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Read Haier: Taking a Chinese Company Global in 2011 case in your course pack.Haier is an example of innovation by an emerging market company. Please read the case, Haier – taking a Chinese company global in 2011. Then, use the readings, presentations, and your analysis of the case to write a two page brief that answers the questions below. You are restricted to a 2 page (1½ -spaced) response. Use 12 point Times Roman font size with one inch margins all around. Do not do any additional research on the company. Confine your analysis and to your reading of the case and the articles assigned.Why was Haier so successful in China? What were their market/competitive advantages?How did Haier achieve each of these market/competitive advantages?Note: You will find it useful to review the readings from Week 3 that pertain to emerging markets before analyzing this case.
Submit your assignment to the Turnitin dropbox located in the assignments area.
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REV: MAY 15, 2012
TARUN KHANNA
KRISHNA G. PALEPU
PHILLIP ANDREWS
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.”
________________________________________________________________________________________________________________
Professors Krishna G. Palepu and Tarun Khanna and Senior Researcher Ingrid Vargas, Global Research Group, prepared the original version of
this case, “Haier: Taking a Chinese Company Global,” HBS No. 706-401. This version was prepared by Professors Tarun Khanna and Krishna
Palepu and Research Associate Phillip Andrews, Global Research Group, with the assistance of HBS-APRC Senior Researcher Nancy Hua Dai.
HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by Karun Kapoor ([email protected]). Copying or posting is an infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
712-408
Haier: Taking a Chinese Company Global in 2011
Haier operated 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
2
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Haier: Taking a Chinese Company Global in 2011
712-408
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 freemarket 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
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712-408
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
4
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[email protected] or 800-988-0886 for additional copies.
Haier: Taking a Chinese Company Global in 2011
712-408
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 …
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