Haier case study questions

AMBA 660 Case Study - Haier’s North America Expansion - Page 1 of 18

AMBA 660 Case Study

Haier’s North America Expansion

Mohamed Ezz, MD, DM (UMUC)

Collegiate Professor, Business and Management Department

University of Maryland University College

Haier Group

www.haier.com

Reuters: “Haier Group said it would buy General Electric Co.'s appliance business for $5.4 billion,

the Chinese company's latest attempt to boost its presence in the lucrative United States

market.

Haier, which made an abortive attempt in 2008 to buy the business, has a negligible presence in

the U.S. white goods market, dominated by Whirlpool Corp, Sweden's Electrolux AB and GE.

The news comes weeks after GE walked away from a deal to sell the business to Electrolux for

$3.3 billion, following months of opposition from U.S. antitrust regulators.

The deal with Haier is unlikely to draw intense antitrust scrutiny, according to some antitrust

experts, but may get a hard look from the Committee on Foreign Investment in the United

States (CFIUS)” (Ajmera, 2016, para 1-4)

Chinese Companies Going Global

China is rising as a globally influential economic and political power. China has achieved an

average growth rate of almost 10% over the past 20 years, making it one of the world’s largest

economies and trading powers. This rapid economic development has enhanced China’s

international competitiveness. Chinese blue chip companies have realized the limitations of

their local market, and worked on becoming global players. Many of these companies have

quietly started their own international expansion; examples include Haier, HiSense, ad Gree.

And while the Chinese government encourages the global expansion of Chinese companies, it

has not yet developed policies and frameworks to govern such expansion. As a result, most

Chinese international expansion has been an exercise based on trial and error. The Chinese

http://www.haier.com/

AMBA 660 Case Study - Haier’s North America Expansion - Page 2 of 18

government has taken what it considers to be a “practical and flexible” stance towards the

companies’ international initiatives (Liu & Lee, 2002).

Haier Overview

Haier is the world’s largest and fastest-growing household appliances manufacturers, and is one

of the largest non-state-owned Chinese companies. Haier has a global turnover of more than

$ 32.3 billion, and commands around 10% of the global white goods market. Haier may

perhaps, may be considered the world’s most pioneering large company when it comes to how

it manages, operates and organizes its activities. Haier was also described as one of the most

innovative companies by Fortune and FastCompany magazines (Crainer, 2015)

Haier Group (Haier) is a privately-owned company that manufactures and markets electronic

products and household appliances. Haier offers its products under the brand names Haier,

Leader, Fisher, Casarte, Goodaymart, AQUA and Paykel. The company operates in Asia, Africa,

Australia, the Americas, Europe, and the Middle East. Haier has different business lines: White

goods, and personal and digital devices, real estate, home appliances, integrated kitchen

cabinets, and bio-medical products. Haier's white goods line includes refrigerators, washing

machines, water heaters, air conditioners, and kitchen electric appliances for both consumers

and commercial customers. The personal devices line includes home appliances, mobile

phones, and computers. In China, Haier manufactures large-screen televisions, mid-sized

computer screens, as well as small screens for mobile phones. Haier's home appliances line

includes personal care products, as well as over 200 kitchen appliances such as induction

cookers, vacuum cleaners, microwave ovens, electric pressure cookers, water dispensers, and

garment steamers (MarketLine, 2015).

Haier Electronics Company (Haier Electronics)

While Haier Group’s stock is not publicly traded for it is a private company, its Hong Kong based

subsidiary Haier Electronics Company is a public corporation. Haier Electronics is traded on the

Hong Kong Stock Exchange (Stock code: 01169). Haier Electronics is primarily engaged in R&D,

manufacturing and sale of appliances such as water heaters and washing machines under the

Haier brand. The company was included in the MSCI Global Standard Index (MSCI China Index)

in 2011, in recognition of its performance as a leading company in “the white goods

manufacturing and integrated channel service industry by the investment community” (Haier

Electronics, 2012, para. 1).

