1.3 Billion Customers are for Suckers

Posted on September 25, 2007
Filed Under China Business, China SMB |

Shanghai Daily reports that Dell has found a local partner to implements its retail sales strategy:

Under the deal, announced yesterday, Dell computers will be marketed in 700 Gome Electrical Appliance stores within three to five months, 70 percent of the chain’s total outlets in China, according to Gome Vice President Wang Junzhou.

There’s a quote from Dell’s VP for global sales and marketing saying that Chinese customers like to “touch-and-see” before buying, implying a unique approach to Chinese customers. The reality is that this is Dell’s world-wide strategy to bolster its position in the consumer market. HP has been hammering them lately and other firms such as Acer and Lenovo are growing market share while Dell is losing it. Mastery of the supply chain does not equate to sales and distribution prowess.

But it’s later in the article where it gets interesting. According to Analysys International’s Li Chong:

“I don’t think it’s a good idea for Dell, as Gome’s influence is limited in the IT circle, and its stores are located mainly in major cities,” Li said. “Dell needs to explore entry-level markets in the third- or fourth-tier cities.”

A Reuters story chimes in:

While analysts said the move was positive for Dell, they noted that computer sales in China were being driven by fifth- and sixth-tier cities, a market where GOME does not have a strong presence but is expanding into.

Mr. Li obliquely points to the most important factor in selling in China: markets. While most people are familiar with the concept of tier 1, 2, and 3 cities, that doesn’t begin to explain the diversity and complexity of Chinese markets. Even within cities there are different classes with different spending patterns. Rural areas can be vast or compact, presenting different challenges to reach customers.

There aren’t 1.3 billion consumers in China, but hundreds of thousands (millions?) of distinct markets. Nokia, of all the international firms in China, has perhaps been the most successful. They market and distribute their products all across China (and lead the handset market), but focus on different classes of products for different tiers of cities. The gadgetful handsets go to tier one, the less so to tier two, and so on down the line.

The same truism can be applied to the enterprises and small-medium businesses (SMB) of China. A securities firm in Shanghai will have dramatically different needs than a manufacturing firm in Changsha.

China is too big and too diverse to treat as a single market. International firms coming to China shouldn’t think of 1.3 billion customers (or some abstracted number representing companies), they should think of markets. That requires local knowledge. Not local in the sense of someone in China, rather local as in someone who knows the specific region and the companies that operate there.

There are a variety of ways for an international technology company to get to know about the multiplicity of local markets.

Option 1: Joint Venture
By establishing a joint venture with a domestic firm, an international firm gains market knowledge and operational distribution channels. This worked wonders for 3Com in its joint venture with Huawei. So much so that they exercised the right to buy out Huawei and run the operation themselves.

Option 2: Chief/General Agent/Tier 1 Distributor
Digital China, originally part of the then Legend Group, now Lenovo, is China’s leading distributor of IT hardware (including mobile phones). IBM, Sun, HP, EMC, Epson, Cisco, etc., all have relationships with DC. They have 6,000-8,000 agents spread across China, managed by regional subsidiaries. They do distribute packaged software, but I would guess that it’s not as big a business as hardware due to piracy.

The top tier distributors balance on a huge pyramid, with a chain of regional and local distributors connecting them to the end buyer.

Virtually all the major international technology firms in China, except Dell, have contracted with a top tier agent/distributor.

Option 3: Tier X (2, 3, 4, etc.) Distributor
Tier X distributors can be found from the top to the bottom of the channel. The biggest have regional or provincial reach, while the smallest may be focused on a city district. Important to the relationship with a lower-tier distributor is managing their incentives and sales targets. This is an area where a good top-tier distributor will show their worth.

Simply put, distributors are the key to reaching China’s myriad markets.

Option 4: Value Added Resellers (VARs)/Independent Software Vendor (ISV)
These are typically found at the local level. There are exceptions, such as Neusoft, who provides VAR-like services across China as part of its partnership with SAP. However, most VARs/ISVs are local or perhaps regional firms.

Companies such as HP and EMC have begun to expand out of the tier one cities to better reach local companies serving local markets. I’m not sure if any locally incorporated subsidiaries of international firms use VARs/ISVs as a true sales channel. I can’t imagine it’s worth effort for local and regional VARs/ISVs and it risks the relationship with distributors.

HP and EMC are both focused on supporting the sales of distributors, rather than selling. This gives them insight into local markets, helps build their brand, and keeps the people who actually do the selling happy.

Option 4: DIY Distribution
I’m sure this has been done, perhaps even successfully. Recommended if you want to have a nervous breakdown or destroy your liver with oceans of banquet baijiu.

Getting back to the consumer, what about Dell? I would have to agree with Mr. Li and the other analysts. By partnering with a high-profile consumer electronics retailer focused on affluent China, Dell will only reach the same potential customers as they reach online. Dell isn’t going to reach the proverbial 1.3 billion customers, they’re just going to hit the same market twice.