How Dell conquered India

February 10, 2011, 1:30 PM UTC

The U.S. computer maker got serious in India only a few years ago — and then proceeded to thrash HP and everyone else. Now India is Dell’s fastest-growing market, with 55% growth.

By Anurag Prasad, contributor

In the U.S., Dell originally became a market leader through its online and direct made-to-order sales model. When the computer maker decided to enter India, however, it needed a change of strategy.

In the B.D. era — Before Dell — India’s computer market was ruled by Hewlett-Packard (HPQ) and Chinese computer maker Lenovo (LNVGY). HP had arrived in 1989, when its only competition was IBM — a business that was later acquired by Lenovo. It quickly established itself as the market leader by focusing on price and after-sales service, and its 2001 merger with Compaq added to its product range. Both HP and Lenovo had factories in India, and their products were available off the shelf through a vast retail network. More importantly, because dealers had huge inventory (the companies supplied machines whether there was demand or not), they offered customers hefty discounts. Sales rose.

To buy a Dell in those days, Indian customers had to wait up to a month for delivery while the computers were manufactured in Dell’s factory in Penang, Malaysia. Little wonder, then, that Dell sold just 79,244 laptops and desktops in India in 2007, its first year of full-fledged Indian operations. In that same year, HP sold 1 million to Indian consumers.

Yet today, Dell has surpassed all the others, selling over 1.1 million desktops, laptops and notebook computers in India in 2010, compared to HP’s 1 million and Lenovo’s 600,000. According to the International Data Corporation, in the third quarter of 2010, Dell (DELL) led in India with a 15.3% overall market share, ahead of HP with 14.7%.

While Dell’s India revenue of more than $1 billion is less than 2% of the company’s global sales, India is emerging as the fastest-growing market for the company. In the third quarter of 2010, India reported year-on-year growth of 55% — the highest for any Dell market.

How Dell did it

The first step was to set up a factory in India. “Manufacturing locally cut delivery time by almost 50% and improved profitability,” says M.R. Sundaresan, general manager of operations for Dell India. It also reduced waiting time to less than eight days.

Dell also changed the way it sold computers. While buying online remained an option, the company set up exclusive outlets across the country, à la Apple (AAPL) — the first time it has experimented with the retail model — and hired a battery of sales affiliates. Dell ensured that these affiliates, or channel partners, were given incentives to sell. The company also made virtually no investment in warehousing and delivering products right to customers’ doors upon demand. Once customers could touch and feel the product, it was easier for Dell to convince them to buy. And buy they did.

This wasn’t technically Dell’s first foray into the country. Dell had quietly entered India back in 2000, focusing on large enterprise and government business. By 2007, Dell’s business was worth $250 million in this segment. It also cashed in on the outsourcing wave, and had set up four customer care and tech support centers in India for its global customers. But, of course, Dell wanted a slice of the increasingly lucrative personal computers space.

“There was no charter or blueprint and we could not copy our competition. We were asked to go and figure how to build the India business,” recalls Dell India’s former country general manager, Rajan Anandan, who was sent to India from Dell in the U.S. in 2006. (Anandan left Dell in 2008 and joined Google India as vice president of sales and operations earlier this year.) He set an aggressive revenue target of $1 billion within three years – a milepost he believed would catapult Dell to the No. 1 spot in the market. “Such targets were not heard of within the company and never in the industry,” he says. “Dell China took five or six years to become a billion dollar business.” Dell India ultimately achieved the $1 billion revenue target in 2009-10, a year behind schedule due to the economic downturn.

The India growth story was powered by a “billion dollar core team,” which came together in the first six months after Anandan’s relocation. The team consisted of people from rivals HP and IBM (IBM), and even Hindustan Unilever, Whirlpool of India, and Airtel India. Sundaresan, for instance, left Whirlpool to set up Dell’s first India factory, in Sriperumbudur near the southern city of Chennai, which he got up and running in just eight months. The industry average for a plant that size is at least 12 to 18 months.

Adopting the insurance agent model

On the distribution front, Dell divided the Indian market between 35 master sales affiliates. It sidestepped the established national, regional, and retail distribution model to instead follow a model typically used for insurance agents. Thousands of registered individual sales affiliates would reach out to retail customers in person and give them a first-hand product experience at their doorstep. Had Dell followed the strategy adopted by its competitors, it would have been forced to change its built-to-order model. The result would have been squeezed margins, extended credit lines, and rigid incentive structures.

Simultaneously, Dell opened 38 exclusive stores across India, and joined hands with retailers such as the Tata group’s Croma and Future Group’s eZone for a shop-in-a-shop counter for its products. These outlets are franchised to the sales affiliates, who are also responsible for supporting field affiliates. “In a way, these affiliates became an extension of Dell offices in their region,” says Mahesh Bhalla, executive director and general manager for consumer and small and medium business for Dell India.

