Dell’s Expansion in China 

 
 

 
DELL INC.

Abstract

In 1995, with sales growth opportunities drying up in the US and with a vastly growing Chinese

PC market that was opening up to foreign business, Dell ventured into the emerging market of

China. Armed with its innovative direct sales model and vast world presence, Dell expected to

become the market leader within a short period. However, since its entry into the market, the

company has struggled to keep up with its competition, and the success that was first envisioned

did not occur. The task of this paper is to understand Dell’s problems in China.

Internal Operational Structure

Dell maintains a flat internal organizational structure. An important aspect of Dell’s

structure that has led to its success is its ability to promote innovation from its employees. This

flat organizational structure is implemented to drive innovation, as it allows employees freedom

to pursue and develop new improvements to processes without the constraints of upper

management. The structure also allows for open communication that helps to drive the

organization towards success. To further promote open communications between employees and

upper management, Dell implements a “Tell Dell” evaluation process that allows employees to

anonymously provide feedback on the performance of senior managers.

Company’s Basic Global Strategy

In its global markets, Dell’s approach is to diversify their business by indentifying new

markets where they are able to utilize their competitive advantages in it supply chain method to

lower costs and prices. Dell's global manufacturing strategy includes owning its own plants,

which allows them to further lower costs. Dell has set up plants in Limerick, Ireland, Penang,
Malaysia, and Eldorado do Sul, Brazil. Because of the nature of the competitive advantage that

Dell possesses, the company generally prefers to oversee their own manufacturing process.

Industry Analysis

The Consumer Personal Computer Market in the US has been greatly saturated by 2008,

with nearly every household owning a PC. The competition is still fierce, and dominated by a

few players, most notably: Apple, Hewlett-Packard, and Dell. Prices have dropped considerably

and are lowered constantly to stimulate demand. Overall, Hewlett-Packard, Dell, Acer, Lenovo

and Toshiba make up the top five manufacturers in the 2008 international PC market, taking up

an aggregate market share of 57%, about three percentage points higher than 2007. The latter 3

brands, however, are rarely seen on the shelves of US retailers in forms other than notebook

computers.

In China, the Personal Computer Market is still growing. According to Forrester research,

China had 54 million PC users in 2007, but the number is expected to grow to about 500 million

by 2015 - about half of the world wide increase. While computer shipments are growing at less

than 3% in the U.S, the Chinese market is taking in 20% a year, which doubles the worldwide

rate. The aforementioned US personal computer makers face stiff competition from Chinese and

Taiwanese Brands as well. China's Lenovo, Haier and Founder, along with Taiwan's Acer and

Asus are also major players in the Chinese Market.

Dell’s Direct Sales Model

An important competitive advantage Dell owns is in its direct sales model. Dell employs

its highly effective direct sales strategy, in which it directly sells products to the end customer

over the phone or internet. This model allows the company to achieve high cost savings and
better information on consumers by supplying, and having direct contact with, its end consumers.

It also allows Dell to use a JIT style (just in time) supply chain in order to keep its production

facilities lean and cost effective. This strategy has proven immensely profitable for Dell, and is

an important aspect of the company’s success.

DELL’S ENTRY INTO CHINA

Key Opportunities Exist

Dell’s success in the developed markets cannot be denied. However, with dwindling

opportunities in its main markets, the company has begun its foray into the emerging markets of

the world. To that end, Dell expanded into China, hoping to take advantage of wealth of

opportunities that a rapidly growing economy provides.

China has one of the world’s largest PC markets currently, and that is expected to

continue to grow as more and more private consumers grow in affluence. China is experiencing

the benefits of its strong economic growth, producing a wealthy middle class that desires quality

products over the cheaper knockoffs that are prevalent in the market. Also, as the middle class

grows, so will internet and credit card use. There is also growth in the education and business

sectors, where Dell may have the ability to meet the specialized needs of those consumers. This

sector of large institutional consumers can provide high order amounts and familiarize the

students/workers with Dell products. Through this familiarity, these consumers may add Dell to

their consideration set when purchasing a computer for their own personal use.

However, all was not smooth sailing, as Dell’s initial entry into China was hindered by

many difficulties.

Difficulties
Lack of Infrastructure

A general lack of infrastructure hinders Dell’s ability to use the direct sales model.

Although there are large, sprawling cities in the style of Shanghai, much of China is still rural

and underdeveloped. The use of the internet in households is limited, by infrastructure, cost, and

the government. Although connectivity is increasing, there are still fewer households that have

access to the internet than in more developed economies.

Another issue that may affect Dell’s success is the lack of credit card usage in China.

Because of China’s relatively young economy, as well as differences in Chinese consumer’s

culture, few consumers choose to use credit cards, or have credit at all. This also creates

difficulty for the use of online purchasing.

