Computer Savvy For Dell, Success In China Tells Tale Of Maturing Market Shoppers Prove Willing to Buy PCs Sight Unseen on Web; A Showdown With Lenovo
By EVAN RAMSTAD in Xiamen, China and GARY MCWILLIAMS in Austin, Texas
Staff Reporters of THE WALL STREET JOURNAL
July 5, 2005; Page A1
Just two years ago, Dell Inc. rejected a plan to sell computers online in China. The personal-computer giant worried that most Chinese consumers didn't use credit cards and were too poor to become big Web shoppers.
But last year, Dell executives in China showed their bosses a startling statistic: More than 90 million people in the country's coastal cities have access to the Internet at home or work. "We're missing a great opportunity," William J. Amelio, Dell's top executive in Asia, recalls thinking.
Today, online sales account for about 6% of Dell's orders in China and are becoming a big part of the company's push to shake up the Chinese computer industry the way it did in the U.S. a decade ago. With its pioneering strategy of building computers to order and selling them directly to consumers, Dell has conquered one market after another on its way to becoming the world's No. 1 maker of PCs.
[William J. Amelio]
In China, Dell faced repeated warnings that its strategy -- which relies on sophisticated computer buyers willing to purchase a product sight unseen -- wouldn't work. But by first going after business customers and then pushing into the consumer market, Dell has become China's third-largest seller of PCs, behind two Chinese rivals, with an 8% market share.
Now Dell's incursion into China is setting up a showdown with Lenovo Group Inc., China's No. 1 player, which has a market share of 25%. Their battle for control of the world's fastest-growing market and the second-biggest after the U.S. has high stakes for the industry, and shows how rapidly China is galloping into the ranks of the world's advanced marketplaces.
Lenovo, founded at a Beijing university, rose to dominate the Chinese PC market in the 1990s by taking advantage of China's low-cost labor and an inexpensive though vast system of distributors and retail outlets. It recently quadrupled its size and gained world-wide reach with the purchase of International Business Machines Corp.'s PC division. As Hewlett-Packard Co., the world's second-largest PC maker, retrenches in the business, Lenovo, now No. 3 in the world, may be the only company with a chance to challenge Dell's global lead.
The clash is changing the way both companies compete. Dell is showing Lenovo there's more to low-cost production than cheap land and labor. Lenovo is reacting to Dell's tactics more quickly than companies like H-P or IBM ever did.
Dell has learned some new tricks in China. Rather than create a joint venture with a Chinese firm, it waited to form a wholly owned subsidiary that cultivated close ties with a regional government. And it boosted its reputation in the region by teaching quality-checking and just-in-time manufacturing skills to locals.
[Yang Yuanqing]
Lenovo executives, while implementing direct sales with some of the company's big customers, publicly are skeptical that Dell's business model will work as well in China as elsewhere. But they also pledge not to be mowed over by Dell, the way PC makers in the U.S. were in the second half of the 1990s. "We are willing to learn things quickly," says Yang Yuanqing, who was Lenovo's chief executive officer until becoming chairman after the IBM purchase closed in May.
The companies have started trading barbs. Dell's founder and chairman, Michael S. Dell, several months ago disparaged the Lenovo-IBM deal as unlikely to succeed. While not naming Dell directly, Lenovo's Web site jabs at manufacturers that consider PCs to be unexceptional "commodities" -- a charge sometimes leveled at Dell by other rivals -- while describing itself as "more committed to innovation...than any other PC company."
Behind the scenes, Lenovo is scrambling to cut its costs closer to Dell's level. Since it started making PCs in the early 1990s, it has relied on China's largest network of distributors and retailers to sell them. But with Dell rising quickly, it overhauled that network last year and started dealing with some large customers directly. "Without a high level of efficiency, the company cannot grow and we will have problems in survivability," Mr. Yang says. He says Lenovo won't stop using dealers for most of its sales in China or elsewhere. Its direct sales volume amounts to just a few thousand units out of the about 750,000 it ships each quarter.
Mr. Dell started the company in a Texas college dorm room in 1984. It thrived on a powerful insight: Selling directly to customers is inherently more efficient than going through distributors or retailers. The company used mail-order catalogs, an internal sales force and later the Web to reach customers. Its direct contact with buyers gave the company early insights into technology shifts.
Dell custom-builds each PC after it is ordered -- a process that takes just a few hours -- and ships them out within a day or two. That allows it to keep a small inventory of electronics parts whose value declines rapidly. World-wide, the company's inventory of parts and finished products amounts to four days of sales. In China, it's even less because many suppliers are close by in southern China and Taiwan, Mr. Amelio says.
Dell's ultra-efficient formula has made it the world's most profitable and largest PC maker, with a nearly 18% share world-wide. An investor who purchased stock at its 1988 initial public offering and held onto it would have a more than 45,000% gain -- compared with 400% for the Dow Jones industrials. Mr. Dell's 9% share in the company is valued at $8.7 billion.
After entering China in 1998, Dell encountered trouble with the term "direct sales." It translates into a Chinese phrase -- zhi xiao -- that's most often used to describe illegal pyramid marketing schemes. To counter the confusion, the company blitzed customers with colorful brochures that depicted its sales and manufacturing processes. And its sales representatives adopted a new Chinese phrase -- zhi xian ding gou -- that means "direct orders."
"When we first opened, the question was: 'Would there be a way to call in orders?' Yes, there is. There are more cellphones in China than anywhere else in the world," says Kevin B. Rollins, Dell's chief executive. "Then, doubters said, 'How will you ship stuff around?' The logistics wasn't a problem.... As we tick down the list of this won't work there, that won't work there, we found every one of the myths was exploded."
