You couldn't blame Michael S. Dell for sounding a little bit smug about his company's prospects in China during a cocktail party for analysts in Austin, Tex., last April. Dell Inc.'s (DELL ) market share in Asia was growing fast, and it looked as if its formula of selling PCs directly to customers over the Internet and phone was catching on just as it had in the U.S. "Demand for our products and services in China is tremendous," he said, adding that "99% of the economic value in China is in the large metro areas" where Dell was concentrating its efforts.
All of a sudden, Dell's strategy in Asia is looking a little shaky. Third-quarter numbers released by tech market researcher IDC show Dell's market share for Asia, excluding mature Japan, dropped by a full point, to 7.8%. Then, on Oct. 25, the company announced that the co-president of its Chinese operations, Foo Piau Phang, had "chosen to retire."
What's happening to Dell's march on Asia? The company won't talk -- it's in the quiet period before its Nov. 10 third-quarter earnings announcement. But there's plenty of evidence suggesting it is out of sync with shifting market conditions in fast-growing China. While Dell has focused on large business and government customers in the country's major cities, demand is emerging elsewhere -- in hundreds of smaller cities, where Dell doesn't sell as effectively as its rivals and where even some business customers want to see products before they buy. That's where competitors Lenovo, Hewlett-Packard (HPQ ), and Founder have been selling briskly through retail shops. Says HP Executive Vice-President Ann Livermore: "You have to wonder, how well does the direct model work in the hinterland?" HP has invested heavily in hiring staffers and recruiting retailers in secondary Chinese and Indian cities.
The China setback is just the latest in a string of recent disappointments for Dell. Since the Round Rock (Tex.) company missed its second-quarter revenue target, its stock price, which peaked at $42 a share in July, has sunk to less than $32. A survey by the University of Michigan recently showed a decline in Dell's customer-satisfaction rating. Also, the company was embarrassed in China in May after the publication of an e-mail from a Dell salesman criticizing the Chinese government -- a key Dell customer.
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A share decline for one quarter does not make a trend, of course. Dell sees China in particular as a key growth market where it already has 5,000 employees. It's even in the process of building a second factory in the southeastern coastal city of Xiamen. Over the long haul, Dell may have the most successful model for Asia, just as it does in the U.S., since today's first-time PC buyers could well evolve into tomorrow's online shoppers.
Yet at least in the near term, the company may have to tack. Dell isn't pursuing consumers, an area that is growing far faster than the business sector. If it does start chasing consumers, Dell's direct-sales strategy might falter because relatively few Chinese customers use credit cards, and those who do aren't accustomed to buying over the phone or the Internet. "The reality is, Dell needs to establish more of a presence on the street," either through sales kiosks or retailers, says Roger L. Kay, president of consulting firm Endpoint Technologies Associates Inc. in Wayland, Mass.
While Dell dominates in the U.S. and other developed markets, it is outgunned at the moment in Asia. Lenovo, the leader with a 20.4% market share, has more than 4,800 retail outlets in China alone. Innovations such as its Jiayue consumer desktop, designed specifically for families, featuring pre- installed education software, have helped it gain share in smaller cities. This local champion isn't likely to crumble under Dell's onslaught.
Even so, Dell is loath to break with its direct-sales strategy. Previous forays into retail distribution, both in the U.S. and in China, ended quickly. Yet if the company hopes to dominate in Asia, it may be forced to play outside of its comfort zone -- at least for a while.
By Louise Lee in San Mateo, Calif., with Peter Burrows in San Mateo and Bruce Einhorn in Hong Kong