With the PC market slowing in the West, Asia Pacific – led by China – has become a new battleground for personal computer makers. No one perhaps feels the heat more than Dell, the world's largest PC maker, which in August reported earnings that fell short of expectations, leading it to look to China and beyond to sustain its double-digit growth. Dell has its work cut out; with 7.6% of the market, it saw its market position last year in China drop two rungs to No. 4 from No. 2 in 2003, trailing mainland rivals Lenovo, Founder Electronics and Tsinghua Tongfang, according to the Gartner Group. Unfazed, Dell says it plans to more than double its market share in China to 20% by 2010 and open a second factory in Xiamen in the first quarter of next year.
To get insights into Dell's China strategy, the CHINA ECONOMIC REVIEW put the questions to Foo Piau Phang, Dell's China CEO. Excerpts of the conversation:
Q: How important is China to Dell?
A: China is now our fourth largest market worldwide, demonstrating its increasing role in our global business. China is highly strategic to Dell's global business – as a market where more and more customers continue to appreciate our direct way of doing business and as a significant base for our manufacturing, customer service, technical support, product development and procurement. In August we marked the celebration of our seventh anniversary in China with the shipment of our 10 millionth of units from Xiamen. China plays a strategic role in Dell's global growth as a base for manufacturing, product development, customer sales and service, technical support and global sourcing, underscored by the fact that we procure parts and components worth US$12 billion annually from China. In the year 2003, Dell was ranked the thirteenth largest exporter in China according to the Ministry of Commerce. These achievements are the result of the great team we have in China. We believe this is only the beginning of our strong and committed presence in China.
Q: Where will the growth in the Chinese market come from for the next five years?
A: We believe more growth in China will come from opportunities in our non-PC businesses, including notebooks, enterprise products which include servers and storage systems, services, printers, software and peripherals.
Q: Is the lack of an infrastructure for direct marketing an impediment in Dell's China marketing efforts. How has Dell adjusted its marketing model to address this gap?
A: On the contrary, we have world-class facilities in Xiamen, Dalian and Shanghai run by our talented and dedicated team as well as excellent government and business partnerships that contribute significantly to our growing business and presence in China. We have 720 toll-free lines covering 258 cities for customers to place orders including the virtual store on our website. In fact, about 30% of our sales to small- and medium-sized businesses and home users in China are done via the Internet, a number we expect to increase as more people get web access.
Q: What are the challenges facing Dell in China today?
A: Our challenge lies in acquiring and developing talent to match and sustain our rapid development and growth globally including China. This is why our management team in China has dedicated significant effort to people development programs, employee feedback on making Dell a great place to work and our winning culture. Recently about 60 young but promising managers were enrolled into our China Leadership Development Program to help prepare them for future leadership roles in Dell China.
Q: How does Dell see China's IT market evolving and its role in it? Will there be greater demand for higher-margin products like servers? When?
A: China is already the No. 2 largest PC market worldwide and continues to grow at a rapid speed, demonstrating the huge propensity for technology here. From my interactions with customers, many are discerning in their purchase decisions, and increasingly paying great attention to the total cost of ownership, service and value proposition of the technology they are buying, This is precisely where they find Dell compelling. We also see demand for servers and storage systems increasing as businesses and governments recognize the competitive advantage of enhancing their internet and technology infrastructure.
Q: There has been a rash of articles in the international press questioning whether Dell is losing its luster on the heels of its recent earnings results that came below expectation. What's the company's response to the negative publicity and how does China figure in Dell's strategy to improve its numbers?
A: Looking at our performance of the second quarter, Dell still achieved a 24% year-over-year unit growth, while the industry growth without Dell is only 17%. I am happy to point out that our China unit growth is 3.2 times of the industry growth. Our growth and the fundamental advantages of our business model remain very strong. In the second quarter, we got more aggressive on pricing than we needed to be, and demand didn't increase correspondingly. We did not execute well in terms of managing overall selling prices, but can and will do better.
Q: How does Dell intend to head off Lenovo and HP?
A: Our focus is on customers not competitors although we respect what they do. We believe customers will decide who takes the leading vendor position. So, we have to make the right decisions for customers in China and focus on providing what they need. What makes us stand strongly in the market is the value we provide to customers. By being direct, we know exactly what our customers want with no intermediaries or filters between us.
Q: The bulk of Dell's China sales is to corporate customers, not consumers right?
A: Yes, corporate customers, including government, education and enterprises of various sizes are our major customers in China, while Dell offers a broad range of products and services for different type of customers.
Q: So, Dell is said to be focusing on the high-end market because the margins in the consumer market isn't there. Can you further comment on this?
A: We provide computer systems and services to the full range of customers, including consumers, for whom we offer a broad variety of computers and prices, from the low end to the high. Our focus on the largest, fastest-growing, most-profitable parts of the business, including within individual customer segments…Our primary interest remains on sales of servers, storage systems and services to corporate and institutional customers.
Chris Patten, Former EU Commissioner for External Relations until, writing in the Financial Times:
"Unlike many American strategists, Europeans have not seen China's rise as a threat… surely we are generally correct in Europe to conclude that China, for all its lamentable human rights re-cord, would only be a threat if it were to fail." Robert Zoellick, US Deputy Secretary of State: "If it isn't clear why the United States should suggest a cooperative relationship with China, consider the alternatives. Picture the wide range of global challenges we face in the years ahead – terrorism and extremists exploiting Islam, the proliferation of weapons of mass destruction, poverty, disease – and ask whether it would be easier or harder to handle those problems if the United States and China were cooperating or at odds."
Chinese Finance Minister Jin Renqing:
"China needs to approach the currency exchange rate from the perspective of China's economic interests first and foremost …We will not listen to someone else's conductor when doing what we need to do."
Richard Parsons, Chief Executive of Time Warner Inc:
"[China is] a very tough market for a media and entertainment company …Because of some fundamental things, [such as] rule of law. It's hard to make long-term investments, long-term deals if you don't exactly know what the playing field is going to look like… [the Chinese] could fall asleep on the switch and the Indians will go right by them."
John W. Snow, US Treasury Secretary:
"Go to the hotels in Shanghai and you get hotel services as good as anywhere in the world.."They've imported their hotels. What we're saying is you can do the same thing in finance."
Morgan Stanley economist Andy Xie, writing on the bank's website:
"China is still trapped in a cheap money equilibrium in which businesses and individuals focus on making quick money rather than building up competitiveness. When the cheap money disappears and China falls on hard times, this will in our view create a new equilibrium in which businesses and individuals be-come willing to focus on long-term is-sues."
Zhou Xiaochuan, the governor of the People's Bank of China, in an interview with Caijing, a business magazine:
"In the next three years, if domestic demand can't be expanded, the Chinese economy would increasingly rely on exports to maintain its growth momentum, which would incur greater pressure over issues like trade, the exchange rate and intellectual property rights."
Australian Foreign Minister Alexander Downer on ABC radio:
"If China wanted to negotiate with Australia a nuclear safeguards agreement and that was satisfactorily negotiated, we would be able to export uranium to China."
EU research commissioner Janez Potocnik, to the EU Observer:
"If we think that the competition from emerging economies such as China and India is simply about low wages and manufacturing, then we are kidding ourselves."
Chinese Foreign Ministry spokesman Kong Quan:
"China hopes Iran, the EU and other relevant sides to maintain patience, show fiexibility and take concrete and practical steps to break the stalemate and promptly resume dialogue, consultation and negotiations."
Taiwan vice premier Wu Rong-i:
"China is not a free country, but we've already enjoyed an open society. Our per capita income is much higher. Going to there as tourists is OK, but very few want to be part of China."