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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. -
AuthorOctober 8, 2007 at 10:03 AM
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