In addition, to support a direct sales strategy, Dell would be required to rely on a highly

efficient and cost effective national postal service. This may not be the case for China at the

present moment, especially in regards to some of the more rural areas. Shipments may require

very long delivery times and may be subject to frequent theft and loss. This would adversely

hinder any plan that relied heavily on direct shipments of expensive items, such as Dell

computers.

Cultural Differences

Cultural differences of Chinese consumers proved to be the biggest problem that Dell had

to face. Consumers in China are far less likely to purchase goods online. This stems from

customer’s preference to actually “see and feel” the product before purchasing. The customers

would want to look at the actual computer that they will be taking home. This is one reason

many Dell competitors (such as Lenovo) have opened various retail locations across China.

These locations serve as posts for consumers to come into direct contact with both product and
service. Normally, Consumers looking for Technology/Electronic goods would go to Computer

malls or plazas; where all the branded retailers and accessories suppliers are gathered. Chinese

consumers usually do not gather information beforehand. They will be able to get all the

information and compare prices among all the merchants gathered at the mall.

Another reason for Dell’s ineffective direct model is because credit card is not a widely

owned item. Chinese consumers are therefore unable to make purchases through the internet or

over the phone. Aside from limited credit card use however, the act of haggling is another

important reason for cash transactions. Haggling is common practice in China, from groceries to

properties, any price is negotiable. Since the profit margin is low, the retailers prefer to avoid

paying the service fees for Credit card companies, and take advantage of liquidity. The other

reason for cash transactions is simply to avoid sales tax. Chinese consumers are notorious for

being stingy; price will be the final deciding factor. The majority of the population will take a

computer with less performance but with more discounts.

Another cultural difference Dell may observe in China is an overall lack of individualism.

This directly contrasts Dell’s sales model in that orders are completely customizable. Dell may

find that customization is less important to Chinese consumers, who are probably most interested

in an average setup with low costs. Since most Chinese consumers do not have high amounts of

discretionary income, they will usually look at low cost items. A personal computer or laptop

can be a hefty price for the average Chinese consumer, so Dell may want to focus directly on

price and decrease the costs associated with creating a highly customizable model.

Dell’s flat organizational structure may be highly effective in promoting innovation in the

US, but may run in to difficulties implementing such a structure in China. Chinese people are

generally more used to understand where they stand and are very aware of formal and informal
hierarchies. Subsequently, Chinese companies typically possess a strong hierarchical structure,

and this may hinder, rather than promote, efficiency. Also, the lack of supervision may lead to

employees taking advantage of the structure, providing the “gray area” that may allow

employees to use typical Chinese business practices.

Business Environment

The business environment in China is also a barrier to the success of Dell. Specifically,

there is little protection from the government against such issues as copyright infringement.

Also, there is a general protectionist attitude for local businesses and those that already have an

established name in China. Some of Dell’s competitors in China are nationalized companies that

realize many benefits an outside company would not. These include the factors of nationalism,

government influence over contracts, and various “gray area” issues where the nationalized

corporations may have the law on their side.

Dell also has the reputation of being extremely stringent in terms of corporate ideology

and guidelines. As many Western companies are aware, some business practices common in

China (such as bribery and the giving of gifts) violate normal Western corporate rules. Having

operations in China can cause a problem is these cross cultural issues are not dealt with properly

under the guidance of experienced Chinese managers. If Dell’s Western guidelines are brought

directly to China, this may create a scenario where Dell is greatly disadvantaged in the market.

They may have trouble building relationships with suppliers and creating a network for

marketing and distribution. Eventually, this negativity can lead all the way to the consumer level

and discourage sales.

Considering China provides many benefits to corporations who both manufacture and sell

their products in China, it may be useful for Dell build their own factories in China itself. Dell
would be able to leverage a less expensive workforce, decrease costs associated with tariffs and

transportation, and prepare for the possibility of large growth in the market.

Result

Dell’s entry into China had mixed results. Whereas the company saw moderate success in sales

to businesses and government customers in major cities, the company is lagging behind its

competitors in the market that matters: the middle class consumers in smaller cities. In 2004,

Dell dropped from being the 2nd largest PC vendor in China to 4th in 2004, in large part to their

failure in keeping step with its competitors in sales to the every-increasing middle-class private

consumer.

Its initial failures in China had a profound impact on the company, leading to then-CEO

Kevin Rollins’ departure and the reinstatement of founder, and former CEO, Michael Dell.

