China's rural populace is offering new hope for computer makers as sales in urban markets decline due to the global financial crisis. But foreign vendors seem to be responding slowly to this new market.

As part of its efforts to stimulate the domestic consumer market, the Chinese government launched a program earlier this year to give subsidies to personal computer (PC) buyers in rural areas, where most people still do not own computers.

But foreign PC companies such as Hewlett-Packard (HP) and Dell took less than 1 percent each of a market where 110,000 new computers were sold during the last three months, according to government figures.

By comparison, Lenovo Group, the country's largest domestic vendor, accounted for 44 percent of sales.

"We don't have a very big presence in the rural communities," said Steve Felice, president of Dell's global small and medium-sized business operations.

"Our focus has been in the top-tier cities, and we are now in the process of expanding our reach," Felice said.

The world's second-largest PC maker last week posted a 21 percent decline in revenues in the second quarter, as consumers and companies reduced their spending on technology products amid the economic slowdown.

Felice said the company's core strategies are to maintain Dell's profitability and conduct the move to rural markets "in a prudent manner".

China is the world's second largest PC market. But market growth has been significantly affected since the end of last year, when consumers and companies began reducing their IT spending.

According to the research firm IDC, the Chinese government's rural PC program is expected to lead to 1.5 million new PC shipments in China this year.

Although the number is small compared with the 40 million annual PC shipments in China each year, IDC reported that the program will accelerate the use of technology products in rural areas to boost the country's sluggish PC market.

Challenges

However, experts said the limited purchasing power of rural consumers, plus a huge investment in distribution and after-sales networks and the complicated process for consumers to apply for government subsidies might reduce foreign PC vendors' willingness to aggressively push into the rural market.

According to the National Bureau of Statistics, China had 727.5 million rural residents last year.

But their annual net income was only 4,761 yuan on average, only slightly more than the 3,000 yuan an average computer costs in rural areas.

See Chin Teik, senior vice president for HP Asia Pacific & Japan, told China Business Weekly in an earlier interview that the company planned to grab more market share in China with affordable PCs.

But he said that HP would not chase market share "at any cost" and was mindful that the low-cost strategy might hurt its profit margins.

During the past few years, HP has limited its distribution network to China's eastern coastal regions, where farmers earn more than their peers in western areas.

Isaiah Cheung, general manager of HP's computer business in China, said he hopes the revenues from small and remote areas will account for 40 percent of HP's business in China in the next three years.

Cheung said sales growth in China was expected to shift from big cities to second-tier ones.

He said sales in rural China, where most people still do not own computers, will see significant growth in following years.

HP's market share in China increased to 13.7 percent in the first quarter of this year, up from 10.9 percent in the previous quarter, according to IDC. That made HP the largest foreign computer maker in China, second only to domestic market leader Lenovo.

Simon Ye, an analyst with the research firm Gartner, said making computers for rural consumers can be profitable if PC vendors handle the business well.

"If you look at the computers sold in rural areas, they are not the cheapest ones," Ye said.

"I think computer makers, including the foreign ones, could make a profit out of it if they put enough efforts into tapping the market," he said.

Ye said he was positive that HP would take a larger slice of China's rural market as the company started to establish distribution networks across the country.

But he said Dell might take a longer time to see further progress in China's rural market, as the company has long relied on the direct sales business model, which does not work well outside big cites.

China's rural population is widely scattered. Establishing a nationwide distribution network and after-sale service network is vital for a robust PC market.

Domestic home appliance maker Haier said earlier this year that it planed to establish 10,000 sales outlets and 5,000 service depots in rural areas.

Lenovo also announced that it would establish 700 county-level stores and 7,800 sales and service outlets over the next three years.

"China's rural areas will one day create a market that is bigger than the country's overall PC market today," said Yang Yuanqing, CEO of Lenovo Group.

Ye from Gartner said as foreign vendors start to penetrate into the rural areas, winning support from domestic distributors was vital to the success of the PC companies.

He said giving domestic distributors reasonable profits and maintaining a stable distribution network were of great importance.