Dell India's next gamble

The next billion PC users will come from emerging markets,” said Michael Dell back in October 2013, when he privatised his eponymous computer company. Eventually, Dell was bought back by its founder in a $25-billion deal. Once a global PC sales leader, the company had read the writing on the wall after ceding ground to Lenovo in a shrinking international market.

At that point, the Dell management decided that it was wiser to walk away from the constant public glare, take a long-term view of the business, rid Dell of its hardware-only image and shift focus to emerging markets. Of course, PC sales in India, too, more or less reflected the global reality of a shrinking market. The Indian PC market has degrown over the past couple of years from 11.5 million units in 2013 to 9.6 million units in 2014 after remaining flat between 2011 and 2013 (see: Low on power).

Low on power

The domestic PC market is grappling with shrinking demand

“The market records either a declining or a flat performance. All you sell is between 10 million and 11 million PCs every year. This is because of various reasons, one of which is the emergence and dominance of smartphones,” says Vishal Tripathi, a research analyst at Gartner. 

When Michael was privatising his company in 2013, Dell’s share in India’s PC market at the end of calendar year 2013 was — as per IDC figures — stuck at an unimpressive 13.2%, far behind the 28.5% of HP; Lenovo was then just a percent shy of Dell.

The company managed to improve this figure by 9% by the next year and its share in the first quarter of CY15 stands at 23.4%, barely 2.6% shy of market leader HP, thanks in no small part to the exit of some of the existing players. So, to keep its head above the water in a shrinking market, Dell enforced two major changes — one, focus on the enterprise market, where customer relationships are stickier and two, venture deeper into smaller towns and cities, where PC penetration is not high.

Dell’s ambition is to establish itself as an end-to-end solutions provider. Over the past five years, Michael Dell seems to have realised that his company was part of an old guard — represented by HP, IBM, EMC and Cisco — and that it needed to accept new ideas.

For decades, Dell and HP provided PCs and servers, EMC supplied storage, IBM and Oracle, databases and Cisco, networking — between them, providing all the pieces needed to fulfil the computational needs of any business. However, things have changed over the past decade.

Not able to rely upon external ICT infrastructure to scale up, Amazon, Google and Facebook have built their own massive data centres, software, storage facilities and networks in the shape of the cloud and shared it with the world. This clearly threatens the established tech giants and that’s why we see them trying different things.

HP has split itself into HP consumer and HP enterprise for better focus; IBM has sold off its PC business to Lenovo; Dell, on its part, has gone private and has acquired a plethora of companies with varied capabilities in the enterprise ICT supply chain, the latest example being EMC, the world’s largest storage player (for a whopping $67 billion). Its previous acquisitions include Perot Systems, SonicWall and StateSoft. 

In the words of Dell India MD Alok Ohrie (whose task it is to transform Dell into a true-blue solutions company), “We now have the opportunity to realign our investment dollars into the growth areas and that’s pretty much helping Dell not only globally, but also in India.”

Akalp Ghosh, principal consultant, CMR, feels that a clear transformational effort is visible and going private has allowed the company to take a lot of aggressive steps, including its recent acquisition spree. “In terms of brand recall, Dell has been primarily known for devices, in particular laptop and desktops. That is something it wants to fend off. The company doesn’t want to be seen as a consumer play company only. It certainly wants to have a very strong enterprise focus. That’s really where the money is. You don’t want to be a box-pusher. These are commoditised areas,” says Ghosh.

Dell has clearly not been a significant player in the enterprise solutions market, so Ohrie’s strategy is to take leaps in that direction. “We have grown four to five times the competition across all product categories post-privatisation. Over the past 12 months, we have seen 52% growth in end-to-end solutions sales.”

Time for change

But all this hasn’t come about without Dell reinventing itself internally. A company that has pushed hardware for the most part of its existence had to devise plans and programmes to start pitching solutions. “We said that there is a certain set of accounts where customers expect Dell resources to engage with them directly — not just for relationship-building, but also to provide some sort of advisory service, especially when they are implementing their strategic initiatives from the IT point of view,” says Ohrie.

