Haier Growth

1
Haier Growth

• Strategy Management in the Asian Corporation
• Week 8

2
The man who made fridges cool

• Haier founded 1984
• When Zhang Ruimin took control of loss-making
  refrigerator enterprise QGRF
• Incorporated as group company 1991 when market
  leader in China
• Sales increased 73 pa 1984-2002
• Sales of 9.7 billion in 2003
• Has 30 of US market in small fridges
• 50 market for wine coolers
• 10 Europes air-conditioner market
• 4th largest white goods manufacturer after
  Whirlpool/Electrolux/Bosch-Siemens

3
Revenue of selected appliance manufacturers
(mySAP case study)
4
Leading name?

• Haier is most high profile Chinese company
• Promoting global brand
• Strategic internationalisation from 1986

5
Haier overall strategy

• Uppsala model
• Low-high commitment modes of operation
• Enter markets with successively greater psychic
  distance
• no regular export activities
• export via agents
• establish overseas sales subsidiary
• overseas production
• Each in a logically sequential step
• Provides technology/knowledge for incremental
  building

6
Classic internationalisation

• Exported to Germany under license
• Direct export (1992) to Indonesia
• JV Indonesia 1996
• Philippines Malaysia 1997
• ?
• Production facility
• JV Yugoslavia 1997
• Greenfield in US 2000 (staffed with Philippines
  trained managers)
• Merger Italy 2001 entry to EU avoiding trade
  barriers
• Classic Uppsala model
• Switch to Greenfield around time of WTO entry
• Foreign competition making home market less
  profitable
• Competition key in internationalisation drive

7
Exporting strategy

• 1 Defender
• licensing agreement (84-91) brought in imported
  production technology
• building strong brand name
• implementing production techniques
• globalisation pressure weak
• 2 Contender
• entered developed economies (1992) to obtain
  prestige/establish brand
• 3 Extender
• post 1992 moved easily into other developed
  markets
• 4 Dodger strategy in domestic market
• transferring back internationally competitive
  products

8
FDI strategy

• 1 Defender
• customised to home market
• began acquisition of small local companies
• 2 Extender
• began overseas operations 1996
• increased psychic distance
• used competitiveness developed in domestic market
• extending initially to similar markets reduces
  risk
• 3 Contender
• 1999 ? Greenfield developments
• adaptive applied local design/local
  products/local sales methods
• 4 - Dodger strategy in domestic market
• did not compete directly
• formal technological alliances with competitors
  (Whirlpool/GE)

9
Basis of strategy

• Strategies based on
• Building global brand
• Following competition
• Exchanging threat
• Following customers
• Shaping the competition

10
Does the light go out when the fridge door shuts?

• Plans or processes?
• Chinese firms have an unmanageably complex
  structure
• Meyer Lu (2002) Managing Indefinite
  Boundaries argue
• Chinese firms are a web of relationships
• Such webs are hard to control because it is not
  clear where one firm ends and another begins
• Is it therefore possible to have an organised
  strategy of development?
• Chen (2004) suggests
• Most of Haiers innovation is incremental and
  carefully guided
• Driver is streamlining sales processes between
  user supplier
• Haier generates technological innovation by
  seizing business opportunity and heavily
  segmenting its markets.

11
Emphasis on process

• Supply chain case study on Haier highlights
• From 1998 globalisation based on appropriate
  partnering strategies on case-by-case basis
• Providing personalised products to meet each
  customers needs
• Implemented JIT
• Shifted manufacturing operations from MTS
  (make-to-stock) to MTO (make-to-order)
• Introduced lean production processes
• Demand-oriented operations
• But in large scale markets (like US)
• Haier owns and manages full scale operations
  encompassing design, manufacturing and
  distribution

12
E-business

• Key role of internal processes stressed by Li
  Chang (2004)studied e-business strategy of Haier
• While commending vision in this respect
• Note domestic strategy ill-timed due to
  insufficient infrastructure
• Positives
• Working capital requirements dropped from 36 days
  in 2000 to 10 days in 2002
• Inventory dropped by 74
• Warehouse space utilisation improved 100
• Working capital in inventory dropped 67

13
Dodgy business

• Negatives
• Made several wrong choices in e-business strategy
  content
• Controversial to focus so much on joining Global
  Top 500 Club as its strategic intent and
• Achieving revenue volume as its strategic target
• Haier might have expanded too far beyond the
  scope of its core competency and managerial
  control
• Failed to differentiate core business from
  non-core business
• Is Haiers strategy misdirected?
• Is pursuit of prestige and sales volume causing
  companys fit between strategy and capabilities
  to dislocate?