Dell stuck to its playbook, concentrating initially on business and institutional buyers, who are most familiar with PCs and tend to be the most profitable clients. In China as in Europe, it started out selling high-margin products, such as server computers, and gradually added less pricey desktop and notebook PCs.
Most of its orders are taken by telephone sales representatives who work at a call center in Xiamen, a city bigger than Dallas on China's southeast coast. In nine other Chinese cities, Dell has sales representatives who visit large business and government customers, sending orders back to colleagues in Xiamen.
Dell's success is partly due to timing. Other PC makers such as AST Research Inc. that entered the market early found themselves forced into joint ventures with local companies. Those relationships initially helped the multinational firms, but many eventually lost business to their local partners and a few left the market altogether. For Dell, such arrangements ran counter to its policy of dealing directly with customers.
[Inching Up]
When the rules requiring local partners were relaxed in the mid-1990s, Dell could chart its own course in China. It wound up forging a close relationship with government leaders in Xiamen, who recruited the company in the mid-1990s to anchor its new technology park.
Dell helped the city streamline customs processing at the Xiamen airport. And when Mr. Amelio pointed out that an intersection near Dell's factory was dangerous, the city installed traffic lights. "We have found them to be anything but bureaucratic," he says.
In 2003, Xiamen city leaders asked Dell to hire a local TV manufacturer, Xiamen Overseas Chinese Electronic Co., or Xoceco, as one of the companies to build Dell-branded flat-screen TVs. Dell helped the company's managers reconfigure assembly lines to produce more in their existing space and make other improvements. Over the past year, Xoceco lowered costs, cut warranty claims and boosted exports. "On quality control and cost structure, we have learned a lot from Dell," says Zhan Yongfeng, a Xoceco vice president.
Dell's relationship with the city most recently paid off with quick approval to double the size of its factory. Dell now builds about three million units a year at the plant, the same number that Lenovo does in China. In Dell's case, about two million PCs are exported to Japan.
The expansion will help Dell pursue China's consumer market. Less than 3% of Dell's China revenue comes from consumers, compared with about 38% of its U.S. revenue.
Dell's China executives early last year lobbied top executives to stop thinking about the country's consumer market homogeneously. Annual household incomes are as little as $325 in rural areas, but surpass $1,800 in cities like Beijing and Shanghai.
Mr. Amelio, the Dell Asia chief who is based in Singapore, became a convert and authorized online sales in China. "You have to think about it as pockets of places that are different," he says. "The coastal areas are much different from western China."
While Dell is still learning about China, it is teaching others about low-cost manufacturing. The company's factory in Xiamen is identical -- right down to the English-language signs on the assembly line -- to its facilities in the U.S., Europe and Malaysia. Workers at all the facilities compete with each other to come up with more efficient processes. As a result, cost- and time-saving ideas from one plant can quickly be implemented world-wide.
Lenovo executives for years professed admiration of Dell's efficiency, but until recently they did little to match it. PCs tend to fall in value at a slower rate in China, so Lenovo was content to operate with as much as 30 days of inventory. Besides, its market share in China was so much larger than any other manufacturer that managers felt little reason to change.
Lenovo began as a distributor of computers for other manufacturers, including IBM. In the early 1990s, it started to manufacture PCs itself and became one of the first companies to demonstrate China's advantages in low-cost workers and real estate. By 2000, the company's market share in China was 25%.
Looking for new markets to conquer, Lenovo in 2001 decided to move into cellphone production and new services like consulting. The move failed. Lenovo faced nearly 40 other manufacturers trying to tap the cellphone market in China and couldn't get traction in services. Worse, its core PC business was losing market share.
In February last year, Lenovo founder and then-chairman Liu Chuanzhi laid out a new direction. Lenovo would exit the services business, focus on high-end phones and restructure the sales operation of its mainstay PC business. Among the changes: adopting Dell's direct-sales approach with large customers, opening a telephone sales center for smaller ones and matching Dell's speedy service capabilities.
Now, they're competing head-to-head over services. Dell initially contracted with service providers in 40 cities to provide on-site response in no more than four hours. When Lenovo expanded its own on-site service, Dell quickly added 10 more cities and opened a dispatch center, similar to one it operates in the U.S., to help it handle customer requests more efficiently.
The race is beneficial to customers like Centaline Property Agency Ltd., a real-estate company with offices around the country. It buys computers from Dell, Lenovo and another Chinese maker. "In terms of service, they are following Dell," says Zhu Jiasheng, a Centaline technology director.
A power outage in Shanghai last summer knocked out the local office's Dell servers, machines that provide data to the company's offices around the country. Centaline engineers had trouble restarting one of the machines, but they were able to get it up and running with the help of a toll-free line Dell had set up. Such lines were rare in China just a few years ago. A data-storage device also turned out to have an error, and Dell's local engineers arrived in a few hours to fix it.
Lenovo can still sometimes play up its price advantages. As recently as last summer, it halted a slide in its market share with one of its old tactics, selling sub-$400 PCs through distributors that reached smaller cities and towns that other manufacturers didn't.
Dell declined to match the maneuver, though it sold one model for a promotional price of $360 during a Chinese holiday in May.
Meanwhile, Mr. Chuanzhi decided to make the contest global by picking up IBM's PC business, which was losing money but had a world-wide brand and strong reputation among corporate buyers.
Last October, Lenovo linked its factories with parts suppliers, letting it reduce production time and try to keep down inventories a la Dell. In the last three months of 2004, Lenovo's inventory fell to 15.6 days of sales from 23 days in the July-September period, though it rose again to above 19 days in the first three months of this year. "We are just still at the beginning," says Guo Ming Lei, Lenovo's chief of operations. |
