HAIER GROUP – Internationalisation Strategy? What are the main features of Haier’s internationalisation strategy since the early 1990s and how does it differ from the pattern of interna

Case 19 Haier Group: Internationalization Strategy

The transformation of the bankrupt Qingdao General Refrigerator Factory into the Haier Group, one of the world’s biggest and most successful household appliance companies, is an epic tale that symbolized China’s rise to become the world’s domi- nant manufacturing center and a major source of foreign direct investment. In the process, Haier’s CEO, Zhang Ruimin, had become a national hero and internation- ally renowned business leader that Fortune magazine listed among “The World’s 50 Greatest Leaders” for 2014.

Yet, the story of Haier is also atypical of China’s industrial development. By 2015, Haier had achieved a global position that had eluded most other Chinese state-owned enterprises. Within the appliance industry, Haier had established itself as a major global brand, a frontrunner in terms of innovation and product design, and, without the help of large-scale acquisitions, had built a strong presence in the sophisticated and intensely competitive appliance markets of North America, Europe, and Japan. Haier views its development as comprising a sequence of phases each lasting about seven years (Figure 1).

What lessons can other emerging market multinationals learn from Haier’s remark- able achievements and does Haier’s unconventional approach to strategy and man- agement also offer lessons for the leaders of Western multinational corporations?

And what about the future of Haier? Its global presence has been built upon a combination of opportunism, ambition, and determination. As it consolidates its position as a leading multinational corporation, does Haier need a more orderly and integrated approach to global strategy?

Building Leadership in the Home Market

When Zhang Ruimin was appointed general manager of the Qingdao General Refrigerator Factory in 1984, it was a cooperative enterprise with about 800 work- ers operating under the control of the Qingdao city government. Zhang’s early effort concentrated upon collaborating with foreign appliance makers—including Liebherr of Germany, Merloni of Italy, and Mitsubishi and Sanyo of Japan—in order to improve product design and process technology. In 1985, Qingdao Refrigerator formed a joint venture with Liebherr for producing refrigerators for the Chinese

This case was prepared by Robert M. Grant assisted by Ayan Chakraborty. ©2015 Robert M. Grant.

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market. A key challenge was changing employees’ attitudes to product quality. In one—now famous—intervention, Zhang ordered defective refrigerators to be removed from the production line and smashed to pieces.1 The company’s efforts at quality management were also greatly assisted by the decision in 1992 to apply for ISO9001 authentication. Achieving this international quality standard required a total reformulation and upgrading of processes.2

At the heart of Zhang’s efforts to build the Haier brand was emphasis on customer service. Haier’s efforts to build an after-sales service network were helped in 1990 by establishing a computerized service center to keep track of its customers.

Under the leadership of Zhang Ruimin and his close colleague Yang Mianmian, the company developed rapidly. Improved product quality fueled strong demand and, between 1984 and 1989, revenues climbed from 3.5 million to 410 million yuan. In 1992, a new factory complex and head office were built on the outskirts of Qingdao and in the same year the company adopted the name Haier Group. In 1995, its refrig- erator division was listed on the Shanghai Stock Exchange and in 2005 its subsidiary, Haier Electronics Group, was listed on the Hong Kong Stock Exchange.

During the 1990s, Haier acquired 16 other Chinese companies with the result that it became a supplier not only of a broad range of domestic appliances but also tele- visions, telecommunications equipment, and other consumer electronics products.

As a result of Haier’s cultivation of brand image through its emphasis on prod- uct quality and customer service, not only did it become a leading manufacturer of domestic appliances in China but it was also able to sell its products at a price premium to other domestic brands.

Haier’s Management System

Governance Formally, Haier was a collective under the supervision of Qingdao municipal gov- ernment. In practice, the ownership, organizational structure, and governance of the Haier Group were unclear.3 The group’s two public companies—Qingdao Haier

FIGURE 1 Haier Group: Strategy phases, 1984–2015

Source: www.haier.net/en/about_haier/haier_strategy/, accessed July 20, 2015.

