Following the Direct Model to Success

interviewed by Terrie Lloyd

How was the PC business in Japan in 1996, and what are the short-term prospects?

Medica: Let me answer that question in the context of the industry. As you know, we have a very close relationship with Intel, and in reviewing with them where we together thought the year had ended up, our expectation was somewhere near 2.4 million units for the Japan PC market in the fourth quarter, and 8 to 8.4 million units on the year. That's up from roughly 6 million PCs the previous year.

So, from a year-on-year perspective, 1996 was a very, very healthy year. And the general expectation is that this calendar year will be another strong year; at this point, we project somewhere from 10 to 10.5 million units for '97 in the Japanese market. As Japan is under-penetrated, we see continued growth through the end of the decade.

What do you foresee as the main areas of growth for 1997?

Medica: We think all channels - customer segments as well as the product segments (servers, desktops, and notebooks) - will show very strong growth.

We also believe this will be a very strong year in the commercial segment in Japan. Channel competition is going to get very heated: between dealers and resellers, buying agents, systems integrators (SIs) and value-added retailers (VARs), and the Japanese version of superstores (like Laox). The end-user community is getting much more knowledgeable. In many ways, the channel here today is very much like the US three or four years ago. So we expect that channel competition will heat up, and the less efficient players will have to find something else to do.

We think, since the small and medium-size business segments are the fastest growing segments, that outside the Tokyo and Kansai areas smaller dealers will pop up to support that business community. We believe that the direct model is ideal to support small and medium-size businesses, and take advantage of our product's leading-edge prices and build-to-order capability. Our time-to-market advantage, due to an inventory-less model, enables us to get new technology and cost reductions faster than other industry players.

Your prices are also pretty good.

Medica: We see the consumer segment getting even more competitive. In the consumer segments around the world, it's extremely difficult to make money. Where you typically make money in the consumer segment is with the more experienced users who are buying up, buying more fully configured machines because they know what they need. Typically, the more experienced users don't call as often for customer support, so on average they are a much more profitable customer set. The more educated the user, the better for Dell and the other direct players.

Do you have a short-term goal?

Medica: Our goal in Japan is to continue to grow by at least 2.5 times in our "served" market. We're not interested in the low-end consumer market, or in the retail market. We'll let the other players have that; our business model is not well suited to play there. Our target "served" markets are commercial, enterprise, and business customers, as well as experienced individual users.

Dell on a global volume basis sells approximately 90% to corporations and 10% to consumers; our business here in Japan is very similar in that regard.

In the past year, here in Japan, we've been focusing predominantly on the OptiPlex desktop family and the Latitude notebook family with our served customer segments. In the coming year, we're going to be broadening our product lineup in desktops, we will be launching servers, and we'll continue to update the Latitude notebook line.

I recall that Dell cut its retail channels about a year ago to concentrate on the corporate market. I assume that move was successful?

Medica: Yes, we did exit retail/consumer distribution in 1996. What we've done is establish relationships with the VARs and SIs to support advanced installations. The way that we are working with them is very consistent with our model.

Do you think the Japanese market will continue to expand as it has in the past 18 months?

Medica: The growth relative to the past 18 months is dependent upon segment. What I've also found in my year here is that there is a significant seasonality to the market. For our business in the past two years, at least, there seems to be a significant increase, anywhere from 25% to 30%, in overall activity in the market from Q4 to Q1. Then there is a slight dip in the second quarter, of roughly 5%....

We believe that the first quarter in 1997 is going to be a strong quarter here in Japan overall, for a couple of reasons. One, the consumption tax rate will rise, so that will certainly be a catalyst to support strong industry-wide sales in Q1 for end-of-fiscal-year purchasing. We've also had the release of Windows NT 4.0, and the MMX microprocessor announcement. I find it interesting that a number of the major players have not announced their MMX machines, and Dell has.

Who are the price leaders in the Japanese PC market?

Medica: It appears that Gateway and Dell have been sustaining a price leadership position here in Japan. Over the past 4 to 6 months, we have been extremely aggressive in passing along our component cost savings to the market. Just in the last 60 days, though, we've seen NEC and Fujitsu taking a much more aggressive posture in regards to pricing. So the market is heating up, and it seems that NEC and Fujitsu are taking a defensive position so as not to lose market share.

You did some TV advertising late last year. What were the results, and will you be doing that again?

Medica: We don't have the figures yet, but initially the results look very, very favorable. This TV ad campaign was our very first nationwide - cable and public broadcast. The feedback I've received has all been very positive. We were even able to place the ad during an extra inning game in the Japan [Baseball] Series - that was a major coup, as viewership was sky-high. All the anecdotal evidence from the TV campaign has been very positive.

