The PC Market Finds Big Money in Rural China

 |  Includes: DELL, HPQ, LNVGY
by: Investment U

By Tony D'Altorio

To Wall Street, China consists of only its thriving, developed coastal belt. Outside of Beijing through Shanghai, down to Guangdong and Hong Kong, Wall Street doesn’t care.

That means it doesn’t pay any attention to the other two-thirds of that vast country. Analysts just don’t consider those areas important to the global economy.

But things are changing in China. And while that change can be painful at times, it’s important to note all the same.

Many Chinese industries are shifting inland, away from the coast. While people wonder if the country can maintain its high economic growth, rural China just keeps going. As it improves, so too do the conditions for the people who live there. And that, in turn, is leading to higher demand for all types of consumer goods.

That includes something Americans today practically take for granted: The PC.

China Poised to Become The Largest PC Market

China already has the world’s biggest vehicle market. Now it’s poised to overthrow the U.S. as the largest PC market by shipments. According to research company IDC, 49% of the 48 million PCs sold in China in 2009 went to country-level cities and below. Analysts expect that to rise to 52% next year. Industry executives estimate that 80% of Chinese households in big cities have a PC. Meanwhile, in rural areas over the past year, that number rose from 8% to 10 percent. Once that number hits above 15%, growth rates should pick up even further.

Global PC makers therefore face an unexpected battle for China’s countryside, as industry shifts away from the big cities. Not that long ago, just about everyone saw small-town China as all but a pointless market. Now it’s becoming the mainstream of the global PC market.

Not that this shift makes it easy for companies to capitalize on though …

Lenovo, HP and Dell Head for China’s Rural PC Market

China’s leading PC maker, Lenovo (OTCPK:LNVGY), has sales numbers fairly similar to IDC’s (Pending:IDC). It derives about 70% of its Chinese PC sales from the country level and below.

Lenovo first focused on rural China in 2005, far ahead of its competitors . Yet the market’s size and fast growth have spurred fierce competition. That includes the world’s two biggest PC vendors, Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL).

HP has had “a particular focus on rural markets expansion [in China] since early 2009,” says Isaiah Chueng, general manager of HP’s consumer business in China; Steve Felice, president of Dell’s global consumer business, believes “the opportunities are going to continue to expand outside of the major-tiered cities.”

Meanwhile, Lenovo estimates its own share of the country’s rural emerging PC market at well above its national average of 30 percent. It also commands over 40% of PC shipments under a government program for subsidized computers for rural areas.

Lenovo has worked within over 2,000 cities on the country level over the past three years, and today has penetration in more than 30,000 townships and a network of 12,000 shops.

Dell and HP are also busy building ties with retail channels in China’s far-flung provinces, but both say that such business accounts for under half of their total China shipments.

Rural Chinese Consumers Demand High-End PCs

HP's and Dell’s struggles may be because they focus on lower-end computers for rural China. Simply put, rural China wants better. In fact, consumers there are even more demanding than those in Shanghai or Beijing.

Tang Jie, general manager of Lenovo’s consumer and channel business, remarks: “There is a strict ceiling in terms of price, but buyers have very high demands with regard to speed, memory and the graphics card. At the same time, design has to be simple and sales have to offer much more support, because people are less familiar with using computers.”

All of that could further squeeze margins in the PC industry. In fact, Lenovo’s small-town business is already less profitable than its overall China sales.

HP, Dell, and any other competitors hoping to break in should expect the same.

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