The Silicon Hutong Suite
Grand Hyatt Singapore
1041 hrs.

Dell’s agreement to sell computers through Gome is a sign that the folks in Round Rock have come to an important conclusion: they can – and in many places around the world, must – adjust the way they do business in order to sell their product.

That is a conclusion of profound import. It means that the way Dell sees the value it that it offers to customers is changing, that it goes beyond mere price to something else. The company’s leaders apparently realize that even if what made Dell unique in the past was the efficiency of its supply chains and its perfection of the direct-sales channel, all of that is of diminishing (relative) importance to the company’s long-term success.

As it moves into retail, Dell is now going head-to-head with Lenovo and HP, setting the stage for the kind of war for market share, shelf space, and attention that has already ripped through so many other sectors, most notably consumer electronics. There will always be people who could care less about the brand on their PC (especially if it saves them some cash), but this sets up a dynamic that will drive all three players to develop and sell products aimed at the low-end of the market, in competition with the build-to-order no-logo white-box computers sold in China’s computer malls.

Fighting for the bottom is not somewhere The Old Dell was comfortable going – the company already bailed out of the Battle for the Bottom once. The question is: does it want to go through that again, or is there something cooking that will see Dell deliver products that are unquestionably better than what HP and Lenovo offer?

The Gome deal, as important as it may be, is only a variation on the idea of differentiating Dell based on how and where it is sold. But the channel is not the product.

Dell’s next move must be to figure out how it can leap ahead of Lenovo, HP, and the white box guys in China without using the words “channel” and “price.” The only way it can win in China is if it starts making some qualitative improvements in the product and the experience it offers – in ways the Chinese consumer cares about.

The Silicon Hutong Room, Wynn Las Vegas Hotel
Looking out over the lights of the insomnia capital of the world
0037 hrs.

I know it sounds like a really bad Kodak commercial, but there really are moments in your life that you wish you could capture and just hold. This is one of them.

My wife and son are sleeping – quietly for the most part, but occasionally the room resounds to the sound of rhinological rhythm – and the lights are out, but the room is lit by the screen of my MacBook Pro and the ambient light filtering in through windows that make up an entire wall of our generously-sized room at Wynn Las Vegas. My vista over southern Nevada looks to the northeast, which at this hour is covered by a carpet of mostly orange streetlights, punctuated by the bulk of the Las Vegas Hilton about a half mile away, and the nearer mass of Encore at Wynn, still under construction. The midnight sky is punctuated by occasional flights in and out of McCarran International Airport.

We’re leaving here tomorrow morning, which is not an entirely unpleasant thought: after four days in a city dedicated to serving the baser needs of its guests, all but the most devotedly amoral are in need of an escape and a very long shower. But I love a great cityscape at night – it is one of the things that makes business travel wonderful – and for the moment my 60-degree panorama gives this city a patina of beauty.

As I said, an amazing moment.

Speaking of Moments…

Before we drove out here from LA on Monday, leaving half our luggage at our hotel there to await our return tomorrow, we attended on Sunday night what can without pretense be termed a Hollywood wedding. At an exclusive club perched above the sea in Malibu, with ocean breezes cutting though the heat of an LA summer afternoon, the bride, groom, and most of the attendees were of that class of people who never show up in front of a camera, but who are the invisible generals of the film and television industries. It was an amazing wedding, filled with people who were warm, unpretentious, and who gave lie to the stereotypes and caricatures that for most of us forms our jaundiced view of the entertainment business. With the possible exception of my own nuptials, it was the most fun I can remember having at a wedding.

it was a memorable evening, and the bride and groom (the latter my cousin) had decided to help remember it by placing at each of the dozen tables something few of us had yet seen – a disposable video camera, capable of filming up to 20 minutes of whatever we decided to put on it.

Without instructions, each of us took turns recording greetings to the bride and groom, narrating the event, recording whatever struck our fancy before passing it on to somebody else at the table.

