Sharing the Pie
Companies take different paths in China's PC market
By Charles Bickers in Hong Kong
June 17, 1999
Chinese computer maker Legend Holdings seems to have chosen its
name aptly. Indeed, the company's meteoric rise in the past two years is the
stuff of legend: Its market share in China grew to more than 17% in the last
quarter of 1998, the company says, double that of the next biggest seller,
U.S. manufacturer IBM. Sales of Legend-brand PCs rose 85% in the year to
March 31.
In this fast growing market, sales are assured. But will Legend be able to
sustain earnings as well? So far, Legend has trounced its
competitors--both domestic and foreign. Now, though, it may have to learn
some lessons from Dell, the latest big-name brand to arrive in China. It's a
company that has consistently taken predictable markets and turned them
inside out.
The possible rivalry between China's leading computer company and one
of the global giants isn't surprising, considering China's potential.
Year-on-year sales growth in 1998 was about 30%, a remarkable rate that
most in the industry believe will be maintained for the next three years.
That would make China one of the world's fastest growing markets. "But
what's interesting about the China market is how alike it is to other parts of
the world, not how different," says Jim Jarrett, president of China
operations for PC chip maker Intel.
Buying habits in China are largely consistent with the rest of the world,
and local brands that focus on home and small-business PCs are gaining
market share. That helps explain why Legend is China's No. 1 brand. It also
shows, says Jarrett, that the country's market is developing along fairly
predictable lines.
It's that predictability that has Dell eager to join the fray in China. Almost
all of the vendors in China--with Legend the prime example--use traditional
distribution models, selling through dealers and retail outlets. Dell intends
to subvert that model with its now famous direct-sales strategy.
Legend has not succeeded by selling cheap, although the company claims
a 15% cost advantage over foreign brands in China. Its main strategy has
been to focus on producing high-quality computers that provide the latest
technology and are tailored for users with specific software packages--the
Happy Family Home PC or My Office Commercial PC, for example. Also at
the heart of the company's success, says Chairman Liu Chuanzhi, is its
strong network of distribution channels--its relationship with dealers and
resellers. All of this has meant that Hong Kong-listed Legend Holdings,
which is majority owned by the Chinese government, generated revenue of
HK$11.6 billion ($1.5 billion) in fiscal 1998-99--up 46% over the previous
year. Profits rose by 34% to HK$275 million.
Despite the company's performance, Liu is conservative when it comes to
Legend's export potential. Focus is firmly on China, and building a global
brand is not expected to begin in earnest until 2005.
Liu is also hedging his bets on how China's consumers will access the
Internet in the future. Liu believes that the Chinese will be getting Wired
rapidly, but that the PC isn't necessarily the only way. The company was
one of the first in China to sign a deal with Microsoft to develop set-top
boxes that allow users to access the Internet and e-mail through their
television and telephone. The low-cost boxes will use Microsoft's Venus
operating system, a Chinese-language version of its Windows software.
Legend begins sales of the boxes in June.
Legend's prospects get a thumbs up from almost every industry observer.
But in late May, Liu met in Hong Kong with the man who may provide a
considerable thorn in the side, not just for Legend, but for all PC sellers in
China--Michael Dell. The 34-year-old American has consistently led his
eponymous and hugely successful Nasdaq-listed company to shake up
every market he has entered, including Europe and the U.S.
Dell's strategy is to sell build-to-order computers directly to customers,
undercutting competitors by ensuring the company isn't saddled with
excess inventory, bypassing middlemen and offering the most cutting-edge
technology. Dell met with customers in Hong Kong and also visited the
company's 135,000-square-foot factory in Xiamen, Fujian province, which
opened in November 1998 and serves China and Hong Kong.
The company founder believes that China will be Dell's second most
valuable revenue generator after the United States within five years.
Currently, its Asia-wide operations represent 7% of annual turnover, and
sales in the region grew by 48% last year, double the industry rate, the
company says.
For his part, Legend's Liu thinks it will take some time for Dell's methods to
succeed in China. Few Chinese consumers use credit cards, which is how
most buyers pay for their purchases when ordering direct over the phone
or Internet. Poor transport infrastructure will be another roadblock. And
Chinese, he notes, prefer face-to-face sales when buying big-ticket items
such as a PC.
It's nothing that Michael Dell hasn't heard before. Wherever the company
has gone, he says, detractors have said that local culture wouldn't respond
to direct sales: "That's even what they told us in the United States."
In fact, Dell's sales to individual consumers are only a few percent of its
total revenues in China. Most sales are to businesses where payment
methods are different. And while foreign PC manufacturers other than Dell
lost ground against Chinese brands last year, they are unlikely to lose too
much sleep since the local brands' sales are mostly in the low-margin
consumer market. Foreign manufacturers are focused on supplying to
corporations, which demand the most sophisticated products and return
stronger margins.
Dell is no different. Most of its China sales are to large businesses
requiring a mix of desktop PCs and the powerful server computers that
control them. Michael Dell admits sales through the Internet--which
account for 35% of his company's global sales but only 2%-3% of sales in
China--will take a while to take off. Dell says that direct selling isn't just
about getting consumers to use telephones or the Internet to place orders.
It's also about building a direct relationship, which the company
accomplishes with sales visits to individual companies. "In a lot of these
markets the computer companies think that their customer is the dealer. Our
customer is the end user," says the CEO.
"We don't have to beat Legend to be successful in China," says John
Legere, who heads the company's Asian operations. With consistent 30%
annual growth rates, there's plenty of business.
With such differing business models and market focus, head-to-head
competition between Dell and Legend isn't on the agenda, for now. But
rapid growth doesn't necessarily mean guaranteed profit, and Dell's model
may well start squeezing margins on its competitors long before the
company builds major market share. The experience of the U.S. and
Europe--two markets that contributed to Dell's standing as the world's No.
2 computer supplier--has been that despite strong demand, selling PCs is
still an incredibly competitive business. If China turns out like other PC
markets, then a showdown between China's Legend and global industry
leader Dell lies ahead.
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