(Solved) Haier: Taking a Chinese Company Global in 2011 Starting in 1984 with a defunct refrigerator factory in Qingdao, a port city in China's Shandong...

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Haier: Taking a Chinese Company Global in 2011
Starting in 1984 with a defunct refrigerator factory in Qingdao, a port city in China’s Shandong
province, founder and CEO Zhang Ruimin built Haier Group (Haier)a into China’s largest home
appliance (white goods) maker before launching operations overseas in the 1990s. Haier
developed a formal global expansion strategy beginning in 1997, when Zhang announced his
“three thirds” goal of having Haier revenue come equally from goods produced and sold in
China, goods produced in China and sold overseas, and goods produced and sold overseas. This
announcement came amid three decades of booming economic growth in China that began with
agricultural reforms in 1978. The reform program then extended to the creation of special
economic zones for manufacturing and trade, the rise of small collective businesses, and the
privatization of state-owned industry in the 1980s. The reforms of the 1990s included tax and
currency restructuring and policies to facilitate foreign enterprise, free trade, and the growth of
equity markets.1
From 1980 to 2010, China’s real gross domestic product (GDP) grew at an average annual rate of
nearly 10%, lifting hundreds of millions of people out of extreme poverty and creating an urban
middle class.2 By 2010, the Chinese economy was the world’s second largest, measured by GDP
at purchasing power parity (PPP), and analysts expected it to exceed the size of the U.S.
economy within decades.3 While per capita disposable income was substantial in 2010, however,
some geographic regions in China were still relatively poor on a per capita basis. (See Exhibits
1a and 1b for economic, demographic, and currency data on China.) Most urban households
already owned white goods, but in rural China, penetration rates for appliances such as
refrigerators still stood at 58.2 units per 100 households, offering room for market growth. China
had been the world’s leading white-goods manufacturer since 2007 and, in 2010, was home to
49% of global capacity.4
In 2011, Haier summarized group performance with three numbers: 1, 8, and 28. The company
had been the No. 1 white-goods manufacturer in China since 2001 and had just been named the
leading refrigerator manufacturer worldwide by Euromonitor.5 (See Exhibit 2 for major
consumer appliances market share in China.) A 75% increase in Haier’s 2010 profits was 8 times
its 9% increase in revenues. (Exhibits 3a and 3b show Haier’s financial performance.) And 28
was the rank of Haier Electronics Group, a Haier subsidiary, on BusinessWeek’s 2010 list of the
most innovative firms.6
a “Haier,” derived from the Chinese word for “sea,” was pronounced “high–R” and Qingdao was
pronounced “ching-dow.” In Chinese, given names follow the family name. The family name
Zhang was pronounced something like “jong,” rhyming with the English word “long.”
______________________________________________________________________________
__________________________________ Haieroperated 240 subsidiaries and had established 61 trading
companies (19 abroad), 24 manufacturing plants (all abroad), 10
research and design centers (8 abroad), and 21 industrial parks (4
abroad).7 (See Exhibit 4 for an illustration of Haier’s worldwide
operations.)
As Haier approached the end of its third decade of operations, Zhang
was aiming at even bigger targets for 2011 and beyond: deeper
market penetration, both in rural China and abroad, to be achieved by
increasing market share and adding product categories. Zhang also
hoped to enter new countries and to see Haier laundry machines and
air conditioners reach the same leading global position that its
refrigerators had reached. “The key,” Zhang said, “is whether Chinese
enterprises can be both the dominant industry rule maker and the
industry leader.” Zhang needed to maintain Haier’s industry leadership
at home as well. This challenge required him to decide which lessons
from Haier’s international operations to apply at home, and which
lessons from its domestic operations to apply internationally. Emergence and Growth in China, 1984–19938 In 1984, Zhang, vice general manager of the household appliance
division of Qingdao’s municipal government, was convinced of China’s
latent demand for refrigerators by the lines of customers willing to pay
cash for second-rate refrigerators as they came off the production line
at the ailing Qingdao General Refrigerator Factory. The municipal
government wanted to appoint Zhang as director of the nearly
bankrupt company, which was already forced to borrow from
neighboring villages to meet payroll. Reluctantly, Zhang accepted the
challenge, thereby launching Qingdao Haier.
