- Email: [email protected]
Marketing PCs to China
Marketing PCs to China
Zhan G. Li Associate Professor of Marketing and International Business, University of San Francisco, San Francisco, California
L. William Murray Professor of Finance and International Business, University of San Francisco, San Francisco, California
Alev Efendioglu Professor of Management, University of San Francisco, San Francisco, California
While the global PC industry has become lethargic and has struggled to recover from an economic slowdown in the major Western markets, the PC market in China has become energetic and buoyant. Western PC makers have been shifting more attention and resources to this rapidly growing market, but few have succeeded so far. Why does China have such huge potential for PCs? What obstacles do Western PC manufacturers face there? And how can a company succeed in this very promising yet challenging market?
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he once high-flying global PC market is in a depressing slump. The International Data Corporation estimates that unit sales in the United States will have declined by 6.3 percent in 2001 from 2000 sales. The Western European market, which makes up 20 percent of the world demand for PCs, showed negative growth from the get-go in 2001. Demand in Japan remained flat, at best. The dot-com bust and economic recession in the US and other developed countries have made the situation even more disheartening. Thumbing its nose at this global slumping trend, China represents one of the very few bright spots for the PC industry. Sales grew by 37 percent per year from 1997 to 2000. In 2000, 7.2 million PCs were sold, showing a 45 percent increase over 1999. According to the IDC, almost 9 million PCs were sold in China during 2001, a 25.5 percent increase over the previous year, and 10.8 million PCs are expected this year. Such impressive growth will likely continue for five to ten years. In comparison, PC sales in Japan are expected to be 11.7 million during 2002, down from 13.3 million last year. It is no surprise, then, that such major PC makers as IBM, HP, and Dell have all shifted gears toward China. Sony and Fujitsu, who used to pay little if any attention to the Chinese PC market, recently began aggressive marketing and production activities there. Nevertheless, succeeding in China is not easy. Even though American PC giants like IBM and HP have been doing business in China for several years, they are finding their market shares slipping away to the local Chinese brands. Chinese brands currently account for nearly 80 percent of the country’s PC market, with Legend, the market leader, commanding 37 percent market share and Founder, the runner-up, with 8.3 percent. Why is it so difficult for Western PC marketers to succeed in China, given their stellar performance in other markets? What should they do to succeed? What really makes the Chinese PC market so different and attractive? Answers to these questions can help Western PC manufacturers better Business Horizons / November-December 2002
understand China, target their marketing efforts more effectively, and better prepare themselves for the challenges in one of the world’s fastest growing markets.
Opportunities
S
o what really makes the Chinese PC market different? Why do sales there continue to grow against the slump in the global market? Such rapid growth obviously benefited from the open-door policies the country implemented in the late 1970s. However, there are more specific reasons for the continuing buoyant PC sales in China, including the huge population and low PC penetration rate, the explosive growth of Internet users, nationwide education reform, and the modernization of business firms and government agencies.
higher—about 40 percent—in China’s major cities, such as Guangzhou, Shanghai, and Beijing. However, it is nearly 70 percent in such top US cities as San Francisco, Salt Lake City, and Washington. A recent survey conducted by a major Chinese newspaper revealed that PCs rank far ahead of other home electronic appliances on the respondents’ to-buy lists. All of this means there is tremendous room to grow PC sales in China. Such huge growth potential explains why some analysts expect China to surpass Japan and become the world’s second-largest PC market, behind only the US, by 2004. Building on the success of reforming its coastal and urban cities, the Chinese government has already announced plans to develop and modernize other parts of the country, particularly its western provinces. This too spells more opportunities for the sales of PCs and other IT products in the years to come.
Huge population, low PC penetration
Growing popularity of the Net
Out of China’s 1.3 billion people, only about 30 percent are wealthy enough to afford PCs. But that is already bigger than the entire US population! Moreover, only about 10 percent of Chinese homes have PCs, while the US home penetration rate is close to 60 percent. The rate is
The Internet is a juggernaut sweeping through China. It has already rolled through society’s elite to reach a much wider user base. Chinese users go online not just for news, as in the past, but also for entertainment, education, and
Marketing PCs to China
61
business. Females and senior citizens are eagerly jumping on the Internet bandwagon as well. A recent survey conducted by China Internet Network Information (CNNIC 2001) indicated that 38.7 percent of Internet users are female, and the proportion of the users between ages 18 and 30, though still the majority, had dropped to 52.9 percent from 91 percent in 1998. What about people who don’t own a computer yet? No problem. They can step into Internet cafes or bars, which can easily be found on the streets of Chinese cities. Four million new users were added to China’s “Netizen” population during the first six months in 2001 alone, reaching a total of 26.5 million. The year’s end saw 33.7 million, and the number had grown to 37.6 million by May 2002. Undoubtedly, the growing popularity of the Net will continue to lead to a buoyant demand for PCs. In fact, 80 percent of Chinese PC buyers cited getting online as one of their major reasons for buying a PC.
Nationwide education reform In 2000, the Chinese government announced its plan to enhance education in information technology (IT) throughout the country’s educational systems. As a part of this plan, computer literacy classes will become mandatory, and more than 600,000 tertiary schools and 2,000 higher education institutions will be connected to the Net by 2010. This new policy will surely create a huge demand for PCs in years to come. Moreover, it is widely known that Chinese families strongly emphasize education. Stories abound about Chinese parents who would do almost anything to get a good education for their children. As computer literacy becomes one of the top priorities in children’s schooling, we should not be surprised to see many parents willing to spend their savings of a few years to buy home computers.
