Doing business in China: learn from Dell

Of all the business innovations explorer Marco Polo discovered in 13th century China, he was perhaps most surprised by the use of paper money. It was worth dozens of times the weight of the heavy coins that European traders lugged around. Today's multinational technology companies could learn a similar lesson: Bring only what's needed when entering China.

That's what Dell did under Phil Kelly, Dell Asia Pacific's first senior executive. In 1998, he introduced just a portion of Dell's famous business model to the Chinese marketplace, adding capabilities and staff as growth dictated. As a result, Dell's share of the PC market has grown more than 60 per cent a year since 2000, and will grow at twice the rate of China's overall PC market between now and 2010, giving the company a strong follower position behind IBM/Lenovo.

The strategy allowed the company to mitigate the risks of trying to force-fit its model to China or abandoning its valuable experience, two common pitfalls for multinationals. Moreover, it allowed the company to localise operations, cement relationships with customers and government officials, and control costs in ways that account for the country's often-unpredictable quirks and opportunities. It's a process that continues today under the leadership of Foo Piau Phang.

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Dell's approach is worth studying. Companies that want to import their business model as-is are following a natural instinct: they believe they will succeed by continuing to do what they do well. In theory, the company's value chain, core capabilities, and values would all come along in a type of palletized, business-in-a-box. Managers would simply adjust downward to satisfy local requirements.

Alternatively, companies that invest in a new business model for China are responding to what they see as unique conditions. They often arrive at an initial arrangement that's very different from their traditional one. Once again, managers intend to incorporate their best capabilities whenever such standardisation would not diminish the custom model for China.

Unfortunately, importing a company's business model lock, stock, and barrel generally means importing costs as well. Doing things the old way often costs too much in China. But customisation can result in a nearly similar outcome, because so much efficiency is lost through the abandonment of a well-proven model.

While Dell avoided these pitfalls, it still hit some bumps in the road - sometimes literally. Mr Kelly, a no-nonsense leader and former executive with Motorola in Asia, felt Dell needed to set up shop in China rather than simply export into the country from its Malaysian plants.

Headquarters thought differently, and initially rebuffed Mr Kelly's proposal to put a factory in China. Not only was Dell's model all but untested in China, they surmised, but also they had concerns around costs, skills, and suppliers.

Mr Kelly remained convinced that Chinese customers would ultimately find Dell's business model compelling, and finally won approval.

He settled on Xiamen in 1997, a city along China's east coast. But first, Mr Kelly and his team worked closely with the local leaders to create mutually attractive conditions for investment, tax relief, and production increases. Mr Kelly credits these initial discussions with setting the right tone, saying "the economic model started well before we collected on our first invoice."

Next, Mr Kelly and his team roughed out the basics of the business model. There was never any doubt it would be based on the US model. But they used a simpler form of it - "about 35-40 per cent worth," Mr Kelly recalls. At first, this meant that Dell sold only a limited line of products - desktops - emphasizing corporate buyers. Dell then built call centers and sales teams, but in a way that was focused on the initial target market.

Mr Kelly had to adjust the model to accommodate local idiosyncrasies, a challenge that continued well beyond his tenure. For instance, even though eligible customers could order PCs online or via phone, low credit card penetration meant that most were unable to pay with credit cards. Dell created a flexible model that allowed customers to pay-on-delivery.

Dell also addressed unexpected order-fulfillment glitches. In one case, Dell hired a trucking company to deliver PCs in the northern part of the country. After two weeks, Mr Kelly's team discovered that PCs were arriving at customer locations in pieces. After some digging, managers learned they needed to specify that deliveries be made only on trucks with new springs.

The larger lesson is that business models must be adapted thoughtfully to the Chinese context. The key watch-out involves cost. If the business model can only be executed at high cost, the company is probably importing too much of the model and needs to consider possible adjustments to processes, standards, and techniques. Paring the model to its core elements, then adding back local pieces over time, allows companies to carefully build on experience.

Consider how Mr Kelly used this insight to minimize the cost of talent. Early on he brought his management team up from southeast Asia to set up of the factory, support services, and suppliers. Then he switched to local talent at the managerial level. He reached full localisation of all direct reports to the production head within the first year and full localisation across all posts within a few years of operation.

The challenges facing companies in China are substantial, but not insurmountable. The country is growing less opaque by the day, and multinationals more experienced by the hour about how to break into this underdeveloped IT market - one that will continue to grow at least four times faster than the US tech sector over the next two years. Defining the exact way to adapt to China depends on each company's situation. As with most issues, the devil is in the details. The heartening message is that multinationals are now beginning to succeed in China. Witness the growing success of companies such as Motorola, Cisco, and Hewlett-Packard. With careful planning and execution, more will follow.

Tom Manning is the founder of China Board Directors LLC. Paul DiPaola, based in Shanghai, is director of Bain and Company in China.