International strategy of the Haier Group

This paper takes the opportunity to critically evaluate the international strategy of Haier, Chinese producer in the consumer electronics industry. A review of the literature on the subject of internationalization and foreign market entry is undertaken, prior to analyzing the micro and macro environments at the time of Haier expansion into new markets during the 1990 and 2000s. An industrial analysis is conducted and a comparison of the competitors approach to international expansion is completed. The drivers behind the Haiers international approach are discussed, together with the reasoning behind their success in the European, Asian and American markets. Finally the performance of Haier international strategy is evaluated and recommendations to enhance the companys international success are discussed.

2. Introduction

Haier Group was founded in 1984 as a government-owned Chinese company under the name Qingdao Refrigerator Co., Ltd. Initially, it started manufacturing refrigerators with production technology imported from Germany. Over the past 26 years, the enterprise has developed significantly, engaging in technical research, new product development, trade and global expansion. Now Haier operates in different industries all over the world.

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Additionally, Haier holds first place in several segments worldwide: for compact refrigerators in the United Stated, for washing machines in Iran and for air conditioners in Cyprus. With a world market share of 5.3 percent, China’s Haier Group Corporation has ranked second in the global refrigerator production industry.

Haier achieved its success by familiarizing with the brand and competing with the major established brands for a larger market share. Haier Groups’ corporate strategy is driven by international growth through creating brand awareness and recognition, meeting consumers’ needs and increasing market shares in different segments.

This paper starts with a review of the literature on the subjects of internationalization and foreign market entry strategies, before reviewing the internal and external factors of Haier’s international strategy.

3. Literature Review

The source of competitive advantage for consumer electronics, such as Haier is associated with the value they create through innovative products and satisfy customer needs. It is important to understand what generates such competitive advantage in the domestic market for the company, before entering the foreign market. Porter states that “advanced factors (research facilities, technological knowhow) are more significant for competitive advantage.” Haier found better R&D, high demand and better factor conditions for innovating in foreign countries and this was one of the reasons for globalization. Porter theorizes that “four attributes promote the creation of national competitive advantage. He speaks of these four attributes as constituting the diamond.” (Porter, 1990).

Relating to Porter’s theory Haier moved abroad to make its product more responsive to particular consumers in foreign markets. In connection with the other components of the Porter “diamond” Haier encountered high local rivalry and support industries made huge investments which indicate Haier’s intention to go abroad.

One of the most significant discussions is related with the reason for internationalization. Minitzberg states that companies go abroad to “achieve some of the benefits-cost reductions, improved quality of products, enhanced customer preferences, and increased competitive leverage.” Haier built a famous brand name and improved its products quality by entering markets with more pretentious customers. The company understood the difference between its domestic and foreign markets. Dupuis and Prime state that “there is a gap between these two environments, particularly in relation to consumer behavior.”(Dupuis and Prime, 1996). The source of competitive advantage in the domestic market may not be the same as in the foreign market. The target market needs to be understood before taking a strategic decision. Examples of such cases are considered by many authors including Hill, (2007) and Bartlett (2003). They compare firms which face culture, religious and ethnical problems penetrating different markets.

The choice of entry mode is another strategic issue which should be considered by companies. Hill states that” firms can use six different modes to enter foreign markets.” (Hill, 2007) Haier used different approaches to succeed in their global expansion. They used “exporting entry mode” and got benefits for economies of scale. In other market where it was difficult to penetrate they used “joint ventures entry mode” and accessed to the local partner’s knowledge. Other research such as Bartlett’s finds that “there are countries which are symbols of high quality and this is the reason why companies form peripheral countries find it difficult to compete against global giants from Europe, Japan and United states.”(Bartlett, 2003). Some companies, as Haier, have entered the global competition too late and this statement confirms how difficult was for them to compete against existing competitors.

The intention of this section was to review the literature concerning the source of competitive advantage, internationalization and entry modes chosen by companies and particularly Haier in respect to its international strategy.

Micro Environment

This section intends to show the internal factors, which influence Haier in its global expansion. According to Grant there is connection between key success factors, resources and capabilities in creating competitive advantage. If the recourses cooperate successfully, the organization has capabilities for success.(Grant, 2005).

Key Success Factors

Strategy

Competitive Advantage

Organizational capabilities

Resources

Tangible

Financial

Physical

Intangible

Technology

Reputation

Culture

Human

Skills/ know-how

Motivation

Collaboration Skills

Skills

Haier built strategy, based on internal strengths which led him to the dominance position on the domestic market before starting its global expansion.

