Dell vs Lenovo Dell’s direct sales model has restricted the company’s growth in China even as domestic competitors such as Lenovo have raced ahead making the most of China’s still rapidly growing PC market. According to data from industry body IDC, Dell had a market share of 9 % of the total PC shipments in China in the second quarter of 2010, narrowly beating out rival HP for the first time. But both foreign manufacturers lagged market leader Lenovo by a big margin. Lenovo had cornered nearly 29% of PC shipments in China in the same period.
PC makers in China benefitted from the government’s economic stimulus policies as Beijing offered subsidies to encourage consumption amongst its population. As detailed in the case Dell’s direct sales model was a misfit in China where customers relied on touching and trying out products before buying them. In the US. , Dell has done well by providing consumers with a way to avoid the hassles of driving to the mall. But Chinese consumers have a favourable attitude towards shopping and many view PCs as a crucial purchase.
As the market for PCs in China’s large cities gets saturated, incremental sales will increasingly come from Tier 3 & 4 cities in the country. It is even more imperative for Dell to create a strong physical presence in China now as consumers in smaller Chinese cities where internet penetration is lower will be even less accepting of Dell’s direct sales model than their big city counterparts. As an acknowledgement of the reality in the Chinese market, Dell tied up with Chinese retailer Gome in 2007 to sell its PCs through Gome’s network of stores.
This is the first time Dell has overstepped it direct-sales model. Gome, the largest electronics retailer in China has over 1000 stores in 200 Chinese cities. But reducing its reliance on direct sales hasn’t solved all of Dell’s China problems. One challenge that Dell faces is its choice of partner. Gome may be the biggest Chinese electronics chain, but the vast majority of Chinese PC sales take place not at retailers like Gome or Best Buy but at IT malls, which have 100s of retailers under one roof. This is a major advantage that Lenovo enjoys over Dell.
The company has a strong presence in its home market through its massive retail network and other points of sales. The company has managed to cover the length and breadth of China better than any competitor by being the first one to set up its retail presence in smaller Chinese cities. Lenovo’s domination of the local Chinese market has taught foreign PC makers an important lesson about operating in China. Dell has been a pioneer in its own right, by using its made-to-order sales model and highly developed supply chain management to its advantage.
But the Texas-based PC maker like many other foreign companies trying to break into the Chinese market has had to rethink many basic assumptions and give in to realities of the Chinese market. Dell is continuing to bet big on the Chinese market. Even as PC growth in more mature markets stays stagnant, China’s market for personal computers is expected to increase by up to 15% this year. Dell said in September 2010 that it plans to spend more than $100 billion over 10 years to broaden operations in China and increase its sales in the domestic market.
Dell will open a second China operations center in Chengdu in 2011, adding production, sales and support in the southwestern part of the country. The world’s third-biggest maker of personal computers will also add an office and as many as 500 workers at its existing Xiamen site. Dell’s move to locate its new facility in inland China follows a spate of rapid wage increases and worker suicides in factories in Southern China. Also the company’s move to the relatively poor Sichuan province is being viewed by analysts as a step closer to the smaller markets in China which are expected to drive PC growth this year.
Both Dell and Lenovo have announced that they will be launching tablet PCs in China in 2011. According to IDC, sales of tablet PCs will exceed 2. 5 million units in China in 2011, an increase of over 300 percent from about 600,000 units in 2010. Currently this market is dominated by Apple with its iPad. The growing popularity of the tablet PCs will completely change the market for traditional PCs, driving PC makers to smaller and smaller Chinese cities looking for incremental sales. These changing market dynamics will test both Lenovo and Dell and force them to become more innovative as the competition in the market heats up.