So, Dell created an organisational structure that would go about addressing that need in the market. “Clearly, we can’t do that for all customers across all cities and towns. To begin with, we restricted this change to eight cities and within those cities, to a certain type of customer,” he adds. For these customers with large buying potential, the route is Dell-led.

Then, there are the next two rungs — partner-led and distribution-led sales. However, Ghosh cautions, “Historically, Dell has not been known to be a very channel-friendly organisation; it has sold directly to customers because of its consumer business. Now, when it is focusing on the enterprise segment, which traditionally is a strongly channel partner-led business, Dell has to rely heavily on channels, and that can be challenging.”

Making inroads

Though Dell has increased its market share, HP still continues to lead

Alongside its consumer business coverage, Ohrie’s team expanded its coverage of the enterprise business as well. “We started this in late 2013 and early 2014 — we have implemented what we internally call GTM (go to market) 1.0, and this has brought us much closer to our customers. We are bringing a lot more specialist conversations to the table, including perspectives on deployment of IT infrastructure,” says Ohrie.

The company’s focus is on businesses based around garments, start-ups and web-tech companies and banking, financial services and insurance firms. “Earlier, Dell did not have so much of a focus on small and medium-sized businesses (SMB). Now, it has a separate team for SMB and a separate one for large accounts,” says Tripathi of Gartner.

Approximately 65% of Dell’s PC sales come from the consumer segment and 35% from the commercial segment. From the consumer business point of view, Dell is now focusing only on five countries — US, Canada, China, Brazil and India. “As a result, the decision-making process has become faster and simpler. We have got a free hand in going and doing the right things to grow the business. We get great support from our head office in the US to grow the consumer market in India.”

The company claims that India was its fastest growing country last year, at 30%. Michael Dell has been quoted as saying that the top three companies — HP, Dell and Lenovo — can take over 80% of the global market in future. The script for that theory was readied through some exits in the years gone by. “Last year, overall demand was only 9.6 million units and there were a lot of exits. There was no Wipro, no HCL and Sony exited the business — with all these factors, the fight is between HP and Dell in India,” says Tripathi.

Room to grow

Sanchit Vir Gogia of Greyhound Research, which conducted a PC consumption study in the country in 2015, believes that there are pockets of consumption and stagnation in India and that Dell has tried to follow the growth pockets. “In many tier 2 and 3 cities, where the internet and start-up boom is currently underway, with more people receiving higher education, demand is not going to decline in the future. Down south, in many such towns, parents are still buying desktops for children, while in the north, cellphones and tablets hold sway,” says Gogia.

“When Michael said that the next billion PC users would come from the emerging markets, we looked at the Indian market and tried to monitor how this would pan out. Some interesting data points emerged,” says P Krishnakumar, vice-president, consumer and small business, Dell India.

The company conducted a study in association with KPMG and found that the overall PC penetration in India was just about 10% households. In tier 1 towns or the top eight cities, PC penetration was more or less like that in the developed world. In tier 2 and 3 towns, it came down to 30% and the figure petered out into single digits in tier 5 towns (see: Enough headroom?).

Enough headroom

With metro markets stagnating, PC makers are betting on smaller cities

Countries in the developing world, such as Sri Lanka (12%), Vietnam and Thailand (in the 20s), China (40%), Brazil and South Africa (both 35-40%), had much higher penetration. This meant that the company’s strategy would have to focus on tier 3 to 5 towns. In the company’s surveys, it appeared that its technology overwhelmed a lot of users in this segment.

“We realised that people in tier 3 to 5 towns were using technology to transform their lives but awareness was low and they needed handholding.” It became even more crucial for the company to then create a channel under a go-to-market programme in the form of Dell exclusive stores in smaller towns, letting customers touch and feel the product. “What we did right was to understand the need for technology and identify markets where we needed to go and open stores,” says Krishnakumar.