Another model which is useful and which can be referred to the topic is Humphrey’s SWOT analysis. In his framework he identifies “the internal and external factors that are favorable or unfavorable for a firm”. Related to internal factors in his theory Haier had 3 main strengths-technology- it has been the domestic leader in different products (refrigerators, wash machines, air conditioner) in terms of market share and in top 3 in world market; innovation -products like safe care water heater, dual drive washing machine are all innovation-reflection of the company; and corporate culture-it has corporate culture recognized by its employees and supported by its managers. If we put the internal factors from the SWOT analysis into the Grant’s model we indicate that the intangible factors lead Haier to success. In particular the company had developed a strong brand reputation through their ability to provide high quality products for low costs. This was driven by their corporate culture and supported by government and competent management. Haier’s dominance in China’ consumer electronics industry was a consequence of its main focus- “customers as the foundation of growth”. This concept helped the company to continue its growth abroad.

According to its CEO “in the end of 1990’s, Haier had become the leading appliance brand in China, with clear dominance in many of its product categories.” The company moved to expand its portfolio into other areas before the management decided to start its global expansion.

Macro Environment

There are many reasons for companies to go abroad. Bartlet states that “there are many forces which are driving companies around the world to globalize by expanding their participation in foreign markets.”(Bartlett,p.80). Global expansion is complex and companies need to have different capabilities and knowledge to succeed. Understanding macro environment is one of the most significant issues when going abroad.

The macro environment includes political, economical, social, and technological factors that influence organizations but they are out of their control. These factors affect many decisions and influence the companies’ overall performance. Yip “provided the most widely used framework for assessing the extent of and potential for, industry and market globalization.” According to him “there is a strong relationship between the factors at work in the macro environment and the globalization drivers.” (Stonehouse 1992,p110).The relationship is illustrated below.

Potential for globalization

Cost drivers

Government drivers

Mark-et drivers

Com-petiti-ve drivers

Technological factors

Economic and financial factors

Political factors

Social factors

When applying this framework to analyze the macro environment of Haier, it is clear that all this factors influenced Haier’s decision for global expansion. The macro analysis of Haier shows that particular consideration should be given to economic and technological factors. Haier started their expansion in 1990’s and the time was favorable for the home appliances and consumer electronics segments in many parts of the world. An example is US market, which Haier penetrated in 1995, where U.S consumer disposable income increased and the mortgage rates were relatively low. These two resulted in fairly high demand for new homes, which on its turn stimulated people’s consumption of durable goods such as home appliances and consumer electronics. The strength of the economy, which can be considered form GDP per capita, is another index that Haier would have taken before penetrating Indonesian market. The stable growth of this index was one of the reasons that led Haier to successful joint venture there. Consumer confidence and unemployment rate are two other components that can be thought over from Haier’s executives when acquiring Menegheti’s refrigeration in Italy. All these factors had positive influence on Haier and moved it forward for globalization.

Technological factors had also their impact on Haier’s intention to go abroad. Technological innovation is crucial for the successful performance in consumer electronics. The growing popularity of the “smart kitchen” concept made a lot of companies invest in the development of “smart” computerized appliances that made life easier for users. Trends were changing rapidly, and manufacturers had to respond to this by maintaining highly creative technical teams. The consumer electronics faced even more pressure for technological improvement. Because of its international strategy Haier was able to globalize its R&D activities. Consumers often liked to have the latest version of an electronic gadget. The replacement of analog televisions with digital ones presented a lot of profit opportunities. Areas like home networking, photography, navigation, LCD, plasma, portable entertainment devices and digital radio were also rapidly growing. Haier had to anticipate new technological trends and respond to them in a cost-efficient and fast way.

The accession of China to the World Trade Organization meant that Chinese manufacturers such as Haier had to start observing some global trade rules and regulations. Haier adapted successfully to the global business environment where copyrighted ideas, trademarks, patents and designs were legally protected. The company used different kind of entry modes to avoid political risk. Hill states that “managers need to consider these carefully when deciding which to use”. Their joint ventures and own subsidiaries were really successful and brought the company a reputable brand name.