Brand Building Strategy

Haier builds presence within the Chinese market though quality and customer service

Diversification Strategy

Haier acquires other Chinese enterprises to expand product range

Internationalization Strategy

Haier enters 19 other national markets and becomes the world’s biggest domestic appliance company in terms of units of output

Networking Strategy

Haier’s networked enterprise strategy embodies: a border-free enterprise, manager- free management, and a scale-free supply chain

Global Brand Strategy

Transformation from a product-driven to a user-driven “on- demand” mode. Globalization uses global resources to create localized mainstream brands.

1984 1991 1998 2005 2012

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CASE 19 HAIER GROUP: INTERNATIONALIZATION STRATEGY 647

Company Ltd listed in Shanghai and Haier Electronics Group Company Ltd listed in Hong Kong—had opaque relationships with one another and with their parent company. The list of directors and senior managers of Qingdao Haier Company made no mention of Mr. Zhang Ruimin. No consolidated financial statements were available for the group. The Haier website gave the group’s revenues as 200 billion yuan in 2014; however, the revenues of the two listed companies totaled 155 billion yuan, implying that another 45 billion yuan were attributable to other business enti- ties within Haier.

Zhang Ruimin Despite its opaque governance structure—or perhaps because of it—power within the Haier Group was concentrated in the hands of Zhang Ruimin. This power derived partly from his formal position as chairman and CEO, partly from his infor- mal authority and reputation as the architect of Haier’s remarkable development, and partly from his political ties. In addition to being the secretary of the Communist Party Committee of the Haier Group, he was also a member of the party’s Central Committee. His political connections gave Haier independence from municipal interference and valuable support from central and provincial government.

Zhang was born in Qingdao in 1949. Despite a lack of formal education, he was an avid reader. His ideas about management developed during his career at Haier, where he began as deputy plant manager at the age of 33. His management philoso- phy combined Chinese traditions from Confucius and Sun Tzu to Mao Zedong and Western ideas he derived from Joseph Schumpeter, Peter Drucker, Jack Welch, and Jim Collins and Jerry Porras (Built to Last).4

Zhang’s management thinking developed in parallel with his strategy for Haier. His early focus was on building Haier’s capabilities in relation to quality manage- ment, customer focus, brand building, and new product development. Gradually, Zhang’s priorities shifted toward fundamentally rethinking Haier’s structure and management systems. For example, customer orientation became the principle of “market chains” around which Haier’s internal relationships were reformulated.

The idea behind “market chains” was that, in the same way that Haier’s funda- mental purpose was to serve its final customers, all interactions within the company could be redefined around supplier–customer relationships:

Every unit, every operation and everyone was linked to a customer and every unit/operation/body was someone else’s customer. In this way everyone within the enterprise, no matter how deeply inside the firm, felt market pressure directly.5

Developments in information and communications technology, especially the internet, greatly influenced Zhang’s thinking about internal organization. Increasingly, he devoted himself to moving Haier from a hierarchy to a decentralized, team- based structure. For example, Haier’s sales organization for China was completely restructured:

We used to have a pyramid-style structure for our sales in China. The people in charge of sales had to manage business at the national, provincial, and city level. After the arrival of the internet age, we realized that under this triangular hierarchi- cal structure, people had a difficult time adapting to the requirements of the times.

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So we reorganized ourselves as an entrepreneurial platform. We flattened every- thing out, taking out all the middle management. We decentralized the structure to one with more than 2,800 counties. Each county organization has seven people or fewer.6

His notion of a platform-based enterprise also embodied the concept of a border- less enterprise:

We are using digital technology to connect everyone … there is no “inside” the company versus “outside” anymore. As a Haier executive, my goal is no longer to be a maker of home appliances, but to be an agent of interaction and network- ing among people who might be anywhere. I want to turn the company into an Internet-based company, a company unrestricted by borders. Whoever is capable, come and work with us … In the long run, there won’t be any company employees to speak of—only the Haier platform. We involve customers in a similar way. In the past, users would hear through advertising which Haier products were good, then they’d go buy those products. Now we bring in users to participate in the whole process of product development.7

Central to Zhang’s approach to management was commitment to innovation, adaptation, and continuous improvement. This was captured in the slogan: “today’s work must be finished today; today’s accomplishment must be better than yester- day’s; and tomorrow’s goal must be higher than today’s.” Increasingly, this meant adopting a totally different conception of what Haier was and what it was trying to achieve. According to an interview with Zhang conducted by Reuters:

The ultimate aim, Zhang says, is for Haier to become a full services company for the wireless age, where customers place orders for tailor-made appliances, and communicate directly with their home appliances via smartphone or controlling device.8

In pursuit of this goal, Haier became the first home appliance maker to partner with Apple on its smart home platform.