Fire the Videographer

It took me until much later to realize that beyond the novelty value of getting to play with Pure Digital’s new Flip Video disposable camera (out just six weeks), we all had an opportunity to give them something they could not get from the best photographer or videographer: six total hours of footage of their wedding shot by their guests, allowing them to see their own wedding from our eyes, and join each of us at our tables.

They will be able to enjoy their own wedding from our viewpoint. Forever.

Talk about completing an experience – your wedding as viewed and experienced by your guests. All for the price of a $30 camera on each table.

Laying aside for a moment the reality that even at the best wedding, not everything is sweetness and light, this to me is another example of how technology – elegantly applied – can create, enhance, and deepen the experiences we have in our lives.

If nothing else, it will tempt you to take video where you haven’t wanted to take it before out of fear of damaging or destroying an expensive camcorder.

In the Hutong
Geeking out and Maccing off
1637 hrs.

I don’t know about you all, but when I was using Windows I seemed to go through a laptop about every 18 months to two years. Somehow, in that period of time, normal wear-and-tear would render the things unstable, slow, and eventually unusable.

My first Windows laptop was an NEC. I bought the thing in November of 1996, and it lasted me until May of 1998. 18 months.

My second Windows laptop was an Acer. That one did pretty good – it lasted me from May of 1988 until July of 2000 before croaking. 26 months.

My third Windows laptop was a second-hand Dell, company issued. That one lasted me from August 2000 to April 2001. 9 months. It was old, anyway.

My fourth Windows laptop was another Dell, also company issued. That lasted from April 2001 until I replaced it 15 months later with my Fujitsu Lifebook D.

The Fujitsu Lifebook D I actually picked up as a second computer so I could have something that was my own. I got it in August 2001. It lasted until February 2003 – 17 months and then completely croaked, leaving me having to borrow a laptop.

The Return of Mac

In April 2003, after an absence of nearly 7 years, I returned to Mac, buying a 17″ PowerBook as soon as Apple in China got its first shipment. In fact, I can confidently say it was the first of its kind outside of Apple in Northern China.

Last year, I bought a new 17″ MacBookPro, expecting the PowerBook to croak.

It’s still going. And I still use it daily alongside the MacBookPro.

Today, it’s been 4 years since I bought the PowerBook, and it’s still running happily. A freaking record.

Oh, and my wife’s iBook has 3-1/2 years on it. That’s a record, too.

Of course, I know that the life of a computer is determined by many things, and so I won’t claim some kind if innate superiority for Macintosh. Your results may vary. Suffice to say that we’ve got 6 Macs in our business and we’ll be buying 2 more in the next year – not as replacements, but as additions.

Four years on a laptop?

Damn.

In the Hutong
Catching up on reading
0200 hrs.

Gordon Orr and Jane Xing of McKinsey cornered Mary Ma for an interview and asked the normally publicity-shy CFO about her thinking on whether Chinese companies are ready to go abroad.

Her answer was interesting:

“Chinese companies are better prepared to invest abroad than many people believe.”

She then goes on to point out that, after all, Chinese companies are used to competition at home, making them very competitive when they decide to go international.

Mary Doesn’t Know

I have a great deal of respect for Mary Ma, and I continue to believe that when the Lenovo management team all sit down together, she’s the smartest person in the room. I also credit her with much of the success the company has had in its integration after the merger with IBM’s PC unit.

However, I think that oversimplifies things a bit. As Lenovo discovered before it bought IBM, all the competition at home was not translating into great success overseas. Its tentative moves to go to battle even in small markets like Italy and Germany as well as some Asian territories left it with little to show. Apparently, there is more to success overseas than being a strong competitor at home.

Bigger is Better?

She then goes on to say that the most important thing for a Chinese company to have before going overseas is scale at home:

“The most important thing for a Chinese company is to grow big enough and strong enough in its home market—in China. Probably the biggest reason for the failure of international growth is that companies lack a certain critical mass at home. Without that, they will lack the level of strategic thinking needed to manage an international organization, and they will lack managers with the necessary breadth and depth of experience.