Modernization of business firms and government agencies Recently, the Chinese government rolled out its “Government Online” project mandating central and provincial governments to computerize many of their functions and connect to the Internet in the near future. Having recognized the significant benefits of IT, local Chinese firms are also in a rush to computerize and upgrade many of their business activities. About 10 million small to mid-sized Chinese companies are currently using computers as a stand-alone system, and only 2 percent of the country’s medium and large companies have established their intranets. This again spells great potential for PCs and related IT equipment. Since the reforms of the late 1970s, many Western corporations have entered China. Now that the country has joined the WTO, many more foreign firms, large and small, are coming too. As this growing number of Western firms be62
come established and expand within the Chinese market, they need a lot of PCs to equip their offices and personnel. Familiar with and believing in US and Western PCs, these firms will surely consider such brands seriously.
Olympics 2008 & WTO Last year, Beijing was chosen to host the 2008 Olympics. So China is planning to use this golden opportunity to showcase Beijing and other major cities to the world. It has set aside $22 billion for the Olympic events. This will certainly accelerate business activities and the pace of the country’s development. Renovations of major infrastructures such as telecommunications, hotels, and roads are currently under way. There is no doubt that IT products, such as PCs, will play a major role in virtually every major project in China’s preparations for the Olympics. Finally, China has officially joined the WTO this year, which will gradually eliminate many barriers against foreign products, including PCs. This means a more level playing field for Western PC brands and the chance to compete more freely in China.
Challenges
D
espite the huge market potential, things are not easy for foreign PC makers and marketers in China. US brands such as IBM and HP, which dominated the Chinese PC market prior to 1996, are now struggling to hold on to their combined market shares in the low teens, while local Chinese brands are prospering. Although many obstacles exist, the key challenges for foreign PC brands include toughening competition, the very different characteristics of the Chinese market, disadvantages in distribution, and regulations and politics.
Toughening competition The big potential for PC sales has attracted a greater number of global competitors. Joining their US counterparts, Japan’s Sony and Fujitsu recently entered China, set up plants, and attacked the Chinese market, which they once ignored, with aggressive marketing campaigns. In addition, a number of local home appliance manufacturers, such as Haier and TCL, decided to branch out from their core businesses (refrigerators, televisions) into the PC market. Unable to resist the lure of growing demand, local distributors such as Qixi also joined the fray with their own brands and successfully took over a corner of the market. Taking advantage of their intimate knowledge of local markets and their strong connections with local retailers, regional brands such as Hengsheng and Boan have also emerged and flourished. Moreover, a large number of small job shops throughout China are selling knockoff Business Horizons / November-December 2002
PCs equipped with smuggled components and bootlegged software at significantly low prices. Their PCs account for 20 percent of the market share and are very appealing to many Chinese consumers, who are willing to forgo warranties and services for a lower price tag.
ficulty understanding the basic PC terminology. Hence, pre-sales education, installation, after-sales services, training, and a lot of hand-holding are paramount for the majority of Chinese PC purchasers, while practical application and easy-to-use interface software are a must.
This growing number of varied sellers means intensifying competition in the Chinese PC market. Rising competitive pressures have already led to price declines, squeezed profit margins, and heightened marketing costs. For example, the lucrative laptop market has seen its once stable, high-priced system totally collapse. Some brands dropped their prices from RMB20,000 to RMB10,000 within the last few years.
Unlike the US, where the PC market is regarded as homogeneous, China is a combination of many different submarkets. Yes, the PC home penetration level is as high as 40 percent in wealthy cities like Guangzhou, Shanghai, and Beijing. But in many other urban cities, it could be merely 2 to 3 percent, let alone suburban and rural areas. Thus, the profiles and characteristics of PC buyers—education, income, and other demographics—are quite heterogeneous throughout China.
A large number of small job shops are selling knockoff PCs equipped with smuggled components and bootlegged software at significantly low prices. Their PCs account for 20 percent of the market share and are very appealing to many Chinese consumers, who are willing to forgo warranties and services for a lower price tag. To cut through the clutter and get the attention of potential Chinese buyers, PC manufacturers had to spend RMB616 million on advertising in 2000, a whopping 77 percent increase from the year before. Advertising expenditures are expected to have risen to an even higher level in 2001. Such intense competition will not abate in the near future as competitors juggle their market positions and many fight for their mere survival.
Different market characteristics With a home penetration level as high as 60 percent, PCs in the United States have reached the mature stage and are considered as much like commodities or home appliances as TVs. Many homes even have multiple PCs. Functionality, specifications, and prices are the key selling points. In contrast, more than 75 percent of Chinese PC buyers are first-time buyers and not as computer-savvy as their American counterparts. Quite often, they are not sure what kinds of computers best suit them and have difMarketing PCs to China
Transporting their mature product lines and marketing practices geared toward homogeneous home markets to China, many foreign PC marketers have found that their market performances are not as good as anticipated. Moreover, many are slow or ineffective in responding to the different market conditions. This is one of the reasons why IBM and HP have been losing market shares in this emerging, lucrative market.
