook in Asian Expansion, Company Case Studies, Real Estate Markets, Silicon Valley.
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Update:  September 13, 2010:  The cover story of this week’s BusinessWeek is a profile on Foxconn and its founder Terry Gou.

Foxconn, a business unit of Taiwanese-headquartered Hon Hai Precision Industry, has, to its dismay, been in the news as of late. Foxconn and Hon Hai are not household names, even though Hon Hai is #109 on Fortune’s Global 500 and has the largest contract manufacturing operation in China. A slew of high tech companies – Apple, HP, Intel, Nintendo, Sony, Dell and others – outsource manufacturing to Foxconn, and the products manufactured by Foxconn are, in fact, household names:  iPhone, iPad, iPod, PlayStation, Xbox, Wii, Kindle and others.  Hon Hai / Foxconn typically shuns publicity and has developed the secretive culture necessary to assure customers that the IP entrusted to them remains guarded. Lately, though, the company’s operation in Shenzhen has garnered unwanted headlines: “String of suicides continues at electronics supplier in China”.

iPhone factorySome think the number of suicides (nine, confirmed, as of this writing) is not all that high given the fact that Foxconn employs at least 200,000 workers (and according to some reports, over 400,000) workers in Shenzhen. Over the years, though, there have been allegations of poor working – and living – conditions. You see, Hon Hai / Foxconn doesn’t have just factories for its workers, but it also has dormitories, all in an environment that – depending upon your point-of-view – is either like a college campus or like a prison labor camp. A few years ago, a famous muckraking article was written about “iPod City” where Apple products are assembled and assemblers are housed. The recent suicides have drawn attention to the factories and its dormitories once more.

The Hon Hai / Foxconn complex in Shenzhen is a city within a city.   In a walled compound, measuring roughly two miles by three-quarters of a mile, in amongst the factory buildings, there are dormitories, restaurants, a hospital, and all sorts of recreational facilities – a 21st Century company town, the responsibility of what-must-be one of the world’s largest corporate real estate departments.

Whether conditions are deplorable or not (which has been Apple’s appraisal) – whether it is a 21st Century Chinese version of 19th Century America’s Pullman or not – the scale of the real estate operation that supports the Hon Hai / Foxconn business is mind-boggling. Hon Hai / Foxconn doesn’t file SEC reports so there’s no public record of exactly how much of its real estate operation is devoted to housing employees, but you can get a sense of the scale from the SEC filings of Nam Tai Electronics, another (albeit much, much smaller) Chinese manufacturer. Nam Tai reports that it has 1.7 million square feet of real estate in Shenzhen. Of this, .7 million square feet – more than 40% – is for dormitories, cafeterias and recreational facilities. Nam Tai’s provision of housing accommodations is no small side-line. The same is probably true of Hon Hai / Foxconn which must be providing many millions of square feet of dormitories and related facilities to its employees.

The willingness of Chinese-based companies to provide living accommodations for their workers sets them apart from foreign companies and may be why they are the low-cost producers in the country. The word “willingness” may not, however, be apropos here. Some think Chinese-based contract manufacturers benefit from the resulting “dormitory labour regime” which gives them more control over the workers. In any event, the provision of worker dormitories is certainly part of  the engine that makes China the “World’s Factory” and is likely to keep it in that position for a long time. And, the lack of willingness on the part of foreign companies to adopt the practice is likely to keep contract-manufacturing as the predominant method that foreigners tap that Factory.

It will be interesting to watch the Hai Hon / Foxcomm story unfold. Apple’s involvement as a customer is going to assure press coverage. Today, it was briefly the world’s most valuable tech company, and for awhile, it’s been  the cultiest – just perfect for muckraking. Expect to see a lot of footage about poor working conditions and poor living conditions, debates about the benefits and evils of company towns … and maybe even an interview with a Chinese corporate real estate exec or two.