Haier thus began as a township and village enterprise (TVE), whose
800 workers collectively owned its assets and shared any profits that
remained after the payment of local and national taxes and
appropriate reinvestment in the company. TVEs emerged in China
during the 1980s, initially on an experimental basis before private
enterprise emerged in an organized way. In addition to creating local
economic vitality, the success of agricultural reforms enacted by Deng
Xiaoping and his reformist allies after 1978 engendered increases in
productivity, which resulted in the release of rural laborers. TVEs
served as alternative sources of employment for these workers who sought new work. TVEs differed from state-owned enterprises, which
operated at the national and provincial level, in that the municipal
governments under whose purview TVEs operated did not own or have
any claim—other than taxes—on a collective enterprise’s assets or
profits. Municipal governments could, however, influence senior
staffing and major business decisions. Poor performance, labor
disputes, or mismanagement of funds were all grounds for dismissal of
senior managers by the local authorities. Because markets were not
yet well developed in China, particularly during the early 1980s,
municipal governments could also help local TVEs by influencing,
directly or indirectly, the allocation of key resources such as bank
credit, machinery, import licenses, and operating inputs.
In 1984, high-quality output was rare among China’s 300 refrigerator
manufacturers, and Zhang believed that Chinese consumers would be
willing to pay more for higher-quality products and reliable service.
Inspired by the workmanship of products he saw on a 1984 trip to
Germany, Zhang signed a technology licensing agreement with
German refrigerator maker Liebherr.9 Later, Haier imported freezer and
air-conditioner production lines from Derby of Denmark and Sanyo of
Japan. Joint ventures (JVs) with Japan’s Mitsubishi and Italy’s Merloni
brought Haier more foreign technology and designs. “First we observe
and digest,” Zhang explained. “Then we imitate. In the end, we
understand it well enough to design it independently.”10
One of Zhang’s biggest early hurdles was getting workers to
understand that Haier’s commitment to quality was substantially
different from that of other Chinese companies. To make his point,
Zhang once pulled 76 refrigerators off the line, some for minor flaws
such as scratches, and ordered staff to smash them to bits. “That got
their attention,” laughed Zhang. “They finally understood I wasn’t
going to sell just anything like my competitors would. It had to be the
best.”11
Haier made a profit of RMB 1 million in its second year, selling
refrigerators in three major Chinese cities. Despite overwhelming
market demand and soaring prices for refrigerators, Haier resisted
ramping up output, focusing instead on quality and brand building. In
1988, Haier won a gold medal for quality in a national refrigerator
competition. In 1989, China’s refrigerator market faced oversupply, but
rather than cut prices as its competitors had, Zhang raised them and discovered that the company could command a 15% premium, even
during a price war.12 By December 1989, revenue had reached RMB
410 million, from RMB 3.48 million five years earlier. 13
The Chinese economy experienced a slowdown after the April 15, 1989
death of Hu Yaobang, a former leader of the Chinese Communist Party
who supported reforms. On the evening before his funeral, 100,000
Chinese citizens, primarily students and intellectuals, began six weeks
of protests to encourage continued economic reform. The international
community disapproved of the Chinese government‘s handling of the
situation and responded with condemnation; the World Bank and the
Asian Development Bank suspended foreign loans to China, and
commitments of foreign direct investment (FDI) were cancelled. Some
within the Chinese government attempted to curtail free- market
reforms and reinstitute administrative economic controls. These
efforts, however, were met with resistance from provincial
governments, and China‘s economic growth continued.
In 1990, Haier set up a computerized service center in Qingdao that
allowed it to keep track of tens of thousands of customers. The
investment soon paid off, as customers throughout China, accustomed
to little or no after-sales service, began to recognize Haier as a new
breed of company. Stories of satisfied customers, such as that of taxi
driver Chu Xiaoming, were repeated throughout China. Chu called
Haier’s customer service hotline when his 10-year-old Haier
refrigerator broke down, not expecting to get much help for an
appliance that old. To his surprise, a serviceman showed up on his
doorstep the very next day, took the broken fridge back to the factory,
lent Chu another one for the interim, and returned two weeks later with
the old refrigerator repaired.14
Haier continued to grow into the early 1990s along with China’s
economy. Aided by continuing market-oriented economic reforms that
aimed to create a “socialist market economy,” China’s GDP had grown
at an annual rate of 9.5% from 1980 to 1990. 15 By 1991, Haier was
China’s leading refrigerator manufacturer. The country still offered
plenty of room for growth, and Haier managers wanted to ensure
market leadership. Zhang’s long-time lieutenant, Ms. Yang Mianmian
(named Haier Group president in 1993), explained, “At that time,
demand outstripped supply, and we didn’t have a large-scale
operation. So we were focused on China’s market. We didn’t think about building our brand in the international market yet.” A Haier
marketing executive added, “Our target is to become a first-class
brand. We need to have a fairly large scale in order to achieve this. If
this brand is not of large scale, it will not be successful.”
