This paper describes the internationalization of Haier into America. It analyses the entry strategy adopted by the company, the key issues the company had to deal with in its foray into the American market. It discusses the basis and motivation behind the entry into the USA, how the company evaluated the country and dealt with the various expansion issues it encountered using Porter’s five forces competition model. It also discusses the company profile and analyses it based on the SWOT analysis, the key factors that contributed to its success in America and ultimately, the lessons learnt by the said internationalization venture of Haier into America.
The Haier group is the leader in the manufacturing of white goods in China with its headquarters in Qingdao, China. In the 1980s, demand for refrigerators really exceeded supply, there was a boom in the industry. Things changed in the early 1990s, due to the deflation in the Chinese economy, growth rate of Haier refrigerators dropped from 50% in 1998 to about 30% in 1999. When China joined the WTO, there was an influx of foreign home appliance manufacturers into the country. This made competition in the domestic market very stiff due to an industry shakeout. He Chinese home appliance market was growing and there was huge potential for profit due to cheap labor cost. A lot of foreign firms were entering the market and competition became fierce. Manufacturers started competing on price basis. Haier refused to join the band wagon, instead, it decided to diversify its product line beyond refrigerators by adding washing machine and air conditioner to its brand and also source for new market.
Haier’s internationalization into the USA was driven by competition. The company moved into the international market when the domestic market became saturated and less profitable. The main factor that influenced Haier’s decision into entering the American market was partly because it has a large demand for white goods and majorly because it wants to build a strong global brand. USA was the largest and most competitive market for consumer appliances. Haier figured that for it to build a strong global brand, it has to compete with the world’s strongest brands. Haier Group launched its expansion drive from the most difficult to the easiest countries. Zhang believed that once Haier established a strong brand reputation in the developed countries like USA, it will be easier to launch expansion into the developing countries. There was this initial fear of how well Haier was going to fare in the American market due to the general perception of Chinese products being cheap and substandard. The firm dealt with these by using its resources and capabilities to achieve a lower cost structure and a differentiated product, which helped it position itself in the American market. The brand however, thrived and created a niche for itself in the market due to its competitive advantage.
Established in 1920, Haier is the world’s 2nd largest white goods manufacturer and Chinese most valuable brand with a presence in all five continents. Haier had not always been a success story, its history dates back to 1984, when it was a small refrigerator factory on the verge of bankruptcy and could not afford to pay the salary of its meager 600 workers. Over the years, Haier has grown to become a multimillion dollar corporation with over 50 000 employees worldwide, with sale outlets of over 58 800 which accounted for a global turnover of 122 billion RMB (17.5 billion USD) in 2008. It has also established 240 subsidiary companies, 64 trading companies, 29 manufacturing plants, 8 design centers and 16 industrial parks worldwide. In 2008, Haier invested 60 million USD (4% of the total turnover of the group) in Research & Development. Haier has become a global brand and has since diversified from the white home appliance industry (Washing machines, Heaters, microwave & dish washer) to the black home appliance industry (TV, VCRs, Fax machines, phones) and the tan home appliances industry (Computers).
Zhang Ruimin, CEO Haier Group played a major role in the company’s success. Zhang was appointed the new Managing Director of the Qingdao Refrigerator Company in 1984 – a state owned refrigerator manufacturing company, officially renamed as Haier Group in 1992. When Zhang took over the company, neither product quality nor customer satisfaction was the company’s strong point. He started importing technology from Germany’s Liebherr and commenced production of technically sophisticated products. He soon realized that the singular act of introducing the Liebherr’s technology is not enough to impact positively on the company. There was decadence in the entire company culture: nepotism, indifference to quality and ineffectiveness characterized the workers’ attitude. Zhang realized there is need to put in place a new management system and focus on customer needs, product quality, innovation and speed to improve operating efficiency. Customer satisfaction, quality control and discipline became top priority in the company such that defective products are not allowed to be sold to customers. Haier’s culture became “quality before profit”.
Zhang also launched a development strategy which is in four stages. 1984 to 1991 saw the Brand building strategy of the organization. During this period, the quality awareness of the employees was awakened and he made them realize that the essence of the business sustainability and continuity is quality, when he ordered the smashing of 76 defective refrigerators in 1985. It was during this brand building era that the firm gained its strength and became a leading appliance manufacturer by setting high standards. It leveraged on the opportunity of importing technology from German’s Liebherr for its technological advancement. The second stage of his development strategy was the diversification era which took place between 1992 and 1998. Haier decided to leverage on its brand strength and introduced new products into the market. It moved from a one product brand to several products. By the end of 1998, Haier had become a national brand leader and had gathered enough experience in corporate management for its foray into the international market. It identified expansion opportunities and the globalization stage of its development strategy was launched in 1999-2005 to put the brand’s strength to test. Haier’s approach was to build the brand name in developed markets where the competition is very stiff, before expanding to developing markets. This era strengthened the firm with global availability. The global brand strategy was launched in 2006 to manage the Haier brand globally, adapt to global market trend and tackle the threat of globalization.