14
The Economists view (March 2004)

• In domestic overseas markets
• diversification is driven by opportunism and
  desperation not good strategy
• Profits are not increasing despite sales growth
• Quotes Zhang Ruimin
• After China joined the World Trade Organisation
  every multinational set up in China. Margins are
  low here. If we don't go outside, we cannot
  survive
• Outside China, Haier has so far concentrated on
  niches--mini-fridges (to which it adds a handy
  fold-down flap for a laptop) and wine coolers.
  But to continue to grow globally it will have to
  compete with the likes of Whirlpool in their main
  markets. Yet Haier lacks such firm's RD, their
  design skills--it employs just ten researchers in
  America--their distribution or their service
  networks.

15
The Economists view (March 2004)

• Nor is Haier being careful to keep costs low. Mr
  Zhang insists that Haier must produce outside
  China to be responsive to customers. Yet, at a
  stroke, that deprives Haier of its greatest
  advantage China's vast pool of low-cost labour.
• Meanwhile, Haier's attempt to reward
  creativity--allowing every engineer the freedom
  to design and build his own products--has worked
  too well, leaving it with a bewildering 96
  categories of goods in 15,100 specifications,
  including a fridge that pickles Korean kimchee
  cabbage and a washing machine that also cleans
  sweet potatoes. Most of these variants add more
  to production costs and complexity than they will
  ever add to sales.
• Worse, the group has moved beyond white goods
  into computers, mobile phones (where sales have
  badly disappointed), and even interior design and
  pharmaceuticals. All with unlimited potential,
  insists Mr Zhang. "This is a globalised era. No
  single industry can survive. There is a great
  future in these markets."

16
Pattern?

• Technology development
• Uppsala model of internationalisation
• Founded on domestic competition
• Illogical
• unrelated product diversification
• over-engineering product
• abandonment of domestic industrial base (
  associated cost benefits)

17
Is this typical Asian strategy?

• Commonalities
• Institutional emphasis
• Shared characteristics of emerging economies
• lack of established product/finance/labour
  markets
• lack of sufficient laws regulations
• inconsistent enforcement of contracts
• unrelated diversification may help to generate
  institutional support
• Explains doing it all oneself

18
Is this typical Asian strategy?

• Agency theory
• owners and managers have divergent interests
• Chinese investors dont have skill to guide
  investment
• institutionally have little power (who owns
  company?!)
• asymmetry of information

19
Resource explanation

• Prahalad Hamel (1990)
• Core competencies harmonised and coordinated
  aggregate of various production skills and
  multitude of technologies in diversified firm
  sharing resources and developed technology and
  skills between diversified firms
• Needs uniform resource support
• Close linkages
• Ability to identify develop core competencies
• This pre-supposes
• Consistent allocation of access to resources

20
Different situation

• In emerging economy as markets are inconsistent
• Broader scope (unrelated diversification) may
  overcome
• institutional behaviour uncertainty
• internally competitive markets
• Put another way
• In advanced economies
• institutional quality
• consistency in resource access
• mature markets
• permit development of corporate competitiveness
  promotion through related diversification
• These conditions do not apply in emerging markets
• This must affect corporate strategy

21
Li Wong (2003)
22
Add in social antecedent dimension

• Keister (2004) studied firm borrowing in China
  1980-89
• In west as companies become more profitable they
  borrow less
• In China as companies become more profitable they
  borrow more
• Consider retained earnings state assets
• So undertake external debt in preference
• Other companies copied strategies of successful
• As firm grows needs to access more capital
• Therefore drive to internationalise may be more
  resource seeking than result of domestic
  competition

23
Im sorry, I just cant help it!

• Di Benedetto Song (2003) analyse Chinese firms
  from perspective of Miles Snows typology of
  strategic types
• Prospectors
• Analysers
• Defenders
• Reactors
• Suggest that in Chinese environment firms fit
  capabilities to promote strategic type (not vice
  versa)
• Zhangs comments suggest Prospector
• Capabilities all aimed at first mover advantage
  aggressive exploitation of markets
• In an emerging market context