Disadvantages in distribution Having a strong distribution network is a key to success in virtually any market. It allows a company to be close to customers and to penetrate, expand, and serve a market effectively. However, distributing products in China has always been a challenge for foreign PC makers. First, only a few Chinese distributors can cover the entire market, and they are likely to be owned and operated by leading Chinese PC manufacturers, such as Legend. If a foreign manufacturer uses one of these national distribution networks, its brands end up competing with the distributor’s/manufacturer’s brands side by side in their retail stores. Surely a Chinese distributor would tout its own brands favorably at the expense of foreign competitors. Second, local PC manufacturers have inherent cultural advantages over foreign competitors in establishing and working with distribution networks. Many Chinese PC marketers were first established as distribution concerns, selling and servicing the computers of foreign manufacturers. Having mastered the manufacturing know-how, they have now developed their own brands and become the dominant force in the Chinese market. A case in point is Legend, the leading local brand. It possesses its own vast nationwide distribution networks, with over 2,000 distribution points, 137 franchise shops, and more than 400 service centers across the country. In contrast, foreign brands have to work with various independent distributors and own only a few servicing centers throughout China. Third, many local distributors claim to provide customer service, technical support, and routine repair and mainte-
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nance services. However, many foreign PC manufacturers have frequently found that these claims are not true. The majority of local distributors have only limited capabilities to execute their highly touted claims and little focus to provide these services and support. They are more interested in selling computers. Nevertheless, as the competition heats up and more first-time buyers flock to the market, services and support will be critical for success in the Chinese market.
Regulations and politics The Chinese government, like any other government, has every intention of promoting the local IT industry. It has been very supportive of local PC manufacturers in the past and will surely be so in the future. This will continue to challenge foreign PC makers when they try to sell PCs to government agencies and educational institutions, which continue to computerize and upgrade their functions. Currently, foreign PCs are also subject to 30 percent tariffs when exporting to China. To avoid such heavy tariffs, Dell, IBM, HP, and other Western companies have set up assembly plants in China. However, they still have to import many high-value components, such as CPUs, drives, and motherboards, paying 6 to 10 percent tariffs for them. This has certainly put them at an inferior position in competing with local brands on price. Many cumbersome distribution regulations are also imposed on foreign competitors. To export PCs to China, manufacturers must use some of the state-appointed agencies to distribute their products. Consequently, they have little control over how and where their products are being marketed. Even though those foreign PC makers that have set up assembly plants in China have the free-
Commitment to localization will reduce costs for foreign brands and allow them to avoid the tariffs imposed on imported PCs and components. dom to choose local companies to handle the distribution and services for their products, they are not allowed to own or manage any distribution network, such as wholesale outlets and warehouses. As such, they still do not have complete control over product distribution, which gives local PC firms significant advantages in distribution and services.
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China’s entry into the WTO will eventually level the playing field for foreign competitors. Companies will be able to export PCs directly to China without using the officially appointed distribution agencies, and to fully participate in all sales and distribution activities, thus managing the distribution and service networks more effectively. But all the WTO rules and regulations aimed at eliminating entry barriers will not be fully implemented in China before 2005.
Suggestions
S
o how can US and other foreign PC manufacturers address all these challenges and seize the opportunities presented by the booming Chinese market? For those interested in entering and succeeding in China, we offer a few suggestions below.
Localization Not too long ago, foreign PC makers were hesitant to fully localize their productions and procurements. Though growing fast, China was still a small market, and Western companies merely built assembly lines there, importing the majority of needed components. It is now clear that China will soon become the world’s second largest market, and major suppliers of PC components, such as those in Taiwan, have set up shops in China. Thus, pursuing a greater level of location in procurement and production makes sense. The intensifying competition in the Chinese market has already resulted in tremendous pressures on PC prices and profit margins. Commitment to localization will reduce costs for foreign brands and allow them to avoid the tariffs imposed on imported PCs and components. This will negate some of the price advantages the local PC brands have been enjoying so far. True, foreign PC makers may still have to import some key components, such as CPUs. But Chinese competitors will likely need to import similar key parts as well. A greater commitment to localization will also help foreign companies better market themselves and their PCs in China. It will lend confidence to potential Chinese distribution and production partners to establish long-term relationships with foreign PC makers. It will boost the image and perceptions of foreign brands when the companies approach potential Chinese governmental and educational customers. And it will bring foreign PC marketers closer to Chinese buyers, helping them understand the market better and be more responsive to fast-changing conditions.
Segmentation and adaptation China’s heterogeneous PC market exhibits different segments. Although nearly 75 percent of Chinese PC conBusiness Horizons / November-December 2002
sumers are first-time buyers, the number of repeat buyers is growing and becoming more important in the long run. Compared with first-time buyers, repeat buyers are more likely tech-savvy and need little support and hand-holding when purchasing PCs. They are also more likely interested in upgrades and advanced computers. Because American PCs are known for their advanced technologies and features and are weak in distribution and service networks, focusing on repeat buyers rather than first-timers appears to be a good long-term strategy. In the short run, however, Western PC makers must also try to tailor their product lines and marketing strategies to the heterogeneous nature of the Chinese market. As noted earlier, many Chinese consumers (parents) buy PCs not for themselves but for their children, even though these parents may know little about computers. This is not surprising at all, given the one-child policy and the strong, traditional emphasis on education in the Chinese culture. Such an entirely different market segment requires different product appeals and marketing messages. But not having faced this kind of market before at home, US manufacturers have not adapted their marketing strategies well to appeal to it and thus are falling behind local competitors. In contrast, Chinese PC makers have designed and introduced product lines just for children. Quite colorful and cute in shape, they come with easy and fun interfaces and pre-installed software for children’s learning. To appeal to parents further, some even have antibacterial coating and reduced radiation emission from PC monitors. Moreover, many of the Chinese consumers buying PCs to surf the Net are not tech-savvy enough to take the right technical steps to connect. Leading Chinese PC makers, such as Legend, have designed and introduced Internet PCs, which require users to touch only one button on the computer keyboard to be connected to the Net. Western manufacturers need to be aware of many segments existing in China and must be willing to make the necessary adaptations to appeal to Chinese consumers.
