It is a tough time for computer makers large and small. Out of all the major personal computer OEMs, Dell is the only one that continues to make money during the tech slump. Most of Dell's success is attributable to the "direct" model of doing business. Dell's "Direct To You" model is not new, you've heard it a million times: Buy low, sell high and cut out the middleman. The magic of the "Dell Direct" model was that it came at a time when personal computers were getting cheap enough to be in middle-class homes around the world and easy enough for people without multiple engineering degrees to use. Dell, like many successful businesses, was in the right place at the right time.

A big part of Dell's business is major corporate and government accounts. Big companies like Boeing and Motorola would spend literally millions every year on computers and services every year from Dell. Unfortunately, the current economic situation for the aforementioned companies is less rosy. Today those big companies are scaling back, cutting corners, laying off employees and spending less on Dell PCs. Where can Dell look to keep the money coming in? The same place that Boeing and Motorola did: China.

The Chinese mainland is home to some 1.2 billion human beings. For that reason alone, most American companies look at China as a country with 1.2 billion potential customers. Motorola wanted the Chinese to buy their cell phones and pagers. Boeing wanted the Chinese airlines to buy their jetliners. Both spent billions in courting that huge market only to find out that China's quasi-communist economy isn't ready for ubiquitous cell phones and convenient air travel. The only other quasi-communist economy that even comes close to having cell phones and regular air travel is France and they aren't buying anything from Motorola or Boeing either.

Motorola and Boeing found the Chinese mainland a tough place to do business. How is Dell going to get a piece of the 1.2 billion-person Chinese customer base? What makes Dell special enough to crack into the Chinese PC market that is completely dominated by homegrown Chinese PC maker Legend? Dell is gambling that their direct model will translate into Mandarin and Cantonese.

Dell's China division makes some of the same systems that Western customers can buy, but Dell knows most Chinese customers (even more than American customers) go for the cheapest system. Once they recognized this fact, Dell partnered with Taiwanese OEM MiTAC to create the SmartPC . Dell China's SmartPC was a basic computer with almost no available add-on options and a meager warranty for $749 (US). Basically the Chinese SmartPC had none of the things that Western customers admire about Dell Dimension and Optiplex PCs sold everywhere else. Even though MiTAC is headquartered in Taiwan, the MiTAC manufacturing facility Dell uses to make the Chinese SmartPC is located on the Chinese mainland. A smart move since the labor is cheaper on the mainland and the company saves on the shipping costs across the Strait. With SmartPCs, Dell hoped to compete with Legend, who also offers a "Smart PC" type system, on their own turf.

One problem is that Legend is much tighter with Chinese government. Like it or not, the Chinese government still has a stake in just about every business in China. As Dell tries to chip away at Legend's market share in China, the Chinese government might get a call from Legend asking them to double-check Dell's legal paperwork. Maybe China and Taiwan will have another political spat over Taiwanese independence. The Chinese government might "nationalize" the MiTAC/Dell facilities on the mainland in retaliation. Think it won't happen because China wants to be a team player in the world market just like the Western democracies? So-called "team players" would stop selling weapons to their trading partner's enemies during times of war. If you want historical proof, just ask Texaco about their past troubles with their oil well operations in Mexico.

The other major problem is just because a nation has 1.2 billion people doesn't always mean they have 1.2 billion paying customers. The fact is that the majority of people in China with money live in four heavily populated areas: Beijing, Shanghai, Hong Kong and Guangzhou. Those four areas contain almost all of what would be considered China's middle class wage earners (the people that purchase PCs). Realistically, those areas are where the ".2" out of the "1.2 billion" Chinese live. Outside of those areas are what the people of China call "peasants." No matter how cheap cell phones, airline tickets and personal computers are, one billion peasants won't have the money to buy them. China has made great strides towards a free market economy, but right now they have a command economy with limited capitalism ruled by a control freak government.

It will be a frighteningly slow and difficult process for Dell to break in to the China market, even with their SmartPC. In a year or two, investors and analysts will probably cry and complain about how Dell isn't making any headway against Legend in China. In the meantime, Dell has started to sell the SmartPC here in America as the SmartStep for $100 (US) less than what it costs in China with better specs. Just like in China, the SmartStep has no options for customization and is the most basic of PCs. However, now that IT spending is down across the board, Dell hopes the cheap SmartStep might be perfect for the many customers who need computers but cannot afford performance PCs. Even worse is the fact that I've heard nothing about Dell's marketing strategy in China. How can Dell expect the Chinese to buy SmartPCs without any TV ads? More importantly, will Dell have a Chinese version of the insufferable Gen-X pitchman Steve ("Dude, you're gettin' a Dell!") on CCTV?

Dell (and other high tech firms) should recognize that China has more labor than customers right now. If nothing else, Dell can use China's cheap labor to offer the SmartStep in the West and avoid the headaches of dealing with China's government. The only thing that will mess that up would be if Legend starts selling their SmartPC-clone in the West for $100-$200 less than Dell's SmartStep. It might be good for consumers, but it will be really bad for Dell and every other major OEM in the West." <>

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