Dell Takes a Different Tack in China

In a nation where computers and credit cards are rare, innovative marketing is lifting sales of a low cost, no-frills model

By Bruce Einhorn

American computer giant Dell is trying hard to crack the Chinese market, and it's willing to depart from some of its tried-and-true business methods to do so, says William Amelio, president for Asia-Pacific and the man responsible for overseeing Dell's Chinese strategy. "China is a hugely important market for us," Amelio told a small group of reporters at a Nov. 29 briefing in Hong Kong.

And with industry experts predicting that Chinese demand for PCs will continue growing at around 20% next year, the market is clearly going to be even more crucial for Dell and other multinationals looking to offset the effects of the global recession.

It's easy to see why. Although China is the world's biggest country, with over 1.3 billion people, not many folks own computers -- fewer than 30% of residents in the wealthiest cities, including Beijing, Shanghai, and Guangzhou, according to a Nov. 30 article in the People's Daily. For the country as a whole, PC penetration is "no more than 10%," the newspaper reported.


  What's more, just 2% of large and midsize Chinese businesses have set up their own intranets. The country's current total market for computers, software, and information services amounts to about $29 billion, according to industry estimates.

As the Chinese economy develops, Dell is counting on those numbers to improve. It's already trumpeting success in China. Having entered the market in the late '90s, many years behind rivals like Compaq and IBM, Dell is now China's No. 4 PC seller. No. 1, of course, is local powerhouse Legend, followed by two other Chinese companies, Founder and Tongfang. That makes Dell the leading foreign brand.

To get to that position, Dell has been doing some things differently. It has departed from its traditional emphasis on customized computer configurations and, last July, it launched a locally produced computer -- the Smart PC -- with preset configurations.


  The goal, according to Amelio, is to bring down the cost of a PC and make it more attractive for the 85% of the Chinese urban population that don't have one, but can afford it. The Smart PC costs just $575 and doesn't have a lot of fancy bells and whistles, but it does sport "enough memory to support any applications that consumers want to run," Amelio says.

Dell won't reveal revenue numbers for the Smart PC, but the company credits the model as one reason sales have been growing -- 16% in the third quarter, giving Dell a 4.9% market share. So far, it's buying the Smart PC from Taiwanese contractors that assemble the machines in China. But next year, Dell will begin producing the Smart PC at its own, 350,000-square-foot factory in Xiamen, a coastal city in southeastern Fujian province. The Xiamen plant opened in November, 2000, and is one of Dell's biggest factories.

Dell has also adjusted to the Chinese market's demands by focusing more on consumers, figuring they're the fuel for market growth. Amelio says half of Dell's PCs in China go to individuals. But reaching them isn't easy, especially given their inexperience with the direct-purchase model Dell uses so well elsewhere.

So Dell has been sending sales teams to shopping malls in China's big cities, giving consumers a chance to "see and touch" the Smart PCs, says Amelio, and make them less worried about buying by phone.


  Once Dell makes the sale, it faces another challenge: getting paid. Not many Chinese use credit cards, something that has forced Dell to come up with alternatives. One is payment on delivery, although that has obvious shortcomings, since some buyers may not have the money when the PCs arrive.

To provide a more secure method, Dell has started working with Chinese banks. Now, a customer in Beijing or Shanghai can call up Dell, order a PC, and then walk down to his neighborhood bank and pay for it there.

Dell faces many other obstacles in China. While Beijing's upcoming entry into the World Trade Organization should make it easier for foreign multinationals to do business in the country, local outfits like Legend still enjoy a lot of advantages in marketing and distribution. And when it comes to making sales to government-backed companies or state ministries, Legend and other locals already have government connections.

But Amelio says Dell could play a trump card of its own. The company buys over $1 billion in parts from China, and that's likely to grow dramatically as more of its Taiwanese suppliers expand their operations in the mainland. That might give local officials more reason to look favorably on the Texas company -- and make Dell one to watch as China develops.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online

Edited by Beth Belton

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