Lenovo And NetApp Get Very Close On Storage Systems

As part of the Lenovo and NetApp deal, it will create a China JV.     STEVE MCDOWELL

Principal Analyst Patrick Moorhead contributed to this post.

Lenovo and NetApp announced a strategic alliance at the Lenovo Transform 2.0 event in New York City this week. Moor Insights & Strategy principal analyst Patrick Moorhead was in attendance and had the opportunity to meet with Lenovo and NetApp executives to better surmise the relationship. Patrick and I both met with company executives months ago, so we’ve had some time to stew on the arrangement.

The new alliance closely aligns NetApp’s mainstream storage business with Lenovo’s growing data center efforts and includes shared products with independent branding, and a China-based joint-venture to develop and sell products in the China market.

The details

The first stage of the alliance between NetApp and Lenovo is deceptively straightforward.

Two storage product lines will be shared between the companies, and the companies created a joint-venture targeting the Chinese market.  While this sounds simple and straightforward, I believe the collaboration promises very high levels of on-going cooperation at every level of the two organizations.

The deal allows Lenovo to develop and build storage products based on NetApp’s FAS hybrid flash storage and its AFF A-Series all-flash storage arrays. Lenovo will market these as the ThinkSystem DM Series all-flash and hybrid flash array, and the ThinkSystem DE Series and flash and hybrid flash array. This allows Lenovo to deliver branded storage products to the sweet-spot of the enterprise market, serving from the entry to mid-range and high-end of the storage segment.

The product offerings go beyond a simple rebranding.  Lenovo will manufacture and test the products at Lenovo’s factories throughout the world and will gain full access to  NetApp OnTap software that controls the storage arrays. Lenovo will also offer first levels of technical support to its storage customers.

More interesting than the product offerings is the announced China-based joint-venture, owned 51% by Lenovo and 49% by NetApp.  The unnamed venture allows the two companies to deliver storage products and data management solutions tailored to the specialized requirements of the Chinese market.

Details about how the joint venture will operate are still being rolled out, but the net result will be an independent company that can deliver a product suite spanning the complete storage offering of Lenovo and NetApp storage. The joint venture will deliver and market both Lenovo and NetApp branded products to the customer in China. As most western companies know, to do meaningful business in China to government-funded entities, they must create JVs with Chinese ownership.

Lenovo and NetApp both growing independently

The timing couldn’t be better for Lenovo and NetApp. The dominant industry competitors Hewlett Packard Enterprise and Dell EMC have each spent the past several years building cross-segment product portfolios, inclusive of both storage and servers.  This level of product integration gives HPE and Dell EMC greater leverage in driving solution-level sales and support with one “throat to choke.”

Standalone technology providers are forced to execute differently to succeed, something at which NetApp and Lenovo are both excelling. The products these two companies, Lenovo in servers and NetApp in storage, coupled with execution-focused leadership, is yielding substantial gains.

Lenovo disclosed during its latest earnings call that its data center business revenue increased nearly 68% year/year to $1.6B. This is the most robust growth that Lenovo had shown since the company entered the server business in 2014 when it acquired IBM Corporation’s x86-based server business.

NetApp is also in the midst of an impressive period of growth. Since George Kurian took the helm in 2015, NetApp has continually increased both revenue and share. The most recent IDC Worldwide Enterprise Storage Systems Tracker shows that NetApp is outgrowing the market. The company grew its revenue nearly 20% year/year, outpacing every other competitor except Dell EMC. NetApp is currently the number three storage provider, behind Dell EMC and HPE.

Even with this impressive growth, it will become increasingly difficult to compete against providers that offer a full suite of both storage and server products.  Deep collaboration is an excellent way to bridge the gap. It allows NetApp and Lenovo to compete as if each had a comprehensive product suite, while leveraging the economies of scale that two large organizations can deliver.

Our quick take

This relationship makes a lot of sense for both companies. Enterprises are looking for server-storage solutions with one throat to choke and it allows the two most substantial remaining independent storage and server OEMs to collaborate in taking on the more horizontally-integrated HPE, Dell EMC, and, in China, Huawei.

China is a difficult market for American companies to penetrate. Lenovo’s heritage allows the announced China-based joint-venture to offer NetApp an entry into a market that it would otherwise be slow to penetrate.  The joint venture will give it a technology boost over its competitors.  The joint venture will also allow Lenovo to better compete much better against Huawei in that region.

Access to the NetApp’s hybrid and all-flash storage arrays will give Lenovo a strong portfolio worldwide. This should allow it to compete more effectively against HPE and Dell EMC.  The same is true of NetApp and its competitors, as NetApp will now have a strong server partner to pull into deals where full-stack solutions are mandated.

Missing from the announcement was mention engagement on converged infrastructure and HCI.  Lenovo delivers HCI to the market through its partnership with Nutanix, NetApp HCI is a compelling offering, though it has been slow to achieve traction. Bringing the HCI technology into a relationship with a server company such as Lenovo could be a strong play.

The announcement of the strategic alliance hinted that this is just the first phase of what each company hopes will be a long-term relationship.  It’s difficult to align organizations as complex as each of these companies are, so perhaps HCI and converged infrastructure will be a part of what Lenovo described as “a future phase.”

This venture has excellent potential for both Lenovo and NetApp. It enables both companies to better compete against the vertically integrated portfolios offered by Dell EMC and Hewlett Packard Enterprise.

Execution will be critical, and not just on the technology, but the sales and marketing.  I am glad both companies have experience and scars from prior strategic engagements. I believe the principals know the good, bad and ugly of strategic engagements and will use that to improve the chances of making this one work well. There are many moving parts, and these are two very different corporate cultures, at least between the US and China, but I believe Lenovo in Raleigh is very much culture-aligned with NetApp US.  If Lenovo and NetApp and can focus and deliver, then together they have a substantial opportunity to multiply their growth.  HPE, Dell EMC, and Huawei should be watching this very carefully.

As storage units are shipping today, I’d say this is a good start to execution. We can’t wait to see where it all leads.