Market leadership in refrigerators and a growing brand reputation led
Zhang to look for further opportunities. “Now we could let our
reputation precede our new products,” said Zhang. “It was time to
diversify.”16 Haier found two candidates: the Qingdao Air Conditioner
Factory and the Qingdao General Freezer Factory, both stumbling under
poor management. Haier took on the debt and employees of each firm.
By introducing a new type of air conditioner at the former firm and its
3 712­408 Haier: Taking a Chinese Company Global in 2011 higher expectations for worker discipline at the latter, Haier
transformed a deficit of RMB 15 million in these new divisions into
profits within a year.
Renamed Haier Group in 1992, the company acquired 500 acres of
Qingdao land for a new industrial park to house its corporate
headquarters and the bulk of its factories and subsidiaries. The land
cost RMB 80 million and construction costs were estimated to exceed
RMB 1 billion, while Haier’s 1992 profits were just RMB 51 million.
For financing, Haier was counting on promised bank loans of RMB 1.6
billion, but within a month of the land purchase, the Chinese central
government tightened credit nationally in an effort to halt real estate
speculation.17 Finding no other option, Haier turned to China’s nascent
stock market, listing 43.7% of its Qingdao Haier refrigerator division on
the Shanghai Stock Exchange in November 1993. The IPO of A shares
(limited to investors from mainland China) raised RMB 369 million. “It
was the first time Haier had done such a risky thing,” recalled Zhang.
“If we had not been successful with our IPO, Haier would have
disappeared.”18 Haier Electronics Group Co., a subsidiary of Haier
Group that manufactured and sold washing machines and water
heaters, was later listed on the Hong Kong Stock Exchange in 2005.
Overall, listed entities accounted for 60% of the book value of Haier’s
assets. (See Exhibit 5 for Qingdao Haier financial performance, and
Exhibit 6 for Haier Electronics Group financial performance.) Developing Abroad and Deepening at Home, 1994–2003 The rapid growth of the Chinese economy in the decade after Haier’s
founding stoked inflation in China, which peaked in 1995 at an annual
rate of 17% amid central government efforts to curtail bank lending.
Simultaneously, China’s central government sought to rationalize
state-owned enterprises (SOEs) by pushing spin-offs, mergers, and
closures of SOEs at both the national and provincial levels throughout
the 1990–2004 period. Haier acquired 15 companies—including those
that made washing machines, telecommunications equipment, and
televisions—during the 1990s, sometimes under government pressure
to take over poorly performing SOEs.19 “We buy only those firms which
have markets and good products but bad management,” Zhang said.
“Then we introduce our own management and quality control to turn
them around.”20
Despite the disruption for urban workers, the effort to rationalize SOEs
ultimately eliminated many underperforming assets and operating
inefficiencies, refocusing state ownership on sectors deemed nationally
important. Over the same period, foreign direct investment inflows
grew rapidly in China from $4 billion in 1990 to over $60 billion in
2004,21 helping to spur GDP growth and technology transfer. China
joined the World Trade Organization (WTO) in 2001 and its trade soared
18% that year, with exports outstripping imports. WTO membership
helped boost Chinese entrepreneurialism and the growth of the
country’s urban middle class.22
The number of Chinese refrigerator producers shrank from over 100 in
1989 to 20 producers by the mid-1990s, with the 10 largest accounting
for 80% of the Chinese market, up from 50% four years earlier.
According to a Chinese industry association, refrigerator manufacturers
needed to produce more than 1 million units annually to be
profitable.23 Only three Chinese manufacturers, together accounting for
about 60% of the market, fell into this category by 1996, Haier among
them. Beyond China In the early 1990s, Haier began to venture into overseas markets as a
contract manufacturer for multinational brands, first exporting to the
United Kingdom and Germany and then to France and Italy. Typically, Chinese manufacturers exported products under an original equipment
manufacturer (OEM) client brand, as Haier’s rival, Kelon, had done for
refrigerators carrying the Magic Chef label for sale in the U.S. 24 Haierbrand refrigerators sold particularly well in Germany, where they were
marketed by Liebherr beginning in 1991. When Haier’s refrigerators
beat Liebherr’s in a blind quality test conducted by a German
magazine, Zhang decided it was time for Haier to market its own brand
overseas.