And this is purely about size; a smaller company’s management wouldn’t have the capability even to think about operating at a global scale, nor the capacity to absorb hundreds more people and managers. The depth of Lenovo’s management meant that we could sustain our success in China and still have managers available to go anywhere we needed them, as long as there wasn’t a language barrier.”

Then in the next paragraph, she talks about companies in the solar panel business, who on the other hand must go overseas first because China is not ready for what they produce.

In short, Ms. Ma, as exceedingly intelligent as she is, is teaching the wrong lessons about Chinese companies that need to go international.

Anyone? Anyone?

So what is the answer?

Zhang Ruimin, Haier’s boss, seems to get it a bit better. In an interview with BusinessWeek’s Tiff Roberts back in 2004, he got closer to the answer when he talked about product design.

“When we enter into overseas markets, if we don’t use local resources, we cannot design and produce the products that satisfy the needs the local consumers’ needs. In the past we tried to design our products in Qingdao and sell them to the U.S. These products looked like American products, but once they were released on the market we discovered that there were minor details that didn’t meet the needs of American consumers.”

Let’s take Mr. Zhang’s point one step further. The most important thing for a Chinese company expanding overseas is to have a deep understanding of the local market all the way to the top of the company, combined with local resources and talent.

Ya can talk, ya can talk, ya can bicker ya can talk, ya can bicker, bicker bicker ya can talk all ya want but is different than it was.

No it ain’t, no it ain’t, but ya gotta know the territory.

– Meridith Willson, The Music Man

So the question overseas-minded Chinese companies should be asking is “where do we find the insight and understanding to make us successful in a given market.”

Unfortunately, not enough are asking the right questions. And if they listen to Mary Ma’s advice, they still won’t be asking.

In the Hutong
Watching Silverado
2300 hrs.

Back at the beginning of February I wrote that the troubles that have led Dell to boot Kevin Rollins and to create what the company is calling “Dell 2.0″ all began when the company’s business model hit a high water mark in China in 2004. (“Dell Freezes Over“).

The first commenter to respond was a gentleman identified as “RichardatDell,” who is either a Dell PR person or somebody at Dell’s PR agency. Richard, for obvious reasons, took strong exception to my points.

Rather than respond to him in a comment, I promised I would respond in a new post. and now, a little over 10 weeks later, here is my much belated reply.

Allow me to retort

First, he said:

“Dell’s competitors are not free to act only in the customers’ interest because they must factor in value for their resellers and distributors. That means the customer is third in line. Not so at Dell.”

Right. And Dell must factor in cost for their sales organization and for customer support – which, if you believe consumer polls, have not done much for customer satisfaction. But we’ll address that later.

Dell’s point about factoring in profit for the channel is correct – assuming you believe, of course, that Lenovo, one of Dell’s largest competitors in China, does not act in the customers interest in their company-owned stores around China. Frankly, I think a lot of Lenovo customers would disagree.

It also assumes that the channel adds no value, or adds negligible value to the process. If you assume that all of your customers know enough about computers to purchase them mail order, that’s true. In reality, there are a lot of individuals out there who don’t know all that much about computers and need considerably more hand-holding and service.

Indeed, consumer trends in China underscore that they want that support – not just with computers, but with mobile handsets, appliances, big-screen TVs, and the like. They want these complicated items delivered, unpacked, set up, turned on, and adjusted for them.

“Dell, its direct model and the competitive advantages that made us number one and a global competitor rest in more than simply efficient ordering and product production processes. The direct model is not about processes. It’s about relationships.

I think the direct model is in part about relationships: between Dell and its employees, suppliers, and yes, its customers. I would argue that these are things that are the hallmark of any successful business in any competitive industry. I know it has been in every business I’ve been involved in my entire career.

But this is not, by any means, all of the story. I’ve got Michael Dell’s book Direct from Dell here next to me, and he says so himself.

What has made Dell unique among its competitors, however – it’s differentiation – is the other parts of the model: tight vertical integration, to the extent of bringing suppliers inside the business; turning the competition’s greatest strength into a weakness (which is what they’re trying to do to all of those big bad companies who sell through retailers); and exploiting the Internet, and dragging every efficiency out of the production process.