Business markets Compared to local competitors, foreign PC manufacturers are weaker in distribution and service networks, have higher retail prices, and deliver products that are less tailored for different consumer segments. This is why they are losing market shares to local PC competitors. However, foreign PCs are renowned for reliability, superior technologies, and technical support capabilities. This suggests that foreign PCs are better positioned for China’s business market, which is currently much larger than the consumer market. Business customers in China are more sophisticated and tech-savvy. They care more about a product’s image, reputation, reliability, functionality, specifications, and technical supports, in addition to costs. Extensive and retail netMarketing PCs to China
works are less important, while a direct sales force plays a more important role in selling computers to them. Plus, many of the current and potential business customers are multinational corporations that have already been famil-
Because American PCs are known for their advanced technologies and features and are weak in distribution and service networks, focusing on repeat buyers rather than first-timers appears to be a good long-term strategy. iar with and bought US and other Western PCs in other parts of the world. As a result, some US manufacturers, such as Dell, have focused primarily on the Chinese business market. True, foreign PCs will continue to face uphill battles when approaching governmental and educational customers that are likely to favor local suppliers. But as China becomes more open and government officials and business managers increasingly adopt Western business practices, purchase decisions will more likely be based on the merits of a product than on blind patriotic considerations. In fact, about 60 percent of Dell’s PC sales in China come from governmental and related enterprises.
Public relations As competition becomes fiercer and advertising and promotion intensify, Western PC makers need to consider creative ways to build brand awareness and preference in the Chinese market. Public relations could be one of the cost-effective avenues to achieve such goals. Good PR strategies could lead to free, favorable publicity by the Chinese media, which would build goodwill and favorable perceptions among Chinese customers—very important for approaching government agencies and related enterprises. Favorable publicity from the Chinese media will also be potent for cutting through the growing advertising clutter created by rising marketing expenditures of major PC manufacturers, both local and foreign. A case in point is Motorola. The high-tech product giant has built many elementary schools in remote areas to promote education in China’s poorest provinces. It has provided technical and financial support to research insti-
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tutes, donated computers to schools, and established Motorola scholarships with leading Chinese universities. Through such creative and persistent PR efforts, Motorola has received an enormous amount of positive media publicity and has thus been considered one of the most favored foreign brands and companies in China.
provincial, and local levels. Now, being cut off from governmental subsidies and guaranteed sources of income, they are aggressive and eager to explore new business. Given the appropriate guidance, training, and support, they can become powerful distribution partners for foreign PC suppliers.
Distribution
Apart from traditional distribution channels, the direct sales channel popularized by Dell could be an effective method of selling PCs in China. Compared to their Chinese competitors, American PC manufacturers have more experience and technical know-how to establish and run such a system. Such a move will cut costs for foreign suppliers and improve their price competitiveness in the Chinese market. The direct model may not be a good distribution solution for the consumer market, since credit cards are not widely used in China as a payment method and the majority of Chinese PC buyers are first-timers. But it has proved to be a very viable distribution strategy to the more tech-savvy business market, even in China. As the population of repeat PC buyers grows and credit card use becomes more widespread, the direct model could be very promising in the long run for the consumer market as well.
To overcome distribution challenges in China, foreign PC makers could form distribution relationships with local large competitors. IBM, Toshiba, Canon, Intel, and many others have been working with Legend to distribute their products throughout China. True, Legend may push its own brands harder at the point of purchase. But foreign PC makers can gain immediate national market coverage through such a distributor. Moreover, strong and successful local distributors like Legend have the resources to meet the strict payment terms usually demanded by foreign PC suppliers, as well as the clout to collect payment from dealers and resellers. They also have the influence over the dealer and reseller networks to enforce strict and uniform marketing strategies, such as pricing and service standards, throughout China. Although they are not allowed to own their distribution functions in China, at least until WTO regulations are fully implemented in a few more years, foreign PC suppliers can set up ventures to actively manage their distributors and resellers. These ventures would focus solely on recruiting, training, accrediting, and monitoring the activities of thousands of local-level service, repair, and maintenance providers. Undoubtedly, this is a costly proposal. But it gives foreign PC makers an opportunity to justify their prices with value-added services. Moreover, it prepares foreign suppliers to establish and run their whollyowned and independent distribution and service networks after WTO distribution-related policies are fully implemented in China. In choosing the right distributors, foreign PC marketers should include financial strength, market coverage, influence over dealers and resellers, technical service capabilities, marketing skills, and connections among their primary selection criteria. One thing not to be overlooked is that the best distributor candidates are many of the formerly state-owned distribution companies. Unlike their private counterparts, these enterprises have established customer bases, distribution and logistics capabilities, distribution centers in strategic locations and markets, and personal relationships with authorities at various state,
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ith its successful and deepening economic reforms and improving standards of living, China offers tremendous opportunities for US and Western PC marketers. However, only those companies that understand and prepare for the challenges of marketing PCs in China can capitalize on those opportunities. ❍
References and selected bibliography Chen, Jiang. 2001. Internet population grows again. @ Chinadaily.com.cn (24 July). China’s PC market set to rise at 25–30% annually over five years. 2001. AsiaPulse News (30 July). CNNIC. 2001. China Internet Network Information, Semiannual Survey Report on the Development of China’s Internet @ www. cnnic.net.cn/develst/rep200107-e.shtml (July). Helsell, Tina. 2000. New paths to market. China Business Review 27/1 (January-February): 64-70.
The authors would like to thank Paul Lee for his assistance in this project.
