Will Dell Get Hit By a Chinese Refrigerator?

Posted on October 6, 2007
Filed Under China Business, China Distribution |

Dell may be changing its China strategy a lot more radically than just selling computers at Gome. USITO, quoting an article from Digitimes, explains that Dell is considering purchasing Founder, the third overall PC vendor in China.

There were rumors of the sale of Founder late in 2006, both to Dell and to the refrigerator (see below). As the rumor mill spins up again, what does this mean for Dell?

Could Dell even pull this off?
Dell, in contrast to all the other major international computer vendors, has never been involved in an acquisition of a competitor. Their only purchase was of Alienware in 2006. Alienware, who build high-end, custom, PCs for gaming consumers, operates as an independent subsidiary of Dell. They were a small company serving a high-value niche product.

It was nothing compared to the scale of the HP-Compaq acquisition, or Lenovo’s purchase of IBM’s PC unit, or even the recent purchase of Gateway by Acer (not to mention Acer’s impending purchase of Packard Bell). These were complex endeavors, requiring merging supply chains, reconciling channel, distribution, and licensing relationships as well as the grunt work of combining operations.

Founder, according to their Alibaba page, produced 3 million computers last year in two factories. They have somewhere between 1000 and 4500 employees. It would be a very new, and very difficult, challenge for Dell.

What if Dell did pull it off, what then?
Dell could either fold Founder’s assets into Dell China, or run it as a subsidiary (as they did with Alienware). Neither prospect is promising. Dell’s core competence is managing their supply chain and delivering custom-built PCs to customers. While Founder’s “factories” (assembly plants, really) could continue their assembly work, Dell would be faced with the problem of integrating Founder’s existing suppliers into their supply chain. Dell’s mastery of the supply chain has allowed them to keep inventories low as PCs are churned out to the consumer’s specifications. Founder doesn’t operate that way. This could turn out to be a long, expensive exercise in rationalization.

And then there is distribution. This is the ostensible reason for Dell’s purchase: to gain Founder’s channels to the Chinese consumer. While it’s all well and good to buy a distribution channel, it’s another question entirely to manage it. Other than a few deals with big box stores in the west and the Gome deal in China, Dell has absolutely no competence in this area.

I can’t imagine that Dell would so completely turn its back on what it’s good at to try to focus on something it has always disdained.

Dell could let Founder operate as a quasi-independent subsidiary, but that would be a very expensive means of bolstering their China market position. Dell would gain a large operation that would do little for their existing brands in China. They would have two entities competing against each other in a fast-growing, highly competitive market. Why would they want to waste money on duplicative efforts?

I would be stunned if Dell did this. It would be a desperate gamble.

What’s this about a refrigerator?
Haier is the 800 lb. gorilla of Chinese white goods manufacturers, and it’s looking to move into the PC cage for some more bananas. Haier launched its computer subsidiary in 2003, and is currently a minor, second-tier vendor in the China PC market. It doesn’t want to stay that way. Buying Founder would put them in the top tier with Lenovo, HP and ahead of Dell.

Haier has been acquiring companies for years now, mostly struggling domestic firms. They made a high-profile bid for Maytag, an American white goods company, but were beat out by Whirlpool. They even have an acquisition strategy, which unfortunately doesn’t survive translation:

“Activating shock fish” Policy has been employed by Haier in acquisition of ailing companies for business expansion.

…

“Shock fish” represent those companies which are well equipped but not well operated and can be vitalized if effective management is introduced.

Haier has a long record of buying and re-fitting companies, Founder would not present a problem. They’re just another shock fish.

The lack of institutional knowledge on distribution and sales channel management that Dell faces is not a problem for Haier. Haier has years of experience, in China and abroad, in sales and distribution.

The deal makes a lot of sense for Haier. They will dramatically increase their market share and (hopefully) realize cost savings through combined management and operations. It’s no wonder they’ve been trying to buy Founder for the past year.

What happens if Haier buys Founder?
It’s bad news for Dell (and for Lenovo and HP), as they may have a revitalized competitor willing and eager to fight. This doesn’t mean that Haier will dominate the market anytime soon, but they have the money and the resources to make a good effort.

For all the hoopla over Dell’s new distribution deal with Gome, Haier has had a strategic alliance with them for years. Dell had better start reading up on retail shelf placement in a hurry.

The implications for Intel and AMD
AMD has slowly been gaining market share in China. China Daily reports:

In the second quarter of this year, AMD’s brand computer market share in China reached 28 percent, a 6-percent year-on-year increase, while its microprocessor division has over 50-percent share of the retail market, according to a report in the Beijing Morning Post.

The survey shows that AMD’s market share in servers, desktop PCs and laptops have all increased in each quarter during the past year.

Among them, its market share in the laptop segment rose by nearly 100 percent in the second quarter. AMD also holds 43 percent of the market in consumer desktops, the highest proportion of the three groups.

Haier is an Intel partner, they don’t use AMD chips. Founder has been in and out of bed with both of them over the past few years. If Haier were to buy Founder, would AMD get frozen out?

Dell may not be the only company threatened by a rampaging refrigerator.

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