When Sun Peishu, chief of the Chinese computer maker Langchao Group, said in 2003 that multinationals would make all-round attacks on China's IT market, many people thought Sun was too pessimistic.

Sun made the prediction at the 2003 China CEO and CIO Summit, one of the biggest annual gatherings of Chinese information technology industry executives.

At that time, domestic firm Lenovo was still the biggest computer maker in the country, although IBM took back the number one title in the notebook segment in the second half of that year.

In the cellphone market, domestic makers took more than a half of the share.

At the summit's 2004 session, on November 14, Li Jianhang, vice-president of the third largest domestic computer maker Tsinghua Tongfang, said that 2004 was the most difficult time for the personal computer (PC) sector in the last five years.

This time, however, his feeling was echoed by peers.

Domestic computer makers have surely felt the chill of a slowdown in market growth and a lack of sufficient customer demand.

A cooling autumn

The third quarter is usually a hot season for computer sales, as students purchase computers during the summer vocation in July and August and parents buy computers to their children going to universities in September.

Government departments and enterprises also add purchases of computers for their employees during the period.

However, this year's third quarter was not a golden harvest for computer makers.

According to Beijing-based domestic research house Analysys, the shipment of desktop PCs reached 3.33 million units in the July-September period, growing 14 per cent over the second quarter and 9 per cent year-on-year.

The growth of notebook computer sales, usually a driver for the growth of the whole PC market, also slowed down in the third quarter.

Analysys' statistics indicate the shipment of notebook computers in the third quarter was 637,000 units, rising 34 per cent year-on-year and 11 per cent quarter-on-quarter.

Figures from another domestic industry consulting firm CCID Consulting also showed a similar trend.

According to its report on the third quarter PC market, desktop computer shipments rose to 3.71 million units in the third quarter, with a 25.84 per cent growth year-on-year and 9.55 per cent quarter-on-quarter. More than 544,000 notebook computers were sold during those three months, growing 17.7 per cent over the second quarter, much lower than the previous growth rate of some 40 per cent.

Pressures of domestic firms

While multinational giants such as IBM, Dell and HP mainly focus on high-end enterprise and notebook sectors, local Chinese companies, which are mainly in the low-end segment and rely on prices as a major competition strategy, felt the mounting pressure from a slower growth rate.

"It is just like we planned in the beginning of the year that we would have a full cooker of rice and should eat two bowls of rice, but when we opened the cover, there is only a half cooker of rice there, so I can only eat one bowl of rice," said Li Jianhang with Tsinghua Tongfang.

He explained many players took it for granted that they would maintain similar growth as in previous years, so they purchased more materials and employed more people, but when they saw the real situation, their high expectations were met with harsh reality.

Li said he believed that macro-economic control in some overheated industrial sectors suppressed purchase demands.

Huang Qi, vice-president of CCID Consulting, agreed with Li's point and said the large scale replacement of desktop computers with notebooks did not happen this year, as enterprises concentrated on their core businesses and the procurement of new computers was delayed or cancelled.

Price wars intensified the difficulties computer vendors faced.

China's biggest computer maker Lenovo Group, faced with slow growth of its PC business and lack of breakthroughs in handset manufacturing and IT services, began to sell computers at a price of 2,999 yuan (US$362) in August.

Although Lenovo achieved good growth in low-price computers and sold 16,000 to schools in Northeast China's Liaoning Province, the move dragged more firms into price wars.

"Fights among computer makers further diluted their profits," said Zhang Shiwei, a computer analyst with Analysys.

"The situation for small and medium players was worsened and their shares might be bitten into by first-tier companies."

At the same time, Chinese computer makers also encountered increasing competition from international vendors.

US giants HP and Dell both launched aggressive pricing strategies this year and price gaps between their entry-level products and those of domestic Chinese companies narrowed significantly.

IBM, which is already the biggest notebook vendor in the Chinese market, gained some ground in the commercial desktop PC market with new products and its reputation of quality among high-end users.

Price wars and international competition have been part of the local market for many years, but one unique characteristic this year was lack of technological drives.

Li Jianhang said that as part of the technology industry, PC development is always related to technological advances. Progress brings richer applications and lowers the cost of computers, which finally stimulates consumers' demands.

However, 2004 has been a flat year in terms of technological applications.

The development of the PC industry is suffering the heavy impact of microprocessor giant Intel and software behemoth Microsoft.

While Intel spared no efforts to promote its chips with the Hyper-thread technology and wireless Internet connection function last year, there is no breakthrough technology from the US chip giant this year.

Instead, it announced in October that the plan for a 4 gigahertz chip was cancelled and Intel would stress total performance, rather than only clock speed.

The news was a shock to Chinese computer makers, who had almost worshipped Intel in the past year because of its promotion on clock speed and Pentium 4.

The slow progress of the sales of Windows Media Centre and lack of other powerful PC applications added to the worries of domestic computer makers on technology drives.

Last year, while many computer makers thronged to embrace the Windows Media Centre version and believed that it would become the centre of people's home entertainment, this year there was no such major attraction.

An industrial shift

With fierce competition and lack of significant market drives, the industry needs to make significant changes.

"There are many changes in this market, but the point is the growth of the PC market will decline and nobody can get away with it," said Ye Lei, a Shanghai-based computer analyst with the US market research house Gartner.

He said he believed that only those with a good control of the supply chain and efficiency could win in the game and survive falls in profits and price wars.

The country's number one PC maker Lenovo, which has been trying to overcome the bottleneck in its PC business, may be an example.

The company's stocks on the Hong Kong Stock Exchange were suspended on Monday, as Lenovo said it would make a price-sensitive statement.

The statement is widely believed to be related to its plan to acquire IBM's plant in Shenzhen in South China's Guangdong Province, an 80-20 joint venture between the US giant and the Chinese firm Great Wall Computer Group Corp.

With the plant, Lenovo will increase its capability in design and manufacturing. It will also help it to expand to overseas markets with IBM's reputation.

For Tsinghua Tongfang, closer relations with software developers is the key to future success.

Li Jianhang said he believed computer makers should have closer relations with software partners to develop richer and more useful solutions for customers.

"Before 2000, we offered buyers many choices of software installations, but now, the amount of installed software fell dramatically, even for operation systems," said Li.

"The problem is not that customers do not need software, but software that is valuable to them."

Yang Weiqiang, general manager of TCL Computer, another major domestic player, said entertainment was one characteristic that differentiated his company from other players.

The company released a game computer this year to target games fans.

It will also use the resources of its parent company TCL in consumer electronics and bundle other electronic devices such as digital cameras with computers.