Dell backed this hybrid retail model by extending onsite service (technicians coming to individuals’ homes) in 650 cities to retail and small business customers as well. Previously this service was offered only to enterprise and government accounts. The new distribution model worked for Dell, giving it access to even rural areas, where customers would not be able to easily order online, and where setting up retail outlets was not viable.

The India team realized that both the consumer and small business segments are driven by strong distribution networks, especially in emerging markets. They looked at Lenovo’s distribution model in China, for example, and found that it used its strong channel relationships to penetrate beyond smaller provincial cities into rural markets. There were also complaints in India of Lenovo’s margins being under pressure due to the overcrowding of distributors, delayed incentives, and dumping of products in the existing partnerships between national and regional distributors and local retailers. It was good news for Dell.

Analysts say these factors converged at the right time to give Dell an edge. “While Dell reorganized itself for challenges in emerging markets like India, it also benefited from the fact that the competition was grappling with its own problems,” says Diptarup Chakraborti, a former analyst with research firm Gartner.

Advertising followed, with the company opting for real-life entrepreneurs instead of celebrities to endorse its products. A “Take Your Own Path” campaign in 2008 featured corporate role models such as Raman Roy, considered the father of India’s back-office processing industry, and P. Rajendran, co-founder and chief operating officer for the Indian technology company NIIT. “They didn’t have the glamour quotient but were inspirations to many,” says Amit Midha, president of consumer and small and medium business for Dell Asia-Pacific/Japan.

Competitors gird for battle

However, the competition is not ready to let market share slip that easily. Globally, HP and Acer have gained market share to push Dell down to No. 3, while Lenovo continues to dominate China. It’s Dell India that is moving against the tide.

Analysts expect the fight to intensify in the coming quarters as the competition reorganizes and fights for a comeback. “HP cracked the Indian retail market long back, and Lenovo has a very strong channel strategy,” notes Bryan Ma, associate vice president of Asia Pacific for the research firm IDC. “They are facing a temporary setback (Dell’s rise) and will return with a vengeance.”

HP has made changes in its distribution and retail network. From a one-size-fits-all strategy, it is now paying more attention to what’s selling and what’s not. “We are increasing our product portfolio according to market demand,” says Vinay Chandra Awasthi, director of personal systems groups for HP India Sales. Lenovo, for its part, will neither change its three-layered channel model—which includes a national distributor, a regional distributor and a retailer—nor will it opt for end-to-end services. But it is working toward better relationships and improved trust among partners. “We will increase engagement with 400 select partners for better customer focus, and in the next 12 months to 18 months add 1,000 low-cost exclusive stores in smaller towns and suburbs to expand our reach,” says Amar Babu, managing director of Lenovo India.

Both HP and Lenovo have factories in India: HP’s plant in the far northern state of Uttarakhand has a capacity of 5.7 million units (personal computers as well as servers); Lenovo’s factory in southern Puducherry (formerly Pondicherry) can produce 3 million units. Both companies shuttered a plant each during the economic slowdown, having overestimated the potential of the Indian market.

Globally, Dell has also closed factories as part of its plan to save $4 billion in operating costs. “The thrust is to get a more profitable revenue market share,” says Sameer Garde, vice president of OEM solutions at Dell in the U.S. He was part of the team that chalked out the India plan and was managing director of India operations before moving to a global role in the Dell headquarters. The next step is to try to lower costs in India as well. Sundaresan regrets the lack of a supplier ecosystem in India, which could make pricing competitive. Dell globally sources around 1,300 components worth $26 billion from China, including components that arrive at the facility in India. Sundaresan says that if India had manufacturers who could make even 10% of components that Dell alone buys, “it will have a huge multiplier effect on the sector and the entire economy.”

Dell is betting on opportunities due to increased data access and demand for solutions around mobility, virtualization, and cloud computing. It has been renewing its products and services portfolio since 2007 and has diversified into areas such as smartphones, tablets, and printers. The Vostro range of notebook computers was specifically designed for the Indian small business segment. The strategy worked to Dell’s advantage, and now competitors are following suit. In the last two years, Dell has invested almost $600 million to add new skill sets, service capabilities, and intellectual property through 14 acquisitions. Dell execs say there’s more to come. “We are open to partnerships and acquisitions, whatever it takes to bring the cost down, at each level of our offering,” says Garde.

For Dell, India has emerged as a local and global service delivery hub. It is the only market outside the U.S. with all business functions—customer care, financial services, manufacturing, R&D, and analytical services—operational at the local level and giving global support. “We evaluated market trends and growth potential, enabling us to invest ahead of the curve in India, resulting in our phenomenal growth,” says Midha. It is a growth story that resonates around the world.

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