Analysis of the social factors highlights the particular differences in values systems, regions, languages and culture across the globe. In the present extremely dynamic pace of life, people needed “smart” appliances that would make their lives easier. This presented great opportunities for companies that could offer such advanced products. People had an urge to have the latest gadget on the market, which translated into shorter product life cycles, and demand for excellent supply-chain management.

The macro environmental analysis has its limitations. It had been conducted more on a regional basis, but there are differences between countries which make difficulties for companies to analyze. This is confirmed by Stonehouse’s consideration, who claims that “it is essential to understand and analyze both the industry and market when undertaking macro analysis” (Stonehouse, 2004.p 106)

Industry Analysis

In order to assess the attractiveness of the consumer electronics industry, a five forces analysis may be undertaken, which is a framework developed by

Porter (1979). This uses organizational economics to derive five forces which determine the attractiveness of a market. They consist of those forces which affect a company’s ability to serve its customers. The figure below illustrates this framework.

Threat of New Entrants

A firm should invest huge financial resources in order to enter the industry. It has to make great initial investment in research and development, also in localization and distribution reach. High technological expertise is extremely important for this kind of industry and it will be hard for all the new entrants to achieve it. Big companies have already established themselves in terms of brand recognition, brand loyalty and distribution channels. All of them experience difficult times and make little profit or no profit at all. We consider that for the international companies like Haier, Electrolux, Whirlpool the threat of new entrants is low.

Power of buyers

If we take into cosideration both- large distribution chain and consumers we can say that they are with high price sensitivity with high relative bargaining power. Customers are offered a great diversity of products at different prices. The consumers can compare these products or service price and quality which inevitably increase the pressure to manufacturers. Products offered in this industry have long useful lives which mean that buyers would shop around in order to find what suits them best. On the other hand buyers’ information (more information, more bargaining power) and switching costs are low. All of the companies in this industry use different strategies to reduce the buyer power- quality strategy, supply-chain management, customer relationship management,etc.

For example Haier’s supreme quality has been validated by many international standards, such as ISO9001, ISO14001, UL, CSA, SAA, CE, etc. The supply-chain management of the company includes framework construction, function integration, internal supply chain integration, external supply chain integration and dynamic alliance of integrated supply chain. Customer’s information by computer systems, providing helpful service information to customers and e-Business as a method of effective utilization of information technology are customer relationship managements.

Supplier power

Generally manufacturers are dependent on materials’ prices and availability. However, there are numerous suppliers worldwide. If we take into consideration just home appliances segment we can say that it is sensitive to material and logistics costs. Some companies observed financial losses as a result of the dramatic increase in materials’ prices. Moreover many international suppliers have comparatively higher technology and design capabilities, and thus have greater bargaining powers.

In order to reduce the supplier power all big companies use differnt methods. Haier uses overall Every Control and Clear (OEC), 3Rs and 3Ts support.

Threat of substitute products

Threat of substitutes comes from incremental improvements (such as the creation of energy-efficient appliances) rather than buying wholly new products. Other substitutes like an older version of a particular product or the manual way of performing its functions are often found outdated and unpractical.

The Competition Force Of Rivalry

There are many rivals already, and they are almost equal in size. All segments of the market are explored, and it is difficult to take sales away from a rival. The key success factors for consumer electronics industry are famous brand name, innovations (R&D), affordable prices, high quality and value added services.

The main industry players- Whirlpool, Electrolux, GE Appliances, Matsushita based their strategies considering these factors. They all tried to achieve high brand recognition and worldwide service network. These companies possessed and continued to develop cutting-edge technologies for the global market. Matsushita, Whirlpool and Electrolux accounted 40% of the world market.

The corporations are leaders in the manufacturing and marketing of consumer electronics all around the world.

Whirlpool implemented its international strategy earlier than Haier. It had different approach to the expansion, but still based on key success factors in the industry. Whirlpool manufactures in the home country (US) and exports to the foreign market. The company uses different kind of entry modes-including direct exporting, acquisitions and joint ventures.(Hill,439). In contrast to Haier, it has different approach for brand building. It acquired different companies with famous brand names (Maytag, KitchenAid, Jenn-Air, Amana, Gladiator Garage Works, Inglis, Estate, Brastemp, Bauknecht, Consul) and the company was able to be recognized to the foreign markets. Whirlpool had very successful joint venture with Philips, which helped the company to penetrate the European market. In terms of R&D and innovations Whirlpool has seventy manufacturing and technology research centers around the world. We can summarize that Whirlpool is a significant industry player which Haier should consider in its international strategy.

