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Lenovo Nose-diving into Rural Market

China's top PC maker, Lenovo Group Ltd, by introducing cheaper computers, is plunging head-on into the country's rural market, where PC penetration is low and purchasing power is weak.

Analysts said the firm's low-price strategy will help it strengthen its market share, which is shrinking. But they are divided about the long-term profitability of the low-priced PCs.

Lenovo last week introduced a new consumer PC series and an e-classroom solution aimed at users in ordinary households and the education sector in townships.

The retail prices for the new PC models will range from 2,999 yuan (US$361), a record low, to 5,999 yuan (US$723).

Lenovo previously focused on PCs that cost more than 5,000 yuan (US$602).

"The growth of the whole PC market is lacklustre. But the township market remains largely untapped," said Yang Yuanqing, chief executive officer of Lenovo Group Ltd.

The company's vice-president, Lu Yan, said the launch of the low-price PCs is part of Lenovo's strategic shift. He expects shipments of the new PC series will reach 800,000-1 million units within a year.

Guo Haitao, an analyst with Beijing-based CCW Research, said tapping the low-end market will increase Lenovo's market share.

"Lenovo is delivering a message that it intends to cover all market segments, from high-end to low-end," Guo said.

The low-price strategy will put pressure on some regional brands, such as Heyday and the DIY (do it yourself) market, the analyst said.

In China, a large number of users prefer to buy PCs in the DIY market, where many vendors and buyers evade the value-added tax (VAT).

Besides, operating systems are not pre-installed in the DIY market.

"We have been put in an unfair position," said Lu.

"If all vendors pre-installed legitimate operating systems and pay the VAT, our market share would be much higher."

Guo estimates gross profit margins for Lenovo's new series PCs will be about 8 percent.

For fiscal year 2003, Lenovo's profit margins were 14.6 percent, compared with 14.8 percent in the last fiscal year.

Edward Yu, president of research house Analysys International, predicted the profit margins will be much lower.

"The shipments of PCs priced at 2,999 yuan are unlikely to reach 100,000 units. Otherwise, it will be unprofitable," Yu said.

"The most likely scenario is quite a few of the PCs will be available in the marketplace.

The low-priced move is largely a promotion strategy."

Since Lenovo is not adopting a "direct-sales" strategy, the firm is unlikely to save the "channel cost," which usually accounts for nearly one-fifth of the price, Yu explained.

Lu reaffirmed Lenovo will not follow Dell's "direct-sales" strategy.

Lenovo has teamed up with its five partner suppliers -- chipmaker AMD Corp, display maker Proview International, motherboard maker EliteGroup Computer System, chipset maker VIA Technologies and hard disk maker Maxtor Corp -- to cut the costs of components used in the new PCs.

Operating systems will not be pre-installed.

The cost of manufacturing, which includes royalties paid to operating system providers, usually accounts for 66-67 percent of the total costs of PCs.

Besides, a 17-per-cent VAT is imposed on vendors in China.

With PCs priced as low as 2,999 yuan, Lenovo will hardly make a profit, Yu said.

"The low-price move is largely aimed at fighting off rivals, changing Lenovo's high-price image and grabbing media attention," Yu added.

Guo expressed doubt about Lenovo's sales target.

Lenovo's low-price strategy is expected to spark a round of price-cutting in China's PC industry.

China's No 2 PC maker, Founder Technology, "will not rule out the possibility of making a similar move," said Qi Dongfeng, the company's managing president.

Qi last week said he agreed China's rural market promises much potential.

"I think a PC price tag from 2,000-3,000 yuan (US$241-361) for the rural market is appropriate," he said.

Another PC maker, Langchao, plans to launch a new PC model that will cost about 1,999 yuan (US$241), some media have reported.

A monitor will not be included.

Even with a monitor, the PC will be more competitive, in terms of pricing, than Lenovo.

A new round of price-cutting is expected dent profit margins industry-wide. Profits have been dropping due to intense competition.

Statistics, released by Analysys last week, indicate PC sales in China in the year's second quarter reached 17.53 billion yuan (US$2.11 billion), up 17.8 percent year-on-year.

Shipments in the quarter totaled 2.91 million units, down 0.4 percent compared with previous quarter, but up 39 percent year-on-year.

Lenovo's market share dropped 5.6 percent, year-on-year, during the period, Analysys said.

According to global research house Gartner, Hewlett-Packard overtook Lenovo as the No 1 PC vendor in Asia-Pacific in the year's first quarter.

HP took a 9.7-per-cent share, in terms of shipments, while Lenovo had a 9.3-per-cent share.

Lenovo has dominated Asia-Pacific's market for years.

HP last year launched a PC model priced at 4,999 yuan (US$602), which analysts said helped the US firm eat into Lenovo's market share.

(China Daily August 10, 2004)

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