Haier: Taking a Chinese Company Global

A r n a b | A n k u r | S o h a m | S u d i p | S h r i k a n t

Group 2

Agenda

Haier – Company Background

Advantages in China & International Expansion

Question 1 : Success drivers in domestic market

Haier – Competitive Advantage ( Porter’s diamond)

Dawar & Frost’s survival strategy : Positioning of Haier ( Export and FDI)

Question 2: Globalization Philosophy and Consequences

Haier: Company Background

• Started in 1984 at Qingdao as a refrigerator manufacturer

• 800 employees• Collective enterprise – ultimate authority

with municipal government• License Agreement with Liebherr• Imported AC & freezer production lines

from Denmark and Sanyo• JV with Japan’s Mitsubishi & Italy’s

Merloni• 1992 – Renamed Haier Group• 2004 – China’s largest home appliance

maker • CEO – Zhang Ruimin• 2nd largest global refrigerator

manufacturer • 3rd largest company in global white goods

revenue• 30% market share in china – White goods• Growing presence in Black Goods sector

Growth & Diversification

• 1992 – excessive debt due to acquisition of land and subsequent construction at Quingdao

• 43.7% of its refrigerator division - IPO at Shanghai Stock Exchange

• Acquisitions continued throughout 1990s – 15 companies till 1997

• Acquired mostly companies with bad management, introduced own management and quality control

Operational Restructuring

• Early 1990s – exported appliance as OEM

• 7 product divisions• 1998 - 4 development

divisions• Capital Flow

(Finance)• Commerce Flow

(Sales)• Material Flow

(Logistics)• Overseas (Global

Operations)• 1998 – China market

share more than 30%, RMB 16.8bn

National Competitors

• 1996 – 20 major domestic competitors (refrigerators)

• Only 3 had annual sales of more than 1 million units

• Guangdon Kelon – Biggest Competitor• Offered full line of

appliances• Multibrand strategy

for China• Targetted China’s

Rural market

Foreign Entrants

• WTO pressure – Chinese economy opened in 2001

• Siemens, Electrolux, Samsung, LG, Sony and Whirlpool

• Foreign Multinationals rapidly growing • 2001 - 26% China

Refrigerator sales• 2002 - 31% % China

Refrigerator sales• 2001 - 31% China

Washing Machine sales

• 2002 - 38% % China Washing Machine sales

Haier: Company Background

International Expansion

1994 – JV with Mitsubishi – setup China’s largest AC plant 1995 – became

first Chinese company to engage in FDI in Indonesia

Began expansion strategy in 1997 1997 –

Launched “Blue line” brand refrigerators in Germany

1998 overseas sales - $62 million (3% of Group sales)

International StrategyInternational Divisions

• Focus on difficult task first

• Begin with niche products

• Staff with locals

• Haier America• Haier Europe• Haier India

Advantage In China

• Retail Channels Before 2000 – State owned

departmental stores 2004 – Domestic chain GOME

accounted for 30% sales 100 outlets in China’s 22 largest

cities• Reputed Brand known for its creativity• Market responsiveness

Modified Dish Washer Tiny Washing Machine

• Service Computerized Information System

• Distribution 1999 : Haier Logistics –

Independently operated company Reduced Inventory levels Reduced delivery times

Success drivers

• Build quality, Reliability• Blind test

• Better than German brand Liebherr

Quality commitment

• Branded, not just OEM products• Unlike most competitors

• Higher priced but better products

Branding

• Best after-sales service• Chu Xiaoming’s case• House calls, Warranty coverage, Temporary replacement

Customer-centric

Success drivers continued

Diversified

• Full line of appliances lesser risk

• Seven product segments• Growth

despite price wars

Innovative

• Potato washer, Happy summers, Detergent-less wonder etc.

Responsive

• Assess needs Identify demand Satisfy it

Supply chain

• JIT system Customer focus, Lesser costs

• Group-wide logistics Cross-product distribution• When

transferring a fridge, can transfer a microwave too

Success drivers continued•Fla

tter hierarchy

•Set up company-wide divisions•I

ndependent profit centers

Organization structure

•Observe Imitate Develop

•TT/JV with Liebherr, Sanyo, Mitsubishi, Merloni

Technology transfer

•Market leader in all their segments•W

ield market power

Market position

•Cover entire China•T

ough for competitors (esp. foreign multinationals) to imitate

Greater reach

Determining competitive advantage in China

• Manufacturing hub• Competitive suppliers• Electronic industry• Close working relations