Business Horizons / November-December 2002
Zhan G. Li Associate Professor of Marketing and International Business, University of San Francisco, San Francisco, California
L. William Murray Professor of Finance and International Business, University of San Francisco, San Francisco, California
Alev Efendioglu Professor of Management, University of San Francisco, San Francisco, California
While the global PC industry has become lethargic and has struggled to recover from an economic slowdown in the major Western markets, the PC market in China has become energetic and buoyant. Western PC makers have been shifting more attention and resources to this rapidly growing market, but few have succeeded so far. Why does China have such huge potential for PCs? What obstacles do Western PC manufacturers face there? And how can a company succeed in this very promising yet challenging market?
60
T
he once high-flying global PC market is in a depressing slump. The International Data Corporation estimates that unit sales in the United States will have declined by 6.3 percent in 2001 from 2000 sales. The Western European market, which makes up 20 percent of the world demand for PCs, showed negative growth from the get-go in 2001. Demand in Japan remained flat, at best. The dot-com bust and economic recession in the US and other developed countries have made the situation even more disheartening. Thumbing its nose at this global slumping trend, China represents one of the very few bright spots for the PC industry. Sales grew by 37 percent per year from 1997 to 2000. In 2000, 7.2 million PCs were sold, showing a 45 percent increase over 1999. According to the IDC, almost 9 million PCs were sold in China during 2001, a 25.5 percent increase over the previous year, and 10.8 million PCs are expected this year. Such impressive growth will likely continue for five to ten years. In comparison, PC sales in Japan are expected to be 11.7 million during 2002, down from 13.3 million last year. It is no surprise, then, that such major PC makers as IBM, HP, and Dell have all shifted gears toward China. Sony and Fujitsu, who used to pay little if any attention to the Chinese PC market, recently began aggressive marketing and production activities there. Nevertheless, succeeding in China is not easy. Even though American PC giants like IBM and HP have been doing business in China for several years, they are finding their market shares slipping away to the local Chinese brands. Chinese brands currently account for nearly 80 percent of the country’s PC market, with Legend, the market leader, commanding 37 percent market share and Founder, the runner-up, with 8.3 percent. Why is it so difficult for Western PC marketers to succeed in China, given their stellar performance in other markets? What should they do to succeed? What really makes the Chinese PC market so different and attractive? Answers to these questions can help Western PC manufacturers better Business Horizons / November-December 2002
understand China, target their marketing efforts more effectively, and better prepare themselves for the challenges in one of the world’s fastest growing markets.
Opportunities
S
o what really makes the Chinese PC market different? Why do sales there continue to grow against the slump in the global market? Such rapid growth obviously benefited from the open-door policies the country implemented in the late 1970s. However, there are more specific reasons for the continuing buoyant PC sales in China, including the huge population and low PC penetration rate, the explosive growth of Internet users, nationwide education reform, and the modernization of business firms and government agencies.
higher—about 40 percent—in China’s major cities, such as Guangzhou, Shanghai, and Beijing. However, it is nearly 70 percent in such top US cities as San Francisco, Salt Lake City, and Washington. A recent survey conducted by a major Chinese newspaper revealed that PCs rank far ahead of other home electronic appliances on the respondents’ to-buy lists. All of this means there is tremendous room to grow PC sales in China. Such huge growth potential explains why some analysts expect China to surpass Japan and become the world’s second-largest PC market, behind only the US, by 2004. Building on the success of reforming its coastal and urban cities, the Chinese government has already announced plans to develop and modernize other parts of the country, particularly its western provinces. This too spells more opportunities for the sales of PCs and other IT products in the years to come.
Huge population, low PC penetration
Growing popularity of the Net
Out of China’s 1.3 billion people, only about 30 percent are wealthy enough to afford PCs. But that is already bigger than the entire US population! Moreover, only about 10 percent of Chinese homes have PCs, while the US home penetration rate is close to 60 percent. The rate is
The Internet is a juggernaut sweeping through China. It has already rolled through society’s elite to reach a much wider user base. Chinese users go online not just for news, as in the past, but also for entertainment, education, and
Marketing PCs to China
61
business. Females and senior citizens are eagerly jumping on the Internet bandwagon as well. A recent survey conducted by China Internet Network Information (CNNIC 2001) indicated that 38.7 percent of Internet users are female, and the proportion of the users between ages 18 and 30, though still the majority, had dropped to 52.9 percent from 91 percent in 1998. What about people who don’t own a computer yet? No problem. They can step into Internet cafes or bars, which can easily be found on the streets of Chinese cities. Four million new users were added to China’s “Netizen” population during the first six months in 2001 alone, reaching a total of 26.5 million. The year’s end saw 33.7 million, and the number had grown to 37.6 million by May 2002. Undoubtedly, the growing popularity of the Net will continue to lead to a buoyant demand for PCs. In fact, 80 percent of Chinese PC buyers cited getting online as one of their major reasons for buying a PC.
Nationwide education reform In 2000, the Chinese government announced its plan to enhance education in information technology (IT) throughout the country’s educational systems. As a part of this plan, computer literacy classes will become mandatory, and more than 600,000 tertiary schools and 2,000 higher education institutions will be connected to the Net by 2010. This new policy will surely create a huge demand for PCs in years to come. Moreover, it is widely known that Chinese families strongly emphasize education. Stories abound about Chinese parents who would do almost anything to get a good education for their children. As computer literacy becomes one of the top priorities in children’s schooling, we should not be surprised to see many parents willing to spend their savings of a few years to buy home computers.
