Haier’s US Refrigerator Strategy

Haier’s, US Refrigerator Strategy

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

1-Why did Haier enter the US market with compact refrigerators? (Ghemawat, Haier's Strategy, 2009)

 Market opportunity 

Compact refrigerator was a category that US appliance leaders- with possible exception of GElargely ignored until recently and this product segment was rather disorganized. Haier could develop distinctive products and work with the big national retail chains to establish itself as a leader in this disorganized product segment.



Compact units were a growth market over the previous 15 years as living and office spaces were upgraded, and as wine enthusiasts discovered storage cabinets. This was not just due to replacement and number of new households but strongly was influenced by several other expansive factors -such as changes in trends in consumers’ tastes and living patterns- as well. From 1970 through 2000 the share of homeowners in the US who were either single or part of a nontraditional family unit rose from 19% to 31% and this trend continued from 2000. The average size single-unit home in 2003 was 2320 square feet up from 1660 in 1973. 25% of new homes built now featured a home office which they usually need compact refrigerators.



Compact refrigerators were the simplest in terms of design and features. This simplicity (less complicated parts and subassemblies) would allow optimization in whole value chain (Design, manufacturing, packaging, transportation, etc.)



Before Haier entrance in the US, a fragmented group of small specialty appliance players and foreign brands supplied a limited range of compacts.  Why Haier?



Haier had already won a reputation among large retailers’ purchasing executives for reliability and fast response to requests for product customization

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

Zhang credited this success in compacts to ability to rapidly develop new niche, even novel, products at the request of Wal-Mart’s executives. It would take only five months against 18 months for western companies to develop a wine storage cabinet.



The other factor could be Zhang Rumin’s management style; importing technology from Germany and employing Western concept of quality and customer satisfaction. And he tried to change China’s dysfunctional bureaucratic management style which was influenced by Japanese preoccupation with quality and American style of pushing responsibility for results down in to the organization. And referring to the case (Ghemawat, Haier's Strategy, 2009) it is obvious that he embedded the capabilities into his organization by : 

Celebrating individual’s responsibility



Expecting rapid rate of innovations



Using OEC (Overall, Everyone, and Control and Clear) and rewarding top performers with praise, visibility and bonuses



Making middle managers compete for each project and driving their bonuses by measurable individual performance.



Even experimenting each new product engineer in an individual profit center In this way Zhang set radical goals for the share of total revenues that had to come from new products and Haier’s actual product line strategy reflected these goals and incentives. Considering the US as a very demanding market from quality and customer-orientation, and the fact that major home appliance is an industry that demands great variety, flexibility in customization for meeting customer’s demand and speed in doing that would be a tremendous success factors.

2-Why was Haier successful in the compact refrigerators segment in the US market?

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Haier was successful because as mentioned before this market segment was rather neglected by big companies and was disorganized, so in a way Haier found a Blue ocean or white spot to work in and due to its cost advantages (difference in labor and manufacturing costs in China and US) and also the fact that willingness to pay for products in US is stronger than China it was a good idea. The other factor would be the alliance making with Michael Jemal who was a knowledgeable, successful entrepreneur. In addition, the fit between Haier’s unusual management style and US appliance market should not be forgotten. Furthermore, successful implementation of adaptation and arbitrage strategies –will be discussed in the next question was another reason.

3-Referring to Ghemawat’s (2007) strategies for global value creation in the course main textbook, how far do you consider Haier’s success in the US market for compact refrigerators is the result of it having implemented an adaption strategy (“ adjusting to differences”)? An arbitrage strategy (“exploiting differences”)? Arbitrage: Using CAGE Framework Cultural: there was not a clear sign of using this element. Administrative: South Carolina’s state government provided financial incentives, including three years of tax abatement and a discounted price on the land. In 1997 Chinese government announced Haier as one of the six companies which state would support to become world’s best 500 companies. Geographical: Construction of its factory in South Carolina is an advantage. Economical: Differences in costs of labor and capital, as well as variations in more industryspecific inputs (such as knowledge) or in availability of complementary products. Obviously, Haier enjoys the difference between cost of labor between China and US.

