Mohan, Chuzz et. al. - Train keeps a-rolling.... Article from Austin360 about Dell in China...
austin360.com
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Scaling The Wall
Computer maker set up to tap
into one of the largest markets in
the world
By Joseph Albright and Marcia Kunstel
American-Statesman International Staff
Published: March 7, 1999
XIAMEN, China -- King Michael of Dell is
capturing territory in China.
Here in a converted avionics plant where Dell
Computer Corp. builds computers for
Chinese customers, optimism is bursting like
the sunrise over the South China Sea.
Remember how fast Dell grew in Europe in
the early '90s?
"We will do the same thing in China --
absolutely no doubt about it," says Buddy
Griffin, an Irish citizen who helped Dell open
factories in Limerick, Ireland, and Penang,
Malaysia, before the company sent him to
China for this project.
Across the big open work floor from Griffin's
office, the Dell sales manager has erected a
Chinese gong. Whenever a salesperson
clinches a major order -- say 20 or 30
computers -- the sales manager bangs it with
a wooden rod.
This year, the gong will be sounding more often, or so the company is
expecting. Dell China President David Chan predicts annual revenues from
Dell sales in China will double in 1999, then double again in 2000.
"Back in Austin, the guys know what we are doing here," said Chan, a
former IBM marketing executive. "Michael (Dell) knows what we've been
doing on a month-to-month basis, because he sees the results. He's very
happy with the progress we've made to date."
In Round Rock, home of Dell's corporate offices, the 34-year-old chief
executive, chairman and founder of Dell, shares Griffin's and Chan's
enthusiasm.
"China has been the fastest startup we've ever seen for any new
business," said Dell. "It's running nicely ahead of plans. And we've been
really thrilled with the reaction from customers so far to the direct business
model."
Already, China ranks as the world's fifth-largest market for personal
computers, with about 4 million computers sold last year, compared with 8
million in Japan and 36 million in the United States. With personal
computer sales in China growing at 27 percent a year, China is projected
to surpass Japan and become the world's third-biggest computer market
by 2002.
As a latecomer to China, Dell ranks only 11th in computer sales on the
Chinese mainland. It lags well behind the entrenched U.S.-based
multinationals -- IBM, Compaq and Hewlett-Packard -- and even further
behind Legend, China's fast-growing, state-owned computer maker.
But Dell's results for October through January show signs of moving up.
For the first time, 1 percent of personal computers sold in China were
Dell's, according to International Data Corp.'s preliminary findings for the
last three months of 1998. And in January, Dell notched probably its
strongest month so far.
"Our take on it is that Dell is going to grow relatively quickly in China,"
said Dane Anderson, an analyst at Massachusetts-based IDC. "They had
a relatively strong performance in the fourth quarter. I think they certainly
will break into the Top 10."
Dell's work force in China has jumped from 200 to 330 in the past six
months and is projected to keep expanding past 500 later this year.
Dell expects sales in China to hit $1 billion within three years, a company
executive said in a report published Friday. John Legere, Dell's president
for the Asia Pacific Region, also told Dow Jones News Service that sales
in China at the end of 1998 were running at a rate equal to $100 million for
the full year.
Because Dell is the first computer manufacturer in Xiamen, almost none of
the assemblers had seen the inside of a personal computer before they
were hired.
Dell picked them on the strength of experience in assembling electronic
parts in other Chinese factories. Now, five days a week, they are turning
out and testing Dell-brand notebooks, desktops and servers that the
company says are virtually identical to those made in Austin.
The long road to China
Dell has been selling PCs in China since about 1993 through the efforts of
PC vendors in that country. The Penang, Malaysia, facility has supplied
PCs for the Chinese market since January 1995.
After about a year of market surveys and other intelligence gathering, Dell
launched a major assault on China early last year. That's when a landing
party of executives from Dell's Singapore office paddled through China's
bureaucratic reefs and managed to win permission to start a 100 percent
Dell-owned computer factory here.
As of February 1998, Dell was on the verge of locating in the hurly-burly of
China's biggest city, Shanghai. But then the mayor of this quaint old port
city, one-tenth the size of Shanghai, approached Dell with an unpublicized
package of tax and other incentives.
Delighted with its reception in Xiamen, Dell announced last March 30 that
it would open a sales, manufacturing and service center here.
Three weeks later, China's central government threw the entire project into
limbo. It ordered all companies to cease "direct selling" to prevent "social
chaos" throughout China.
Although the order mainly targeted some upstart "pyramid sales" schemes
by Chinese and Taiwanese hucksters, the language was broad enough to
cripple the China operations of Avon Products Inc. and several other
blue-chip international companies engaged in direct selling.
Arguably, Dell's strategy of bypassing retail outlets and going directly to
customers could be viewed by the Chinese as akin to the legendary Avon
Lady's tactics in selling lipstick door-to-door, outside normal commercial
venues. But after a few days of worried consultations with Chinese
authorities, the Dell advance party concluded its own direct selling
strategy was not jeopardized.
By May, Dell resolved to push ahead. Griffin's team of five expatriates
recruited and trained a 200-member Chinese crew, everyone from
computer assemblers to salespeople to telephone help-line technicians.
On Aug. 20, Dell started the assembly line. The early products were
clustered at the most expensive, high-tech end of Dell's computer line:
OptiPlex desktops, Latitude notebooks and PowerEdge servers.
Trouble was, Dell's foreign legion could find almost no Chinese customers
ready to buy Dell computers. Michael Dell's vaunted worldwide direct
model didn't seem to catch on in China.