Modernization of business firms and government agencies Recently, the Chinese government rolled out its “Government Online” project mandating central and provincial governments to computerize many of their functions and connect to the Internet in the near future. Having recognized the significant benefits of IT, local Chinese firms are also in a rush to computerize and upgrade many of their business activities. About 10 million small to mid-sized Chinese companies are currently using computers as a stand-alone system, and only 2 percent of the country’s medium and large companies have established their intranets. This again spells great potential for PCs and related IT equipment. Since the reforms of the late 1970s, many Western corporations have entered China. Now that the country has joined the WTO, many more foreign firms, large and small, are coming too. As this growing number of Western firms be62
come established and expand within the Chinese market, they need a lot of PCs to equip their offices and personnel. Familiar with and believing in US and Western PCs, these firms will surely consider such brands seriously.
Olympics 2008 & WTO Last year, Beijing was chosen to host the 2008 Olympics. So China is planning to use this golden opportunity to showcase Beijing and other major cities to the world. It has set aside $22 billion for the Olympic events. This will certainly accelerate business activities and the pace of the country’s development. Renovations of major infrastructures such as telecommunications, hotels, and roads are currently under way. There is no doubt that IT products, such as PCs, will play a major role in virtually every major project in China’s preparations for the Olympics. Finally, China has officially joined the WTO this year, which will gradually eliminate many barriers against foreign products, including PCs. This means a more level playing field for Western PC brands and the chance to compete more freely in China.
Challenges
D
espite the huge market potential, things are not easy for foreign PC makers and marketers in China. US brands such as IBM and HP, which dominated the Chinese PC market prior to 1996, are now struggling to hold on to their combined market shares in the low teens, while local Chinese brands are prospering. Although many obstacles exist, the key challenges for foreign PC brands include toughening competition, the very different characteristics of the Chinese market, disadvantages in distribution, and regulations and politics.
Toughening competition The big potential for PC sales has attracted a greater number of global competitors. Joining their US counterparts, Japan’s Sony and Fujitsu recently entered China, set up plants, and attacked the Chinese market, which they once ignored, with aggressive marketing campaigns. In addition, a number of local home appliance manufacturers, such as Haier and TCL, decided to branch out from their core businesses (refrigerators, televisions) into the PC market. Unable to resist the lure of growing demand, local distributors such as Qixi also joined the fray with their own brands and successfully took over a corner of the market. Taking advantage of their intimate knowledge of local markets and their strong connections with local retailers, regional brands such as Hengsheng and Boan have also emerged and flourished. Moreover, a large number of small job shops throughout China are selling knockoff Business Horizons / November-December 2002
PCs equipped with smuggled components and bootlegged software at significantly low prices. Their PCs account for 20 percent of the market share and are very appealing to many Chinese consumers, who are willing to forgo warranties and services for a lower price tag.
ficulty understanding the basic PC terminology. Hence, pre-sales education, installation, after-sales services, training, and a lot of hand-holding are paramount for the majority of Chinese PC purchasers, while practical application and easy-to-use interface software are a must.
This growing number of varied sellers means intensifying competition in the Chinese PC market. Rising competitive pressures have already led to price declines, squeezed profit margins, and heightened marketing costs. For example, the lucrative laptop market has seen its once stable, high-priced system totally collapse. Some brands dropped their prices from RMB20,000 to RMB10,000 within the last few years.
Unlike the US, where the PC market is regarded as homogeneous, China is a combination of many different submarkets. Yes, the PC home penetration level is as high as 40 percent in wealthy cities like Guangzhou, Shanghai, and Beijing. But in many other urban cities, it could be merely 2 to 3 percent, let alone suburban and rural areas. Thus, the profiles and characteristics of PC buyers—education, income, and other demographics—are quite heterogeneous throughout China.
A large number of small job shops are selling knockoff PCs equipped with smuggled components and bootlegged software at significantly low prices. Their PCs account for 20 percent of the market share and are very appealing to many Chinese consumers, who are willing to forgo warranties and services for a lower price tag. To cut through the clutter and get the attention of potential Chinese buyers, PC manufacturers had to spend RMB616 million on advertising in 2000, a whopping 77 percent increase from the year before. Advertising expenditures are expected to have risen to an even higher level in 2001. Such intense competition will not abate in the near future as competitors juggle their market positions and many fight for their mere survival.
Different market characteristics With a home penetration level as high as 60 percent, PCs in the United States have reached the mature stage and are considered as much like commodities or home appliances as TVs. Many homes even have multiple PCs. Functionality, specifications, and prices are the key selling points. In contrast, more than 75 percent of Chinese PC buyers are first-time buyers and not as computer-savvy as their American counterparts. Quite often, they are not sure what kinds of computers best suit them and have difMarketing PCs to China
Transporting their mature product lines and marketing practices geared toward homogeneous home markets to China, many foreign PC marketers have found that their market performances are not as good as anticipated. Moreover, many are slow or ineffective in responding to the different market conditions. This is one of the reasons why IBM and HP have been losing market shares in this emerging, lucrative market.
