Is Dell Betting The Company On China?

by Rob Enderle

I just returned from China where Dell walked a large group of us through Dell’s massive move to shift from a US centric world market to a China Centric world market. Driving this are projections that predict that China will account for more sales opportunity next decade than Europe and the US combined.

This reflects not only on Dell, but on both China and the US, and let’s take a look at both topics.

Dell’s China Move

Dell is effectively betting the company that the next big market opportunity will be in China. This is well supported by China’s massive growth rate and, along with that growth, the emergence of a middle class that will consume the largest portion of the world’s production.

Dell has shifted its design center to China and most of the new products, as a result, will originate from there going forward. This anticipates a shift that is already evident in both corporate and consumer lines to providing a higher variety of choices because the Chinese market demands them. This is evidenced first by their Studio Hybrid consumer desktop product and their “E” Series corporate laptop line. The first has skin options which allow it to change color and even take on a real bamboo external appearance, the second has color choices which is, to my recollection, the first time a corporate line has embraced the fact that not everyone wants black today, or wanted off-white in years past.

In addition, the Chinese market buys heavily on value. This isn’t a premium market yet, which suggests that much of Dell’s effort going forward will be focused on making their lower cost products more attractive, capable, and interesting. This doesn’t mean they won’t have premium lines, but historically low cost lines were often intentionally crippled to assure the higher margin premium lines would sell well, under the new model, the premium lines will continue to be enhanced but the value lines will no longer be crippled. In fact, as evidenced by the Studio Hybrid, the value lines may actually have unique advantages that the premium products don’t pick up.

This could actually do some interesting things to the PC market that could, overall, be very beneficial because it focuses the efforts solidly on where most buyers want to buy and way from trying to drive them to products that would typically fall outside of their economic bracket.

Finally, this is a market that could leapfrog into a new technology because it is underpenetrated with traditional PCs. This further explains why Dell has moved aggressively into the kind of storage that could be used to deploy diskless PCs and directly address one of the biggest costs and exposures in the existing model. These exposures include the excess complexity of the current model, the inability to protect distributed data, and the rapid rise of bots and Trojans which are spreading like wildfire through China and the world.

China vs. the US

This move is predicated on the belief that China will eclipse the US as the major world power. Trends fully support this conclusion but trends often don’t play out as the charts would forecast. Recall that the current economic crisis largely resulted from analysts who predicted a never ending rise to housing prices and didn’t foresee a market collapse that now seems very evident in hindsight.

There are some troubling problems in China and the US just got the biggest wakeup call since the 1920s. You could argue the that earlier market crash actually resulted in making the country stronger though I doubt many at the time would have seen that.

For China they are repeating some of the US’s mistakes. They are not focusing very strongly on alternative energy and are ramping to become a bigger consumer of oil than the US is and that addiction could severely limit their growth. They aren’t focused enough of curtailing pollution and that will likely increase dramatically their domestic health costs and reduce dramatically their productivity over time. And they are rapidly increasing the strength of unions which is causing labor costs to skyrocket eroding their labor cost advantage dramatically year over year.

Finally they haven’t fully stepped up to protecting intellectual property yet and are still largely known for their capability to mimic and pirate and not their ability to innovate. I don’t believe you can be a market leader by mimicking others but if there isn’t enough protection for intellectual property there is no incentive to innovate.

This suggests that China may hit a wall and the US, much like it did after the crash in the 1920s, could return stronger than before possibly free of its addiction to foreign oil. While far from a sure thing it does remain a likely possibility.

Wrapping Up

This doesn’t mean that Dell’s bet is a bad one. They remain largely split between the US and China so are able to move in whichever direction the world market eventually decides to go. The changes they are making should work well globally regardless of where they are centered and China remains the short term opportunity for growth regardless. Dell recently reported they are the fastest growing technology vendor in China with an impressive 30% growth rate which suggests their investment is already paying off though they currently lag both Lenovo and HP in the region.

Overall this has a lot to say about the future of Dell and both the US and China. And that is the future remains in flux with the only sure thing being that with the current economic climate nothing is certain. Dell appears to be positioning itself well against this uncertain future.