AMBA 660 Case Study - Haier’s North America Expansion - Page 3 of 18

Haier’s International Expansion

Path of Haier’s international expansion (Liu & Lee, 2002, p. 702)

Path of Japanese companies’ international expansion (Liu & Lee, 2002, p. 702)

Haier’s internationalization strategy has been very successful so far (Crainer, 2015). Haier’s

international expansion (investment) in terms of the sequence strategy has resembled that

used by Japanese companies, which pursued two types of global market expansion (see the two

Figures above). Also, initially, Haier’s internationalization focused on developing countries in

Southeast Asia in order to build volume and gain international exposure. Indonesia was Haier’s

first international joint-venture in 1996. However, a major difference between Haier and

Japanese companies which followed the Type I path is that the Japanese concentrated on high-

tech industries such as semiconductors and computers, which were developed in Japan, while

Haier focused on its traditional products such as home appliances, and tried to

develop/enhance its technology in the U.S. market (Liu & Lee, 2002).

Haier’s Early Exports (1986-2000)

Year 1986 1993 1994 1995 1996 1997 1998 1999 2000

USD 300 K 1.8 M 1.84 M 4.2 M 5.0 M 5.64 M 7.57 M 1.38 B 2.8 B Source: Du (2003)

AMBA 660 Case Study - Haier’s North America Expansion - Page 4 of 18

Haier’s Early FDI (1996 – 2001)

Year Location Products

1996 Indonesia Refrigerators

1996 Philippines Refrigerators, A/C

1998 Malaysia Refrigerators, A/C

1999 Iran A/C

1999 USA Refrigerators

2000 Bangladesh Refrigerators, A/C

2000 Vietnam Refrigerators

2001 Pakistan Washer

2001 Italy Refrigerators Source: Liu and Lee (2002, p. 702)

Haier’s success is based on five foundations (Crainer, 2015, pp. 27-29):

1. Change, and change again

2. Small self-managed teams.

3. Customers first

4. Creating a marketplace of ideas

5. Borrowing and adapting

Haier’s international strategic objective (3 X 1/3) was to manufacture and sell one third of its

total production in China, manufacture one third of its total production in China, but export it,

and manufacture and sell the remaining one third outside China. The company realized that it

had to go abroad to develop products design, production, and marketing networks, especially in

the U.S., in order to build and enhance its brand internationally. Haier also pursued a product-

focused international market entry strategy, in which it focused on marketing of a single

product. Once this product picked-up and became successful, Haier followed-up with other

products, capitalizing on the now successful brand name (Liu & Lee, 2002).

Haier localized human resources, culture, and capital in an effort to enhance its brand globally.

Haier’s sales department was located in New York, and the entire sales team, with the

exception of the CFO was American. Haier also strategically established R&D centers in

Germany and the U.S. to develop, acquire, and transfer needed technologies (Liu & Lee, 2002).

AMBA 660 Case Study - Haier’s North America Expansion - Page 5 of 18

However, in pursuing its international strategy, Haier was faced with constraints such as (Liu &

Lee, 2002):

1. Limited resources.

2. Limited R&D capabilities for core technologies

3. Unfavorable international brand recognition

4. Negative country of origin effect

5. Lack of international management/market entry experience

Haier: TIMELINE (Bloomberg, 2016, (Crainer, 2015; Hoovers, 2016; MarketLine; 2015; Reuters,

2016)

Over the years, Haier expanded both locally in China, as well as globally with improvement in

quality and a wider product range.

- Founded in 1984, the Haier Group (Haier) was established in 1991, in Qingdao, through

the merger of Qingdao General Refrigerator Factory and Qingdao Air Conditioner

General Factory.

- In 1993, the Haier Refrigerator Company was listed on the Shanghai Stock Exchange.

- Also, in 1993, Haier started exporting refrigerators and other products to the Middle

East.

- In 1994, Haier started exporting its products to the US, initially OEM (original equipment

manufacturer) products, and later on under its own brand.

- In 1995, Haier launched its first top-loading washing machine and microwave oven.

- Also, in 1995, Haier acquired Qingdao Red Star Appliance Company.

- In 1997, Haier established a local assembly plant in Malaysia; the Malaysia Haier

Industry (Asia) Co.

