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Look Out Lenovo: Dell Plans Expansion in China

Dell plans to expand its presence in China from 45 cities to more than 1,000 over the next year or so in a bid to match the broader market reach of Lenovo.

"When we talk about that 45-city presence, we're really talking about cities with populations of 2 million plus where Dell has applied its direct [sales] approach," said Steve Felice, president of Dell Asia-Pacific and Japan, during a conference call with reporters.

Despite having a limited presence in China, Dell's performance in recent years underscored its success penetrating the Chinese market, Felice said. "We're only hitting a small portion of the total population in the total geography, and yet we're still seeing revenue growth rates and share performance that's extremely competitive," he said.

Fast-growing markets like China are more important than ever to Dell, which saw its consumer PC sales drop in the U.S. during the most recent quarter. By contrast, sales in Brazil, Russia, India and China combined grew by 32 percent during the same period. The company is counting on continued fast growth in these markets to regain ground lost in recent quarters to rivals like Hewlett-Packard.

"It's definitely the right path to go down," said Bryan Ma, director of personal systems research at IDC Asia-Pacific. But he cautioned that HP and others are also counting on growth from these smaller cities, and Dell will face strong competition from them.

Over the next year or so, Dell will expand beyond the 45 Chinese cities where it now has a presence into smaller cities, using both its direct sales model and partnerships, Felice said. These smaller cities are now dominated by domestic PC vendors like Lenovo, but fast-growing demand for computers makes them an attractive target for Dell.

"It's our desire to have much broader coverage," he said.

How well Dell can work with partners, especially local systems integrators, may ultimately decide how successful its efforts are to expand its reach in China, Ma said. Lenovo's established presence in the smaller cities could make it tough for Dell to gain much traction with consumers, but the company could make inroads with small businesses if they are able to develop close relationships with systems integrators, he said.

Dell's expansion into smaller cities could see low-cost computers become a larger portion of its Chinese sales, as incomes are generally lower in the smaller cities than in major ones, such as Beijing and Shanghai. Dell has already stepped up its efforts to cater to this segment of the market, with the introduction earlier this year of the EC280, a low-cost machine that runs Windows XP and was developed for sale in China.

"You will probably see some shift in [product] mix to the lower end of the price bands in the product line, but I'll tell you there's still a very high share of demand for higher-price products," Felice said, adding he doesn't expect this expansion into smaller cities to cause a "dramatic shift" in Dell's average selling price in China.

One factor that could help offset any decline in PC selling prices is Dell's ability to offer product bundles aimed at small business. For example, offering accounting packages and other software preinstalled on PCs for small business would help the company maintain its pricing levels, Ma said.

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