HAIER IN AMERICA
Haier’s first venture into the USA was in 1994, when it was selling its products to American import companies that are only interested in the low price and least concerned about the brand except Michael Jemal. During his visit, Jemal was challenged to buy 150 000 units of compact refrigerators with a deal of being granted exclusivity and a long term relationship if he made a success of the sale. It seems Haier was ambitious to think it could gain 10% of the market of that particular product without any kind of brand awareness in the US. Jemal took up the challenge and by the end of the year, the sales exceeded 165 000 units which was over 10% of the market. By 1999, Haier’s refrigerator export has exceeded the minimum production volume to break even and it had become the market leader in the sales of compact refrigerators and wine coolers. This achievement prompted it to float the Haier America Trading Company in March, 1999 and open an industrial park in South Carolina on April 30, 1999 to boycott tariff barriers, save freight cost, gain access to advanced technology and establish itself in the market by manufacture refrigerators for the American consumers.
One major factor that facilitated the company’s final decision to move to South Carolina is the relatively labor union environment in the state. Employees have the right to join labor union or not, and the decision has no effect on their employability. There are also state investment incentives such as: Property tax incentive, job-creation tax credits (ranging from $1,500 to $4,500 per job created), five-year moratorium on general county taxes and also various sales taxes-exemptions on machinery, equipments, fuel and electricity. Net operating losses are allowed to be carried forward for a fifteen year period due to the low corporate income tax rate (5%).The price of land was almost twenty times cheaper in South Carolina than China. All these environmental evaluation, including the opportunity to recruit local talents and ability to apply for American Trade and Industrial organization made South Carolina a good choice for Haier.
When Haier entered the US market, it was being dominated by American companies such as GE, Whirlpool and Maytag, the only foreign player being Sweden’s Electrolux. There was a market entry barrier created by customers’ loyalty to these major market players. The company realized that, to compete successfully with these established home appliance manufacturers, it needs to be very innovative and not duplicate existing products. Instead, it focused on the neglected segment of the market that the market players were not interested in, due to profit margins or low volumes. Haier introduced compact dorm refrigerators, to meet the needs of graduates that can’t afford to buy standard refrigerators. Hoping that by the time they graduate and start their families, the good memory of the Haier experience will still be with them and encourage them to buy more of Haier products. It was able to capture about 30% of the American compact refrigerator market by mid 2002. It broke into the American market using quality, price and local manufacturing. This combination enabled it gained footing in the competitive retail sector. With its ‘Quality before Profit’ policy, it was able to gain a sizeable share of the market in a very short period of time.
In competing in the American market, Haier emphasizes quality and not price. Though, it wasn’t easy for the company due to the general perception of the American consumers. They believe that Chinese goods are cheap and substandard. Haier decided to create a localized brand name by producing the refrigerators in the USA with a ‘Made in USA’ tag alongside the Haier brand. It uses local resources to design, manufacture and distribute. The localization strategy adopted by Haier helped strengthen its presence in the market. Almost all the workers in Haier America are Americans. This make Americans feel that Haier is a localized US brand. The Haier picture began to take shape in 2002, an extensive sales network was established, by partnering with top 10 retailers in the USA, e.g Wal-mart, SEARS, Lowes, Home Depot, Best buy, PC-Richard, Sams, Costco, Brands mart and Target. In addition to this, over 7 000 independent stores also carry Haier products. The distribution network is very strong because it operates at both the retail chain and mass outlet levels.
Based on the strategic branding principle of CEO Zhang Ruimin, Haier believes that ‘the essence of Globalization is Localization’. The operational framework was based on complete localization of design, manufacturing and marketing. Haier recruits local talent and hire local managers to see to the day to day business operations. There was an initial cultural clash at inception, the Americans were not used to the Chinese’s autocratic management style. The tension subsided as the two sides got familiar with one another.
Haier America has achieved quite a lot since its establishment in 1999, it has expanded and grew its market share in the United States, Canada and into South America through strategic channel partners. When it entered the American market ten years ago, it sold three products. Today it sells over 3,000 ranging from room air conditioner, compact refrigerator, wine cellars, washing machines, portable electronics, HDTV etc.
KEY SUCCESS FACTORS
Haier America’s position in the market can be reviewed, using the PESTLE analysis to define the success of the brand in relation to the American market.
Over the years China has become a major US trading partner, The US-China economic ties have been strengthened substantially. China’s WTO accession enhanced the firm’s entry into one of world’s most competitive economy.