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Cost of capital: Haier used China’s government help as mentioned above and bearing in mind that Haier was at least 30% state-owned. A more detailed investigation can be found in Table 1 Table 1 ADDING Value via global expansion Haier for analysing arbitrage (Ghemawat, 2007)

Components of

Haier’s achievements, attempts or intent

Value Adding volume



Compact refrigerators were a category that US appliance leaders with the possible exception of GE largely ignored until recently.



Compact units were a growth market over the previous 15 years as living and office spaces were upgraded, and wine enthusiasts discovered home storage cabinets.



Overall, China’s domestic market for major appliances was relatively mature; most urban households already had a refrigerator, washing machine, and microwave oven. Unit growth was mainly in rural areas. In the cities, urban households were upgrading their purchases by buying larger units with more features. This was true for refrigerators, autos and other durables.



Despite holding roughly one-quarter of each major home appliance product category in China, Haier found it difficult to earn high returns. CEO Zhang consistently, complained of the “malicious completion” among the four China producers.



LG and Samsung also used China as an export platform. Zhang further complained that since China‘s entry into WTO in 2002, “Every multinational set up in China. Margins are low there. If we don’t go outside, we cannot survive”

Decreasing Costs



The one kind of cross-country difference that does have a significant effect in the opposite direction that is, it encourages cross-border expansion- is the differences in labor costs, which account for 20-30 % of sales revenue for domestic production in high-cost countries. (Ghemawat, 2007)

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

R&D costs and costs of parts which are made in China are much lower, and exchange rate of Yuan against USD, etc

Differentiation or



increasing willingness to pay

customers’ purchasing power against Chinese ones WTP would be higher 

Improving industry  attractiveness or

Apparently, via building an American brand and considering American



bargaining power

We should add Haier’s fast responsiveness to customer’s requirements Considering problems back home in China Overall, China’s domestic market for major appliances was relatively mature; most urban households already had a refrigerator, washing machine, and microwave oven. Unit growth was mainly in rural areas. In the cities, urban households were upgrading their purchases by buying larger units with more features. This was true for refrigerators, autos and other durables.



Despite holding roughly one-quarter of each major home appliance product category in China, Haier found it difficult to earn high returns. CEO Zhang consistently, complained of the “malicious completion” among the four China producers.



LG and Samsung also used China as an export platform. Zhang further complained that since China‘s entry into WTO in 2002, “Every multinational set up in China. Margins are low there. If we don’t go outside, we cannot survive”

Normalizing or



optimizing the risk

expanding to US and adding volume risk of demand volatility would be lower (due to having another market) but considering fluctuations in US economy comparing to China’s economy which has been growing for the past 25 years the risks would increase.



But being successful in US market, automatically would open other market to the firm which means expanding the portfolio of markets and less risk.

Generating



knowledge and other resources and capabilities

Working in a demanding market such as US would help firm learning to be successful in other markets



Working with a successful American entrepreneur would help diffusing American entrepreneurship into Chinese dysfunctional bureaucratic management

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

Working with huge retailers such as Wal-Mart would help them learning about best class logistics and supply chain management.

Adaptation: 

Labor & Transportation Costs: One of the important that persuade cross-border expansion is the difference in labor costs- which can account for 20 to 30% of sales revenue for domestic production in high-cost countries. But high transport costs should be considered. So, although Haier transport many compact refrigerators from the lowest-cost production place in the world to US, high transport costs prevent the profitable export of large refrigerators –even before tariffs are taken into account.



Industry economics: Regarding different expenditures –e.g. advertising, R&D, and Labor- to revenue ratio, home appliance industry is higher than median manufacturing industry, but is far less than ninetieth percentile. Therefore, there is limited thrust to override the variety and complexity required to compete across borders. Adaptation levers



The first most obvious approach to adapting to differences across countries is variation. (Electrolux’s individualization) the second involves focus on particular geographies, products, vertical stages and so forth as a way of reducing heterogeneity-like Haier’s focus on compact-t. The third involves externalization –through joint ventures, partnerships etc- as a way of reducing its internal burden. Haier’s example of partnership with Michael Jemal as a way of adapting to the unfamiliar requirements of the US market. Forth is design to reduce the cost of, rather than need for variation. The final lever is innovation, which given its cross cutting effects, can be characterized as improving the effectiveness of adaptation efforts. (Ghemawat, 2007)