Haier was willing to bear the costs of establishing the firm as an
independent player overseas. As Zhang recalled in 2004, “I predicted
that overseas profit growth will be a little slower than the overall
company’s profit growth. In some mature markets we will make profits,
but in entering new markets we may also at first lose money.”25 Zhang
also saw other benefits of remaining independent: “The objective of
most Chinese enterprises is to export products and earn foreign
currency. This is their only purpose. Our purpose in exporting is to
establish a brand reputation overseas.” 26
In this task, Haier was influenced by the strategies of successful
Japanese and Korean firms such as Sony, Samsung, and LG Electronics.
LG, for example, produced the first Korean refrigerator in the 1950s
before moving into other home appliances and electronics. In the early
1990s, following the makeover of its budget Lucky-Goldstar brand into
the higher-end LG brand, the company began its strategic global
expansion.27
Before 1999, overseas sales, largely to Europe and the U.S., amounted
to just over 3% of total Haier Group sales.28 The creation of Haier’s
Overseas Promotion Division in 1999 signaled the beginning of rapid
growth in international sales through exports and overseas production.
Haier’s overseas sales were organized into five large regional markets:
the Americas, Europe, the Middle East, Southeast Asia, and East Asia.
The largest overseas operations were in the U.S. and Europe while
operations in India, launched in 1999, were poised for rapid growth.
Haier’s international divisions also included JVs on five continents, in
countries including Indonesia, New Zealand, Nigeria, the Philippines,
and Yugoslavia.29 Usually, Haier was the majority shareholder. In some
cases, such as in the Middle East, Haier held a minority share. 30 Haier America Haier entered the U.S. market in 1994, having been approached by Michael Jemal, a partner in a New York-based import
company, Welbilt Appliances. At the time, only three Haier compact
refrigerator models met U.S. energy and safety standards, and Jemal
purchased 150,000 units for U.S. sale. All of these units sold under the
Welbilt name within the year, capturing 10% of the U.S. market for
compact refrigerators.
“When we entered the U.S. market, we found nobody was making
competitive refrigerators for students or for offices. So we offered what
the U.S. manufacturers did not make,” said Overseas Promotion
Division executive Diao Yunfeng of Haier’s typical entry strategy for
developed markets. “Within three years, we had over 30% market
share in compact refrigerators,” he recalled. When rivals appeared,
Haier added new features such as mini-fridges that doubled as
computer desks. “We don’t look to compete with them, because they
are much bigger than we are,” said Jemal. “We believe we have our
separate position in the market and they have theirs. They can step on
us anytime they want because we are so small compared to them in
the U.S.”31 (See Exhibit 7 for manufacturer market share of major
consumer appliances in the U.S.)
Jemal focused on getting Haier products into large chain retailers such
as Home Depot, Best Buy, and Office Depot. Wal-Mart was the most
difficult retailer to connect with. Recalled Jemal, “It took us a whole
year just to get an appointment.” Wal-Mart finally agreed to look at
Haier’s room air conditioners and, after testing different products for
quality and visiting Haier’s manufacturing facilities in Qingdao, placed
an order for 50,000 units. The next year, Wal-Mart doubled its order,
giving Haier credibility with other major chain stores. “After we were
successful in the niche products, then we started to introduce regular
products to the U.S., like the full-size refrigerator freezers, air
conditioners, and washing machines,” said Diao.
