China's tech streets not lined with gold
HONG KONG (Reuters) - For all the 65 million PCs that are expected to be sold in China this year, one question that many people have not yet answered is: how much money is actually made selling these computers?
Rising incomes and a push by the Chinese government to encourage its 1.3 billion citizens to spend more on consumer items have made the country the biggest battleground for PC brands such as Dell, HP and Lenovo.
"This is going to be battle royale," Amit Midha, head of Dell's China operations, told the Reuters China Investment Summit. "This is not for the faint-hearted, and it's only the first inning of a very long game."
The numbers are compelling at first glance, with China the world's No. 2 PC market by most counts, ranking only behind the United States in shipment figures and expected to overtake it within the decade.
It is also one of the fastest-growing, with shipments expected to rise 14 percent to 74 million units next year, outperforming the dismal single digit figures seen in most developed markets, according to research firm IDC.
However, dig deeper into the numbers and a different picture emerges. The average selling price of a PC in China was $604 in the third quarter of this year, some 18 percent lower than the $739 recorded in the United States.
The Saige Computer Center in the southern Chinese city of Shenzhen provides a picture on why PC prices are so much lower in the country, as crowds of young people gather around shops that assemble and sell their own computers.
Lines of pirated software and home-made Hello Kitty accessories also line the stores for those looking to jazz up their dull grey desktop CPUs, that can go for as low as 1,000 yuan ($150).
"Tell us what you want and I can do it for you," said a salesman, gesturing to a room at the back of the store where technicians sat under fluorescent lights assembling computers. "Everything is done in-house here, so we can sell it cheaper."
CHEAPER CHINESE COMPUTERS
While part of the reason for the cheaper price in China stems from less expensive office and shop rentals, customers' preference for lower-end products also plays a part, Lenovo's chief financial officer said.
"Generally, emerging markets have a lower average selling price partly because there is much stronger demand for much lower configurations," Wong Wai Ming told the Summit.
"In mature markets, when the economy was strong, they obviously could pay a lot more for a much higher-priced product."
The interest in low-cost PCs has spurred many PC companies to focus on large corporate customers such as hospitals and banks, which also buy data servers which typically command higher profit margins.
Retail and corporate users in China also tend to spend less per unit because they are less likely to buy peripheral items and software, Midha at Dell said, all of which help boost the bottomline of most PC companies.
In the United States, the average consumer spent about $1.05 on accessories for every $1 spent on a PC in 2009, helping to comfortably boost PC companies' net margins, which can fall to the low single digits with companies such as Acer.
Besides PCs, accessories such as printers that help companies pull up their overall profitability are also shaping up to be more difficult to sell in China, with customers happy to take their ink cartridges to be refilled by streetside vendors.
All the executives interviewed during the Summit also made clear their intention to remain in the country for the long run, as it remained the centerpiece of their future growth plans.
Further helping top tech brands is the massive number of PCs they ship every year, which gives them the critical mass needed to compete effectively against PC vendors like those found in the Saige Computer Center in Shenzhen.
"In the long run, only the top three or four brands will be able to survive," said Lillian Tay, an analyst at research firm Gartner. "It really is a volume game, and once the big brands start flooding the market, the smaller players will find it difficult to compete."
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