QINGDAO and LOUISVILLE: It is to China
what General Electric (GE) once was to the United States. In fact,
household appliance giant Haier is tops not only in its home market, but
also the world.
Its maverick leader Zhang Ruimin has done for it what GE’s Jack Welch
did to make the American conglomerate the world’s best company when he
was chief executive officer. And one of Mr Zhang’s heroes was Mr Welch
himself.
Haier was just a small refrigerator company in 1980 when GE was raking
in US$25 billion (S$34 billion) in sales. In the early 1990s, however,
the two became business enemies after the century-old organisation tried
to buy the Chinese manufacturer.
“When we told them we didn’t want to work together, they were furious,”
recalled Mr Zhang, 69. “They told us they were definitely going to enter
the Chinese market, and their first goal would be to eliminate us.”
Haier Group chairman and CEO Zhang Ruimin.
Two years ago, Haier turned the tables with a bid to buy GE’s appliance
unit, which by then was struggling and no longer the heart of the
company famously co-founded by inventor Thomas Edison.
The story of how a company that once sold defective fridges became the
saviour of one of the world’s oldest appliance makers is told in Inside
the Storm, a series about the high-pressure decisions and risks that
major companies take and how they adapt in times of crisis.
SMASHING UP FRIDGES
Last year, Haier’s global revenue hit 242 billion yuan (S$48 billion).
But there was a time when the outlook was grim for what was then known
as the Qingdao Refrigerator Factory.
Teetering on the brink of collapse, the collective enterprise had gone
through three managing directors in 1984 when Mr Zhang, a 35-year-old
city manager, was appointed as the fourth.
No one expected much of him, since a revolving door of directors had failed to stop the rot. He put it thus:
People didn’t have faith in the factory.
But he grabbed the national headlines a year later, upon discovering
from a check on the inventory that a fifth of the fridges were faulty.
Each fridge was worth two years of a worker’s pay, but Mr Zhang ordered
the workers to destroy those 76 fridges – with a sledgehammer.
Mr Zhang joined the workers in destroying the defective fridges.
IMD business school Professor of Innovation Management Bill Fischer, who
was living in China then, remembers the buzz about the dramatic
gesture, which “made no sense to people” because they would buy a fridge
“whether it worked or not”.
“That was the only way they’d ever get one,” he said. “There was this
wonderful, ingenious repair business where people could fix anything
because Chinese quality was so bad.
“It became a signature event not only in Haier’s history but in the
minds of everybody in China who recognised that this was an organisation
doing the unthinkable – which was, promising not to sell products that
didn’t work.”
It was, shared Mr Zhang, also the “entry point” for him to change the
mindset of his staff, for them to understand that “high-quality products
are made by high-calibre individuals”.
Mr Zhang in his younger days.
Within three years, the company’s fridges were declared the best in
China, an accolade they would win repeatedly. The municipal government
rewarded the company for its turnaround by handing it 18 other appliance
factories to manage over the years.
Where Mr Zhang succeeded while others had failed was in motivating his
workers by, for example, determining that a worker’s pay would be linked
to performance.
But this was another “unimaginable” concept, said Dr Hu Yong, a
professor from Peking University’s School of Journalism and
Communication, “because we grew up in a society where a company had to
pay poorly performing workers forever”.
He added: “We needed to break the iron rice bowl.”
Dr Hu Yong.
Throughout this process, Mr Zhang realised that many workers were
talented, “but there was no way for their intelligence to be
acknowledged” nor for their ideas to be implemented.
“Everyone accepted and carried out their superiors’ suggestions from the
top down. At times, the superior’s directives weren’t that clever,” he
said.
He too was once a factory worker, and even before he became a
supervisor, he was studying management theories such as those of Mr
Welch, who was focused on rewarding talent and ideas and giving
employees control over innovations.
“We specifically went to (GE’s) training centre to … learn,” said Mr
Zhang. “We used it as our yardstick … It was hard to imagine how such a
vast, global enterprise could motivate its workers so effectively. GE
was almost a legend.”
Mr Jack Welch in a television interview when he was CEO.
BRUSHING OFF G.E.
In 1992, the Chinese company was renamed the Haier Group, a simplified
transliteration of its former German technology partner Liebherr
(pronounced ‘Li-bo-Hai-er’ in Chinese).
That same year, GE was looking for a contract manufacturer in China, and Haier said yes to its overtures at first.