- Also, in 1997, Haier started producing dishwashers and color televisions.

- In 1998, Haier created Qingdao Lejia Electric Appliance, and branded its products as

Leader.

- In 1999, Haier established America Refrigerator Corporation in South Carolina.

- Also, in 1999, Haier founded its first overseas industrial complex, Haier (America)

Industrial Complex in the United States.

- In 2000, Haier founded Haier-CCT Holdings in Hong Kong and Qingdao, a joint-venture

with CCT Telecom Holdings. The joint-venture started producing mobile phones in

2001.

- In 2001, Haier established its second overseas factory in Pakistan.

- Also, 2001 Haier acquired the Italian refrigerator company Meneghetti Equipment.

AMBA 660 Case Study - Haier’s North America Expansion - Page 6 of 18

- In 2002, Haier launched its products in Australia and New Zealand markets.

- Also, in 2002 Haier established trading companies in Thailand and Malaysia, and

founded the Sanyo-Haier Company with the Japanese company Sanyo.

- In 2003, Haier launched its Benfeng slim mobile phones in China.

- In 2004, Haier launched its home computers in the France, established its Haier Middle

East Industrial Complex in Jordan, and founded Haier Electronics Middle East Company

in Dubai.

- Also, in 2004, Haier teamed-up with the with the Fujitsu Hitachi Plasma Display joint

venture to develop and sell plasma TVs.

- In 2005, Haier entered into a joint-venture with India's Scope Group creating Haier

Telecom (India) in an effort aimed at becoming a market leader in cell phones in India.

- In 2006, Haier launched a non-detergent powder washing machine in Malaysia.

- In 2007, Haier created a joint-venture with Qingdao Dong Ao Group to build the five-star

Haier Intercontinental Hotel in Qingdao.

- In 2007, Haier started selling refrigerators in France.

- In 2008, Haier founded a production facility in Thailand.

- In 2009, Haier acquired a 20% stake in New Zealand's Fisher & Paykel Appliances.

- In 2009, Haier supplied 70,000 desktop computers to schools in Macedonia.

- In 2010, Haier created Qingdao Haier Optronics Co in China (a joint-venture with AU

Optronics Corp.) for the production of TFT-LCD TV panels.

- In 2011, Haier New York Life Insurance, started business in Nanjing.

- In 2012, Haier enhanced its global brand with the acquisition of the Sanyo home

appliance business from Panasonic for $ 130 million, which helped extend Haier’s

operations in Japan, Malaysia, Philippines, Indonesia, and Vietnam, where it developed

and manufactured refrigerators and washing machines. Haier turned Sanyo’s loss-

making business around within the year.

- Also, in 2012, Haier increased its stake in New Zealand's Fisher & Paykel Appliances to a

controlling 92.8%.

- In 2013, Haier created a new joint venture with Fagor, a Spanish appliance

manufacturer.

- Also, in 2013, Haier formed a partnership with Alibaba Group for the creation of a

system for the delivery and installation of home appliances.

- In April 2015, Haier entered into a joint-venture with Alibaba to launch their second

generation customizable modularized television.

- In 2016, Haier bought GE appliances for $ 5.4 billion, creating a solid foothold for the

company in North America.

- Also, in 2016, Haier forged a long-term strategic partnership with GE that focuses on hi-

tech manufacturing in areas such as Internet manufacturing and health care.

AMBA 660 Case Study - Haier’s North America Expansion - Page 7 of 18

Haier America

Haier entered the U.S. market in 1994 through exports, and by marketing refrigerators only -

mainly compact models. After it successfully secured a foothold in the market, Haier followed

with their washing machine line, which required less promotion (Liu & Lee, 2002).

Haier initially sold its household products through Wal-Mart; however; it took them a year

before they could secure a meeting with Walmart to discuss their products. While Haier

manufactured one out of every three refrigerators sold in China, it meant little to U.S.

consumers who were wary of Haier’s quality, and felt more comfortable buying better known

local brands (Chang, 2016).

To command higher profits, Haier realized that it had to sell its products through major U.S.

retailers such as Lowe’s and Sears. Haier began the production of higher-end appliances in the

U.S., as it would have been too expensive to ship them from China. Eventually, the company

started exporting those higher-end products to China targeting affluent customers there.

