Villages, townships driving Lenovo's growth
Consumers in China's vast rural markets are expected to provide computer giant Lenovo with steady and higher growth opportunities over the next five years compared with the mainland's major urban markets.
That will lead Lenovo, the world's second-largest supplier of personal computers, to significantly expand its distribution network and marketing in the mainland's so-called tier seven region of more than 1,500 rural villages, a report by Bernstein Research says.
'Rural China represents sizeable unexplored markets with material profitability,' said Bernstein Research senior analyst Alberto Moel, who recently surveyed Lenovo's operations in rural villages.
Bernstein estimates there are about 50 cities in tiers one to three, about 60 in tiers four and five, and more than 500 smaller cities in tier six. It says there are thousands of still undeveloped townships and counties on the mainland.
Lenovo's national sales team has categorised tiers one to three as mature markets, tiers four to six as emerging markets and the rest as townships and villages, Moel said.
'The company's China growth strategy lies in a thoughtful segmentation of local markets,' he said. Lenovo's management, Moel said, has forecast up to 5 per cent growth over the next three to five years in the mainland's mature markets, 15 per cent in its emerging markets and 25 per cent or more in the townships and villages, where the company has enjoyed consistent price premiums and a stronger local presence than its traditional competitors.
The mainland's classification of cities is not consistent, despite efforts by many market analysts to use economic scale and population size as yardsticks. But Beijing, Shanghai, Guangzhou and Shenzhen are the widely-known tier one cities.
According to a 2010 report by InterChina Consulting, the term 'city' in China refers to an administrative division. This typically comprises an urban core and the surrounding rural area, which includes lower-tier cities, towns and villages.
In Jiangsu province, for example, the tier two city of Suzhou has jurisdiction over the tier four cities of Kunshan, Zhangjiagang and Taicang, among others.
Since Lenovo covers only an estimated 10 per cent of villages at present, Moel said expansion of channel distribution and personal computer sales is expected to take place simultaneously for the company in those locations.
He calculated a 158 per cent rise in sales to US$614 million for Lenovo's fiscal year to March from US$387.8 million the previous year.
China accounted for US$2.9 billion, or 39 per cent of Lenovo's US$7.5 billion total revenue in its fiscal fourth quarter to March 31. The firm also seized an industry leading 30 per cent share in personal computer sales in its core market.
'Lenovo's strong performance in China continues to be driven in part by the company's significant presence in emerging and developing cities,' Wong Wai-ming, the company's chief financial officer, said last month.