“But during negotiations, we felt they treated us as a processing plant
and did not intend to help us expand,” said Mr Zhang. “So we rejected
them.”
GE threatened Haier with competition and warned that the company was
“bound to meet great difficulties” as it continued to develop because
“wages would have to go up and workers were bound to become less
motivated”.
In the old days, GE advertised its initials as those of a friend. In 1992, it made itself a foe of the Haier Group.
Mr Zhang responded with a quote from the late United States President
Franklin Roosevelt: “The only thing we have to fear is fear itself.”
Haier brushed off GE’s words and grew throughout the 1990s and early
2000s, banking on its reputation for quality and ability to scale up –
until being big was no longer enough.
“The fight began to change from who was the biggest to who was the
smartest,” explained Peking University Professor of Investment Jeff
Towson.
“It’s easier to be smarter than the other person in smartphones because
there’s a lot to be smarter about; it’s hard to have a cutting-edge
toaster … A toaster’s a toaster.”
Prof Jeff Towson.
Even before demand from Chinese consumers slowed down, Mr Zhang noticed
Haier developing the sluggish bureaucracy of big businesses – the kind
that Mr Welch pared down when he cast off more than 100,000 GE workers
in his first five years.
In 2005, Mr Zhang initiated a restructuring of his own: To connect every
worker with the customer and regain the entrepreneurial zest of small
companies, he started dividing Haier into more than 1,000
microenterprises.
He termed this model RenDanHeYi (translated as maker-customer
integration), in which each unit became responsible for its own
decisions and financial survival. During this overhaul, Haier laid off
10,000 mid-level managers, which was “a very difficult decision to
make”.
“They were excellent workers or managers. But they found it difficult to
be entrepreneurs. I suggested that they could either become
entrepreneurs or leave. On this matter, we were determined to implement
this business model,” he said.
In this entrepreneurial spirit, workers can elect their team leaders and
members as well as vote out non-performers. If a unit’s products are
not well-received, feedback is quick: Profit and loss numbers are shown
even on the factory floor.
A worker can see from the screens the consumer data on his product and
his performance relative to his group, including how many products he
has completed in a day and how much he has earned.
RenDanHeYi has encouraged innovations like the e-concierge system Ms Sun
Dan Feng’s team created to help retail stores order Haier products.
The company provided seed funding for the venture, but she and six
others also forked out more than US$400,000 to keep the start-up afloat.
“We were forced to do it for survival,” said Ms Sun, the general manager of Haier Group’s Yantai microenterprise.
“It’s because we invested our own funds that we paid so much attention
to the market and the deadlines. My team always stayed up late to update
the system for our clients.”
Ms Sun Dan Feng.
BUYING G.E.
Haier became the world’s top home appliance brand in 2009, a position it has held since then.
But in trying to ramp up its international expansion owing to its slower
growth in the huge China market, it has had to deal with the perception
that the Made in China tag meant poor quality.
“The stereotypes are hard to disabuse,” said Prof Fischer. “I think
Haier has been frustrated by its inability to make more of a statement
in the North American and European markets.”
Prof Bill Fischer.
It finally decided to buy its way into developed markets like Japan and
New Zealand by snapping up Sanyo in 2011 and Fisher & Paykel in
2012.
But in the market it entered in 1999 and valued most, the US, it had
made little headway: Its market share was around 1 to 2 per cent.
“The great firewall against Chinese manufacturing is brand equity,” Prof
Towson said, adding that many Americans also do not buy washing
machines in stores.
“Washing machines are sold to builders, real estate developers and then
some trade stores like Ikea and stuff. But that system – the
distribution, the marketing and the brand – was a pretty defendable
position for companies like Maytag, Whirlpool and GE.”
The signing ceremony to finalise Haier's acquisition of Sanyo.
GE Appliances’ market share was around 14 per cent, but its parent company wanted out of the appliance game.
In 2014, GE struck a deal to sell the business to Sweden’s Electrolux.
But objections from antitrust regulators scuppered the deal. So GE
Appliances was put on the market again. This time, Haier was invited to
make a bid.
“We were already five times larger than them. We could see that even
though they were massive in scale, they … expanded very slowly. We
developed much faster,” said Mr Zhang.
At the Haier headquarters, some questioned whether it would be a good buy, which he agreed was an important question.
“But I felt that our goal was very clear. We wanted to create an
established brand, a localised version of the Haier brand,” he
explained.