In February 2013, the company had just 47 exclusive stores in 45 cities. By the same time the next year, the number increased to 200 stores in 150 cities, and in another year, it rose to 400 stores in close to 300 cities; by July 2015, the number was at 600 stores in over 400 cities (see: Booting up).

Apart from exclusive stores, the company also expanded its reach in multi-brand outlets. From 650 cities two years ago, today it has a direct presence in 1,100 cities and indirect presence in 150 cities through franchisee stores. Krishnakumar shares some more data to substantiate this insight, “Of the 600 exclusive stores that we have, close to 375 stores are in tier 3 to 5 towns and all of these were added during the past two years; we didn’t have anything at these locations two years ago. Our sales growth rate in tier 3 to 5 towns is 2X that in tier 1 and 2 towns. In terms of online searches, there has been an almost 47% increase in enquiries coming from tier 3 to tier 5 towns.”

This is also part of the reason why the company approached these cities differently. “In tier 3 to 5 towns such as Ajmer, Bulandshahr and Ballabhgarh, Dell talks more about how technology can transform lives. In tier 1 towns, its ads are in English and the communication is more about product specifications and benefits.

Booting up

Dell has embarked on aggressive store expansion in recent years

In the vernacular towns, the communication is more about how buying a PC is not only good for children, but also makes parents’ life easier thanks to e-commerce sites, Skype and video calls. For schools, the communication is along the lines of how to use a computer to understand solar eclipses,” explains Krishnakumar.

That strategy is working. “We have a lot of partners opening up more than one store, which makes Dell a very viable product from the business point of view. It means that they are making money,” he says. This is why the company is expanding through the franchisee route. Vipul Jain (23) from Ajmer opened his city’s only Dell exclusive store over a year ago.

When HP leads the PC market and Lenovo has been aggressively expanding, why did he choose Dell? “Brand trust and after sales services made the decision for me,” he says. On an average, Jain manages to sell one to two computers every day. However, he doesn’t reveal his revenue and margin arrangement with the company. “Our buyers are mostly school and college students from the city and the villages around Ajmer,” he says.

However, the Flipkarts and Snapdeals of the world are making things difficult for Dell in India. A logical question then arises: why does Dell need to undergo physical expansion when a lot of folks are buying online now? Aren’t exclusive stores costly to maintain? Doesn’t e-commerce dent the company’s margins by offering discounts?

“E-commerce, at the end of the day, is killing everybody. It is not that Dell is not impacted. Yes, people do go try things in the store and then buy on Flipkart, which is hurting everyone in the retail chain. Now, the company is looking at exclusive tie-ups with e-commerce sites, where certain models will only be sold on e-commerce sites. Again, that would create rifts between the offline and online channels. I don’t think Dell has an easy way out because it cannot bring down prices to a level where its channel is not making profits,” says Tripathi.

However, Krishnakumar sees a peaceful coexistence between the two channels. “Across the globe, in terms of developed markets, the online business contributes 15-20%. For many people in tier 2 cities and below, a ₹30,000 machine is equal to two months’ salary, so it is a very complex buying process. They want to touch and experience, buy through a referral, through someone who can take care of the servicing,” he says.

Can’t rest easy 

And it’s not just e-commerce that Dell needs to factor in — there’s Lenovo. Ashok Nair, director, home and small business, Lenovo India, says, “Last year, with many players moving out, every player was able to garner a portion of the market left behind. Going forward, it is going to be a bit of a challenge.”

Nair is right — four years ago, the notebook replacement cycle was 2.5 years, but this has gone up to 3.5-4 years, primarily due to the popularity of tablets. But, then again, the tablet market has declined and the notebook market has picked up in the second half of 2014 and the first half of 2015.