Performance Management A feature of the management system Zhang introduced at Haier was commitment to performance enforced through accountability and backed by individual incentives— an approach that was unusual among Chinese companies.

At the heart of this system was “Overall, Every, and Control and Clear”—also known as Haier’s “OEC” principle. According to Haier’s head of human resources, Wang Yingmin: “O stands for Overall; E stands for Everyone, Everything, and Every day; C stands for Control and Clear. OEC means that every employee has to accom- plish the target work every day. The OEC management-control system aims at over- all control of everything that every employee finishes on his or her job every day with a 1% increase over what was done the previous day.”9

OEC became part of a performance management system that began each December with performance targets set by corporate headquarters for every division. Each

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division submits a divisional action program. This becomes the basis for a month-by- month system of performance management where actual performance is compared to the previous month’s performance and targets for the current month. Monthly divisional performance management is disaggregated into daily performance man- agement assessment for every employee. Each day begins with team leaders brief- ing team members and each day ends with each worker completing a self-checking assessment against specific OEC criteria. These assessments are linked to employee compensation through a system of bonuses and penalties.

Innovation and New Product Development Haier’s product development was driven primarily by its responsiveness to customer needs. A Harvard Business School case study reports on how, in response to fre- quent breakdowns of washing machines in rural China, Haier technicians discov- ered that its washing machines were being used to clean sweet potatoes and other vegetables. Haier responded with design changes to its washing machines together with advice to rural customers on their use for cleaning vegetables and peanuts.10

Providing design modifications to meet the preferences of specific customer groups were facilitated through flexible modular design. According to Zhang Ruimin, “Our products are based on modules and sub-systems, and on basic platforms that we can vary. Periodically we will add some new features, but the basic model is there.”11 Simple design modifications included freezers with separate compartments that kept ice cream at a slightly higher temperature to permit ease of serving, and Korean refrigerators with separate compartments for kimchee.

Haier’s commitment to enhancing consumers’ experiences also extended to pro- viding internet connectively for it appliances. In 2014, it launched its “Smart Living” appliances with Broadcom’ embedded wireless connectivity allowing customers to monitor and control their appliances remotely including home appliance con- trols, managing lighting and curtains, multimedia entertainment, and security alarm monitoring.

Building the Networked Enterprise Zhang Ruimin’s ideas about market responsiveness, entrepreneurial initiative, and team-based organization eventually became crystallized in his concept of the net- worked enterprise. Central to the transformation of Haier into a new type of orga- nization was the creation of some 2000 self-managed teams called “ZZJYTs”—an acronym for Zi Zhuu Jing Ying Ti, meaning “autonomous business unit.” Professor Bill Fischer and colleagues described the ZZJYTs as follows:

Each comprises a team of 10 to 20 people—sometimes located in one place, other times virtual—who come from various functional roles and are brought together for a specific mission, and who are given profit and loss responsibil- ity and accountability. They have their own independent accounting systems and complete autonomy in hiring and firing employees, setting internal rules about expenses and determining bonus distribution, and making almost any operational decision that typically would be made by an independent functional organization.

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Haier organizes its ZZJYTs in three tiers. First-tier ZZJYTs have the task of directly facing the market, understanding customer needs, and providing customers with the right products. Second-tier ZZJYTs are responsible for supporting the first-tier ones, providing them with the resources and the guidance they need. Third-tier ZZJYT managers are the business division managers or functional managers who set corporate strategies and direction for the whole group. A typical first-tier ZZJYT is composed of sales, R&D, marketing, and finance people. Everyone, whatever their function, is expected to talk to consumers regularly.12

The transition from hierarchy to self-managed teams is one phase in Haier’s transformation into a network of microenterprises where each team becomes an entrepreneurial business unit responsible for its own success. Within this model, the team members are not necessarily Haier employees. During 2014 and 2015, Haier’s eliminated thousands of jobs then encouraged displaced employees to seek opportunities as self-employed members of micro-enterprises collaborating within the Haier network. According to Zhang Ruimin:

