To Big PC Firms' Chagrin, Local China Makers Thrive
May 10, 2011
Small Chinese makers of personal computers -- offering high-performance machines at knockdown prices -- are outracing giant U.S. companies in China's massive consumer market. The China group of U.S.-based market research firm International Data Corp. in a report issued last week raised its estimate of China's overall PC-market size by nearly 50%, saying it had overlooked the explosion of cheaper PCs assembled locally. Once largely ignored as low-quality clones put together in back-alley shops, these local-brand PCs accounted for 44% of the 1.5 million PCs sold in China last year, IDC now says. The new estimates are likely to cause some consternation among big PC vendors, since they diminish the importance of having the top market share in China, a distinction that has sparked an often bitter rivalry between the top foreign brands in China -- Compaq Computer Corp., International Business Machines Corp. and Hewlett-Packard Co.. The figures also point to a more vexing challenge: foreign multinationals have been counting largely on sales to businesses and the government in China, building brand recognition until rising disposable incomes put the PC within reach of household budgets. The clones have managed to beat them to the punch. ``If they (foreign PC makers) want to penetrate the home market, they have to come up with a strategy to compete,'' said Denny Keck, vice president and managing director of IDC's Asia/Pacific unit in Hong Kong. Firms Target Key Market Though China's market is still tiny compared with the more than 20 million PCs sold annually in the U.S., big computer makers consider it crucial to their long-term strategy. IDC estimates that China's market will grow by more than 40% this year, and will rank as Asia's second-largest market behind Japan by 2015. Compaq, IBM, Hewlett-Packard and AST Research Inc. all have built factories in China to meet growing demand, and to demonstrate their commitment to the Chinese market. China's consumers still account for only a sliver of overall sales, however; the top-selling PC in China costs about $1,900, far above the average urban annual income of 4,000 yuan ($479.78). But IDC's new numbers show that more consumers are buying PCs than previously thought; sales of home computers account for 13% of all PC sales, nearly double the previous estimate. Still, a recent survey found that only 1.6% of Chinese families owned a computer. Industry insiders have long complained that market-research firms, such as IDC and its main competitor Dataquest, were underestimating the size of China's PC market. ``The market-research companies had a blind spot for the local market,'' said Sebrina Dunbar, general manager of Asian-Pacific operations for Intel. ``For two years, we've been arguing that they've been undersizing it. They saw it through multinational eyes.'' Home-Grown Brands IDC found concrete evidence of this when it began looking at sales of semiconductors in China. In reappraising the market, it not only interviewed PC vendors and resellers, but the companies that make and distribute the parts that go into a PC, including the central processors and motherboards, IDC's Mr. Keck said. By cobbling together such parts, small local makers in so-called screwdriver shops were able to grow in size and quality, Mr. Keck said. Now brand names in their own localities, they sell PCs with Intel's 100 Mhz microprocessor for between $1,200 and $1,400. By comparison, a similar Compaq PC sells in China for between $1,800 and $1,900, Mr. Keck said. Compaq's managing director for China, T.C. Holcomb, was unavailable for comment. Being able to affix Intel's ``Intel Inside'' sticker to their PCs is a plus for these makers. Mr. Keck said most PCs sold in China now include Intel's  chips. In a survey this year, Chinese consumers identified Intel as the PC brand they recognize most, according to an industry source. The big-name brands aren't exactly hurting in China, however. IBM, which this year has so far taken the lead in terms of market share, tripled its sales in the country during the first quarter. Nonetheless, IDC puts IBM's China market share at 7.4% for the second quarter, down from the roughly 14% it would have held before the reappraisal. IBM's general manager for China, Petrina Eckhardt, was unavailable for comment, but Mr. Eckhardt has predicted IBM will finish this year with top market share in China.
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