What We Can Learn From Dell
With the United States battling the sub-prime crisis, and the economy slipping into recession, analysts are busy trying to figure out how this will impact China. On the one hand, falling U.S. demand may hurt China’s export machine. On the other, U.S. companies may become even more cost-conscious and seek to further reduce costs through China sourcing. Dell Inc., the world’s second largest PC maker, made some announcements last week which begin to provide answers to these questions and others.
It could not be more simple in Dell’s case. “China is critical to Dell’s global supply chain,” founder and Chief Executive Michael Dell told reporters last Thursday. Dell will purchase “$70 billion of computer-related supplies and equipment from China,” he said, referring to total purchases over the 2007-2009 period. The company plans to buy $23 billion of components from China this year and $29 billion in 2009, helping it reduce costs while the company’s main market, the United States, is facing recession.
Dell’s statement also demonstrates that, despite higher wage costs and increasing inflation, China’s role as a manufacturing center is only increasing, not diminishing. China is moving up the value chain. For every textile job that goes to Vietnam, two more come to China to make more sophisticated products like electronics. Dell estimates it will contribute more than $50 billion to China’s gross domestic product this year and “support” more than 2 million jobs, according to a statement from the company. In addition to reducing costs, Dell is also looking to sales in China to help it remain a global leader. Dell’s CEO predicted that the U.S. market “will be OK, but not the fastest-growing. We expect more growth in Asia.”While it ranks second behind Hewlett-Packard globally, Dell is only in fourth place in China with a 7.9 percent market share. At the end of last year, Lenovo had a 28.8 percent share of the China market and was the market leader, followed by Hewlett-Packard, Founder Technology, and Dell, according to IDC.
For Dell, like so many other companies, China has become the final battleground for global leadership. Dell lost its top position to HP in 2006, and must now gain share in China to have any hope of retaking it. Fortunately, after changing its approach, China sales are increasing. Dell’s consumer sales in China grew by 54 percent last year, more than three times the industry average of 17 percent, the computer maker said. Dell, which focused on an online and phone sales model, started to sell products in retail stores last year, in cooperation with Best Buy and Wal-Mart. In China, Dell sells products in 500 Gome stores after announcing a cooperation agreement with the country’s No. 1 home appliance chain store five months ago.
From a product point of view, Dell is targeting the large, relatively untapped rural and downscale markets by developing products that are more affordable. “Dell is developing new models aimed at Chinese and Indian consumers to drive sales in fast-growing Asian markets,” according to CEO Michael Dell. He said that the “new models are meant to meet ’specifically the requirements that we see in countries like China and India.” Personal computer makers increasingly are designing products with Chinese buyers in mind. Both Dell and China’s Lenovo Group unveiled low-cost PCs last year for rural and novice users.
Dell’s announcements last week come at a time when the company’s profits are falling and sales to its core market, the United States, are sluggish. Nonetheless, they illustrate four key points:
- China’s role as a manufacturing center for the world is becoming even larger as it moves up-market in the manufacture of more sophisticated products.
- The China market for just about any product is already big, and is among the fastest-growing in the world. If a company cannot succeed in
China, it is doubtful that it can remain a global leader. - A company may need to change its business model to succeed in
China. Dell switched from an Internet sales model to one with which sales are made through retail outlets. Result: sales went up by 54 percent. - The key to the vast China market is to develop products specifically for
China which meet the unique requirements of the Chinese consumer, one of the most important of which is affordability.
