Haier International Business Approach Team: Rahul Gossain Ratnesh Saurabh

Haier Case Overview Haier Group in China Haier Group, ranked China’s number-one company by the Asian Wall Street Journal, Starting with a defunct refrigerator factory in Qingdao, Shandong province, founder and CEO Zhang Ruimin built Haier into China’s largest home appliance maker Globally, Haier ranked third in white goods revenues, and was the second-largest refrigerator manufacturer (with about 6% of the global market) behind Whirlpool and ahead of Electrolux, Kenmore, and GE. Zhang pledged to make Haier the world’s best-selling refrigerator brand by 2006.

Competitive Rivalry Large number of competitors High threat from new MNC’s Entry barriers frorm of access to retail & logistics Economies of product being breached with new facilities Brand equity is Haier’s biggest strength but MNC’s come with global brands Poor access to distribution for MNC Absolute cost advantages of Haier Learning curve advantages with Haier Government policies – Access to logistics Large number of competitors Intermittent industry overcapacity Informational complexity and asymmetry Economies of scale Sustainable competitive advantage through improvisation over years Haier had defined suppliers of raw materials, components, labor, and services Low degree of differentiation of inputs Wide presence of substitute inputs Employee partnership Extensive variety of close substitute Buyer propensity to substitute is low Relative price performance of substitutes is low Competitive Rivalry

Haier Group Growth and Diversification Why do firms go abroad: Saturation in local market: By 1991, Haier had become China’s leading refrigerator manufacturer. Exploiting market imperfections during product life cycle Beyond China Approach: Zhang founder Haier Group: “Let our reputation precede our new products”

Porter Diamond Model for Competitive Advantage of Nations

Defining Global Competitive Advantage Strategic Choices Value Chain Configuration Measuring Value Chain Optimization Imperatives Global Presence Global Competitive Advantage

Defining Global Competitive Advantage Imperitives: Haier held about a 30% share of China’s RMB 129 billion white goods market and had a growing presence in “black goods” sectors such as televisions and personal computers, but margins on domestic sales were shrinking. The Haier Group’s Shanghai-listed arm, Qingdao Haier, saw 2004 profit margins drop to 2.6%, from a high of 9.4% just five years earlier. Industry observers attributed the decline to increased competition from local firms and foreign multinationals in China. National overcapacity was estimated at 30% in televisions, washing machines, refrigerators, and other major appliances. Manufacturers were cutting prices at 10% to 15% annually.6 In this environment, Haier was betting its future on global sales. Haier’s 2004 export revenues were nearly double the previous year’s the company was targeting $1 billion in sales to the United States alone for 2005. Could Haier Competition from MNC after WTO entry

GLOBAL CO-ORDINATION / COST PRESSURE Defining Global Competitive Advantage Global Presence: Integration/Responsiveness Grid GLOBAL CO-ORDINATION / COST PRESSURE Low High LOCAL INDEPENDENCE & RESPONSIVE-NESS International Divisions Global Product Companies Subsidiaries Transnational Corporations

Defining Global Competitive Advantage Global Presence: Haier developed a formal global expansion strategy beginning in 1997 when Zhang announced his “three thirds” goal of having Haier’s revenue derive in equal parts from sales of goods in three categories: one-third from goods produced and sold in China, one-third produced in China and sold overseas, one-third produced and sold overseas. Choice of Strategic Market: Focus on difficult markets first Shunning conventional wisdom, Haier determined to focus on the “difficult” developed markets first, and only after proving itself in those, to go after therelatively “easy” emerging markets. In 2004, about 70% of Haier’s overseas sales came from the developed markets of Europe, the United States, and Japan. Overseas sales for 1998, largely to Europe and the United States, amounted to just over $62 million, or about 3% of total Group sales.

Defining Global Competitive Advantage Choice of Entry Model: Haier had started to venture into overseas markets as a contract manufacturer for multinational brands in the early 1990s, first exporting to the United Kingdom and Germany, and then to France and Italy. Haier also used JVs to explore foreign markets. In 1994, Mitsubishi invested $30 million for a 55% stake in a JV with Haier to set up China’s largest air conditioner plant. The Qingdao factory would produce five of Mitsubishi’s latest models for export to Japan. In 1995, Haier became one of the first Chinese companies to engage in foreign direct investment, setting up a refrigerator and air conditioner plant in Indonesia as the majority partner in a JV with a local firm.\ In 1997 Haier launched its first European manufacturing base, producing air conditioners in Belgrade through a JV with a Yugoslav company. Haier refrigerators sold particularly well in Germany, where they were marketed by the German appliance firm Liebherr under the “Blue Line” brand. When a blind quality test by a German magazine gave Haier’s Blue Line refrigerators eight top rankings, beating Liebherr’s seven, Haier decided it was time to market its own brand overseas. In 1997, Germany became the first export market for Haier-branded refrigerators. The same year, Haier formed a JV with the Philippine electronics company LKG to manufacture Haier-branded freezers, air conditioners, and washing machines in the Philippines for sale to local and regional markets. Haier continued OEM production for foreign multinationals and actively sought new OEM clients, but after 1999 the company was focused on selling Haier-branded products in overseas markets. “The objective of most Chinese enterprises is to export products and earn foreign currency. This is their only purpose,” said Zhang. “Our purpose in exporting is to establish a brand reputation overseas.” Overseas sales for 1998, largely to Europe and the United States, amounted to just over $62 million, or about 3% of total Group sales. The creation of Haier’s Overseas Promotion Division in 1999 signaled the beginning of rapid growth in international sales through exports and overseas production, bringing the combined figure to nearly 17% of total revenue in 2004.

Defining Global Competitive Advantage Value Chain Optimization: Before 1998, most of the acquired businesses operated independent R&D, procurement, production, and sales departments. Haier replaced the numerous service departments with four new Group-wide “Development Divisions” Capital Flow (Finance) Commerce Flow (Sales) Material Flow (Logistics) Overseas (Global Operations)—whose heads reported directly to the Haier Group president. These new businesses operated as independent profit centers that competed with third-party service providers for Haier’s business and could sell services to external clients as well. Human Resources, R&D, and Customer Relations were also joined into group-wide business centers and sold their services on a fee basis to Haier Divisions. Total Planning Management, Total Quality Management, and Total Equipment Management centers were formed by combining these functions across divisions. In 2000, Haier added an e-commerce company serving businesses and individual customers.

Defining Global Competitive Advantage Outstanding Product quality Haier refrigerators sold particularly well in Germany, where they were marketed by the German appliance firm Liebherr under the “Blue Line” brand. When a blind quality test by a German magazine gave Haier’s Blue Line refrigerators eight top rankings, beating Liebherr’s seven, Haier decided it was time to market its own brand overseas. In 1997, Germany became the first export market for Haier-branded refrigerators. Understanding of Markets Successful products like mini refrigerators Sourcing & Distribution network in place: Expanded international production facility Walmart access Synchronization of International operations Development of Global brand Worldwide Branding