While the world's top luxury brands are flocking to Chinese cities to peddle their high-end wares, IT multinationals have hit pay dirt in low-end products aimed at the country's rural areas. Banking on diversified distribution channels, cheaper products and a more flexible marketing strategy, companies like Dell, Hewlett-Packard and Nokia see rural China as their next big revenue driver.

 

"Most recently, we've seen a propensity to move up in the fourth-, fifth- and sixth-tier cities in China," says Steve Felice, president of Dell, Asia-Pacific and Japan. "We will expand to 1,000 Chinese cities from the current 45. Some of that will be done through continued expansion of our direct sales model and some of that through increased partnerships."

 

Dell's bold goal is a reflection of the market trend in China. According to figures from research firm IDC, the average growth rate of the Chinese PC market in the next four years is expected to reach 11.7 percent, while that in fourth- to sixth-tier centers is expected to hit 23 percent.

 

"It's the demand in China's third- and fourth-tier cities that sustains the rapid growth of PCs and laptops in the country," says Simon Ye, an analyst with research house Gartner. "But the absence of a retail channel increases Dell's difficulty in delivering its products to end-users in third- and fourth-tier cities and slows it down."

 

A new consumer base

 

Like Dell, multinationals historically have focused on China's premium markets - the cities. But about 60 percent of the country's 1.3 billion population live outside the main urban areas.

 

The contours of the business playing field over the last few years have changed rapidly. The government has taken significant policy measures to boost income for rural consumers to reduce the widening gap between urban and rural areas. Last year, the average annual income of people in rural areas increased 15.4 percent to 4,140 yuan, about one-third of the average income of those in cities.

 

A report by McKinsey & Company says some in China's third- and fourth-tier cities have shown a stronger propensity to consume than people in big cities because of the lower pressure of real estate prices.

 

"Mindful of this growing market, multinationals are making aggressive inroads into rural areas, largely relying on a premium price strategy and high-end brand image," says Zhang Shenwei, an analyst from research firm SERI China, in a new report. "Such tactics, however, merit reconsideration in light of the special circumstances of these markets, where diversification of distribution and lower prices may be the more optimal strategies."

 

For most multinationals, rural areas hold great promise. But the problem is getting there. With highly scattered consumers, who often have no convenient means of transportation, it's hardly easy.

 

"Profit in China's rural areas needs an advantage of scale," says Chen Shaopeng, president of Lenovo Greater China. "You need to establish a national distribution network as well as an after-sales services team that can reach most small villages while keeping costs low."

 

Since 2004, Lenovo has established over 5,000 sales and 2,500 maintenance stores in China's fourth- to sixth-tier cities. "Although we increased our presence in rural areas, we did not see much profit until 2006," Chen says. "But now we have broken even. We don't think any of our competitors will be able to put in place a comparable network in the next two to three years."

 

Like Lenovo, Nokia is one of the few multinationals to have a strong presence in China's villages. Since 2000, the Finnish handset manufacturer has shifted its distribution strategy here from reliance on one national distributor to one that combines different layers of distributors and partners who can most make Nokia products available in the remote areas.

 

Nokia's sales

 

Last year, Nokia saw its mobile phone sales soar 38.6 percent year-on-year to 70.7 million units in China, which the company attributed to its well-spread distribution channels, product variety and a strong position in the low-end segment.

 

"Revamping Nokia's distribution system from a center-oriented sales model to a more cooperative system has been one of the company's most successful revolutions," says Anand Narang, director of Nokia's emerging market. "It is especially important for our business in China."

 

Creating a comprehensive rural reach is vital, but so is making a brand acceptable to villagers. Since 2006, Lenovo has been conducting an annual campaign titled "Lenovo Olympic Activities in 1,000 Counties" to reach out to rural consumers. As part of this campaign, the company has invited many well-known Chinese athletes to participate in county tournaments.

 

"We discovered that consumers in rural areas are more easily influenced by promotional events and almost always buy the same products as their neighbors," Chen says. "In fact, our Olympic campaign would have little impact if we did it in big cities like Beijing and Shanghai. In many rural areas, consumers have never heard of our brand and we have to paint advertisements on the walls where you usually see ads of chemical fertilizers or insecticides."

 

Computer giant Hewlett-Packard has also found its own way to tap the rural market. Since December 2006, HP has joined forces with China Telecom to offer a "Computer + Broadband" service in areas like Taizhou and Nantong of Jiangsu Province. The users are given an HP Compaq desktop computer free of charge when they sign up with China Telecom and pay 198 yuan per month for 27 months.

 

Although HP refuses to disclose its exact gains as a result of the deal with China Telecom, the company's market share in the third fiscal quarter of last year crossed 10 percent, outpacing Founder to become the second largest player in China's PC market after Lenovo, according to research firm Gartner.

 

Apart from marketing campaigns, many companies have introduced products that are specially designed for rural users in order to establish their brands. Last year, Nokia released two low-end products with call-time tracking system that enables users to set a time or cost limit, automatically ending the call when the limit is reached. The system is especially designed for rural users who often share a handset. Sometimes families or even entire villages share one handset.

 

"Low income does not mean they demand fewer features," said Collin Giles, former president of Nokia (China) Investment Co Ltd at the launch of these products.

 

(Shanghai Daily February 18, 2008)