The Chinese government is interested in making Haier a model of national industry for other Chinese firms to emulate, a domestic firm turn global with an international competiveness. The government gives the company both financial and moral support. Haier has a substantial financial resource (deep pockets) due to its affiliation with the Chinese government. This is a key factor that made the huge investment the company made in USA a success. The $40 million industrial park built in Camden is the first production plant ever built and largest investment ever made in the USA by any Chinese company.
The Economic trend in the US is favorable for Haier to carry out its business activities and created an opportunity for a beautiful interplay of ownership, location and internalization advantage. Localization of Product design contributed to the strong foothold gained by Haier in the American market. Haier used local resources to design, manufacture and distribute in America.
When Haier entered the American market, it did not consider the industry big players as competitors. It understood the fact that it was very small compared to them, so instead of competing with them, it tried to find a position for itself in the market. Haier America develops products that were different and sell products the big players don’t pay attention to. It realizes the opportunity of manufacturing products that are clearly different from competitors who were targeting a broader group of consumers. The company did not only compete to expand a category, it created a market for itself.
The success story of Haier America would not be complete without the pragmatic and vibrant leadership of Michael Jemal, who had always keyed into the overall vision of building a strong brand name for Haier with his long term views and commitments.
The Haier global culture of building a business model that maintains operational excellence. The OEC management model adopted globally by Haier also contributed immensely to its success in America. It inculcated the Haier’s work culture and its global commitment to quality, customer value, operating efficiency and innovation.
With the philosophy of ‘Customer as the basis and foundation of Growth’, Haier provides top-notch customer service to its customers. The company understood the concept of ‘Customers being the main motive of an organization in business.’ To ensure the quality of product delivered to customers, it assigns incentive-based responsibility to staff. Its sensitivity and responsiveness to customers’ preferences contributed to the company’s success in the American market.
Haier America co-operates with top retail brands in the USA to carry their products and built a very strong distribution network. In 2006, Haier became a strategic partner and the first world home appliance sponsor of the National Basket ball Association. The NBA is one of the most popular sports league in the USA and this alliance has strengthened the Haier Brand in America
Haier’s innovation and design has continually enabled it outperform its competitors. Its value-creating process are deep rooted, it adopted a focused approach by concentrating on a narrow, exclusive competitive segment and created a market niche for itself. It has been able to stay ahead of present or potential competition through the competitive advantage it created for itself. This has ensured its survival and prominent placing of the Haier brand in America.
Haier America has since diversified and increased its product portfolio from the three products it entered the market with. With its diversification strategy it has managed to win more market share in the industry. It also enables it spread out its risk among different products.
Haier managed to appeal to the brand conscious American consumer, to whom brand name means a lot maximizing its brand building strategy. It was very committed and pragmatic when it comes to brand building.
Speed was another key business strategy that Haier used in winning the American market. It is very fast at satisfying customer’s needs as quickly as possible. A good example of the company exhibiting speed was when Jemal, the Haier American President had an idea of his dream refrigerator that he thinks will suit the American consumers perfectly and win their heart. He drew a sketch of the refrigerator and handed it over to Zhang during one of his visits to the headquarters in China. To his utter astonishment and pleasure, a prototype of the refrigerator was built and reached the American market in seventeen months without compromising standards and quality.
Haier has strongly impacted the general public with its campaign “Try your best and strive to be the number one”. Haier’s corporate culture of quality control is the soul of the company’s brand identity and success. It was confident of its growth potential and also exhibited confidence in the Americans by allowing them run the Camden factory.
Haier is very fast in its expansion initiatives, it relies strongly on its speed to meet consumers’ needs. Its entry into America has enabled it understand the peculiarities, customs and habits of local consumers and to also convert innovative ideas into local consumer tastes. Its innovative thinking, corporate culture, adaptation to evolving market and its efficient response to change, sets it apart from other Chinese companies. Haier’s management philosophy and corporate culture is recognized worldwide and worthy of emulation.
A major lesson to be learnt from the success of Haier’s entry into US is the way it internalized the western business model in response to economic condition and consumer preference. It was cautious in the US market at first but capitalized on the fact that it was being largely neglected and develop its growth potential. Haier’s continuous success in America has challenged the superiority of multinationals in developed nations. It has taught them the essence of understanding the changing market place if they intend to stay ahead of competition. It is also imperative for western multinationals to pay attention to the culture and business strategies of competition from emerging market as much as they paid to theirs. An intimate knowledge of one’s strength and that of competition enhances the progression of the business.
Haier implemented its own survival strategy in the US by being flexible, meeting customers’ requirements timely, continuous innovation and braving competition to establish a strong brand and market position. Haier is certainly an active, dynamic and impressive company that never rest on its oars.
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