Hewlett Packard’s printing business is dying. Can HP leverage digitization as its tailwind?
Digitalization has been of concern to Hewlett Packard Inc. (“HPQ”) for the past decade. HP’s printing business, which accounts for 38% of its total sales in 2016, is dying as its US$18bn revenue has been declining at an annual rate of 7% since 2011. HPQ’s printing business is to sell printer hardware at a discount and make profits from ink supplies. However, the profit growth stopped because digitalization resulted in decreasing demands for printing and competition not only with Japanese manufacturers but also with independent suppliers offering cheap alternatives for HPQ’s ink supplies have intensified.
To combat this declining revenue, HPQ renovated its ink supply chains by introducing “the Instant Ink” program. Under this program, HPQ monitors the ink usage of customers and delivers a new ink cartridge before they run out of ink. The customers pay a monthly fee determined by the number of pages they print per month. For example, a customer pays a monthly fee of US$9.99 for 300 pages. Customers benefit more by joining the program because customers neither run out of ink supplies nor need to keep ink inventories. They also save money as the unit cost per page is less; simple calculation shows that a customer who joins the 300-page program pay only US$0.03 per page although a customer would pay US$0.05 per page if they purchase ink supplies from retailers.[1]
HPQ benefits from the program by minimizing in its supply chain the bullwhip effect, where variabilities in the demand order are increased as they move up the supply chain[2]. The bullwhip effect causes poor production forecast, excess inventories or backlogs, and high costs to fix the supply-demand mismatch, such as for overtime work. [3] With the program, HPQ can forecast ink demand accurately as it monitors real-time data on customers’ ink usage. Matching supply to demand not only reduces the inventory level but also avoids excessive discounts offered to retailers. Moreover, HPQ can remove wholesalers and retailers from its supply chain and turn distribution margins into its own profits or lower selling prices.
To pursue long-term growth, HPQ entered the 3D printing market in 2014. The market size of 3D printers is estimated at US$5.2 billion in 2015[4] and is expected to reach US$21 billion by 2020[5]. 3D printers for additive manufacturing, which HPQ is developing, is expected to lead the market growth[6]. HPQ has established partnerships with leading chemical manufacturers, such as Dow Chemical, to develop supplies for 3D printers.[7] HPQ estimates the total addressable market is US$10 to 30 billion.
In addition to these initiatives, HPQ should turn around its B-to-B printer business, whose revenue declined 26% in 2016.[8] HPQ can promote its security feature and cost-saving program more aggressively. In HPQ’s pull printing system, a print job is first kept on a centralized server and then released by the user. Employees have to authenticate their print job, reducing uncollected documents on printer trays. Furthermore, HPQ should promote its scan-centric multifunction products (SCMFPs) more.[9] Combined with the built-in optical character recognition, users can produce searchable PDFs quickly and save physical space for storage. Strengthening these products, HPQ can establish the leading position as a solution provider for documentation digitization.
It remains unclear whether HPQ can succeed in the era of digitalization. Dion Weiser, the CEO, said in the 2016 fourth quarter earnings call that “I’m pleased with the adoption of instant ink, our consumer subscription service which continued to increase with a record quarter of new enrollees.” Nevertheless, its printing revenue has decreased for three consecutive quarters. It seems 3D printing takes time to pick up as Tim Long of BMO Capital Markets says “3D printing has very high potential, but a meaningful contribution is still several years out”[10]. The questions remain:
- How can HPQ overcome the decreasing demand for printing?
- Should HPQ focus on 3D printing?
