Second-Tier China Market Powers Up IT Device Sales

TAIPEI ( TheStreet) -- The Chinese dream for people with a real pile might be a flat on the 30th floor of a tower overlooking the colorfully lit riverfront in Shanghai. But hundreds of millions in the country's vast second-tier cities and provinces are sleeping comfortably with new electronic devices. That's where your portfolio comes in.

According to a Nov. 1 report from market research firm IDC, the middle third of China in terms of wealth will spend 13.6% more next year than this year on consumer electronics, more than the richest regions. The same segment would also lead the nation next year in buying smartphones, PCs and printers.

IDC is talking about places such as Tianjin, a 13 million-population city half an hour by train from Beijing, the province of Anhui just outside greater Shanghai and the western industrial boom megalopolis of Chongqing.

"We recommend that IT companies invest more in developing the markets in these provinces to strive for a competitive lead," IDC's Beijing research manager Xiao Hongliang says in a statement from the Massachusetts-based firm.

But a China cynic like me might be sitting in front of his Lenovo Tianyi Y300 laptop right now thinking, "hello, what's new?"

China is getting wealthier all the time, and the government has said consumer spending is top priority between now and 2015 per the current five-year plan for economic development.

It's actually simple. Second-tier China is growing. It's the teenager of Chinese consumption. Many people there haven't made their brand preferences clear yet, Xiao argues. The more mature markets of Beijing, Shanghai and Guangzhou, in contrast, are better penetrated and easier to predict.

But in five years the middle-tier market will mature because of growing incomes, the IDC analyst expects. Whichever IT brands march on Anhui, Chongqing and Tianjin, among other places, are in for a revenue boost if consumers like their stuff.

Smartphones should top the priority list, says Taipei-based principal analyst Tracy Tsai with the market research firm Gartner. She describes that tool as "a personal companion device for not only phone use but also for content consumption."

Next, in order of popularity, are mobile PCs, media tablets and desktop PCs, she says. Mobile PCs, presumably laptops, are selling because their multiple functions can be shared within a family, Tsai adds.

Their relatively large screens make them more attractive than tablets for hours of videos and Internet surfing. Ultrabooks, which are lightweight, thin PCs with strong processors and long battery life, are just beginning to make an impression in mid-tier Chinese markets, she says.

"The overall purpose is to improve the life quality, education and entertainment," Tsai says, suggesting that companies keen on the middle-China market boost their brand recognition and customer service.

An on-the-move local favorite is Beijing-based, Hong Kong-listed Lenovo (0992.HK). Lenovo had a 13% market share across China as of August, putting it just slightly behind market leader Hewlett-Packard ( HPQ). This year, Lenovo shares reached their second highest prices since 2007.

Lenovo already owns the venerable IBM's ( IBM) old PC division. As a Chinese brand, its devices are easy to find and with plenty of after-sales support. My laptop benefited liberally from that support, a reason it still works nine years after I bought it.

Asustek Computer (2357.TW) is also moving fast into China. The Taipei-based, Taipei-listed manufacturer's laptop can reach China, if not made there already, faster than U.S. rivals. While unit prices are hard to undercut it's another big deal for middle-tier Chinese buyers. Its CFO said in August he expected the company to grow its China market share to 14%. Asustek share prices have climbed steadily this year so far after going nowhere in 2011.

Lenovo and Asustek are also pushing media tablets to rival the pricier but more iconic iPad and Android-based smartphones to deepen a dent in iPhone sales.

Fairer prices could raise either firm's market share if the devices survive dinner-table product reviews. Middle class buyers in China usually decide what to buy by asking friends what brands they use and then choose either that -- or one almost identical to it on the surface -- as soon as they find a price that works.

Xiao argues that IT product prices won't matter, as Chinese already tend to pay a lot for home appliances, seeing their quality as a long-term investment.

But what other than price would explain Apple's ( AAPL) second-quarter market share decline in China, to 10%? The seller of those expensive icons remains a status symbol in China but one that's often out of budgetary reach. Apple share prices have fallen since mid-September on supply issues (unrelated to China) concerning its iPhone 5.

Hewlett-Packard will be mindful of its brand, service and prices as it tries to keep a lead. According to the state-run China Daily newspaper, HP expects China to help it reach $7 billion in global profits next year. HP's chief American rival Dell ( DELL) said two years ago it would spend $250 billion on production, procurement and sales in China by 2020.

Xiao picks Lenovo as the likely second-tier market leader. But any company mentioned here stands to increase sales in middle-tier China, offsetting post-financial crisis consumer demand problems in the West. Gains in sales would keep share prices afloat for old-guard tech firms and send emerging ones much higher.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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