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Dell Hopes to Catch Acer With Help from China, India

Dell (DELL) is fed up with losing ground to Acer. Last year Dell lost its spot as the world's second-largest computer maker to its Taiwanese rival, lagging behind Acer in market share for the first time ever. As of the fourth quarter of 2009, Dell had just 12.4% of the global market, according to market research firm IDC, compared with 13.4% for Acer and 21% for Hewlett-Packard (HPQ).

While Acer executives, including Chairman J.T. Wang, are already talking about how they're going to close the gap with HP, Dell isn't giving up on recovering its No. 2 spot, says Stephen J. Felice, Singapore-based president for the Dell division focused on consumers and small and midsize businesses. And Dell hopes to claw back lost ground without sacrificing profitability. "We are not ceding that second place," he said on a conference call with reporters on Feb. 19. "We see a way to get back to leadership position but will do it in a more measured way."

Dell executives want to avoid following in the footsteps of Acer, which has grown largely because of its strength in low-cost netbooks and other inexpensive computers. "Acer has had a focus on low-end products, but the operating margin they work at is substantially lower than ours," Felice said. "We don't think that's the right strategy for our shareholders."

PRESSURE ON PROFIT MARGINS
Acer's share gains aren't helping Dell investors much either. Dell's fourth-quarter profit dropped 4.8%, to $334 million, the company reported on Feb. 18. Dell's gross margin of 17.4% was also below the 18% expected by analysts, Bloomberg News reported. And the profit picture isn't likely to improve soon. Margins "will be under pressure short term with increased competition from the likes of Acer and, to a lesser degree, Hewlett-Packard," Ashok Kumar, managing director at Northeast Securities, told Bloomberg.

Dell's comeback strategy hinges partly on China and India. The company had sales of about $4 billion from China, according to Felice, making China Dell's second-largest market, behind the U.S. Sales grew 81% in China, which now accounts for 7.5% of the total. Last November, Dell launched its first smartphone, the Mini 3, with state-owned China Mobile (941:HK), the largest cellular operator in the country. The company, which also began selling the Mini 3 in Brazil, plans to launch it in the U.S. with AT&T (T) this year. "We are in very early stages" of the smartphone business, Felice said. "But we have had good sales results in China."

In PCs, Dell's improving Chinese sales haven't translated into better market share. According to Felice, Dell got a big boost from the Chinese government's stimulus package, which promoted purchases of computers. "The stimulus has helped," said Felice. "A lot of it was aimed at small businesses," he said. That's a segment of the industry where Dell has traditionally been strong. Dell's market share in China for the fourth quarter of 2009, however, fell to 8.2%, compared with 9.5% in the fourth quarter of 2008. Dell was the only one of the three biggest vendors in China to lose share: Lenovo grew from 30.8% in the fourth quarter of 2008 to 33.4% in the fourth quarter of 2009, according to IDC data; HP went from 10.9% at yearend 2008 to 14.3% in the fourth quarter of last year.

BACKING AWAY FROM GREEN DAM
Felice also addressed Beijing's controversial attempt last year to force PC vendors to include Internet filtering software with their computers in China. Dell was prepared to provide the software, known as Green Dam, Felice said. "If customers wanted that, we would provide it," he said. Beijing backtracked from the requirement, however, after an outcry from computer users inside the country. Now "it's really a non-issue for us," said Felice.

For Dell, India is a smaller market than China. The company's Indian sales were about $1 billion, or 2% of Dell's total revenue. Dell was No. 2 in the market with a 13.6% share in the fourth quarter of 2009, according to IDC, compared with HP's 16.2%. Dell is narrowing the gap: In the fourth quarter of 2008, it had 11% and HP had 15.6%. Dell intends to expand in India as the government increases spending on health care and education and on revamping its IT systems. In India, the public sector "is critical to our overall strategy," said Felice. It may also play a role in helping Dell keep from losing more global share to its Taiwanese competitor.

Credit: www.businessweek.com