According to Krishnakumar, there are a lot of first-time buyers in the market, and after 12 to 18 months of using content consumption devices (tablets), they feel the need to purchase computers. What about competition from smartphones? “In smaller towns, many first-time users with basic computing requirements are opting for smartphones,” says Tripathi. However, PC-makers disagree. Nair of Lenovo, which is equally entrenched in the phone and tablet market, feels, “Phones and tablets are largely consumption devices. For content creation — word processing, image modification, editing — you need a computer.”

Krishnakumar adds, “In tier 3 to 5 towns, people who bought smartphones two years ago have now started moving to larger screens and devices on which they can work. Therefore, I am seeing a 47% increase in searches from tier 3 to 5 towns, with people wanting to buy laptops and searching for the same using their phones. I would have never reached them without cell phones. This way, they know that there is a Dell store available in their city,” he says. 

“What is making a comeback is the all-in-one or two-in-one,” says Gogia. Unlike conventional desktop computers, the all-in-one has a CPU integrated into the monitor and the two-in-one is a tablet-cum-laptop. Lenovo, too, has an exclusive store expansion strategy and will be adding 300 exclusive stores in the current year. Nair goes claims that Lenovo’s differentiator vis-a-vis Dell or HP is its extensive portfolio, with phones and tablets available alongside PCs. But analysts feel that Lenovo has some catching up to do when it comes to the consumer space.

“Lenovo is more entrenched in the enterprise market because of its ThinkPad series. In the consumer space, it is always a Dell or an HP that has a higher market and mind share,” says Tripathi. Having sold off its hardware business to Lenovo, IBM wants to focus only on IT solutions. But, strangely, Michael Dell has the exact opposite strategy. 

Different tactic

Unlike his rivals, who are hiving off their hardware businesses, Dell has been building up on acquisitions. The most recent example has been — as mentioned earlier on in this story — the acquisition of EMC, the largest storage vendor in the world (see: On the prowl). As per Ghosh, “Dell is definitely trying to be the Walmart for ICT infrastructure globally — a one-stop shop for anything ICT.”

On the prowl

The parent company has made a slew of buyouts to boost its solutions business

Says Ohrie, “We are not distracted, we are not breaking, we are not selling or hiving off businesses. And that’s great.” Adds Ghosh, “With EMC, Dell is now clearly No.1 in storage. Then, it has software and security companies like SonicWall. It has spent a huge amount of money on acquisitions. But the way forward won’t be easy as these companies have divergent cultures; there will definitely be challenges.”

But, in the same breath, he adds, “If it can pull through, Dell will be the biggest ICT force to reckon with.” A forward-looking observer might cast doubts on the EMC purchase, especially when the likes of Amazon, the world’s largest cloud services company, have recently announced cloud products, which implies that one doesn’t need servers and other hardware from Dell, HP, EMC and Cisco and databases from Oracle and IBM.

Globally, with the traditional storage system seeing a lot of disruption thanks to cloud computing and with new entrants providing all-flash arrays or a mix of flash and traditional disk storage, analysts remain divided on whether the Dell-EMC merger will work. In India, where a large number of companies are still not moving to cloud computing due to safety concerns, the EMC acquisition will strengthen Dell’s hand. This purchase would, in fact, allow Dell to compete better with rivals IBM and HP in large enterprise deals. It might also help the company reach its $3-billion revenue target.

“Storage is clearly more complex than box-selling, so margins are still better. EMC has very strong brand equity in the Indian market. For Dell, EMC will be a marquee brand,” says Ghosh. Michael Dell wants a billion PCs to be sold in emerging markets, but he clearly wants a lot more from India. Ohrie sees ‘Digital India’ as a great ICT opportunity for the company. But Dell isn’t a single organisation now. It is a group of many small companies plus EMC, a company which Dell bought at a valuation which was more than its own annual revenue. “The big challenge is how to get this entire juggernaut rolling into one big organisation,” says Ghosh. Michael Dell should clearly know better.