1-Levers and sub-levers for adaptation 1-1-

Variation

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1-1-1- Products: Haier had a reputation for fast response to request for customization. 1-2-

Focus; reduce need for variation

1-2-1. Products: at first it focused on compact models. 1-2-2. Geographies: Haier first concentrated on US: first difficult ones, but later it expanded its activities all around the world. 1-2-3. Segments: focusing on compact segment (retail prices $100-$600) 1-3-

Externalization: Reduce burden of variation

1-4-

Strategic alliances: Making alliance with Michael Jemal and Welbilt company

1-5-

Design: Reduce cost of variation

1-5-1. Flexibility: design business model to reduce fixed costs 1-5-2. Partitioning: having fixed (integral) parts and variable parts 1-5-3. Platforms; having one or two basic platforms per each category that can be developed into hundreds of different SKUs. 1-6-

Innovation: improve effectiveness of variation Haier’s small-chest freezers had some innovative features including a bottom pull-out drawer, which made it easier to find a deeply placed item To save on shipping costs, Haier shipped spare service parts from China inside its freezers. In its marketing, Haier focused on trade publications and less expensive media such as outdoor and airport advertisements. Jemal used internet to reach college students.

1-6-1. Transfer: The whole idea of starting from US was to learn from difficulties from there and use them. 1-6-2. Localization: form the case, it can be seen many forms of localization –the idea of building an American brand. The US marketing organization had 105 employees none of them were Chinese. Many products were designed for US markets. Establishing a factory inside US could be considered as localization. Page 8 of 16

B. The response of the “big three” US producers to Haier’s entry 4-Can you replicate the table “refrigerator cost structure” shown in Exhibit 10 and fill in the missing cells? Low-end 18.2 Cu-Ft Unit

Low-end 1.8 Cu-Ft Unit

US legacy Union

US South Non-Union

Mexico

China

US legacy Union

Mexico

China

100

US South NonUnion 100

Labor Productivity (index)

100

100

40

70

40

60

Payroll: Full Cost/Hour (US$)

25

17

3.5

1.5

25

17

3.5

1.5

Purchased materials and components (index) Depreciation and Facilities cost (index) Freight and Warehouse Cost/Unit (US$) Additional import shipping cost (US$) Price/Cost Structure per Unit (US$) Retail selling price

100

100

100

85

100

100

100

85

100

85

75

60

100

85

75

60

25

28

30

35

8

9

10

11

0

0

7

35

0

0

1

9

425

425

425

425

115

115

115

115

Net manufacturer’s price

300

300

300

300

82

82

82

82

Payroll

70

48

25

6

25

17

9

3

Purchased material and components Depreciation and facilities

180

180

180

153

47

47

47

40

25

21

19

15

10

8.5

7.5

6

Freight and warehouse including ocean shipping Total cost of goods sold

25

28

37

120

8

9

11

20

300

277

260

294

90

82

74

68

Gross profit

0

23

40

6

-8

1

8

14

Cost of goods sold

Table 2-Refregerator cost structure

5- From this completed table, what do you conclude about china’s cost advantage in refrigerators?

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In small units (low end 1.8)China’s plants have considerable advantage over plants in US and even Mexico, however due to transportation and import costs in bigger units (18.2 Cu-ft) they are far less profitable than Mexico and even US South non-Union factories 6- What arguments would support the view that the “big three” US producers should have aggressively moved into the compact segment to thwart Haier’s entry early? What counterarguments could be made, that the “big three” should have ignored Haier’s entry? The main argument is in case of having new rival, the local competitors should be alert and watch every move of it because if it succeed -even in an area which is not their specialty and main marketit would use this success and market as foot hold for the next moves which would be attacking their main profitable markets. Secondly, if a foreign company comes from a long distance and approaches a segment, there should be some potential in it so it could be their share. Furthermore, considering Chinese specialty in cost effectiveness and combination with an American entrepreneur would be an effective and influential combination and subsequently a dangerous one and if the Haier’s unusual approach to quality and management is considered the matter would be worse. Counterargument: The big three with the possible exception of GE, traditionally had showed little interest in compacts due to the fact that as specialty items they needed additional distribution channels, were smaller markets, carried lower price tags and margins and did not need the more sophisticated full-product-line merchandising of major appliances, which their organizations were used to do. Also, these refrigerators had limited appeal to major appliance dealers, especially the independent dealers that formerly dominated white goods retailing, whose sales people were trained to spend time with customer to educate them to purchase thousands of dollars worth of goods. In addition, they could argue the segment is not profitable enough and it is not our core business and considering the size of their organizations entering this market just could be a noise to their system.

