Haier: A Global Chinese Firm Leverages “Distance” 1

Haier: A Global Chinese Firm Leverages “Distance”

Allison Santa Cruz

INT 700 Multinational Business Strategy

Dr. Jen Ekern

Southern New Hampshire University

Haier: A Global Chinese Firm Leverages “Distance” 2

1. Characterize Haier and its industry.

“NO URINATION or defecation in the working area.” That admonition was among 13

rules that managers felt necessary to post on the walls of a shambolic fridge factory in Qingdao

in the early 1980s. After several senior managers failed to turn it around, in 1984 the municipal

government of the Chinese city appointed a young employee, Zhang Ruimin, as the firm’s boss.

The gamble worked. Since then a lousy local firm has turned into the world’s biggest appliance-

maker. Most think of Chinese companies as peddlers of cheap, undifferentiated kit or mere

copycats. In contrast, Haier is recognized globally for reliability and marketing know-how. Mr.

Zhang had spent time in quality-obsessed Germany, where he observed that even manhole covers

were precisely made and numbered. It made a deep impression. Incensed that a fifth of the

products his plant turned out were defective, in 1985 he handed out sledgehammers and joined

employees in smashing 76 faulty fridges in public view. That won him national celebrity and was

the start of the firm’s transformation. Haier became China’s biggest fridge-maker in 1999 in part

by acquiring lots of lossmaking local rivals. Mr. Zhang looked for firms with strong products and

markets but inept leadership “stunned fish”, he calls them, that could be turned around by

superior management. His un-Chinese obsession with quality and branding helped, earning his

products a premium even during periodic price wars. He also emphasized top-flight service, rare

in China, promising that machines would be free if not delivered within 24 hours. The results of

Mr. Zhang’s unconventional strategy have been breathtaking. Haier’s revenues have shot up

fourfold since 2000, topping 160 billion yuan ($26 billion) last year. Pre-tax profits rose more

than six fold over the same period. It was judged the eighth most innovative firm worldwide,

ahead of Amazon among others, in a ranking drawn up last year by the Boston Consulting
Haier: A Global Chinese Firm Leverages “Distance” 3

Group. And now KKR, a private-equity giant, is investing in the firm. It has stumped up $500m

for a 10% stake, if the rumors are correct.

2. Discuss Haier’s entry timing, location selection, and modes of entry in light of the

module’s concepts and vocabulary.

Zhang Ruimin, the chief executive of one of China's largest appliance makers, has a plan

to build a signature, $2,000 refrigerator in America to capture a bigger slice of the lucrative U.S.

market. Mr. Zhang's strategy brought Haier Group closer to its potential customers and avoided

the cost of shipping bulky appliances from China. But since it was introduced last year, the new

high-end refrigerator has been given a cool reception. One of China's biggest consumer brands,

Haier makes more than twice the number of refrigerators in a year made by Whirlpool Corp.

Even though it is the leading seller of compact fridges used in dorm rooms, it is still a mere

pipsqueak in the $40 billion U.S. market, where it has been selling mostly lower-cost appliances

for years. Growth overseas is crucial for Haier because profit margins from the company's core

products in Haier's rigid, top-down management structure fell flat with American workers

accustomed to a less-authoritarian style. By 1999, Haier had become a colossus in China,

probably the single best-known appliance brand in the country. It had a reputation for good

quality, and surveys of recent college graduates consistently ranked Haier as one of China's most

desirable employers. But profit margins were falling, prompting Mr. Zhang to search for growth

abroad. "Haier is at a crossroads" as it attempts to build a dynamic company out of a

bureaucratic, formerly state-owned enterprise, said Teng Bingsheng, a professor at the Beijing-

based Cheung Kong Graduate School of Business. Haier's head of its U.S. division, Michael

Jemal, acknowledged that the economic downturn has hurt business, but said in an email that

U.S. sales have increased year-to-year in all areas. But Haier's U.S. factory in Camden, South
Haier: A Global Chinese Firm Leverages “Distance” 4

Carolina is still running at a loss. Having higher-cost overseas operations to manage has weighed

on profit growth. According to unaudited figures from China's Ministry of Information, Haier's

2006 gross profit was $20.3 million, a 32% drop compared with four years ago.