In 2001, Haier America moved its New York headquarters into a
landmark building on Broadway and established a $40 million industrial
park and refrigerator factory in South Carolina. “Of course, labor costs
are much higher in the U.S. than in China. They can be 10 times
higher,” said Zhang. “But our strategy in the U.S. market is not to
manufacture cheap products, take them out of the factory, and push
them into the market. We intend to manufacture quality products that we can sell at a premium.”32 In 2002, Haier’s South Carolina factory
had annual production capacity of 400,000 units, and Haier sold
80,000 full-size refrigerator-freezers in the U.S., accounting for 2% of
the market. Sales to Wal-Mart alone in 2002 amounted to 400,000
units and included compact refrigerators, washing machines, and air
conditioners. Even after a planned expansion, Haier’s U.S. factory
could not supply Haier’s 10% target market share, so Haier planned to
supplement its output with exports from China.33 In 2005, Euromonitor
reported that Haier had U.S. market shares of 26% for compact
refrigerators, 50% for wine coolers, and 17% for window air
conditioners.34 Haier Europe In 2000, Haier Europe, headquartered in Varese in
northern Italy, began coordinating sales and marketing of Haier
products in 13 European countries. Product lines included refrigerators,
freezers, washing machines, dishwashers, microwave ovens, and small
appliances, all manufactured in China but designed specifically for the
European market. Haier chose a former sales executive of Italy’s
Merloni, Europe’s third-largest appliance maker, to head European
operations.35
The European appliance market was similar in size and maturity to the
U.S. market, but significant differences in distribution channels and
consumer preferences across countries made it difficult for
manufacturers to establish scale economies. For example, most
Europeans favored front- loading washers, but in France, consumers
preferred top-loaders. Independent appliance retailers dominated in
Germany and Italy, while chain stores were common in France and the
U.K. Few pan- European appliance retailers existed and national and
independent stores often favored domestic manufacturers. Thus,
multinational appliance manufacturers had often found themselves at
a disadvantage to local national players.36
In 2001, Haier invested $8 million to acquire a refrigerator plant in
Padova, Italy from Meneghetti SpA, one of Italy’s largest manufacturers
of built-in appliances made to match kitchen cabinetry. By 2004,
Haier’s European headquarters coordinated logistics through four
distribution centers in Italy, the Netherlands, Spain, and the U.K. to
serve 17 markets. In 2004, revenue generated in Europe accounted for
17% of Haier Group’s total revenue.37 Haier India Haier earmarked India as a potential high-growth market
and invested heavily in building up production, distribution, and sales
capacities there. A 1999 alliance with Indian appliance firm Fedder
Lloyd Corporation to jointly produce and market refrigerators nationally
gave Haier preliminary experience in India. In January 2004, Haier
formally launched a broad range of products in India, initially
manufactured in China and exported to India. Haier had a slower-thanexpected start gaining market share in India and, a few months after
the formal launch, announced a $200 million investment in India over
four years to establish a refrigerator factory and R&D center.
In India, Haier discovered the challenges of working in emerging
markets. Haier’s greatest challenges in India were “the environment,
the economy, and especially the channels,” said Li Pan, Haier brand
manager for overseas markets. “In the U.S., you can easily find the top
10 chain stores. But in India, you cannot find them.” Haier found that
emerging markets required even greater reliance on locals than the
company permitted elsewhere, and it hired a former Whirlpool India
executive to head Haier India. International Strategies Focus on difficult markets first Shunning conventional wisdom among
Chinese firms, Haier opted to enter the “difficult” developed markets
first and, only after proving itself in those, go after the relatively “easy”
emerging markets. Zhang explained the strategy: “Many Chinese
enterprises will first export to Southeast Asia, for instance, which has
competitive markets but where there are no strong, dominant
competitors.”38 Haier also saw developed markets as a way to meet
the highest quality standards. “We chose the developed countries first
because the requirements of both customers and retailers are very
tough and not easy to meet,” said Li.
Haier used its U.S. and European experience to convince emerging
market retailers to carry its products; competing effectively in mature
markets against brands such as GE, Matsushita, and Philips gave Haier
credibility elsewhere. This approach followed Haier’s growth in China:
starting in Beijing and Shanghai and moving into medium-size and
small cities.39 Staff with locals When entering a new market, Li said, “The first stage
relies on local people, who know the market very well. This allows us to
expand very quickly.” Haier began by identifying a local manager with
experience, preferably in a leading white-goods firm, to head the
country operation, hire a local team, and develop sales and distribution
channels. “Our strategy is not just purely export. We want to use local
people and local thinking to satisfy the needs of the customer,” said
Yang. “Compared to other foreign brands, we have an advantage in
that we have gathered experienced people who have worked for top
brands.” Multinationals entering China had a different approach, Yang
noted. “Top foreign companies coming to China tend to use local
Chinese, but local hires often have not worked with maj...

 


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