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Price war in the branded PC market?

By , agencyfaqs! | In | September 29, 2000
The introduction of direct marketing into the branded PC market by Dell could eventually lead to a price war

Sabil Francis
agencyfaqs!
NEW DELHI, September 28

Be direct. With that idea, and $1,000, Michael. S. Dell set up a company in 1984.
Today he is the richest man in the world under 40, and the chairman and chief executive officer of Dell Computer Corporation. The value of Dell stock has risen by nearly 50,000 percent over the last decade, and Dell has received more than 1,700 requests to speak across the world.
Michael's idea was simple. Bypass middlemen who added little value to a product, and sell custom made PCs direct to the consumer.
Dell Computer Corporation now plans to introduce its "direct business model" in India. The company has been in the country since 1996, but only had indirect marketing. With Dell launching its India operation today the Indian consumer can buy the latest Dell computer in India, the moment its counterpart is launched in the United States. "We see an enormous increase in our sales, with the tariff barriers coming down. The Indian market is opening up, and especially for Dell" says Michael. S. Dell.
Direct selling of computers to the Indian consumer could eventually set of a price war in the branded PC market.
Right now, tariff barriers prevent Dell, which has no manufacturing unit in the country, from drastically undercutting markets. Import tariffs stand at 15 percent, but India has to comply with the demands of a zero duty regime under the WTO-Information Technology Agreement by 2003 after which Dell can freely import. This perhaps explains why the company is not planning to set up as manufacturing unit in the country at present.
Dell's model gives it an advantage over other players in the Indian market, who currently sell through the retail market. By giving custom made computers to the consumer, Dell gets over the pre-configured computer trap. By selling direct, the company does not have to split the profit with the distributor. Dell also has low inventories, and with the cost of computer hardware declining on an average by one percent every week, the customer benefits. Though company officials are unwilling to make any fixed commitment, they do say that eventually Dell computers could be cheaper than even assembled products on the grey market.
Dell has been able to sell quality cheap. In Australia, when the energy services corporation went to tender a new hardware supplier in mid-1999, Dell was able to beat five other bidders by providing custom built software, at cheaper rates.
Figures bear out the company's optimism. The new market is in Asia. In the last fiscal quarter, which ended in March, the Asian market grew by 48 percent. Dell is cheerful about its Indian prospects. Since starting its India operations the company has had a unit growth of 261 percent, and expects the Indian market for its products to grow at more than 40 percent. Dell plans to capture at least 50 percent of the market.
However, right now, Dell is not targeting the consumer market. ""We are targeting the professional home user who appreciates technology. We want people who appreciate Dell," says Jimmy Yam, managing editor, South Asia/ Developing Markets Group. Dell will concentrate on the MNCs and the government at first, and only later move on to the consumer market.
The company plans to bolster its direct marketing with impressive customer relation's management, having a partnership with Tata Infotceh and is in the process of setting up a call centre in Bangalore to deal with customer queries.
Dell does not see a threat from companies like Sun, which insist that wireless technology will mean the end of the PC as we know it. "Would you journalists write on a small screen and a tiny keyboard? The world is changing but the PC is not going away," says Dell smiling. At present, there are an estimated 425 million PCs, and only about 9.5 million handheld devices, most of them owned by people who also own PCs.
The company is however looking at new products and new ways of selling. Dell.com is one answeróthe selling of computers on the net. In the United States, the sale of laptops, desktops and servers through the net, netted Dell more than $30 million in sales per day in 1997. In the last quarter, the company grew at 3.5 times the market, when all its competitors saw eroding market shares.
The company is also looking at the server market. In the US, desktops are becoming cheaper, and the gross margin on a desktop is expected to drop to 18.5 percent in the fiscal 2002, from the present 19.5 percent. However, server margins continue to hover around a reassuring 32 percent.
In India, however, the company is bound to face problems. A moribund bureaucracy can slow down the Dell juggernaut, while the grey market will offer stiff competition unless consumers are convinced to buy quality at slightly higher prices. Dell's increased stress on service in the face of declining computer margins and stiff competition could also spell trouble. ""The big challenge for Dell is whether it will be able to continue as a service or utility company. Service is a people business, with slow linear growth, while software is a non linear market with fast growth rates" says Dr. Mohanbir S. Sawhney, Tribune Professor of E-commerce & Technology, the Kellog Graduate School of Management.
Dell has sales offices in 34 countries, and approximately 37,000 employees around the world, Company sales worldwide grew from US$ 6 million to US$28.5 billion worldwide, and Dell ranks number 154 on the Global Fortune 500. If Dell can keep on going in growing Asian markets, Michael. S. Dell, may one day soon, become the richest man in the world.

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