3. Was Haier able to leverage differences between its home and foreign institutional

environments?

Unlike MNCs, EMNCs have to pursue very different global growth strategies in order to

internationalize and gain a competitive advantage. It is widely known that MNCs are able to

successfully internationalize by utilizing their ownership, locational and internalization

advantages (the OLI model) however these advantages are not readily available to EMNCs as

they tend to lack the resources to enter a new market (Matthews 2002). Peng (2012) suggests that

EMNCs utilize locational advantages and internalize transactions, but typically do not own the

better technological or organizational capabilities to internationalize like MNCs. As

demonstrated by successful EMNCs like Mabe and Haier, in order to gain a competitive

advantage and succeed globally, EMNCs first go through the process of international expansion

as a way of building competitive resources (Bongalia et al. 2007). However, this reversal process

of internationalization (Bongalia et al. 2007) does involve the companies to overcome the

disadvantages of being a late entrant to the industry (Matthews 2002)

4. What are the strategic imperatives for action for Haier to successfully balance its

international expansion with its need to deepen its home country competitiveness?

With the dramatic increase in average Chinese’s living standards and favorable

government policies to improve rural people’s lives, rural China where a growing number of

people longing for more advanced home appliances implies great domestic opportunities for

Haier’s further development. There is also a huge market potential for ―green‖ electrical
Haier: A Global Chinese Firm Leverages “Distance” 5

appliance which is more environment-friendly and energy-efficient. The explosive growth in

household appliances in China is leading to a rapid increase in carbon dioxide output, which

seriously contaminated the air. It is urgent and profitable for China, now being the world’s largest

energy consumer (reported by IEA) and the world's largest refrigerator manufacturer, to exploit

the green market. Moreover, Governments and organizations all around the world are beginning

to advocate and support this trend. For instance, recently US launched a $40 million project

which introduced innovative market incentives designed to encourage Chinese refrigerator

manufacturers to promote green refrigerators and to advocate customers to purchase them.

Considering the market and social environment, it is wise for Haier to develop more green

products to maintain a sustainable development. Moreover, with the advancement of the

economic globalization, there is a growing interdependence between businesses all around the

world. An increasing number of foreign appliance companies enter China which is the world’s

largest and fastest-growing market, and it is also possible for Chinese companies to step into new

foreign markets and have business partners worldwide. Therefore, this economic trend provides

Haier with more opportunities for mergers or joint-development with other business partners to

strengthen itself. It also inspires Haier to conduct innovative reform and strategic transformation

to adapt itself to the changing market.

Haier: A Global Chinese Firm Leverages “Distance” 6

References

Bongalia F, Goldstein A & Matthews JA 2007, „Accelerated internalization by emerging

markets‟ multinationals: The case of the white goods sector,‟ Journal of World Business,

Sydney.

Chan, X. (2011, June). A SWOT Study of the Development Strategy of Haier Group as One of

the Most Successful Chinese Enterprises. Retrieved February 25, 2017, from

http://ijbssnet.com/journals/Vol._2_No._11_[Special_Issue-June_2011]/21.pdf

Fong, Mei, “Chinese Refrigerator Maker Finds U.S. Chill,” Wall Street Journal, March 18, 2008.

Mathews, John A. 2002, „Competitive Advantages of the Latecomer Firm: A Resource-Based

Account of Industrial Catch- Up Strategies,‟ Asia Pacific Journal of Management, 19,

pp. 467–488.

Peng, Mike W. 2012, The Global Strategy of Emerging Multinationals from China,‟Global

Strategy Journal, Dallas.

Qingdao. (2013, October 12). Haier and higher. Retrieved February 25, 2017, from

http://www.economist.com/news/business/21587792-radical-boss-haier-wants-transform-

worlds-biggest-appliance-maker-nimble