Dell in China: the knives are out

Dell in China: the knives are out

As I write this, Dell Computer is trying hard to dodge a bullet. The company stands to lose a customer in mainland China that has provided it with nearly $US10 million in income since 1995. Worse, it risks alienating officials of the Beijing municipal government. That is not an enviable position for a US vendor to have in the fastest-growing PC market in Asia.

Dell is at loggerheads with Scriven Trading, an outfit that serves as the official trading arm in Hong Kong of the powerful Beijing city Government. The two parties are at odds over what to do about a $US2.5 million shipment to Scriven of 4,000 486-based Dell PCs that have experienced extraordinarily high failure rates due to inoperable Quantum hard drives.

Dell and Scriven had been scheduled to meet on February 25 to work toward a resolution; however, the meeting was postponed to February 27 due to events associated with the death of Deng Xiaoping. Immediately after the February 27 encounter, Dell provided me with a one-line statement: "We're meeting and working towards a resolution. Both companies have agreed to that." Neither company would comment beyond that at press time.

Malfunctioning hard drives

In any event, details that are beginning to emerge about the January 1996 transaction which led to the dispute demonstrate that the PC business in China is not for the faint of heart. Judging from the Dell experience, it is characterised by a complex, convoluted set of commercial affiliations that would seem to invite misunderstandings, misconceptions and the kind of acrimony that now defines the relationship between Dell and its high-profile, government-owned mainland customer.

It is when a customer has a problem that the lack of an easily identifiable audit trail backfires on the vendor. In this case the trail was so obscure that Dell and Scriven can't even agree on who sold them the PCs, let alone what constitutes a fair resolution to the problem that eventually arose.

Scriven is adamant that it purchased the PCs through Amdec LLC, a components supplier in San Diego, California. The way the Scriven officials tell it, they were chatting one day with some Amdec folks when the subject of Dell PCs came up. Someone from Amdec mentioned he had heard Dell was ready to sell off the last of its 486-based PCs at some bargain prices, the Scriven officials say, and Amdec ended up as the middleman, or broker, in a deal in which Scriven bought 4,000 of them. Scriven was able to show me order confirmations on Amdec letterhead and signed by Amdec's Tony Chen, who was identified as the "seller".

Nonsense, Dell says. Amdec's role in the transaction was nothing more than that of an "LC agent" - a financial intermediary or "vehicle" whose job it was to facilitate documentary letters of credit and the transfer of funds in US dollars to Dell, says Phil Kelly, vice-president and managing director of Dell's Asia/Pacific group.

"It is common in China for distributors to use either sister companies or LC agents where those people have the ability to convert renminbi into US dollars - because I only use US dollars," Kelly told me. "So far we have 13 authorised distributors in China, and we're taking a look at names that have come across as LC agents and vehicles - we're up to about 45 now." And even Kelly acknowledges that it can all get quite complex.

"I cannot profess to know all of the relationships that exist between Amdec, Scriven, and many of the distributors we have, because I'm only a small piece of the business - I'm the PC business," he said. "I'm sure they all have businesses running in telecommunications, textiles, many other things that go back and forth."

What Kelly does profess to be certain about is that Scriven purchased the 4,000 PCs in question not through Amdec, but through an authorised Dell distributor in China called Fo Shan Molik. Kelly insists that Scriven became aware of the availability of the bargain-priced 486 PCs (which would all be built to order, he stressed) not through Amdec in the United States, but through Fo Shan Molik in China, because it was Fo Shan Molik that had generated the letters of offer and the pro forma invoices. This is where it really starts to get complicated.

Fo Shan Molik's preferred "financial vehicle" in the United States is a Molik "sister" company called Sheridan International, Kelly maintained, adding that at one point officials from Scriven, Amdec and Sheridan had been "entertained" together at Dell's headquarters in Austin, Texas. His point was that Scriven's contact with Sheridan in Austin was part and parcel of a connection between Scriven and Sheridan's "sister" company in China, Fo Shan Molik.

The plot thickens

Nonsense, says Scriven. The Scriven officials insist they had never even heard of Fo Shan Molik until the issue of the malfunctioning hard drives arose, and that they had never heard of Sheridan until the Austin gathering, which was after the contract was signed with Amdec. Moreover, while Kelly insists that Sheridan is an arm of Fo Shan Molik ("I'm not sure if Fo Shan Molik owns any equity in it or not, but clearly we know they're sister companies," he says), Scriven says Fo Shan Molik on two occasions denied that it has any legal affiliation with Sheridan.

Now, when they became aware of the hard-drive problem, the Scriven officials contacted Amdec - a natural course of action given their assertion that they had purchased the PCs through Amdec. According to Kelly, Amdec referred Scriven back to Fo Shan Molik, which, he indicated, was proper.

"When [the hard drive issue] first came up we thought it was clearly an issue between Scriven and Fo Shan Molik," Kelly told me, adding that it was Fo Shan Molik that had originally brought the hard drive problem to Dell's attention (Scriven says it verbally informed Dell's Hong Kong office immediately after it became aware of the problem, and later sent a formal letter to Amdec). Dell's communication with Scriven on the matter was initially limited to Scriven being copied on correspondence between Dell and its distributor, Fo Shan Molik. "We wanted to make sure they [Scriven] were in the loop," Kelly said.

From Scriven's perspective, this was obviously bad form. Dell had gone from entertain-the-client-in-Austin mode to it's-a-distributor-issue mode when a problem arose. By the time Dell had gotten involved to the point where it performed the "due diligence" to determine the root cause of the hard-drive problem, distrust had already set in. It was difficult for the Scriven officials to see how this distributor they had never even heard of could be expected to be of any help.

Indeed, I have seen no indication at all that Fo Shan Molik was really an involved party that would be inclined to take responsibility for addressing such a serious problem.

When I asked Kelly what, if anything, Fo Shan Molik had gained in this transaction, his response was wobbly: "I think that would be only speculation on my part," he said. "There are relationships between Molik and Sheridan and Scriven - how they worked it behind the scenes is kind of between those guys."

Therein lies the crux of the problem that Dell - and almost certainly other foreign PC vendors as well - is facing in China. When there is so much happening "behind the scenes" with their distributors that the vendors are left to speculate about what's really going on between them and their customers, there is far too much room built into the system for finger-pointing and buck-passing when serious after-sales issues arise.

If Dell suffers in China as a result of alienating a high-profile government customer, it won't be because it built a bunch of PCs that were alleged, however unfairly, to have been faulty. It will be because it built a clunky, dangerously ineffective distribution mechanism that, unfortunately for Dell's customers, was just waiting to break down.

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