Global Economics

Grudge Match in China


HP and Dell are exporting their rivalry and starting to challenge Lenovo

Used to be, places such as Shanghai's Atlantic Ocean electronics mall didn't offer much variety. Stores stocked computers from a handful of local companies or no-name boxes snapped together by technicians, and foreign brands were tough to find. But these days the foreigners are making inroads, and none more aggressively than Hewlett-Packard Co. (HPQ). Enter the four-story mall and you immediately see a Hewlett-Packard shop festooned with bright red-and-yellow paper Chinese lanterns, one of three outlets the company has on the first floor alone.

Shopping centers like this one are becoming a key battleground in the global PC war. While native son Lenovo Group (LNVGY) still dominates the market with a 36% share, HP and Dell Inc. (DELL) are gaining ground. HP moved into the No. 3 position in the fourth quarter of 2006. Today it has more than 9% of the market and is within striking distance of No. 2, Beijing's Founder Technology Group Corp., which has 13%. Dell is No. 4, with just under 9%, up from 7% at the end of 2003. "Everybody wants a piece of China," says Stephen J. Felice, Dell's chief in the region.

It's easy to see why the Americans are taking their stateside rivalry to China. In 2006, PC sales in the U.S. advanced just 2.6%, according to market tracker International Data Corp. But in China they jumped 21%, to 23 million. At this rate, China will overtake the U.S. as the biggest computer market by 2013, according to New York tech consultancy Wolf Insights. Although neither HP nor Dell breaks out China sales, American Technology Research, a securities firm in San Francisco, estimates that they account for less than 2% of companies' global revenues. Still, PC makers can't afford to neglect the $19 billion market. "China is among the fastest-growing economies in the world, and PC penetration is low," says Shaw Wu, an analyst with the firm. "It is critical for any player to do well there."

The Americans are working hard to improve their game. Chief Executive Officer Michael Dell traveled to Shanghai on Mar. 21 to launch a new computer designed for China. The $340 Dell EC280 uses only about a quarter of the power of a conventional desktop and has been simplified for first-time computer buyers. "We said to ourselves: Let's design something that doesn't have things that people don't use,'" says Darrel Ward, Shanghai-based director of the Dell research and development team that designed the computer. "Those things cost money and add complexity."

NEW ROAD MAP

HP, meanwhile, has spent the past three years remapping its mainland operations. The company has an R&D lab in Shanghai and a research center in Beijing that focuses on long-term projects. HP has also been boosting the number of outlets selling its products: By yearend the store tally will reach 2,000, compared with 330 in 2003. And to spice up its marketing, the company is staging promotional shows featuring black-clad models and elaborate laser displays. "It needs to be fun and fashionable," says Ding Hui, HP's Beijing-based marketing manager.

Indeed, as Chinese buyers face a broader array of brand choices, style is becoming a bigger consideration. Xu Jian, a 26-year-old IT technician, owns three no-name machines he assembled himself. But when he decided to splurge on a fourth computer last year, he didn't even consider a Lenovo. "The look is not very good," he says. Instead, he went for a $750 HP notebook with a 14-inch super-bright screen and scratchproof case. "This one is more fashionable," Xu says on a visit to an HP customer center in Shanghai, one of dozens the company has opened around the country.

Savvy customers such as Xu are far less common in smaller Chinese cities, where PC penetration lags far behind the national average of 7%. That presents a special challenge to Dell, since it depends on customers understanding computers already. So far, most of its China business has been with corporate accounts, but now Dell is tinkering with its direct-sales model to better reach consumers. Last year it opened three "customer-experience centers" (as they are called in Dell-speak) in Nanjing and Chongqing where would-be buyers can test-drive PCs and get help from Dell salespeople in ordering. "The strategy is to use the centers to reach out to consumers who really want to have the touch and feel of our products," says Alex Yung, North Asia sales director for Dell.

Dell, too, is boosting its research in China. A five-year-old r&d center in Shanghai now employs some 500 people, up from 300 a year ago. Those engineers developed Dell's new low-cost China PC and will now work on adapting it for Brazil, India, and other emerging markets. Striding past a sea of cubicles, the center's managing director, John Terwilliger, points to a wall covered with blue-and-white Dell banners awarded in recognition of the center's work. "There are more coming," he predicts.

The burst of foreign competition is increasing the pressure on Lenovo. The state-backed company's market share is growing as the "white-box" segment, today roughly one-quarter of the market, continues to shrink, and it picked up five points from its 2005 acquisition of IBM's (IBM) PC division. Yet Lenovo is struggling in its quest to become a global powerhouse, as many former IBM users overseas are reluctant to embrace the new Chinese owners. And at home, Lenovo's profit margin is slipping. It's down to 5.1% in the most recent quarter, vs. 6.5% at the start of 2006, largely because of price cuts designed to keep the foreigners at bay. Despite its troubles, Chen Shaopeng, Lenovo's president for Greater China, dismisses suggestions that its home advantage may be eroding. "No one else has such a strong portfolio," he says.

Nor do they have Lenovo's reach. The company already sells its PCs at more than 12,000 outlets nationwide, and plans to add 1,000 more this year. "This is our competitive edge," says Chen. It's also pushing deeper into the Chinese countryside with a $650 PC targeted at farmers and a campaign to promote computer use in rural areas. Under CEO William J. Amelio, a former Asia hand at Dell, the company has been trying to bolster management ranks by poaching talent from rivals, including several Dell executives and, in March, HP's China brand director, Arthur Wei.

For both American players, the biggest challenge in China is reaching customers. In the U.S., Japan, and Europe, computer users tend to be concentrated in big metropolitan areas, but about half of potential PC buyers in China live in small towns and cities. "You need to have your people going to 3,000 cities and establishing relationships," says Roger L. Kay, president of Endpoint Technologies Associates Inc., a consulting company in Wayland, Mass. "It's just a very big job."


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