Adrian Koch, Senior Vice President for Personal Systems Group, HP Asia Pacific and Japan

September 19, 2007 -- Hewlett Packard announced last week that its future growth plans in China would be focused in the country's second-tier cities. Adrian Koch, senior vice president of Hewlett Packard's (HP) Personal Systems Group for Asia Pacific and Japan, was quoted in the Chinese media as stating that HP's new high growth areas lie outside China's big cities.

"Our geo-expansion plan is an aggressive one and we're now moving into tier three and four, even tier-five cities," Koch told Emerging China. "We are now in 420 cities and have over 2000 outlets. We aim to extend our coverage to 600 cities over the next 2 years. Some city names include Yi Bi in Sichuang Province, Ma Anshan in Anhui Province, Da Tong in Shanxi Province, Shi Hezi in Xinjiang Province and Haikou in Hainan Province to name a few."

According to Euromonitor, a global market research firm, PC ownership in China rose 26 percent from 81 million in 2005 to 102 million in 2006. Households with internet connectivity rose to 18 percent in 2006 from 14.1 percent in 2005.

"After many years of development, the China market has entered into a new era - that of personalized demand," Koch told Emerging China. "There are huge demand differences between tier one and two cities and and tier three to five cities. Even at the same tier level, demand differentiates across different regions."

Research-firm AC Nielson, in a recent report, also believes that it is important not to view China as one single market. "Though brands appear to translate well across regions, the actual product variants offered may need to be tailored to individual markets," the report states.

In August, China's National Bureau of Statistics reported that the office appliances industry grew by 19.7 percent over August 2006. As a whole, China's retail industry was worth 711.1 billion yuan. Urban areas contributed 68 percent of retail sales, worth 485.5 billion yuan, and rural areas contributed 32 percent, worth 226.1 billion yuan.

Chinese electronics retailer Suning has seen its revenues rise 60.58 percent to 18.9 billion yuan in the first half of 2007, as compared to the same period in 2006. At the end of the first half, Suning had 413 stores in 103 cities across China, adding 13 district level cities over the period. Suning is one of HP's two retailers in China.

"Historically, on-the-street retail and IT malls were extremely popular with Chinese people as a place to purchase their IT computers and equipment. With new international retail formats entering the market, we are seeing the emergence of a wider range of IT retail formats and goods along with an associated competitive pricing policy which provides a wider range of choice for the Chinese consumer," David Hand, managing director of Jones Lang La Salle China (JLL) told Emerging China. "Many international retailers will increase their expansion plans throughout China, bringing more choice and international formats to this emerging market for the first time. Such growth is already expanding beyond first tier cities and this trend will increase over time."

A report by JLL identifies Chengdu, Dalian, Kunming and Shenyang as second-tier centers for foreign retail in the near future. According to JLL's research on increasing wealth levels, eastern second and third tier cities are at the closest to levels in Beijing and Shanghai. Central and northern Chinese cities are eight to ten years behind Beijing and Shanghai. And western cities, with the exception of Chengdu and Chongqing, even further behind that.

"Robust growth in China's economy and improvements in living standards will fuel continued fast growth of the electronic appliances and consuming electronic retail industry," Mr. Chen Xiao, president of GOME, said in a statement. Hong Kong-based GOME is China's largest electronics retailer with 654 stores in 168 cities as of June 2007. The company reported revenues of 21,157 million yuan in the first half of 2007, a 73.9 percent increase over the same period a year earlier.

"Growth of the modern trade [formal retailing] in lower tier cities has outpaced that of key cities in the past few years," states an ACNielsen report. "The growth is supported by the steady rise of disposable income in these less developed markets, increasing at around 10 percent annually."

Despite strong growth in urban centers throughout China, there still stands a stark divide in PC use between urban and rural areas. According to a 2007 World Bank study, internet penetration in urban areas in 2003 was 40 times higher than in rural areas. Approximately 28 percent of urban households owned a computer contrasted with just around 1 percent in rural areas.

Texas-based Dell Inc. opened its third Customer Experience Centre (CEC) in Tianjin this past April. With 57 percent year-on-year growth in China, Dell's Tianjin CEC follows Chongqing and Nanjing as the U.S.'s leading computer manufacturer seeks to expand its direct selling presence in China.

"After the establishment of CECs in Chongqing and Nanjing, we received lots of positive feedback and universal recognition from the local consumers, so we're more convinced that we should help more domestic consumers learn more about Dell's products through the establishment of CEC," said Alex Yung, regional sales director, North Asia, Home and Small Business of Dell, in a statement. Dell was unavailable for comment.

HP's announcement of its growth plans in China comes barely a month after Chinese PC manufacturer Lenovo announced it was in formal purchase negotiations with Holland-based Packard Bell. If the estimated 5.8 billion yuan Lenovo-Packard Bell deal goes through, it would significantly increase Lenovo's presence in Europe.

With global computer brands beefing up their presence in China, HP's expansion into second tier cities and beyond is just one more sign of the global push for China's IT market. Under China's eleventh 5-year plan the government is pushing for an increase in PC ownership nationally. Such increases will benefit PC manufacturers and retailers who are able to diversify their product lines and market to consumers outside of China's first-tier gateway cities.