In the hearts and minds of Americans, or of many people at least,
they believed in GE … The brand had a lot of depth and substance. For us
to create this depth, the issue wasn’t money, but rather time.
The opening days of the bid were tense. Reports suggested there were
seven bidders, and he knew that Haier’s bid was not the highest. So he
rushed to the US to meet GE’s then CEO Jeff Immelt.
“During the talk, we mainly exchanged our personal philosophies on
management, how RenDanHeYi can solve problems common to large
corporations and … could possibly bring more opportunities to GE. He
couldn’t agree more,” recounted Mr Zhang.
“After hearing this, he became more inclined to think that price wasn’t
the only yardstick … He felt that Haier would be a better fit.”
The Chinese company also did not intend to retrench staff “the way many companies do after a merger”.
On Jan 15, 2016, GE announced it had accepted Haier’s bid. The final price was US$5.6 billion.
The unveiling of the new GE Appliances sign at its headquarters.
THE FUTURE, TOGETHER
At GE Appliances’ headquarters in Louisville, Kentucky, there was a
“fear of the unknown” as workers wondered what it meant to be acquired
by a Chinese company and what it could offer, admitted its current CEO
and president Kevin Nolan.
But there was also relief because “we were finally acquired by someone
that really wanted us”, said Mr Nolan, the then chief technology
officer. “And I think all the employees … knew we needed to do something
different”.
As part of the deal, GE Appliances kept its autonomy, so Haier could not
simply enforce its will. But change was also needed because the market
leader of the 1980s had fallen behind Samsung and LG in the US.
Mr Nolan spent a year in Qingdao to learn about the new parent company’s technology road map and to see how RenDanHeYi worked.
Mr Kevin Nolan.
He was promoted soon after, and in his first year as CEO, he started to break the company into microenterprises.
One of these first units was its laundry business Clothes Care, which
became the best performer last year with a profit of US$12 million, in
contrast to losing US$3 million in 2016.
“What's great about this model is the speed. There aren’t four layers of
approval,” said the enterprise’s vice president Peter Pepe. “We’re
being responsive to the market … and it lets us grow.”
From the outset, Mr Zhang thought the workers would accept RenDanHeYi
because its core concept is about “respecting the individual”. He said:
“It places the value of the individual first and allows the individual's
potential to be fully unleashed.”
Haier employees at work.
Still, there are areas of concern. One pillar of Haier’s strategy is the
Internet of things, so that appliances can be smart products in a smart
home, connected and remotely controlled – but GE Appliances has “just
started” on this.
With buy-in from its employees, however, that strategy is starting to
pay off. This year, its new Kitchen Hub was named the most innovative
appliance at the annual CES, formerly known as the Consumer Electronics
Show.
“It allows us to create things like virtual cooking classes. It has
cameras on it that can create interactions with families that hadn’t
existed before,” said Mr Shawn Stover, the vice president of GE
Appliances’ SmartHome Solutions.
“So if you wanted to reach out to Mum and have her help with that
recipe, you can do it (via video chat) right from the Kitchen Hub.”
Mr Shawn Stover.
The idea for the product came from FirstBuild, an innovation lab Mr
Nolan co-founded in 2014, before Haier came on board. It has an open
community of industrial designers, scientists, students and makers
co-developing ideas with GE Appliances.
Together, they sell up to 1,000 units of promising prototypes, and the
company may take up products that do well, with the inventors getting
royalties – a crowdsourcing model of innovation.
This year, GE Appliances reported its best results in a decade, with
profit growth of 22.4 per cent. But now, Haier wants the American brand
to become truly global.
“It didn’t have much of an overseas strategy, so … it has to change drastically,” said Mr Zhang,
Haier recently opened a GE Appliances boutique shop in Qingdao, but the
storm clouds of the deepening trade war between the US and China are
threatening those expansive dreams on the mainland.
Mr Zhang wanted China to be the first of GE Appliances' new frontiers.
Perhaps a greater challenge lies ahead as Mr Zhang turns 70 next year and edges closer to retirement.
So far, Haier’s story has been one of reinvention, from the humblest
appliance to the work culture, and to him, the largest takeaway point is
this: “No matter the size of the company, you need to challenge
yourself every day, and persist in triumphing over yourself.
“There must be change every day, otherwise you’ll definitely lag behind the times.”
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