UPDATE II:

We have released VMware Tools Version 10.2.0, with more fixes and improvements for VMXNet3 vNICs. Please download and update your VMware Tools, even if only for the additional improvements in VMXNet3 vNIC drivers.

Recommended drivers versions for Windows and Microsoft Business Critical applications is: 1.7.3.7

UPDATE:

We have just released a new version of the VMware Tools which fixes the issue described in this post (below).

Please download and install this version of the VMware Tools, especially if you are using the VMXNet3 vNIC type for your Windows VMs.

We thank you very much for your patience and understanding while we worked on fixing this problem.

From the Release Notes:

Receive Side Scaling is not functional for vmxnet3 on Windows 8 and Windows 2012 Server or later. This issue is caused by an update for the vmxnet3 driver that addressed RSS features added in NDIS version 6.30 rendering the functionality unusable. It is observed in VMXNET3 driver versions from 1.6.6.0 to 1.7.3.0.

VMware is aware of the following reported issues affecting Windows Server 2012 / 2012R2 and newer Guest Operating Systems on VMware vSphere:

The Windows Receive Side Scaling (RSS) feature is not functional on virtual machines running VMware Tools versions 9.10.0 up to 10.1.5

up to Some Windows Virtual Machine running these versions of the VMware Tools may experience increase in rate of “Received Dropped Packets”, caused by the fact that all network traffic will be serviced by only one CPU in the Guest. This would occur only if vCPU 0 is overwhelmed and cannot keep up with the rate of the network transmit/receive.

This condition results in performance degradation for the applications and services hosted on the affected Virtual Machine.

NOTE: RSS is disabled by default on VMXNet3 virtual NICs in Windows. VMware encourages enabling RSS only for applications requiring high network throughput and large bursts.

VMware is working on creating a fix for this issues.

VMware advises any customer experiencing the issue described to contact VMware’s Global Support Services for immediate assistance.

NOTE: If you are experiencing dropped packets at the NIC level, it may be because of the described bug (but also to other causes such as network congestion). If you are not seeing dropped packets, the driver has sufficient CPU power to process all packets. If you see dropped packets and can confirm that the root cause is with the VMXNET3 driver, we recommend that you evaluate the risks of downgrading versus status quo. If the applications running on the VM are not sensitive to dropped packets, it may not be needed to do anything before we have the permanent fix.