Global Economics

Dell Goes Retail in China with Gome


The PC maker is teaming up with the mainland's biggest electronics retailer after its direct-sales model gets off to a slow start in China

For almost a decade, Dell (DELL) has devoted considerable resources to building its China business while trying to convince skeptical Chinese computer users of the beauty of its direct-sales model. Last year, for instance, it doubled its Chinese manufacturing capacity by adding a second factory in the southeastern city of Xiamen. One exports to other Asian markets and the other is meeting demand inside China. In March, CEO Michael Dell traveled to Shanghai to unveil a new low-priced desktop PC designed by Dell's Chinese engineers specifically for domestic customers. Over the past year, the company has also opened nine kiosks in Chinese shopping centers to make it easier for the nation's consumers to order PCs from Dell on the spot.

Still, the Chinese have not exactly embraced Dell Direct as a way of buying PCs. Dell's market share among domestic consumers is tiny, just 2.5%. It does much better among big corporate buyers, but it's overall market position is below 10% and it ranks No. 4, behind market leader Lenovo as well as the second-largest Chinese company, Founder. Perhaps even more irksome to Dell executives, the company can't even brag that it's the top foreign brand, since Dell has fallen behind resurgent Hewlett-Packard (HPQ) in the People's Republic.

Gome's 'Great Footprint'

With Dell struggling in the U.S., it can't afford to remain in the slow lane in China. That market is too important. It's the second-largest in the world, behind only the U.S. With the Chinese likely to buy more than 33 million PCs this year, it is expected to grow by about 17% (BusinessWeek.com, 4/2/07) in 2007, according to Gartner (IT). That's why Dell is trying something new in China and depart from its famed direct-sales model by selling to consumers through a big retailer. On Sept. 24, Dell announced it was teaming up with the biggest Chinese electronics retailer, Gome (or Guomei, in Chinese,).

The alliance with the Chinese retailer will provide Dell with the boost it needs to reach more consumers nationwide, boasts Michael Tatelman, vice-president of consumer marketing for the U.S. company. Gome has "a great footprint," he says, with almost 1,000 shops in 200 Chinese cities. In the first phase, due to start next month, Dell plans on moving into 50 Gome shops in China's bigger metro areas, with further expansion in 2008. "A good goal will be north of 200 shops by next year," says Tatelman, who joined Dell six weeks ago after working for three years as the corporate vice-president and general manager in Beijing for Motorola (MOT).

The move is an acknowledgment by Dell that stubbornly sticking with the direct model doesn't work in a market where few consumers are keen on shopping on the phone or via the Internet. "China is not an easy place to do direct distribution," says Henry Chan, head of Asian equities at Baring Asset Management in Hong Kong. "Even a company as powerful as Dell has to follow the typical sort of channel model that's been adopted by their competitors," says Chan.

Shopping Has Cachet

There's also a cultural obstacle that direct sellers like Dell have to overcome. In the U.S., Dell has done well by providing consumers with a way to avoid the hassles of driving to the mall. But as Ross O'Brien, managing director of Hong Kong market research firm Intercedent Asia, points out, among Chinese city residents "shopping is an activity that has cachet." In contrast, "there still tends to be some inconvenience with direct distribution."

Reducing its reliance on direct sales won't solve all of Dell's China problems, of course. One challenge that Dell will face is its choice of partner. Gome may be the biggest Chinese electronics chain, but the vast majority of Chinese PC sales take place not at retailers like Gome or Best Buy (BBY) (which opened its first Chinese shop in Shanghai last year and controls Gome rival Jiangsu Five Star Appliance) but at the many IT malls, which have more than 100 retailers under one roof. According to Dell's Tatelman, more than 80% of PC sales in China take place in such malls.

IT Malls Growth?

The Gome partnership won't help Dell make any headway there. But Tatelman argues that Chinese consumers increasingly will be going to stores like Gome. "It's not a great buying experience for consumers in these IT malls," he says. The former Motorola executive points to the Chinese cellular phone market, which used to be dominated by small retailers and has now consolidated around bigger players like Gome, which he says accounts for 30% of all handset sales in China. "You are going to see the same type of accelerated consolidation in the PC market," says Tatelman.

Tatelman says that there are no talks under way with other partners, but Chan of Baring Asset Management thinks there's still a big role for the IT malls. "Both will grow, the megastores and the computer malls," he says. Now that Dell has taken the plunge and departed from the direct-sales business model in China, Tatelman and other Dell executives may soon find they need to take the next step and be even more like their competitors.

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau .

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