(800 words)
[1] Assuming the customer purchases the HP950XL/951 cartridge, which costs US$104 on Amazon as of November 11, 2017 and includes black and color ink cartridge yielding up to 2,300 pages in black and 700 pages in color
[2] H. L. Lee, V. Padmanabhan and S.Whang (1997) The Bullwhip Effect in Supply Chains. MIT Sloan Management Review
http://sloanreview.mit.edu/article/the-bullwhip-effect-in-supply-chains/
[3] See note 2
[4] T. McCue (2016) Wohlers Report 2016: 3D Printing Industry Surpassed $5.1 Billion. Forbes
https://www.forbes.com/sites/tjmccue/2016/04/25/wohlers-report-2016-3d-printer-industry-surpassed-5-1-billion/#72e1d37b19a0
[5] Wohlers Associates, Inc. (2016) 3D Printing and Additive Manufacturing Industry Expected to Quadruple in Size in Four Years
https://wohlersassociates.com/press65.html
[6] HP inc. (2017) HP Accelerates Path to Industrial 3D Manufacturing with New Jet Fusion 3D 4210 Printing Solution and Expanded Materials Portfolio
http://www8.hp.com/us/en/hp-news/press-release.html?id=2530726#.WgetHWhSzg8
[7] See note 6
[8] S. Scribner (2017) HP Inc.: Questions for management Detuche Bank Markets Research (October 16, 2017)
[9] L. Lam (2017) Hype Cycle for Imaging and Print Services, 2017 Gartner
[10] Tim Long (2017) HP Inc.: Analyst Day Takeaways BMO Capital Markets Flash (October 17, 2017)
Cool article! While the Instant Ink program sounds like a great way to smooth customer demand and improve cash conversion through reduced inventory levels and fewer discounts, it does not solve the secular decline in HPQ’s core printing segment. Ultimately, I think that the core printing business will reach a plateau (since businesses will always have a minimum demand for printing), but HPQ’s only ability to grow has to come from an adjacency like 3D printing. While development of its own technology may take a long time, HPQ could accelerate its entry into the market through acquiring a smaller 3D printing company that could benefit from HPQ’s distribution and scale.
To answer the questions you’ve posed: HPQ may be better equipped to overcome the decreasing demand for printing by rethinking its position in the market from a customer-centric perspective, not a supply-chain perspective. And 3D printing is not the answer.
Currently, HPQ is taking a supply-chain centric approach to its sales decline – i.e., ‘How can we use the supply chain assets we have to continue to sell stuff when customers to are switching away from our product?’ The answer: make it easier to buy ink, and sell something customers are not switching away from.
The customer-centric approach would be to ask, ‘How can we continue to meet the needs of our existing customers, even if it means changing our supply chain?’ The answer would be to consider what is replacing printing and offer that – namely, document sharing and information storage. HPQ should consider undertaking an IBM-esque transition from goods to services if they want to survive in the long term – even if that means eliminating ink and 2D printer manufacturers and replacing it with software development.
3D printing is not the substitute for document sharing and information sharing, which means HPQ’s customers are not switching away from HPQ in favor of 3D printers. HPQ is not taking full advantage of its existing customer base by moving to the 3D market – it’s going to have to win on a new consumer battle ground.
I like HP’s foray into 3D printing, but in order to execute it they will need to expand the current printer use-case for the technology. Today, the strongest use-case for 3D printing is metal printing (typically DMLM, direct metal laser melting) for industrial design, rapid-prototyping, and manufacturing of complex parts. Plastic printers remain somewhat of a novelty due to an unclear use case to the consumer and high cost. As the costs of these machines and their materials continue to come down, I believe those use-cases will be unlocked and 3D printers will be utilized by the consumer market. Imagine a world with 3D printers in every home where rather than purchasing an iPhone case that gets shipped to your door, you purchase the iPhone case manufacturing sequence that enables you to 3D print it at home immediately. I see the process of getting mass adoption of 3D printers similar to that of 2D printers and believe HP, given its successful history of bringing 2D printer technology from the business into the home, would be well positioned to profit from that adoption.
Really like the article. I do think that 3D printing is an exciting market to venture into and it will form a big part of the “printing” future with additive manufacturing. It can be a good opening for HP to set its ground in a new growing market. While I do agree that expanding 3D printing will not cater to the declining 2D printing sales but I feel that the consumer is moving away from 2D printing by using other digital platforms and that entering into the service industry will not necessarily improve HP’s revenue margins. First services are hard to sell for a fixed price, second moving to subscriber model may require offering a free subscription for a few months which might lead to the free loader problem, third the service industry is not very capital or technology intensive hence there are very few barriers to entry for the competitors making this segment prone to saturation.
Hence I feel that HP should focus more on growing its business in the 3D printing segment. HP can leverage its manufacturing experience to dwell early into the market and become the first mover in an industry that has good future prospects.