China PC Share: You Can't Always Get What You Want

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

China's economy is now the second largest in the world, and it's growing at an impressive rate, especially for a goliath. China now accounts for more than 20% of PC unit shipments worldwide. It's no wonder PC makers are looking to China for growth.

There are two ways to win. First, grab a piece of a growing pie. Second, get a bigger share of pie. But market share is a zero-sum game. With every player hoping to gain market share, some companies -- and their shareholders -- will be disappointed. Let's hope you're not among them.

The comeback kid?
(NYSE: HPQ  ) has the most at stake near-term, having cited PCs in China as a reason it expects improved performance later this year. Its China PC business saw sequential growth of 25% in its latest quarter, although some of that is likely due to normal seasonality.

Notably, management dodged questions about year-over-year comparisons. Gee, maybe that has something to do with last year's missteps dealing with faulty graphics chips from NVIDIA (Nasdaq: NVDA  ) in HP laptops that have since been fixed. In responding to the problem, HP was accused of treating U.S. customers better than Chinese customers.

HP eventually stepped up in China with extended warranties and compensation. Its early bungling also led to an apology. But saying "I'm sorry" only does so much to heal wounds. According to IDC, HP lost half of its China PC market share in one quarter.  

Right place, right time
(Nasdaq: DELL  ) was a big beneficiary of HP's mistakes. Dell's market share in China jumped from about 8% to 10% as HP's fell from about 17% to 9% last year. That moved Dell from a distant third to distant second. In its latest quarter, Dell reported 21% growth in China year over year.  

To continue its growth, Dell expects to spend a formidable $250 billion in China during this decade (largely thanks to procurement of PC supplies), including plans to establish a presence in 800 smaller cities by the end of this year. Dell seems to have learned that its Internet sales model wasn't working in emerging markets. That said, the company has struggled with retail kiosks and stores in the United States. What reason do we have to believe they'll get it right in a foreign market?

Home field advantage
was the biggest beneficiary of HP's missteps in China last year. It already held a solid market share lead. With HP's help, Lenovo went to 29% share from 26.5%. Lenovo has almost three times the share of No. 2 Dell. That could drive some tremendous scale -- especially cost -- advantages.

Lenovo is the Chinese company that bought IBM's (NYSE: IBM  ) PC business in 2005. The dominant PC supplier in Asia-Pacific, Lenovo enjoys a strong brand name, including Lenovo-branded stores, in China. It could also benefit from loyalty to a domestic supplier, particularly after HP was perceived as treating Chinese customers as second-class citizens.

It's a mobile market
PC unit shipments in China grew a paltry 4% last quarter. For many people in emerging markets, their smartphone is their computer. Internet access is limited, making mobile more practical. In addition, the high cost of mobile devices and PCs relative to incomes makes it tough to afford both. Thus smartphones, and potentially tablets, are important offerings for any PC supplier in these markets.

Apple's (Nasdaq: AAPL  ) prestige spans the globe. The company's iPhone and iPad are enjoying success in China, even though average incomes make pricey Apple products less accessible to the typical consumer.

HP's smartphone and tablet strategy revolve around proprietary WebOS devices stemming from its Palm acquisition, putting HP into head-to-head competition with Apple ... without the prestige.

Lenovo introduced its LePhone in 2010, going after the iPhone with an aggressive price point on a device running Google's (Nasdaq: GOOG  ) Android software. It plans to offer several tablets this year that include a planned model combining both Android and Microsoft's (Nasdaq: MSFT  ) Windows software.

Dell's smartphone and tablet efforts center on Android, putting it in head-to-head competition with Lenovo.

Foolish takeaway
Rapid growth of consumption in China provides attractive opportunities for companies riding that wave. But market share gains are a zero-sum game.

Apple's prestige and mobile device mojo could serve it well in the expanding affluent segment of the market. Lenovo's home team advantages -- a strong brand name and local presence, loyalty to a domestic supplier, and low cost structure -- are formidable challenges for foreign suppliers of undifferentiated products.

Share gains could prove elusive for both HP and Dell. HP is counting on a PC comeback in China to reaccelerate growth later this year, creating risk to investor expectations for 2011. Looking longer term, Dell seems to be relying on competitor missteps and large investments in unproven strategies to improve its position.

To keep track of market share battles in the PC space and see which companies are best positioned to score from China's growth, set up a watchlist through our free personalized stock tracking service.

Fool contributor Cindy Johnson currently owns shares in Microsoft. She thinks management initiatives are like New Year's resolutions -- sometimes they take, often they don't. Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Apple and NVIDIA are Motley Fool Stock Advisor recommendations. The Fool has written puts on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2011, at 9:32 PM, FreeRange1 wrote:

    "Internet access is limited, making mobile more practical. In addition, the high cost of mobile devices and PCs relative to incomes makes it tough to afford both." These are grossly oversimplified statements. First, internet access is everywhere so not sure where that statement comes from. It is provided by the phone companies, that provide the cable tv, that provides the internet, that are all owned by the govt who placates the masses with their sanitized platform of entertainment called TV. Second, there is a huge and growing middle and upper class here that rivals the size of any other in the world. I know of no one in my circle of friends here that doesn't have both a smart phone and at least one PC! This type of oversimplified "analysis" is what totally misleads companies about the Chinese market. It is a far from simple market to approach.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1454705, ~/Articles/ArticleHandler.aspx, 10/28/2016 6:28:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:00 PM
AAPL $114.48 Down -1.11 -0.96%
Apple CAPS Rating: ****
DELL.DL $0.00 Down +0.00 +0.00%
Dell CAPS Rating: *
GOOGL $817.35 Down -4.75 -0.58%
Alphabet (A shares… CAPS Rating: *****
HPQ $13.99 Up +0.08 +0.58%
HP CAPS Rating: ***
IBM $153.35 Up +1.54 +1.01%
IBM CAPS Rating: ****
MSFT $60.10 Down -0.53 -0.87%
Microsoft CAPS Rating: ****
NVDA $70.68 Down -1.48 -2.05%
Nvidia CAPS Rating: ****