The world is a tough oyster for U.S. PC makers

Although opportunities abound, brand-name PC makers acknowledge that becoming a force in emerging markets such as Asia and Latin America can be a challenging task.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
For U.S. PC makers, world conquest is possible--but it won't be easy.

With U.S. and Western European PC markets hitting their saturation points, computer makers are increasingly turning their attention to resurgent economies in Asia and Latin America to fuel revenue and profit growth.

Although opportunities abound, brand-name PC makers acknowledge that becoming a force in emerging markets can be a challenging task. Import duties, bureaucratic regulations, credit and currency, language, and the local commercial culture are among the hurdles.

"The most fundamental barrier is just understanding how business is done. You just can't export a U.S. model," said Webb McKinney, vice president of Hewlett-Packard's Personal Computing Organization.

In China, for instance, HP used to deliver PCs through Hong Kong because the "informal" tariff through that route, which the military collected and kept, was cheaper than tariffs attached to importing parts for local manufacturing, McKinney said.

By contrast, "to be cost-competitive in Brazil, you have to manufacture there," he said.

Local manufacturers also provide heady competition. China's Legend, which has graduated from making cheap PCs to a wide variety of systems, is the leader in the Asian market. Compaq Computer has the largest share in Eastern Europe, but Russia's Formoza and R+K are second and third place in market share.

Latin America is emerging as a hot market that will pit the multinationals against regional PC makers and dealers that specialize in house-built "white box" computers.

Although comparatively small, Latin America is the fastest-growing regional PC market, according to research firm Gartner. PC shipments grew by 47 percent in the third quarter in the region. Compaq is the largest company in the region, with 22 percent market share and a 36.1 percent growth rate.

HP, however, is growing slightly faster than Compaq. And Dell Computer opened a factory in Brazil a little over a year ago and is selling into Mexico through its U.S. plants.

"The market is growing very fast; we are spanning all segments," said Terry Kahler, vice president of services and operations for Dell in Latin America.

Global warning
U.S. PC makers only account for a fraction of overseas sales:
Asia-Pacific unit market share, first half of 2000
Legend: 9.5 %
Samsung Electronics: 8.1 %
Compaq Computer: 7.3 %
IBM: 6.8 %
TriGem Computer: 5.6 %
Others: 62.8 %
Latin America unit market share, first half of 2000
Compaq: 23.3 %
IBM: 6.0 %
Hewlett-Packard: 5.8 %
Acer: 5.0 %
Alaska: 3.8 %
Others: 56.1 %
Eastern Europe unit market share, first half of 2000
Compaq: 4.1 %
R&K: 2.9 %
Formoza: 2.1 %
Hewlett-Packard: 2.0 %
Optimus: 1.6 %
Others: 87.3 %

Source: Gartner

Still, the "other" category of PC makers not in Latin America's top five companies in terms of shipments grew fastest of all. As a whole, this group, which includes manufacturers like Itautec and Metron from Brazil and Mexico's Alaska, saw shipments grow by 74 percent in the third quarter. This group saw market share increase from 50 percent to 59 percent. Latin America's top five--Compaq, Dell, HP, IBM and Acer--all lost market share during the period.

Global warfare
Although PC makers still draw most of their revenue from the United States, tapping overseas markets has become an increasingly important goal.

"Asia, Japan and Latin America get 25 percent of the output of the PC market. That will grow with time," said Charles Smulders, an analyst at Gartner.

Becoming a world player, however, depends on a number of factors. Ad campaigns sometimes don't travel. Local buyers and governments can favor indigenous companies. "There is quite certainly a question over price," and tariff structures can hurt U.S.-based companies, Smulders said.

Another disadvantage for U.S. manufacturers lies in less contact and familiarity with local dealers, said Roger Kay, an analyst with IDC. Although direct buying is on the rise, dealers still rule overseas in markets that demand "local companies, local contacts and customer service."

"Face-to-face interaction is much more important," Smulders said.

The difficulty of doing business overseas comes partly from the sheer number of legal and cultural tangles that the globe has to offer. For every country, there is an annoying level of bureaucracy.

"You really have to be there. You just can't run it from Cupertino, (Calif.)," McKinney noted. "You have to develop a competitive cost structure."

Some easy, some tough
China, Brazil, Japan and India, among other nations, impose tariffs that can run higher than 20 percent on imports. To top it off, the rules change--often. HP avoided getting stung by a change in China's informal tariff policy in 1998 by anticipating the change with more domestic production.

Generally, importing parts, rather than complete computers, cuts tariff costs, he said. Components, such as processors, are fairly stable in price worldwide, minus tax issues, said sources at Intel.

As a result, manufacturers typically build regional manufacturing centers in countries with large market potential and tax laws that can be avoided by having a local presence. In the end, these facilities serve large local markets but also serve as regional hubs.

HP, for instance, serves Australia by building base systems in Singapore and assembling custom configurations in Australia.

The political climate is another issue. "Colombia is the way it is. You either stay or you don't," said Dell's Kahler.

Government aside, each nation comes with its own distribution structure, dealer base, level of economic development, and buying season. The Chinese New Year, which takes place in February, is a major purchasing season in Asia, McKinney noted. Latin America has a massive holiday season in the first part of November, Kahler added.

Product strategies also have to be fashioned for local conditions. HP currently is doing well with a server designed for emerging markets that "is maybe a notch down below the same one in the U.S." McKinney said. Some small desktops designed for Japan are sold only there.

And woe to the company that doesn't localize--adapting ad copy, PC designs and even support desks to local languages.

"They don't want to be a dumping ground for other people's products," Kahler said.