Dell Primes For Battle In China

SHANGHAI, China — Michael Dell doesn't like being No. 2, let alone No. 3. But that's where he is in China, and a distant third at that.

Dell Inc. this week opened its third "experience store" in the world's second largest PC market, allowing first-time buyers to get an idea of what Dell has to offer. As its main markets mature and growth sputters, Dell is making a more concerted effort to tap into the higher growth in PC sales outside the U.S. It will be tough to pull off.

With 6.8 percent market share in China, Dell trails Lenovo Group, Founder Technology and Hewlett-Packard in desktop and notebook PCs. Its growing server sales helped it maintain its No. 3 ranking.

Few believe Dell can break out of the pack to attack Lenovo's 30 percent share anytime soon. Dell seems determined to stick with its current online sales model, and that doesn't sell in China, nor some of the other emerging markets.

"If you look at the growth in China now, the key driver is really coming from the lower tier cities. And in these places they need more advice on the technology," said Kitty Fok, a Hong Kong-based PC analyst for IDC. "So their success depends on how they are going to change their strategy to get in closer touch with the user."

Dell, however, seems to think its potential users will change. CEO Michael Dell, in China during a recent Asia tour, indicated that the online sales model that has done so well for the company in the U.S. will increasingly be applicable in emerging markets. "There is a place for a physical demonstration of our product, so we have some test stores in China and some starting in the U.S. as well," he said. "But we think more and more people will become comfortable buying online."

Dell has done pretty well with its direct sales model in China, but unlike the U.S., direct sales here is mostly done over the phone, not online. To grow its consumer business, Dell is opening stores in Tianjin, just south of Beijing.

Dell has two similar stores in Chongqing and Nanking. Customers can check out Dell products but, interestingly, cannot buy them there. For that, they need to call Dell or go online. "But the online selling mode is not in accordance with the consuming habit of local users," noted Simon Sun, an analyst with In-Stat.

Although China is the world's second largest PC market, its PC penetration is actually pretty low. Less than 10 percent of Chinese households have a PC. That compares to 74 percent in the U.S.

That presents plenty of opportunities. Yet competition is fierce in China, with many of the PC vendors honing specialties to survive. China's Founder focuses on large corporations, government and education. Tongfang makes a lean, low-cost PC for schools. HP wins in consumer, as it does globally. And Lenovo is good in just about every area, which is why it's the top dog.

Chip maker Intel Corp. is also looking to enable new competitors. Intel is talking with local OEMs about its Classmate PC. The price will be about $300 to $400, based on a Celeron M 900-MHz processor, 915GMS chip set, 256-Mbyte DDR2, 1Gbyte/2Gbyte NAND and a 7-inch LCD display that runs either Windows or Linux.

With Dell back at the helm, the company may see renewed focus—and that could help its drive in China. So far, Dell is eager to show its love of the Chinese market. Last month, it launched a Chinese blog so that users could offer feedback. And to top things off, it unveiled a PC especially designed in China and for Chinese users.

The Dell EC280 boasts a mini-ITX motherboard with an Intel processor 205, 256- or 512-Mbytes of memory, a 40- or 80-Gbyte hard drive and optional CD-ROM or DVD-ROM. It runs Windows XP Home Edition.

The EC280 was unveiled with much fanfare, yet the machine looked like any other—perhaps something you could get in the U.S. Asked what made the PC particularly suitable to China, Dell offered no response.

—Additional reporting by Cai Yan.