Japanese port city where sanyo and panasonic are headquartered

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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 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 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 Haier-brand 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-than- expected 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 major brands before.”

Li believed that, in time, Haier would have to place its own people in key positions overseas to get better market intelligence. “We have to know the information at the point of sale. You have to have your own people who will report from the field,” said Li. Yang preferred to continue sending only temporary technical support teams from China while relying on local partners to operate the business. “We hope to have Haier in each country be the Haier that they created. For example, in the U.S., we hope that it is Americans who build up Haier America,” said Yang. “If Americans can create GE, Whirlpool, and Electrolux, they can create Haier.” Zhang explained Haier’s two-pronged strategy for competing with local brands on their home turf:

Consumers in the U.S. are used to popular brands like GE and Whirlpool, so they’ll wonder why they should choose a brand they’ve never heard of. But large companies are established and slow-moving and we see an opportunity to compete against them in their home markets by being more customer-focused than they are. To win over those consumers, we have two approaches: speed and differentiation.40

Haier paid close attention to consumer needs in overseas markets and made product modifications to meet them. “We send our R&D people to the U.S. to talk directly with our customers or even with the salespeople in chain stores,” said Zhang.41 Haier’s market research resulted in simple innovations such as a freezer with a separate compartment to keep ice cream at a slightly warmer temperature, making it softer and easier to serve. “Consumers like the features we provide,” said Zhang. “Large manufacturers aren’t paying attention to such minor details.”42

Haier’s eight design centers facilitated rapid product development, which allowed ideas from the field to be quickly tested and prototyped. For example, having noted that American customers did not like deep-box freezers because items at the bottom were difficult to reach, Jemal suggested to Zhang a two-level model with a drawer on the bottom. Seventeen hours later, Jemal was presented with a working model of his design.

In 2004, Haier-branded products sold globally through 62 distributors at over 30,000 retail outlets outside of China. About 59,000 sales agents and 12,000 service personnel supported sales operations, and Haier operated 13 overseas factories.43 (See Exhibits 8a and 8b for market share of major consumer appliances globally.) Still, revenues from exports and from goods made and sold overseas each accounted for only 8.3% of total Haier Group revenues for 2004, far below the “three thirds” goal Zhang had set seven years earlier (see Exhibit 3b).

Deepening at Home

Foreign rivals in China Just as Haier had been busy growing overseas during the 1990s, foreign consumer-appliance brands had been entering China, both to take advantage of cheap Chinese labor and to sell into the world’s most populous market. As early as 1994, Whirlpool formed a JV with a Chinese manufacturer to produce refrigerators in a plant near Beijing.44 In 1996, Zhang noted, “The Chinese market has become part of the international appliance marketplace.”45 The impact of China’s 2001 WTO entry added pressure on Haier to solidify its brand globally and maintain a dominant position in the Chinese market. “Before 2001, our competitors were domestic brands,” said Haier vice president Gao Yicheng. “But now, after China’s ascension into the WTO, our competitors are Siemens, Electrolux, Samsung, LG, Matsushita, Sony, GE, and Whirlpool.”

Most multinationals realized that penetrating the Chinese market would not be easy. “Normally, people think it’s a market of 1.2 billion people and that it’s going to explode,” said a Siemens executive. “But in terms of saturation levels, urban areas in China are quite well equipped. The big gap is in the rural areas and smaller towns, where saturation levels are low.”46 (See Exhibit 1a.) Many multinationals were banking on the emergence of a replacement market in the large cities, where they targeted the high-end market. “Setting up a sales and marketing network is a big challenge,” added the Siemens executive. “It is tied closely to local conditions. . . . The key point is to build an effective sales and marketing organization that can also follow changes in distribution.”47

Haier’s domestic rivals also planned to capitalize on the rural Chinese market, where, in 2001, less than 20% of households owned a refrigerator.48 Chinese refrigerator firm Kelon had already begun doing so, selling nearly a million units of a new lower-priced brand in 2002.49 “The future lies in the second-line and third-line markets, which is the rural population in counties and townships,” said Kelon’s CEO.50 While Haier already had a strong presence in the rural markets, the company had not specifically targeted this segment with specially priced products.