• Cheap labor• Infrastructure investment• Government influence• Opening economy

• Decreasing demand• High GDP growth• Picky consumers• Diverse preferences

• Market leader• Differentiation• Diversification• Multinationals• Local competitors Firm

strategy, structure

and rivalry

Demand conditions

Supporting and

related industries

Factor conditions

DodgerFocuses on a locally

oriented link in the value chain, enters a joint

venture or sells out to a multinational

ContenderFocuses on upgrading

capabilities and resources to match multinationals

globally , often keeping to niche segment

DefenderFocuses on leveraging

local assets where multinationals are

weak

ExtenderFocuses on expanding to similar markets like the home base, using

competencies developed at home

Dawar & Frost’s Survival Strategy Positioning for Emerging Market Companies

Pres

sure

to g

loba

lize

in th

e in

dust

ry

Competitive Assets

Customized to home market Transferable abroad

High

Low

*http://hbswk.hbs.edu/archive/501.html#figure

Defender

Contender

Extender

Dodger

(1987-1991) TQC& national brand(1984-86) Technology-learning

1992- Direct exporting to developed markets to build international brands

After 1992- Competing with international competitive assets

After 1992- Competing with international competitive assets

Customized to Home market

Transferable abroad

Pres

sure

to g

loba

lize

High

Low

Competitive Assets HighLow

Haier’s Positioning Strategy for Exporting

Defender

Contender

Extender

Dodger

(1987-1991) TQC& national brand(1984-86) Technology-learning

1999-2001 – FDI in Developed markets

1998-2001 – International brand and international alliances

1991-1998 – Diversification1991-1999 - FDI in LDCs

Customized to Home market

Transferable abroad

Pres

sure

to g

loba

lize

High

Low

Competitive Assets HighLow

Haier’s Positioning Strategy for FDI

Competing in developed markets with top players would improve the competency of various functions of the company.

Understanding both the developed and developing markets and coming up with products that suit these markets

Established brand name in developed markets would create a good reputation for the brand which will help it in emerging markets.

Success in US would draw attention of retailers like Wal-Mart, Best Buy

Developed markets have well established infrastructure and distribution networks which make Haier could leverage to get a hold in the market

Haier Established relationship based distribution networks which invariably helped it over the long run

Customers in developed economy are more quality conscious than price. This would suit Haier as this would push it to meet higher quality standards and at the same time they can sell their product at a premium.

BENEFITS

Benefits of going to developed market

Difficult for a new player to create a market position for

itself among top players.

Difficult to meet quality and safety standards of

developed economy on all product lines. Cost of

production will go up as well.

Cost of building new establishment, labour,

employment, marketing the product etc. goes up in

developed market.

Culture difference is bigger between china and US than with other Southeast Asian

nations.

Not easy to take on with bigger competitors on their strong hold.

Not easy to woo the big retailers and wholesalers in developed markets to carry the products of an unknown brand.

Risks Involved Are

Globalization Philosophy

• 1/3 made and sold at home• 1/3 made at home and sold abroad• 1/3 made and sold abroad

First difficult then easy

Three Internationalizations

• Internationalization of management system – build up employee loyalty• Internationalization of service – build up customer loyalty• Internationalization of brand – build up international competence

Without domestic market, business is rootless, without international market, business is weak

Three 1/3rds

Set up 18 design centers worldwide to consolidate resources from developed countries

Globalization of design

Set up 10 industrial parks and 22 plants overseas enabling prompt action to satisfy local user needs for quality

Globalization of manufacture

5,000 overseas retail outlets and over 10,000 service centers all over the world. Best practices exchanged

Globalization of marketing

Globalization Philosophy

Consequences :Three Third Strategy

Domestic Sales

Domestic Sales Growin

g at diminis

hing rate

•Saturation of the urban market ( Haier stronghold)

•National overcapacity estimated at 30% in appliance market

•Growth Potential at Rural area where saturation level below 10%

•Kelon and other competitors also have strong focus on rural market

19981999

20002001

20022003

20040.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%

57.89%48.88%

48.09%

14.68%9.91%

16.79%

Domestic Sales Growth

DomesticSales Growth

Consequences :Three Third Strategy

Increasing

export

•Prospect of reaping global economies of scale

•Low labour cost in producing white goods in China

•Export in European market such as Germany where they are marked under the Haier brand name

Export from China

1998 1999 2000 2001 2002 2003 20040

200

400

600

800

1000

1200

62138

280

424 444532

1000

Export From China in US$ Million

Export From China

Consequences :Three Third StrategyOverseas Made and Sold

Increasing

sales of

Overseas

Manufactured

products

•Started from Niche products then introduce full range of products

•Some of the successful niche products Compact refrigerators , Wine cellar, Mini-fridge

•2% market share of full size refrigerators in US in 2002

•10% market share of European air conditioner market

Product Market Share

Compact refrigerator

26%

Wine cellar 50%

Air conditioner 17%2002 2003 2004

0

200

400

600

800

1000

1200

400500

1000

Overseas Made& Sold in million USD

Overseas Made& Sold

Three Third Strategy: Success or Failure?

Sluggish domestic growth rate compensated by international sales

Sales from exports and overseas production grew from 3% of total revenue in 1998 to 17% in 2004

70% of Haier’s overseas sales came from developed markets

Year Growthover previous year in exports

Growth over previous year in overseas made & sold

2003 19.82% 25%

2004 87.97% 100%

Total in 2004

$1000 m $1000 m

19981999

20002001

20022003

200475

80

85

90

95

100

105

97 95.8 94.3 94.290.3 89.3

83.4

3 4.2 5.7 5.8

5.1 5.5

8.3

4.6 5.28.3

Overseas made & soldExport from ChinaDomestic Sales

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