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 user 2007-10-08 at 10:03:00 am Views: 59
  • #18863

    Dell Goes Retail in China with Gome
    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

    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’
    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%
    (, 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
    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?
    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.