Not at first, anyway.
For the first month Dell was running the factory, it had to rely almost
entirely on sales to China-based U.S. multinationals that purchase Dell
equipment for all their worldwide offices through their global accounts.
Dell's market share in China actually sank lower than the previous year
during the first month the factory was operating, according to International
Data Corp.
In cold numbers, Dell had done better when it was still exporting
computers from abroad and selling them through Chinese vendors.
Chan, who was working in Dell's Singapore headquarters, was named
president of Dell China in October and took on the responsibility as Dell's
bilingual salesman-in-chief.
The tide began turning around the time Chan took on the assignment.
When Michael Dell arrived in November to commemorate the opening of
his Xiamen factory, Chan's salespeople were clinching orders from
provincial telecommunications companies and banks.
The big buyers
One early customer was the state-owned Xinhua news agency, which
bought personal computers for its Beijing and Guangzhou offices.
Then on Jan. 13, Dell locked up what was probably its biggest China order
so far: 265 of the company's newest-model servers, the entry-level
PowerEdge-1300. They were bought by one of Beijing's increasingly
technology-conscious government agencies.
It was a sale that demonstrated Dell's strengths and weaknesses in China.
So far, Dell's China sales have been heavily concentrated in what the
company calls "the corporate space."
To Chan, that means big buyers with at least "a few thousand employees,
buying a few hundred PCs a year." They could be foreign multinationals,
Chinese banks or manufacturing companies or agencies of the Chinese
government.
What gives Dell an edge in the corporate sector of the market, says Chan,
is that buyers are most often looking for the latest high-end models,
powered with 400-megahertz processors or faster. And they insist on
reliable service.
In that price range, Dell's head-to-head competitors turn out to be the
same ones it has successfully challenged in Europe: IBM, Compaq and
Hewlett-Packard.
"The Chinese computer makers are not really playing in the high-end PC
market that we play in -- at least not yet," Chan said. "They (Legend and
other Chinese makers) are playing in the lower-power market, selling
266-megahertz and 300-megahertz desktops like those we used to offer.
"Right now, our minimum in desktops is 350 megahertz, and very soon it
will be 400 megahertz. Every few months we jump up a notch, and so we
(the Chinese and American computer makers) are not meeting."
The small buyers
Eventually, Dell would also like to sell computers to vast numbers of
Chinese individuals and small businesses.
But it has had only scant success so far.
To start with, Dell has determined the overwhelming majority of China's 1.3
billion people are not now potential Dell customers.
It has meticulously pared down the theoretical mass market to what it
calls the "addressable market size" in China. That is made up mainly of
sophisticated urbanites and the big institutions that employ them.
"You still have a roll out of communications going on across the country
that doesn't reach all of the population," said Michael Dell. "The relevant
thing for us, of course, is that people who have telephones are our primary
target before the people who don't. So, the end of the railroad track is way
out there for us."
Partly in deference to the market power of Legend and other Chinese
computer makers, Dell has avoided offering budget-priced computers that
might appeal to Chinese university students or other first-time computer
buyers.
Thus, for Chinese looking for bargain home computers, China-made Dells
aren't especially attractive.
Dell's cheapest desktop sells here for about $1,500, compared with about
$800 for a desktop made by Legend or other domestic manufacturers.
A comparison of the Dell Web sites in China and the United States
produces other examples of why Dell isn't a consumer's bargain in China.
A typical Dell high-end OptiPlex GX1p desktop sells for $3,010 in China,
compared with a $2,672 pricetag on a virtually identical GX1p model
purchased through the Dell Web site in the United States.
A typical Dell 266-megahertz Latitude notebook costs $3,601 when
purchased through the Dell Web site in China, compared with a price of
$2,902 when the same model with the same features is bought through the
Dell Web site in the United States.
What's ahead
How much of China does King Michael think he can capture in the next 10
years?
For outsiders, perhaps the best gauge will be to watch what happens in
the next few years to a parcel of land five miles up the highway from Dell's
Xiamen factory.
At least four months before Dell opened its assembly line in August, its
executives had already reached a preliminary agreement with Xiamen city
authorities for a 99-year lease on the much larger piece of land. Dell
viewed its present leased plant as a starter factory that would handle only
the first few years' growth.
Since then, Dell and its architects have laid detailed plans for an efficient
two-story factory on the larger block of land -- one with at least twice as
much workspace that would contain highly automated assembly lines. It
could theoretically manufacture large numbers of computers, many more
than the current Xiamen factory, according to Griffin.
This month, Xiamen city authorities are scheduled to start preparing the
land for construction of the second Dell factory. Dell has hired a Chinese
civil engineer to seek necessary environmental and other construction
permits.
The land for the second factory should be cleared and ready for the start of
construction as early as August.
But Dell's top management has yet to announce final approval. If sales
flatten, there could be an indefinite delay.
"My best estimate is that in two years, we'll be in there," said Griffin. "It
won't be less than 12 months, that's for sure. But it could be a year and a
half from now."
In Round Rock, Dell executives say the company aspires to be the No. 1
PC maker in the world. China, with its prospects for explosive growth, is a
key part of that goal.
"It's not likely to go straight up forever, but by and large, this is going to be
the fastest-growing market that we and many companies have," said
Michael Dell.
"If you look at the growth of the telephone industry, you can kind of see a
precursor to what we think computing will look like in China. And it has a
lot of potential for our company.
"Our first goal in China is we want to be the No. 1 American computer
company in China," Dell said.
American-Statesman staff writer Jerry Mahoney contributed to this report.
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