The actual message has been received very favorably, not only by customers and media types, but also prospective employees. In Japan, there appears to be a significance in whom you work for: prestige and the pride factor. What do you tell mom and dad when they spent all this money to send you through school, and you end up at this "little" company from America that they've never heard of? The TV exposure really is helping.

Our new headquarters facility is also part of the effort in making a very visible and prominent investment. The TV campaign, this facility, and the broad exposure that we are engaging with the media - telling our corporate success story, explaining the advantages of direct sales - is keeping our visibility and awareness very high.

What about the TV campaign's effect on sales?

Medica: We continue to grow faster than the local market. Our overall activity, and inquiries, are increasing. Also, many of the customers who previously bought our products have been extremely pleased, and account for repeat purchases. Since our major media campaign, they can tell their boss "See, this Dell is a great company." And the latest Nikkei Computer customer satisfaction index ranks us number one. What these, and our other initiatives, are doing is essentially ratifying IT decision-makers' decisions to do business with Dell here in Japan. We believe that collectively this will help us gain a lot of momentum as we move forward this year.

How has the entry of other foreign companies, like Gateway 2000 or Micron, into the market affected Dell?

Medica: If you look at the combined market share of all the "foreign" direct players, it's obviously going to be fairly small. And when you take a look at the segmentation, of how these different companies are addressing the market, all are offering different propositions. Gateway is very focused on the consumer; Dell is much more focused on the business segment.

It makes good press to talk about the local direct player competition. Is there competition? Sure. Are we breaking each other's backs over it? No way. It's healthy competition, and the PC user wins in the end. Each of us has our own business strategies, goals, and objectives. And that's what competition is all about.

In your direct sales model, are you using the World Wide Web yet?

Medica: We're very excited about the Internet and the Web. We don't have a channel conflict issue, whereas some of our competitors do.

Right now, we have a homepage here in Japan, but Internet commerce has not been a priority so far. In the US, some 10% to 15% of our transaction business is from the Internet. It is serving us very, very well. So the opportunity for us to leverage all of that work and training is there, and we will do that later this year. We see the Internet as a big opportunity.

Regarding government procurement, the Japanese government has had a pretty dismal record buying foreign products. Are you selling to the Japanese government, and if so, in which areas?

Medica: It is always a dangerous thing to disclose customers to your competitors, so I won't name names. But yes, we do have three Japanese government entities within the top 10 of our client base. We are doing business with a lot of big-name Japanese companies as well, and American multinationals.

While we do sell to government agencies, what we find is that government bids, as they are more open in nature, are cutthroat in terms of competitors. You run into NEC, Fujitsu, Toshiba, and everyone else. And for the larger bids - wow, the discounts are huge. In bids for a thousand units or more, 50% discounts are not unheard of. So, we mainly use those types of bid opportunities to get some market intelligence: as a gauge for the market, and to get a better understanding of who is really getting aggressive, and what products they are pushing, and why.

Which Japanese PC company will be the one to watch this year?

Medica: Fujitsu. We'll be watching Fujitsu's lead and see how they fare this year in this competitive market. There are also so many macroeconomic factors going on: currency exchange rate fluctuations, GDP growth, the consumption tax hike.... Knowing how aggressive Fujitsu has been - and because we run into them in so many companies - they're the company I believe will set the tone for the competitive environment in Japan.

What other companies bear watching?

Medica: It will be interesting to see how Apple does this year. I'm sure they were very disappointed with their results for last quarter. It appears that both their revenue and their unit sales were down from the previous quarter, and that's typically the biggest quarter of the year. Then, with the NeXT acquisition, it looks like another major operating system transition, following on the PowerPC. If I were a developer, I'd be asking myself some hard questions, whether I can afford to hang on. How does Apple keep the developer community embracing the Macintosh platform?

Finally, what do you think will be hot in Japan's PC industry in 1997?

Medica: Desktops, notebooks, and servers are all going to grow dramatically, and I think NT 4.0 will make big commercial inroads this year. In that regard, it will be very interesting to see what happens in the Win95/Win97 transition - where everything equals out between consumer and commercial, and the like.

I think DVD will probably get a lot of play. And large-screen notebooks will see a breakthrough in capacity in the second half of the year, as second-generation fabs come online. In notebooks, it will be interesting to see where built-in telephony goes, and how is multimedia really going to be utilized. So many notebooks incorporate multimedia features, but I have yet to have anyone come in and give me a multimedia presentation on a notebook.