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7- How would you briefly describe the “big three” strategy for each of the three rough product segments (compact, mid-size, full-size)? 

“GE was the traditional US leader in refrigerators and in 2006 still claimed 29% of the market, down from 34% in 2000. While GE as whole was a global company, its white goods business was not. GE sold refrigerators in the US under several brand names, including GE, Hotpoint (its economy brand) and its premium high end GE profile and GE Monogram, where GE had its most profitable $2 billion worth of sales. GE produced the widest price range of refrigerator models for US market. GE was also strong in the lower-price, smaller unit product segments (including compacts, apartment size, and the smaller end of the full-size range) and in the builder/contractor segment, which bought and installed smaller units in the larger quantities in new or renovated buildings. These positions were under severe price and volume pressure.GE had considered selling or spinning off the appliance business.



Whirlpool was No. 2 in refrigerators with a 25% market share in 2004. In the US Whirlpool sold under several brands including Roper (an economy brand) Whirlpool, Kenmore (for units sold to and labeled by Sears) KitchenAid and high end, Whirlpool Gold and KitchenAid Architect. Whirlpool traditional strength was its position as leading supplier to Sears, easily the US’s largest major appliance retailer. Sears accounted for an estimated 20% of Whirlpool white goods production. In 2006 Whirlpool acquired Maytag, formerly No.4 producer in the US for $2.7 Billion, winning over a Haier bid. Maytag’s US brands include Maytag, Admiral and two economy brands, Jenn-Air and Amana. Whirlpool was global in its sales, with only 61% of total sales in North America. It had strong market positions in India and Latin America a modest but improving position in China and was the No.3 or 4 player in Western Europe based on earlier acquisitions of Fiat’s and Philips’ white goods businesses.

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

Electrolux was No.3 in US white goods overall and had 25% of the standard refrigerator market up from 21% in 2000. AB Electrolux in Sweden was the most internationally experienced of all appliance makers, with production operations in over 40countries and 16 billion in sales, 45% of which were in Europe and 6% in Asia. The company historically grew through cross-border acquisitions and thus sold under dozens of brands. The early 2000 were a turbulent period for the company globally as it restructured and radically reduced its number of products, local brands and factories. Despite this reduction of operational complexity, appliance profitability both globally and in the US continued to moderately decline. “ (Ghemawat, Haier's Strategy, 2009)

C. Haier’s South Carolina plant 8- What are the arguments and counterarguments for Haier building its $40 million

South Carolina plant? Business-Related: 

Considering Haier’s goal of building an American brand like Toyota’s successful approach in US via establishing manufacturing plants in US, it was a necessary action.



Most advanced capital equipment used in refrigerator manufacturing came from small number of German, Italian, and Japanese companies.



Purchased materials and components ranged from 55%-65% of ex-factory prices and it should be noted that compact refrigerators were relatively labor-intensive, while premium units were relatively material and component intensive.



Key components (like compressors) came from common global suppliers based on best delivered value and meeting product specifications. In addition, some materials such as coated steel or molded plastics were purchased locally.



considering above points, it can be seen that only compact units are relatively labor intensive which make them appropriate to be made in China (because other factors are the same) and to produce Page 12 of 16

bigger or units with more features materials are more important . So, importing simple compact units from China was logical but to enter into higher end of market establishing plants inside or somewhere closer to market was necessary. Mexico-related: 

Mexico is a member of NFATA along with the US



Mexico has a common border with US



As can be seen from Table 2Mexico has an obvious and total advantage over other options for bigger units, even for small units it could be justifiable.



Basically, all of the big players of refrigerator producers (big three, LG, Samsung) have some plants in Mexico while the Big Three continued to spend hundreds of millions of dollars modernizing US factories. As one Whirlpool’s executive once said:” Mexico geographically is an advantage for us in terms of exporting to the United States. Exporting from as far away as Asia just doesn’t make sense”



Considering closeness of Mexico and US, running factories which needs supervision and calling on by top management would be much easier than going to China.