Whatever Dell’s “customer relationships” are like in the U.S., they aren’t much in China. I was a Dell owner for 4 years from 1999 to 2003. I can tell you that after the post-delivery call, I never heard from Dell again. Apocryphal? Yes.

Anyway, you tell me. What do you think brought Dell this far? It’s relationships, or direct sales backed up by efficient production?

Yeah. Me, too.

Beware of Anything 2.0

Dell 2.0 is about reinvigorating and extending the competitive and non-replicable direct 1:1 relationship with our customers to provide the best customer experience, build a strong global services business and ensure our products deliver the best long-term customer value.”

While I’m willing to give Dell some time to show me what Dell 2.0 is about, and whether Mike and his new executives can deliver on the promise. This is a high bar. How are they going to build a better services business than IBM or HP in modest period of time? How are they going to offer a better customer experience than Apple or Lenovo?

Even if they try, it’s going to be expensive. Especially when part of your solution is to open costly “experience stores” that won’t sell anything.

And, with respect, “reinvigorating and extending” the customer relationship makes it pretty clear that Dell knows they need to be doing a lot better in this department. Giving them the benefit of the doubt, that suggests that whatever Mr. Dell wrote in his book about relationships was either forgotten or took a second priority to the rest of the model. A less charitable soul might suggest that it was never part of the deal in the first place, and that any talk about “relationships” is so much window-dressing.

Xeroxing Dell

In addition, while we are investing in our business for the long term, competitors have announced they will continue to eliminate costs to maintain their ability to compete with Dell; other competitors are not making much or any profit because they need to sell products at a loss. Perhaps they have a ways to go before we can suggest Dell is easily replicated?

Specifics, please. What competitors are selling products at a loss? If a company sells products at a loss, it will lose money. Continue to do that, and you’re out of business.

If, on the other hand, a profitable competitor sells computers at a minimal profit, no profit, or a small loss, it is because they choose to add value elsewhere, like in servers, integration, software, services, or accessories.

Then, of course, there are companies like HP, who are learning to make and sell inexpensive computers that, sumbitch, are even more energy efficient.

Oh, and that snarky crack about competitors eliminating costs? We’re hearing in the Hutong about a plan to reduce up to 13% of Dell’s China staff, apparently because revenue per employee has dropped to its lowest level since 2000.

Grow to Dell

With respect to China…The region’s growth was led by 33 percent unit growth in China, where Dell was the fastest growing among the top five vendors in the region, growing at three times the growth rate of the industry.

Two questions on that. First, 33% growth on what kind of base? What was the current market share? And how have things been in Q4?

Second, where is the growth coming from? Is it in laptops (a market that is growing) or desktops (a market that is shrinking?) Is it with large corporate customers, who service themselves or are getting service someplace else, or from small businesses and consumers?

All of this is germane, because what it will tell you is to what extent this is sustainable growth, versus growth that is gained in the near term at the expense of the long term.

Dell’s Biggest Problem

I see Dells finding there way into corporations. What I don’t see or hear buzz about is Dell winning the hearts and minds of the people that are using them at work. Everyone I know who uses a Dell, laptop, docked laptop, or desktop – cordially hates the damned thing. Again, it’s apocryphal. But the plural of “anecdote” is “data.”

I don’t hear people talking about the Inspirion XPS laptops. I DO hear them talking about ThinkPads, HP Pavilions, and MacBooks.

My data may well be wrong. I’d be happy to have it proved wrong. But I suspect Dell is buying all of that growth at the expense of long-term customer satisfaction and relationships.

Now, maybe Dell 2.0 is set to change all of this. But Dell has to start by admitting that there is a problem here, not by either spinning or ignoring all of the people who aren’t happy.

Worldwide announced today are not encouraging. In the most recent quarter Dell sales dropped 14% in its core U.S. market and 6.9% worldwide. HP, meanwhile, is up 28% worldwide and 26% in the US. Lenovo is up 17.4% worldwide, Acer up 41.4%, and old Toshiba up 13%.

So, roll on Dell 2.0. Let’s see what you’ve got.