Dell might have to log into a new sales model
Dell was born in direct sales, a business model that once helped the company vault to the No 1 position in the world's PC market. But experts now say that as Dell's growth in its traditional market slows and its growth engine moves to emerging markets like China, the 23-year-old company may have to reinvent itself to win the new battle.
"It's the demand in China's third- and fourth-tier cities that sustains the rapid growth of PCs and laptops in the country," said Simon Ye, an analyst with Gartner, a research house. "I think Dell's problem lies in its inability to fit the direct sales business model into this market, where consumers are highly scattered and Internet and telecom access are not always available."
In China, about 90 percent of the population does not have PCs.
Dell saw robust growth in the country from 2000 to the first half of 2005 because of its growth in enterprises market and its penetration in the first- and second-tier cities such as Beijing, Shanghai and Guangzhou, where Dell's direct sales model has given the company unique advantages over its competitors.
But as growth in China's big cities nears the saturation point and the demand in the third- and fourth-tier cities surge, Dell's direct sales model begins to look somewhat inadequate.
Alex Yung, general manager of Home and Small Business at Dell Asia-Pacific, told China Daily that about 80 percent of Dell's revenue comes from orders over phone and more than 10 percent from online orders.
But the penetration of fixed-line phones reached only 28.1 percent and mobile phones just 35.3 percent by the end of March, according to government figures. Internet penetration, despite years of rapid growth, reached a paltry 10 percent by January.
Retail gap
"The absence of retail channel increases Dell's difficulty in delivering its products to end-users in third- and fourth-tier cities and slows it down," said Ye.
In the fourth quarter of last year, Dell saw its China revenue increase by 26 percent. This, according to Ye, was below Dell's expectations.
According to Gartner figures, Dell's market share in China in the fourth quarter of last year was 6.8 percent, ranking fourth after Lenovo's 30.2 percent, Founder's 9.6 percent and Hewlett-Packard's 7.2 percent. These numbers include both desktop and mobile PCs.
Dell's competitors, including Lenovo and HP, have all been building a nationwide retail network and have a fast-expanding retail team.
"I think Dell may have some internal debates about its direct sales model but they will not make it public, since any wavering on that established model will affect the company's current customers," Ye said.
But changes may already have been set in motion.
In March, Dell kicked off its first Chinese-language company blog to get closer to its consumers. CEO Michael Dell announced the same month the debut of a low-cost PC priced at 2,599 yuan, aimed at rural consumers.
The most remarkable change, however, has been Dell's rapid opening of user experience centers, where customers can touch and feel Dell's products before making a purchase decision (though users still can't buy products directly from these centers).
The company plans to open two to three centers in different cities in the following quarter, and they will not be located "only in China's big cities".
"The direct sales model has been a revolution, but is not a religion," said Michael Dell in a memo to employees last month. "We'll continue to improve our business model, and go beyond it, to give our customers what they really need."
(China Daily 05/23/2007 page15)
