Dell's Problems in China

            
 
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Case Details:

Case Code : BSTR193
Case Length : 18 Pages
Pages Period : 1995-2005
Organization : Dell Computers
Pub Date : 2006
Teaching Note : Available
Countries : China
Industry : IT Hardware

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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"Dell eventually needs to reinvent its direct business approach in China if it wants to adapt to the local market." 1

- Thomas Wang, Analyst, Analysys2 in 2005.

"There's tremendous growth in the future in China. That is clearly one of the world powers today, and it'll be more so in future. If you want to grow globally, you have to have a large presence in China." 3

- Mort Topfer, Former Vice-chairman, Dell Computers in 2005.

Introduction

On October 25, 2005, the US-based Dell Computers (Dell), a leading PC manufacturer in the world, announced that Foo Piau Phang (Phang) would retire as the President of Dell China. According to analysts, Phang retired due to less than forecasted sales in China and the lower than projected results from Dell's direct sales model in that country.

Bill Amelio (Amelio), the Chief of Dell Asia Pacific, underplayed the nature of Dell's problems in China, saying, "I simply think (the talk of problems in China) is because we had two quarters in a row, as a company, where we didn't quite meet the expectations of analysts."4 By the third quarter of 2005-06, Dell's market share in China had slipped to 7.5% from 8.2% in the second quarter. However, the unit sales of Dell China grew by 46% and revenue by 29% during the third quarter as compared to the third quarter of 2004-05. According to Analysys International, "The market share of international giant Dell dropped due to the weak sales power in small cities, the SME market and fierce competition."5

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The other factor that led to the erosion of Dell's market share was fierce competition from Lenovo and HP in the middle and lower end of the market. Dell entered China in 1995, and was successful in capturing the urban markets and corporate customers.

The company was able to use its direct sales model successfully in these markets. By 2004, the urban markets had reached saturation and Dell failed to gauge the increasing demand for computers from smaller towns and rural areas. Chinese companies like Lenovo, Founder and THTF reached those markets at the right time by launching low priced products and sprucing up their distribution networks, which Dell failed to do. Dell was not performing well globally. In the third quarter ending October 28, 2005, Dell reported a drop of 28% in profits. The company's net income fell to US$ 606 million against US$ 846 million in the third quarter of the previous year(Refer Table I for the details). The company generated revenues of US$ 13.9 billion as against the projected US$ 14.5 billion.

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1] Weitao Li, "Straight Talk," China Daily, November 28, 2005.

2] China based Analysys International provides data, information and advice about technology, media and telecom industry in China to over 10,000 clients across the world.

3] "Dell to Build Second China Plant," American Statesman, March 25, 2005.

4] Young Doug, "China Passes Japan as Dell's No. 3 Market," www.yahoo.com, November 12, 2005.

5] Wang Jessica, "Analysys International Says China's PC Market Continues Growing to Reach RMB 20.26 Billion in Q3 2005, While Dell's Market Share Drops," www.analysys.com, November 30, 2005.

 

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