Dell In China:Strategic Rethinking

I. Problems/Recommendations

In 1995 Dell entered the Chinese computer vendor market. It initially focused at the low-priced end of the PC Market with direct sales. As competition grew and price wars at the low end consumer market began, Dell was unable to compete as their low end consumer model cost consumers twice as much as one of its competitors. Dell was also having trouble with their direct sales model, which led to complaints about slow delivery, service and support. Overall the industry began so see dramatic decreases in profit margins in the low-priced consumer sector.

In order for Dell to profit in the Chinese computer vendor market it must be competitive in the low-priced consumer market, high-end consumer market, and corporate market. Dell would not be able to compete in all markets with its current resources and capabilities. So it must joint venture with Compaq to utilize one another’s resources and competencies. Compaq is the world leader in PC sales and is currently fifth in the Chinese market. Since, IBM and Legend plan to joint venture, Dell must also joint venture if it plans to compete in the Chinese market.

II. Critical facts/Issues

1) Research by ChinaInfo, in 2002 stated only 2.5% of urban Chinese households owned a computer.

2) Chinese market expected to grow 19% in 2004-2005

3) Dell only made 5 percent of its direct sales in China via the internet.

4) China withdrew tariffs on information technology products by 2005.

5) Chinese customers preferred to have a trail use before buying.

6) Dell operates under the Just In Time inventory system.

7) Five main industries accounted for 50 percent of dells business: Government, education, telecoms, power, and finance.

8) State owned companies, MNC’s, and government and educational institutes accounted for most of the PC sales in China.

9) In 2003 PC sales in China reached 22 million; second most after the United States.

10) According to Gartner research the IT industry’s prices and profit margins had been decreasing dramatically and firms looking to gain market share were not making much profit.

11) IBM and Legend plan to joint venture.

III. Analysis

Dell initially focused on the low-priced consumer market, which is a small market since only 2.5% of urban Chinese household owned a computer. At the same time there is potential for dramatic growth within the market segment, since many households do not currently own a PC. Why don’t more Chinese households own computers? How many individuals in the market are computer literate? Dell could potentially find itself competing in a small market segment with limited growth if it doesn’t have a full understanding of the Chinese culture.

Dell only made 5 percent of its direct sales in China via the internet, which can be linked to the fact that on 2.5% of the urban Chinese population owned a computer. Unlike the United States market where 50% of sales were via the internet, Dell must figure out how to reach its customers without the internet. The Chinese population also likes to use the computer for a trial period before buying. This is probably due to the fact computers are very new to the population. Dell must figure out how instigate a demand for PCs in a population where it seems to be very new to the technology.

China withdrew tariffs on information technology products by 2005. By doing so the cost of owning a PC reduced, which may give some consumers who were unable to buy a PC, the ability to so. This government action could potentially increase market population, which will increase the number of new PC consumers. Targeting these new consumers will be key for Dell.

Dell operates under the Just In Time inventory system, which reduces costs such as warehousing. The disadvantages to using the JIT system are potential delays of product delivery and customer service. Some consumers may not want to wait a week for their PC, so they will pay more for one they could walk out of the store with. Dell is unable to offer a attractive price to consumers that has enough benefit to wait the extra time. Also, like mentioned above only a small percentage of sales come from the internet and the majority of buyers in China like to test the product before buying. The JIT system may work in the United States, but the Chinese population has different needs and wants.

Five main industries accounted for 50 percent of dells business: Government, education, telecoms, power, and finance. What is the other 50% allocated to? It seems Dell is fairly diversified within the industry. Diversification could cause Dell to lose focus on a growing market such as consumer PC’s. It may also reduce overall profit margins, since resources tend to get spread thin in high diversified companies. Also, state owned companies, MNC’s, and government and educational institutes accounted for most of the PC sales in China. Dell