Haier’s Global Struggle

The Economist writes about the challenges facing Haier, the leading Chinese white goods company, in its efforts to build a global brand:

Haier’s drive into markets abroad mirrors a push into new markets at home. In both, diversification is driven by opportunism and desperation, not good strategy. Predicting that profits in 2004 will be flat at 2 billion yuan for a third successive year, despite an expected 20-30% rise in sales, Mr Zhang admits that plunging returns in his core white goods business are driving him abroad. After China joined the World Trade Organisation, he says, 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 nichesmini-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 R&D, their design skillsit employs just ten researchers in Americatheir distribution or their service networks. Mr Zhang says his biggest headache is hiring decent managers, since he cannot pay as well as rivals. Haier does not have their established brandsor the money to build one.

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 creativityallowing every engineer the freedom to design and build his own productshas 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.

This attitude is widespread in China. Rather than focusing on a core business or dominating a few markets, as western, Japanese and South Korean managers have slowly learned to do, their Chinese counterparts quit any market where competition is rising, as so many other profitable opportunities beckon. Lack of accountabilitynot even Mr Zhang can say who really owns Haierand cheap loans from state banks encourage this trend. The result is firms that are broad but shallow, thinly-spread and managerially stretched. Sadly for Haier, that is the very opposite of a focused, global brand.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.