Kevin Rollins

Kevin Rollins’ background was in Civil Engineering. Throughout his employment at Dell,

he held a variety of positions, from VP of Corporate Strategy to COO, President, and eventually

took over from Michael Dell as CEO. Although successful in maintaining the success of Dell in

its already established markets, Rollins, more a manager than leader, was ill-equipped to deal

with the ambiguity that existed in the Chinese market. He was eventually replaced by the

visionary and creative force behind Dell, ex-CEO Michael Dell, who subsequently has attempted

to address their failings in China in various forms:

Dell’s Direct Model

 Dell attempted to address the weaknesses of their direct model in China by forming

partnerships with Chinese retailers across the country, most notable of those being Gome

Electrical Appliances Holdings. Gome Electrical is the largest home appliance retail chain

operator in China that during the year ended December 31, 2007 had 726 traditional stores,

which included 61 flagship stores, 624 standard stores (including supermarkets) and 41

specialized stores (Google Finance). In late 2007, Dell announced plans to break away from

their direct-sales model in China and begin selling Dell products at Gome stores. Gome had

already been selling computers from Dell’s competitors such as Lenovo and HP.

Dell also expanded their direct-sales model to incorporate Dell Experience Centers,

which are store front locations that allow potential customers to test Dell models as well as

interact with a knowledgeable sales person. Once a customer decides to purchase a computer,

the sales person helps them order it and the finished product is shipped directly to the customer.

Dell further expanded its Partner Direct program, which taps resellers focused on the mainland's

large number of small and medium-sized businesses (South China Morning Post).

All these actions were steps taken by Dell to appeal to the “try before you buy” mentality

of the Chinese consumer. It also allowed Dell to reach the “emerging markets in China’s second-

and third-tier cities where Internet use is lower, hindering Dell’s direct-sales model (Article 2).”

Subsequently, Dell has been able to expand its presence to 1200 cities, up from roughly 45 last

year (South China Morning Post).

Chinese Suppliers

Dell continues to purchase more supplies from Chinese suppliers in both an effort to

increase its price competitiveness, as well as to endear itself to the Chinese government. On
March 20, 2008, Dell announced their plans to purchase $23 billion of components from Chinese

suppliers, up from $18 billion in 2007 (Article 6). By purchasing a bulk of their supplies from

Chinese suppliers, and through its relationship with Gome, Dell is beginning to change the

Chinese consumers’ perception of the company as a “foreign bully”.

Price Competition

Dell realized that price was a leading factor in Chinese consumers’ decisions regarding

PC purchase, and began selling a cheaper model of its computers to compete with its low-priced

competitors and reach less-wealthy consumers. The proposed low priced computer would be

sold for between 2,599 Yuan, or $336, and 3,999 Yuan, which would be 69 percent cheaper than

the lowest priced model on Dell’s China Web site (Article 3). Dell is looking to bolster sales and

growth by targeting smaller cities and towns in China where incomes are rising and many first-

time buyers are entering the market.

Recommendation

Dell should take into consideration the need to understand and embrace the culture of any

new market they wish to enter; this is especially true for China. In order to avoid many of the

difficulties they have faced Dell should have implemented the following strategy.

First, formally assess the culture and market in China with the help of locally hired

managers with experience in the computer industry. These managers may already have a strong

relationship with suppliers and retailers that they could bring to Dell. This allows Dell the

opportunity to start their business with some “GuanXi” already established and gives them a

relationship base to build upon. These managers would also be extremely valuable in

understanding the local customs and applying them correctly with suppliers and the local work
force. They understand the hidden cues that a foreigner may easily overlook when conducting

business in China, giving Dell an opportunity to reach deal that may have otherwise been

impossible. Local managers should be retained through a variety of reward packages that help to

dissuade them from taking positions with competitors. These could include stock options,

bonuses, and the ability to move ahead within the company.

Dell should enter the Chinese market through the retail sector with high quality partners

to spread their brand name and reach individual consumers. This could help address the issues

of credit cards, lack of internet, and the consumer’s need to “see and feel” the product before

purchase. Creating Experience Centers will also allow Dell to gain precious knowledge of

consumers’ wants and needs while building a reputation for the highest level of quality and

service. The direct sales model should be targeted primarily towards businesses, institutions and

on a lesser scale, wealthy individuals. Creating the network for direct sales model will give Dell

the opportunity to reach private customers once internet use has spread to the masses. In

addition to low cost products, Dell should bring to market a high end product to take advantage

of the economic boom that has occurred in recent years in China.

As a change to the organizational structure of the business, Dell should increase their

internal controls and interactions to focus on a vertical framework. Chinese workers are

accustomed to a rigid structure and may feel lost with a flat organization. Without the hierarchy,

they become unwilling to voice their ideas and lose efficiency due to lack of oversight.

With these recommendations, it is possible for Dell to successfully enter a large and

growing market. This entry carries little risk that can not be controlled through an understanding

of the Chinese market, its consumers and workers.

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