Disadvantages in distribution Having a strong distribution network is a key to success in virtually any market. It allows a company to be close to customers and to penetrate, expand, and serve a market effectively. However, distributing products in China has always been a challenge for foreign PC makers. First, only a few Chinese distributors can cover the entire market, and they are likely to be owned and operated by leading Chinese PC manufacturers, such as Legend. If a foreign manufacturer uses one of these national distribution networks, its brands end up competing with the distributor’s/manufacturer’s brands side by side in their retail stores. Surely a Chinese distributor would tout its own brands favorably at the expense of foreign competitors. Second, local PC manufacturers have inherent cultural advantages over foreign competitors in establishing and working with distribution networks. Many Chinese PC marketers were first established as distribution concerns, selling and servicing the computers of foreign manufacturers. Having mastered the manufacturing know-how, they have now developed their own brands and become the dominant force in the Chinese market. A case in point is Legend, the leading local brand. It possesses its own vast nationwide distribution networks, with over 2,000 distribution points, 137 franchise shops, and more than 400 service centers across the country. In contrast, foreign brands have to work with various independent distributors and own only a few servicing centers throughout China. Third, many local distributors claim to provide customer service, technical support, and routine repair and mainte-
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nance services. However, many foreign PC manufacturers have frequently found that these claims are not true. The majority of local distributors have only limited capabilities to execute their highly touted claims and little focus to provide these services and support. They are more interested in selling computers. Nevertheless, as the competition heats up and more first-time buyers flock to the market, services and support will be critical for success in the Chinese market.
Regulations and politics The Chinese government, like any other government, has every intention of promoting the local IT industry. It has been very supportive of local PC manufacturers in the past and will surely be so in the future. This will continue to challenge foreign PC makers when they try to sell PCs to government agencies and educational institutions, which continue to computerize and upgrade their functions. Currently, foreign PCs are also subject to 30 percent tariffs when exporting to China. To avoid such heavy tariffs, Dell, IBM, HP, and other Western companies have set up assembly plants in China. However, they still have to import many high-value components, such as CPUs, drives, and motherboards, paying 6 to 10 percent tariffs for them. This has certainly put them at an inferior position in competing with local brands on price. Many cumbersome distribution regulations are also imposed on foreign competitors. To export PCs to China, manufacturers must use some of the state-appointed agencies to distribute their products. Consequently, they have little control over how and where their products are being marketed. Even though those foreign PC makers that have set up assembly plants in China have the free-
Commitment to localization will reduce costs for foreign brands and allow them to avoid the tariffs imposed on imported PCs and components. dom to choose local companies to handle the distribution and services for their products, they are not allowed to own or manage any distribution network, such as wholesale outlets and warehouses. As such, they still do not have complete control over product distribution, which gives local PC firms significant advantages in distribution and services.
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China’s entry into the WTO will eventually level the playing field for foreign competitors. Companies will be able to export PCs directly to China without using the officially appointed distribution agencies, and to fully participate in all sales and distribution activities, thus managing the distribution and service networks more effectively. But all the WTO rules and regulations aimed at eliminating entry barriers will not be fully implemented in China before 2005.
Suggestions
S
o how can US and other foreign PC manufacturers address all these challenges and seize the opportunities presented by the booming Chinese market? For those interested in entering and succeeding in China, we offer a few suggestions below.
Localization Not too long ago, foreign PC makers were hesitant to fully localize their productions and procurements. Though growing fast, China was still a small market, and Western companies merely built assembly lines there, importing the majority of needed components. It is now clear that China will soon become the world’s second largest market, and major suppliers of PC components, such as those in Taiwan, have set up shops in China. Thus, pursuing a greater level of location in procurement and production makes sense. The intensifying competition in the Chinese market has already resulted in tremendous pressures on PC prices and profit margins. Commitment to localization will reduce costs for foreign brands and allow them to avoid the tariffs imposed on imported PCs and components. This will negate some of the price advantages the local PC brands have been enjoying so far. True, foreign PC makers may still have to import some key components, such as CPUs. But Chinese competitors will likely need to import similar key parts as well. A greater commitment to localization will also help foreign companies better market themselves and their PCs in China. It will lend confidence to potential Chinese distribution and production partners to establish long-term relationships with foreign PC makers. It will boost the image and perceptions of foreign brands when the companies approach potential Chinese governmental and educational customers. And it will bring foreign PC marketers closer to Chinese buyers, helping them understand the market better and be more responsive to fast-changing conditions.
Segmentation and adaptation China’s heterogeneous PC market exhibits different segments. Although nearly 75 percent of Chinese PC conBusiness Horizons / November-December 2002
sumers are first-time buyers, the number of repeat buyers is growing and becoming more important in the long run. Compared with first-time buyers, repeat buyers are more likely tech-savvy and need little support and hand-holding when purchasing PCs. They are also more likely interested in upgrades and advanced computers. Because American PCs are known for their advanced technologies and features and are weak in distribution and service networks, focusing on repeat buyers rather than first-timers appears to be a good long-term strategy. In the short run, however, Western PC makers must also try to tailor their product lines and marketing strategies to the heterogeneous nature of the Chinese market. As noted earlier, many Chinese consumers (parents) buy PCs not for themselves but for their children, even though these parents may know little about computers. This is not surprising at all, given the one-child policy and the strong, traditional emphasis on education in the Chinese culture. Such an entirely different market segment requires different product appeals and marketing messages. But not having faced this kind of market before at home, US manufacturers have not adapted their marketing strategies well to appeal to it and thus are falling behind local competitors. In contrast, Chinese PC makers have designed and introduced product lines just for children. Quite colorful and cute in shape, they come with easy and fun interfaces and pre-installed software for children’s learning. To appeal to parents further, some even have antibacterial coating and reduced radiation emission from PC monitors. Moreover, many of the Chinese consumers buying PCs to surf the Net are not tech-savvy enough to take the right technical steps to connect. Leading Chinese PC makers, such as Legend, have designed and introduced Internet PCs, which require users to touch only one button on the computer keyboard to be connected to the Net. Western manufacturers need to be aware of many segments existing in China and must be willing to make the necessary adaptations to appeal to Chinese consumers.
