With global personal computer sales at an all-time low, the world's leading PC makers are stepping up their activities in China, one of the few markets still seeing strong growth. However, increasing competition is pushing down prices and posing a serious challenge to domestic companies that have until recently dominated the industry.
Global PC shipments slipped two percent in the second quarter of 2001 from a year ago, marking the first ever year-on-year quarterly retreat, and worldwide shipments of consumer PCs are expected to fall 10 percent for the year. By contrast, total PC unit sales in China grew 27.7 percent during the quarter.
The reasons are easy to find. China recorded a 7.9 percent surge in gross domestic product in the first six months of 2001, while its Asian neighbours were fighting the spectre of recession, and the US economy was slowing to a crawl. China expects its economy to grow by more than seven percent for the year.
Analysts point out that there remains a lot of room for growth in China, particularly as the government is actively encouraging companies to become computerised. "China is still at an early point in its growth line compared with the United States," says Ted Dean, a partner with BDA (China), a Beijing-based high-technology consultancy.
"There are still people upgrading and a lot are making new purchases."
Kitty Fok, an analyst with International Data Corp in Hong Kong, agrees that the market potential is healthy. "Penetration in China is still very low," she says. "By the end of 2000, PC penetration was just two percent. This is why there's high demand."
Until recently, foreign companies have focused on the high-end market, targeting companies and government units, while local companies have dominated the home market. For one thing, domestic brands are considerably cheaper than foreign brand names. Chinese consumers don't have much disposable income even in Beijing, Shanghai and Guangzhou where the aver-age per capita monthly income is little more than Ynl,000.
Domestic distribution networks
Companies such as Legend Holdings have also established good distribution net-works, and have outclassed the big foreign suppliers in terms of service. Legend, China's biggest PC maker, said its revenues shot up 56 percent for the fiscal year ending March 31, 2001, pushing up net income 78 percent. The company attributed the growth to ?internet fever.'
According to statistics from the Ministry of Information Industry (MII), some 80 percent of PCs sold in China are ?home made' models, a fact that has attracted the attention of foreign PC manufacturers.
The growing challenge from foreign companies such as IBM, Dell and HP, as well as local newcomers to the market, has Legend looking over its shoulder. These companies, discouraged by falling sales elsewhere, have been stepping up their efforts to expand market share in China, contributing to rising competition and falling prices. Investec Asset Management said in August that PC demand would remain strong in China and predicted growing competition from global manufacturers.
Fok says Dell has been doing well in China as a result of an aggressive pricing strategy. In November, it announced a price cut of up to 14 percent on certain models in China. The company, which opened a plant in Xiamen in 1998, has set up toll-free hotlines offering technical support and is even attempting to sell computers over the internet. According to Fok, Dell's sales grew 47 percent in the second quarter over the same period last year.
Earlier this year, Dell launched its Smart Computer, a pared-down model aimed at the home market and priced at less than Yn5,000. "This is quite close to the pricing of local products," says Fok. She says anecdotal evidence indicates the computer is selling well.
Meanwhile, more Chinese companies are joining the fray. China's largest home appliance manufacturer, Haier Group, and TCL International Holdings, a Hong Kong-listed company, have turned to the high-growth IT sector and are assembling their own PCs in the face of flagging domestic demand for low-tech appliances, such as televisions.
To meet this challenge, Legend has said it is willing to sacrifice margins to hold on to its 30 percent share of the China market. However, it has been hit hard by rising competition and falling prices, with shares of the Hong Kong-listed company falling 40 percent in the three months ending August.
This year marks the first time in Acer's history that the company will make more personal computers on the Mainland than in its home base of Taiwan. The company announced in May that it expected to pro-duce as many as 350,000 desktop and note-book computers on the Mainland this year, compared with 220,000 made in Taiwanese factories. Acer says it is aiming to become the number two supplier of brand-name notebook computers in China.
HP several years ago attempted to exploit the home market for PCs, but did not succeed. Likewise, Compaq tried for five years to crack the domestic market through a joint venture with Beijing's -tone Group, but has little to show for its effort – it is not even among the top 10 PC companies in China. According to Gartner Dataquest, Compaq had just 1.3 percent of the market in the first half of this year and fell to 13th place. The company announced in August that it would invest JS$100m in distribution, R&D and local customer support in China over the next few years. HP and Compaq announced heir intention to merge in September 2001.
Legend lost its leading position to IBM in notebook computer sales during the first quarter of 2001, a position it had held for six previous quarters, according to IDC. IBM grabbed a 22.4 percent share of the laptop market for the period, leaving Legend with just 19.5 percent. In the previous quarter, Legend had 23.3 percent compared with IBM's 17.1 percent.
Fok is confident that Legend will hold on D its PC ascendancy. She says that while Dell has increased its share of the domestic market, it may well be at the expense of other companies, and not Legend.
"It's pricing. The foreign companies really can't compete with Legend," she says. "Much of the growth is coming from the home market, and foreign companies have not been able to crack this market. In terms of pricing, localisation and service, Legend still has a strong advantage."
As in other sectors in China, foreign and domestic companies are increasingly looking to cooperative ventures to strengthen their market position. In June, Legend struck a US$200m joint venture with AOL Time Warner, a deal expected to help both companies. AOL gets access to the world's fastest-growing internet market, while Legend will get much needed help in strengthening its flailing internet portal, FM365.com, which it hopes will also boost PC sales. Last month Legend and Taiwan's Gigabyte Technology announced a US$32m joint venture to produce mother boards in the Mainland.
Meanwhile, California-based Kingston Technology, one of the world's largest suppliers of PC memory, revealed in August that it would team up with Great Wall Computer Shenzhen in a new joint venture in Shanghai. Kingston will invest an initial US$8m in the venture.
"There are a number of companies from the US, Europe and Japan that are partnering with local Chinese companies in order to get into that market," Richard Gordon, an analyst with Dataquest said in an interview in August. "If China doesn't become a huge market for tech products, then the whole world has got a problem."
Strong growth to continue
A report released in September by the Centre of Computer and Microelectronics Industry Development, under MII, predicted that strong domestic demand for PCs would support high growth for the foreseeable future. The centre said the PC sector would record Yn270bn in business in 2001, up 25.6 percent from last year.
However, while China is providing one of the few glimmers of hope for the global computer industry, even here growth is slowing down. IDC said second quarter PC sales were below forecasts, with 28 percent year-on-year unit growth. IDC is predicting 25 percent growth this year, falling to around 20 percent in 2002.
IDC's Fok attributes the slower growth to Chinese companies waiting to assess the effects of China's imminent accession to the World Trade Organisation or to see a fall in prices of Intel Pentium 4-based PCs. Making matters worse, government purchases also fell in the second quarter.