Employees used to obey their superiors and now they create value for users. They must become entrepreneurs and makers. The makers set up micro-enterprises, and the micro-enterprise owners jointly create users and the market. However, micro-enterprise owners are not appointed by the enterprise but elected by mak- ers, and micro-enterprise owners can also select makers. After a period of time, if a micro-enterprise owner is considered incompetent by micro-enterprise members, he/she will be removed from the post, which actually often happens in Haier. More importantly, micro-enterprise owners are not limited to Haier employees but can come from external resources as well. The micro-enterprises plus social resources form an ecosystem to jointly create different markets.13

Internationalization

International Strategies in Domestic Appliances Internationalization in the domestic appliance industry has attracted considerable interest from business school scholars. In an influential article, Harvard professor Ted Levitt argued that the success of Italian appliance manufacturers such as Indesit and Merloni was the result of the economies of scale they were able to exploit through producing large volumes of standardized models for world markets.14 Subsequent research, however, showed not only that scale economies were modest in appliance manufacture but also that the most profitable producers were typically those that differentiated their products and their marketing strategies to meet the preferences of individual national markets.15

By the beginning of the 21st century, the domestic appliance industry was domi- nated by multinational firms whose operations spanned most continents of the world: Electrolux (of Sweden), Whirlpool (of the US), LG and Samsung (of South Korea), and Bosch-Siemens (of Germany). However, there were still major players whose markets were predominantly either national or regional: General Electric and Maytag (of the US); Merloni (of Italy); and Haier, Hisense Kelon, and Wuxi LittleSwan (of

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CASE 19 HAIER GROUP: INTERNATIONALIZATION STRATEGY 651

China). However, during the first decade of the 21st century, several of these national players either internationalized or sold out to multinational players (e.g., Maytag was acquired by Whirlpool and GE’s appliance division was acquired by Electrolux).

Haier’s Initial Internationalization Haier began its internationalization in, what appeared to be, a fairly haphazard fash- ion. Between 1992 and 1997, Haier entered a number of overseas markets:

● In South-East Asia, initially Indonesia, Philippines, and Malaysia, Haier estab- lished joint ventures with local companies to manufacture and sell refrigera- tors and air conditioners.

● In the US, Haier began supplying compact refrigerators to an importer, Welbilt Appliances, initially for sale under a retailer’s brand, subsequently under the Haier brand. Compact refrigerators were followed by wine coolers. Sales were concentrated on large chains—notably Walmart.

● In 1997, Haier began exporting appliances to Germany, the Netherlands, and Italy for sale by importers mainly under the Haier brand name. Haier achieved significant sales in Germany, where Liebherr was its sales agent and distributor.

However, Zhang soon made it clear that Haier’s goal in expanding overseas was not to seek export revenues through exploiting Haier’s low manufacturing costs in China but to build a global brand: “making Haier the most respected brand in the world is the most important goal in the global strategy.”16 While this was partly a matter of national pride—“China should have world famous brands of its own”—it was also about challenging Haier to raise its standards of product development, manufacturing, marketing, and customer service to world-class levels. Yet, building a global brand would be achieved through focusing on local markets: “All success relies on one thing in overseas markets—creating a localized brand name,” noted Mr. Zhang. “We have to make Americans feel that Haier is a localized US brand rather than an imported Chines brand. The same goes for the European market.”17

Haier’s “locally designed, locally made, locally sold” approach involved three stages of development:

● First, seeding—getting its products established in an overseas market and building brand recognition, initially through using local distributors and sales agents.

● Second, rooting—building market share and establishing manufacturing plants in the foreign market.

● Third, harvesting—establishing R & D facilities and conducting a full range of activities within the foreign market.