In the beginning of its project the Swedish company- Electrolux was a firm focused on the home market.On the analogy of Haier’s approach the company strategy was focus on the product development and building brand name. Elecrolux used localization strategy and tried to adapt its products to the customers preferences and to identify a number of global trends in the societies. The company was really successful in local adaptation with famous local brand names. Their localization approach was based on mergers and acquisitions which enable the company to build competitive market position.

Whirlpool and Electrolux became one of the leaders in all of their international markets. In Latin America Whirlpool had robust revenue growth- from $1,350 million in 2003 to $1, 962 in 2005. In North America the company acconted $6.6 billion of its $10.34 billion in sales during 2001. During 2001 the corporation had to contend with a variety of turbulent economies. The growth of the firm in Latin America was challenged by the economic crisis in Argentina and an Energy shortage in Brazil. A recession in Germany weakened its European sales. The economy in India-one of the firm’s largest growth markets-began to experience a decline as well, due in part to the military action in South Asia. Nevertheless, Whirlpool continues to invest in its global operations and nowadays ………………

The market share of Electrolux also grew every year. Electrolux’s expansion into Asia, Eastern Europe, and Latin America dates from an early 1990s planning review, which concluded that demand for household appliances, consumer electonics……….. was mature in Western Europe and North America. In 1994, Electrolux set an ambitious goal; the company would have to double its sales in the global markets from the $1.35 billion it achieved in 1994 to $2.7 billion by 1997. In 1995 the company generated 85% of its sales in the global market. At about 52 % of sales were in Western Europe, and another 27 % in North America. The fastest growth had come from:

Asia – which accounted for 5.1 % of 1997 revenues,

Eastern Europe – 7 % of revenues,

Latin America 6.4 % of revenues.

As of early 1998, the company employed over 100,000 people worldwide, had 150 factories and 300 warehouses located in 60 countries, and sold about 55 million products per year in 150 countries.

International strategy

The business strategy is the organization’s link between the micro environment (internal environment and the macro environment (external environment).Corporations followed different strategies in evolving from domestic company to multinational corporation with global emphasis. The internationalization process for Haier began in 1990’s, when Haier started its expansion to UK and Germany and then France and Italy. Its main purpose was building a brand name and deep understanding of its customers. In that time the company had a leading position on the Chinese market and it established its international strategy by manufacturing the majority of its product in China. Haier could have had advantages from “avoiding the substantial costs of establishing manufacturing operations in the host country.”(Hill, 2007, p.493) Its international strategy can be referred to Hill’s model that developed a “Reductions/Responsiveness framework” which differentiated between four multinational strategies: international, localization, global standardization and transnational. Using these framework Haier approach would be categorized as “International”, as shown below:

Pressure for cost reduc-tions

Pressure for local responsiveness

Global standartization strategy

Transnational strategy

International strategy

Localization strategy

Low

High

Low

High

Hill

Haier’s position in the “International quadrant” was a “good start”, because in early 1990’s the company just “tried the markets”. Another example would be their attempt to penetrate the US market, where they focused upon “niche markets”, by exporting compact refrigerators and electric wine cellars. Haier believed that both American and European markets had growth potential, and the sales figures proved this belief to be correct.

Haier continued its expansion by changing its main approach. After its “international strategy period” the company moved to another stage, considering the need to localize to each particular market. This can be referred to Hill’s statement that” localization strategy focuses on increasing profitability by customizing the firm’s goods so they provide a good match to tastes and preferences in different national markets.”(Hill,437) Haier would have followed this consideration and started to localize in different markets. The company used different approaches for entry modes to penetrate different markets. Production facilities were constructed in Pakistan in 2002 and Jordan in 2003, greatly strengthening its position in the Middle East market. In Africa, Haier had plants in five countries: Tunisia, Nigeria, Egypt, Algeria and South Africa. Stonehouse indicates that changing the production location “can provide advantages in terms of production flexibility and market responsiveness”(stonehouse,228).Another big advantage for companies with own subsidiaries abroad are that they “reduce risk of losing control over its main competence”.(Hill, 500) Haier was able to take control of its subsidiaries and its success encouraged the company to target the market in the United States. As part of its strategy, Haier decided to build a production facility in the United States in 2000. The company made an intensive capital allocation in order to upgrade its products so they can be competitive in the US. The fact that Haier is a Chinese-based company was a major obstacle for penetrating Western markets due to quality concerns of westerners with regard to Chinese-made products. Therefore, an appropriate entry mode for Haier on the US market was through foreign manufacturing of company’s products. By building a plant in the US, Haier was able to shift the perception of its product from “Chinese manufactured” to “US made”. By building this new image, Haier was able to expand its market share as Haier’s products was not be regarded as low-quality and low-price. This was controversial to Hill’s statement that “foreign factories are established where labor costs are low”. (Hill, p.574) Haier was close to its consumers which helped the company to tailor its products to consumers needs and to answer swiftly to changes in these needs. Moreover, establishing local production is a good way for a company to adapt faster and more effectively to local economic, legal, and socio-political factors in the environment. The entry mode of local manufacturing has its disadvantages as it is known to be the most expensive mode of penetrating a foreign market. Manufacturing primarily in the US would result in relatively higher production costs and a weaker ability to absorb increasing material costs compared to Asia-based manufacturing.