Around this time, Haier developed a refrigerator with a fold-out table that targeted American

university students who live in cramped dormitories. These are some examples of Haier’s

adaptability and flexibility in coping with market forces, and the new challenges of globalization

(Duysters, Jacob, Lemmens, & Jintian, 2009).

In 1999, Haier invested $30 million in establishing a marketing center in New York, a design

center in Boston, and a manufacturing facility in South Carolina; this was the largest Chinese FDI

in the U.S. to that date (Liu & Lee, 2002). Haier’s Industrial Park in Camden, SC was the first

Chinese production facility established in the U.S. (Business News, 2015).

In 2015, Haier America announced that it will expand its Kershaw County, SC refrigerator

factory, which should help support the company’s continued growth, and will enable it to

provide modern whole-home solutions in the United States. Haier America will invest an

additional $72 million into its existing $40-million facility; which is projected to create an

additional 410 jobs in South Carolina in the next five years. Construction is expected to be

finished in 2018. In January 2016, Haier acquired GE Appliances - the second largest

manufacturer of major household appliances in the U.S., for $ 5.4 billion. Haier’s offer was 60%

more than the Swedish firm Electrolux’s $3.3 billion offer. The Electrolux deal was scrapped due

to regulatory worries that the acquisition would create an entity with a very high market share

in cooking appliances (Chang, 2016).

AMBA 660 Case Study - Haier’s North America Expansion - Page 8 of 18

U.S. Household Appliance Industry (Ibis World, 2015)

- Key economic drivers

 Housing starts

 Price of household appliances

 Per capita disposable income

 Price of steel

 Price of plastic materials and resin

- Demand industries

 Home Builders

 TV & Appliance Wholesaling

 Apartment & Condominium Construction

 Commercial Building Construction

 Consumer Electronics Stores

- Key success factors

 Establishment of brand names

 Market research and understanding

 Development of new products

 Control of distribution arrangements

 Economies of scale

 Optimum capacity utilization

Haier: U.S. Main U.S. Competition (Global Figures)

2015 Key Figures Haier GE Appliances Whirlpool Electrolux

Annual Sales $32.10B* $ 6.30B $ 20.89B $14.71B

Employees 70,000 12,000 97,000 60,038

Market Cap Private GE Subsidiary $ 11.34B $13.91B * 2014 figure

Sources: GE Appliances (2016), Haier (2016), Hoover (2016), Statista (2016)

AMBA 660 Case Study - Haier’s North America Expansion - Page 9 of 18

U.S 2015 Market Performance

Company Haier Whirlpool1 Electrolux2 GE3 LG

Market Share 1.1% 37.8% 20.6% 13% 5.1%

Revenue $ 254 M $ 6,819 M $ 3,714 M $ 2,336 M $ 911 M

Op. Income Private $ 368 M $ 78 M $ 151 M $ 17 M

1. Includes Maytag, Kitchenaid, Magic Chef, Amana, Henn-Air, Admiral, and Inglis

2. Includes Electrolux, AEG-Electrolux, Eureka, and Frigidaire

3. Includes GE Monogram, GE Café, GE Hotpoint, and Ge Profile

Source: Google Finance (2016), Hoovers (2015) & Ibis World (2015)

U.S. Market Share

The U.S. Household Appliances industry has a high level of concentration. The top four industry

players accounted for around 81.8% of revenue in 2015. Whirlpool dominates the market with

a 37.8% share of all industry revenue. The company's dominance is derived from its wide

product range, competitive pricing, and acquisition of competitors. In 2010, the top four

companies claimed around 90.7% of revenue. After the recession, several companies left the

industry, which allowed the big players to gain market share. As market conditions improved,

the industry continued the consolidation trend as smaller manufacturers moved manufacturing

abroad to low cost countries such as Mexico and China, or exited the market. However, market

concentration has declined in the past five year due to low cost imports from China. This has

increased China’s share of the U.S. appliances market in 2015 to around 32.9% (Ibis World,

2015).