It also meant a focus on challenging markets. Rather than following conven- tional wisdom and focusing on entering nearby markets which were at a similar (or lower) stage of economic development than China, Haier chose to tackle developed markets with sophisticated consumers—North American, Europe, and Japan. As

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Mr. Zhang remarked: “If one wants to improve one’s chess skills, then one must play with the top players.”18

Success in these markets required hiring experienced local managers to head Haier’s overseas subsidiaries. “We want to use local people and local thinking to sat- isfy the needs of the customer,” explained Yang Mianmian. Haier typically targeted experienced executives who had worked with leading appliance companies to head up its foreign operations. Chinese expatriates were primarily technical staff sent from headquarters.

Haier America Haier America was established at the initiative of Michael Jemal, a partner of Haier’s US distributor, Wellbilt Appliances. Under Jemal’s leadership Haier penetrated niche markets—notably small refrigerators for offices and students’ dorm rooms and wine coolers. In both categories Haier became the market leader, before expanding into window air conditioners and full-size appliances. In 2000, it opened a manufactur- ing plant in South Carolina and in 2001 moved into its New York headquarters on Broadway.

Haier’s US production and marketing focused initially on refrigerators, where Haier positioned itself at similar price points to the market leaders, Whirlpool, GE, and Electrolux (Frigidaire), but sought differentiation advantage through innovative design features targeted at specific customer needs. Thus, Haier’s product develop- ment and marketing of appliances were built around a segmentation of four demo- graphic groups: 18- to 25-year-old dwellers in dorms or small apartments, 22- to 30-year-old apartment dwellers, 28- to 35-year-old first-time homebuyers, and 35- to 55-year-old “step-up” home dwellers.

In 2006, Haier introduced its upmarket range of Italian-designed appliances under the Casarte brand name. The Casarte line of products was subsequently introduced into other markets, including China.

Haier’s US product development capability was enhanced by the creation of an R & D center at its South Carolina industrial park in 2012. In 2013, Haier America became a fully owned subsidiary of Haier Group after minority shareholders were bought out. In 2014, Adrian Micu, formerly head of engineering with Whirlpool, was appointed CEO of Haier America.

Haier Europe In 2000, Haier established a European sales office in Varese in the north of Italy to coordinate its European appliance sales. In the following year, Haier acquired Meneghetti Equipment, which owned a refrigerator plant in Padua and a distribu- tion network.

Over time, Haier repositioned itself from the lower price band to the middle of the market, where it sought to capture market share through aesthetics and design— drawing upon its Italian design center (in Varese) and German R & D center (in Frankfurt). In refrigerators, Haier Europe put a special emphasis on three-door models and novel color options. In 2010, Haier Europe moved its headquarters to Paris and, in 2015, Yannick Fierling, another recruit from Whirlpool, was named CEO of Haier Europe.

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Haier in Asia-Pacific Most of Haier’s market entries into Asian countries were through joint ventures. In India, Haier partnered with Fedder Lloyd Corporation; in Pakistan, with the Ruba Group. The most important collaboration was with Sanyo Electric Company of Japan. The 2002 agreement with Sanyo involved the distribution by Haier of Sanyo products in China, the supply of technology and components from Sanyo to Haier, and the creation of Sanyo Haier to produce and market Haier appliances in Japan.

In 2012, Haier acquired Sanyo’s domestic appliance business from its parent, Panasonic, for $132 million. As explained in a Financial Times case study, transfer- ring Haier’s management system to the newly acquired Sanyo employees was a major challenge given Haier’s emphasis on individual responsibility for performance targets and Sanyo’s traditions of collective responsibility and deference to seniority.19

Later in 2012, Haier acquired New Zealand-based Fisher & Paykel, an upmarket appliance maker specializing in dishwashers, washing machines, and cookers, for $751 million. Fisher & Paykel had plants in New Zealand, Australia, US, Thailand, Mexico and Italy.

Haier’s Future as a Global Company

For all Haier’s remarkable success under Zhang Ruimin’s leadership, the effective- ness of its international strategy is difficult to assess. Clearly, Haier had done a brilliant job in exploiting the greatest opportunity available to the appliance indus- try for the past three decades: the rapid rise in the living standards of Chinese households. By 2015, it had become the world’s biggest supplier of major home appliances with a unit market share of over 9%—ahead of rivals LG, Electrolux, Samsung, and Whirlpool. In terms of domestic appliance revenues, Haier was either third or fourth.

However, the great majority of Haier’s sales was in its home market, w

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