Haier used different approach when penetrated the Indonesian market by a joint venture with a local company. This was followed by joint ventures partnership in Pakistan and agreement in Japan. In each case Haier chose partners that had a good understanding of the local market. This approach supported Haier in dealing with the political, economic influences in the macro environment. Research shows that the joint venture approach with local partners, results in a lower risk of being subject to nationalization or other forms of government interference. (Bradley, 1997)

Haier always opted for a majority stake in the joint venture, which gave them tighter control over the business. Lack of dominance would have seen as a disadvantage to the business giving less control on the company. Research on joint ventures shows that there can be a conflict of interests in the strategy and goals when a partnership is formed between two nationalities.(Hill,499)

Alternative method which was used by Haier was franchising. The company has 30 franchises all over the world. It had positive affect for Haier because it allowed it for fast entry in foreign markets.

In terms of staffing policy Haier used geocentric approach which “seeks the best people for key jobs throughout the organization.” (Hill,p 630). The company got advantages by bringing some of its management from Asia, combining it with local experts. An example would be Haier’s implementation of OEC (Overall Every Control and Clear) management in the US, which was considered superior market-chain system combining Chinese traditional culture and Western Industrial Experience.

A key element of Haier’s world success is its connections with retailers. Supporting Hill’s statement that “there is a tendency for greater retail concentration in developed countries” Haier tried to make strong relationship with them. Haier is famous with its cooperation with the top retailers as Wal Mart in US, Ramada in Japan, and Carrefour in Europe.

Conclusion

Today the company enjoys leading domestic (China) market shares in washing machines (24 percent), refrigerators (23 percent), vacuum cleaners (18 percent), and air conditioners (13 percent). Haier has built a reputation in its domestic market for product quality, continuous innovation, and customer service. The company is the world’s fifth largest manufacturer of large home appliances behind U.S.-based Whirlpool Corporation and General Electric, Sweden’s Electrolux, and Germany’s Bosch-Siemens.

The company markets its Haier-branded products in more than 160 countries with global networks for design, production, distribution, and after-sales service. The company operates 18 design institutes (8 outside China), 10 industrial complexes (in China, Pakistan, and the United States), 12,000 after-sale service centers, and 22 factories (13 outside China) that produce mostly home appliances. Haier’s worldwide home appliance market share is about five percent.

Haier is the fourth largest goods manufacturer and global consumer in electronic maker in today world. In 2008 they were ranked the 18th top 50 consumer electronic brand. They were also ranked in 2008-2009 the first for the third time in a row the top brand from china. These rankings consist of the entire leading consumer electronic brand from the four areas of North America, West Europe, Japan, Korea and China. This situation where by all the candidates will be assessed by people through online voting on TWICE’s global network of websites and at the end of the voting the final assessment will be made by expert from famous international enterprises. The expert will then show a clear concept of globalization and a strong desire to go global, and have detail strategies for their brands to develop in overseas market. Other criteria include global sales, achievement and the brand awareness. In 1999 Haier campaign there product with a three-in-one strategy: complete localization of design, manufacture and marketing. They now successfully provide high quality and energy efficient home appliances that are designed and manufactured in facilities all over the world, to over 160 countries.

In 2006, they focus on building a global recognized brand that competes with other electronics leaders. They achieve these goals by providing quality home appliances and energy product. According to the article the ranking of the global top 50 really encourage them to continue to globalize there strategy and bring home appliances and consumer electronics to people all over the world.