Keeping in mind that there are more than 40 million Hispanic in US and many Mexican immigrants in US the cultural distance is far less than with China. China-related:



China is far away from US. Given relatively high transport costs, although Haier ships many underthe-counter refrigerators from China -the world’s lowest-cost production platform- to the US, transport costs preclude the profitable export of large refrigerators-even before US tariffs are taken into account.

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China is not in a regional economical treaty with US

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

There are some economic and political between US and China (about human rights, protectionism, Yuan exchange rate, etc.)



On the other hand, higher costs of labor, and probably energy, working in alien country with different rules and regulations and culture would endanger firms’ success.

9-What do you conclude about the South Carolina plant decision? To begin building a local/American brand it was a wise decision, especially when production of bigger units with more features are considered which are not labor intensive and transportation costs makes them hard to import from China. However, keeping in mind that all other competitors have plants in Mexico with more advantages over non union plants, moving plant to Mexico or establishing a new one there would be a good strategy.

D. Haier’s status and prospects in the US 10- What do you conclude about Haier’s profits, product line and market positioning, and market share in the US refrigerator market compared to where it wants to be on these measures? If “creating a localized brand, competing against established companies (The Big Three) by being more customer-focused using speed and differentiation” are considered as main goals; Haier’s success to be one of US’s four biggest and world’s seven biggest home appliance makers has been impressive. It was market leader in compact units with 21% market share and also had 12% of the free standing freezer market, placing it behind the leader Frigidaire and via building its factory in South Carolina to manufacture full-size units start competing head to head against US leaders. It has more than 100 models in refrigerator market. Form mentioned argument it can be said Haier has achieved most of its goals. However, its financial success cannot be evaluated accurately because the only reliable evidence for Haier’s profitability were its Shanghai listed arm accounting for about one-fifth of the Page 14 of 16

group’s revenue refer to Table 3 . The table shows Haier’s declining operating profit as percentage of sales since 2002 to 2007

11- What actions should Haier take in the short and long-term to increase its profits in the US refrigerator market? 

To continue and increase its marketing activities in branding itself as a American brand and because now it has big market share using Mass Media is appropriate



To establish a new factory in Mexico, discussed as above.



To Use another retail stores other than the ones it already uses for example independent stores control 35% of market share which is a considerable market to work with. Refer to Exhibit 6(Ghemawat, Haier's Strategy, 2009) for other players’ information.



To pay attention to China’s domestic market: bearing in mind economic recession and the fact that China did not damage as much as others which was to some level because of boosting domestic economy, to decrease risk having a better and bigger market share in such a big, steady economy would be helpful and via using cash from domestic market expansion projects in US could be financed. To expand domestically Haier could use its influence in Chinese government to use state money or other institutional levers.



To diversify: not only in domestic market but also in US market, in this manner the risk would be decreased and it would help making Haier a household name in American market that everyone knows. Considering volatility of financial market and recent recession diversification into this market should be approached in a prudent manner. Table 3Qingdao Haier Refrigerator Company Financial Statements 2001-2007 (million Yuan)

Gross Sales Cost of goods sold Gross profit Operating income Net income Consolodated net income GM% Sales Page 15 of 16

2002 11,611,296 10,057,751 1,553,545 652,170 429,458 397,060

2003 11,731,745 9,972,234 1,759,511 607,482 394,652 368,953

2004 15,319,070 13,276,840 2,042,230 627,661 397,000 369,436

2005 16,522,672 14,567,235 1,955,437 439,324 249,742 239,127

2006 19,661,420 16,868,522 2,792,898 600,197 356,479 313,914

2007 28,783,629 23,182,819 5,600,810 797,042 754,286 643,632

13.4

14.9

13.3

11.8

14.2

19.4

Op Income % Sales Consolidated Net Inc % Sales

5.6 3.4

5.1 3.1

4.1 2.4

2.6 1.4

3.1 1.6

2.8 2.2

References Ghemawat, P. (2009). Haier's Strategy. Harvard Business School. Ghemawat, P. (2007). Redifining Global Strategy. Boston, Massachusetts: Harvard Business School Publishing Coropration.

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