Business markets Compared to local competitors, foreign PC manufacturers are weaker in distribution and service networks, have higher retail prices, and deliver products that are less tailored for different consumer segments. This is why they are losing market shares to local PC competitors. However, foreign PCs are renowned for reliability, superior technologies, and technical support capabilities. This suggests that foreign PCs are better positioned for China’s business market, which is currently much larger than the consumer market. Business customers in China are more sophisticated and tech-savvy. They care more about a product’s image, reputation, reliability, functionality, specifications, and technical supports, in addition to costs. Extensive and retail netMarketing PCs to China
works are less important, while a direct sales force plays a more important role in selling computers to them. Plus, many of the current and potential business customers are multinational corporations that have already been famil-
Because American PCs are known for their advanced technologies and features and are weak in distribution and service networks, focusing on repeat buyers rather than first-timers appears to be a good long-term strategy. iar with and bought US and other Western PCs in other parts of the world. As a result, some US manufacturers, such as Dell, have focused primarily on the Chinese business market. True, foreign PCs will continue to face uphill battles when approaching governmental and educational customers that are likely to favor local suppliers. But as China becomes more open and government officials and business managers increasingly adopt Western business practices, purchase decisions will more likely be based on the merits of a product than on blind patriotic considerations. In fact, about 60 percent of Dell’s PC sales in China come from governmental and related enterprises.
Public relations As competition becomes fiercer and advertising and promotion intensify, Western PC makers need to consider creative ways to build brand awareness and preference in the Chinese market. Public relations could be one of the cost-effective avenues to achieve such goals. Good PR strategies could lead to free, favorable publicity by the Chinese media, which would build goodwill and favorable perceptions among Chinese customers—very important for approaching government agencies and related enterprises. Favorable publicity from the Chinese media will also be potent for cutting through the growing advertising clutter created by rising marketing expenditures of major PC manufacturers, both local and foreign. A case in point is Motorola. The high-tech product giant has built many elementary schools in remote areas to promote education in China’s poorest provinces. It has provided technical and financial support to research insti-
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tutes, donated computers to schools, and established Motorola scholarships with leading Chinese universities. Through such creative and persistent PR efforts, Motorola has received an enormous amount of positive media publicity and has thus been considered one of the most favored foreign brands and companies in China.
provincial, and local levels. Now, being cut off from governmental subsidies and guaranteed sources of income, they are aggressive and eager to explore new business. Given the appropriate guidance, training, and support, they can become powerful distribution partners for foreign PC suppliers.
Distribution
Apart from traditional distribution channels, the direct sales channel popularized by Dell could be an effective method of selling PCs in China. Compared to their Chinese competitors, American PC manufacturers have more experience and technical know-how to establish and run such a system. Such a move will cut costs for foreign suppliers and improve their price competitiveness in the Chinese market. The direct model may not be a good distribution solution for the consumer market, since credit cards are not widely used in China as a payment method and the majority of Chinese PC buyers are first-timers. But it has proved to be a very viable distribution strategy to the more tech-savvy business market, even in China. As the population of repeat PC buyers grows and credit card use becomes more widespread, the direct model could be very promising in the long run for the consumer market as well.
To overcome distribution challenges in China, foreign PC makers could form distribution relationships with local large competitors. IBM, Toshiba, Canon, Intel, and many others have been working with Legend to distribute their products throughout China. True, Legend may push its own brands harder at the point of purchase. But foreign PC makers can gain immediate national market coverage through such a distributor. Moreover, strong and successful local distributors like Legend have the resources to meet the strict payment terms usually demanded by foreign PC suppliers, as well as the clout to collect payment from dealers and resellers. They also have the influence over the dealer and reseller networks to enforce strict and uniform marketing strategies, such as pricing and service standards, throughout China. Although they are not allowed to own their distribution functions in China, at least until WTO regulations are fully implemented in a few more years, foreign PC suppliers can set up ventures to actively manage their distributors and resellers. These ventures would focus solely on recruiting, training, accrediting, and monitoring the activities of thousands of local-level service, repair, and maintenance providers. Undoubtedly, this is a costly proposal. But it gives foreign PC makers an opportunity to justify their prices with value-added services. Moreover, it prepares foreign suppliers to establish and run their whollyowned and independent distribution and service networks after WTO distribution-related policies are fully implemented in China. In choosing the right distributors, foreign PC marketers should include financial strength, market coverage, influence over dealers and resellers, technical service capabilities, marketing skills, and connections among their primary selection criteria. One thing not to be overlooked is that the best distributor candidates are many of the formerly state-owned distribution companies. Unlike their private counterparts, these enterprises have established customer bases, distribution and logistics capabilities, distribution centers in strategic locations and markets, and personal relationships with authorities at various state,
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ith its successful and deepening economic reforms and improving standards of living, China offers tremendous opportunities for US and Western PC marketers. However, only those companies that understand and prepare for the challenges of marketing PCs in China can capitalize on those opportunities. ❍
References and selected bibliography Chen, Jiang. 2001. Internet population grows again. @ Chinadaily.com.cn (24 July). China’s PC market set to rise at 25–30% annually over five years. 2001. AsiaPulse News (30 July). CNNIC. 2001. China Internet Network Information, Semiannual Survey Report on the Development of China’s Internet @ www. cnnic.net.cn/develst/rep200107-e.shtml (July). Helsell, Tina. 2000. New paths to market. China Business Review 27/1 (January-February): 64-70.
The authors would like to thank Paul Lee for his assistance in this project.
Business Horizons / November-December 2002