Executive Memorandum

To: Mr. Zhang Ruimin, CEO, The Haier Group

Background
From 1984-2004, Haier Group has transformed itself from a failing refrigerator factory to the 3 rd ranked
white goods manufacturer in the world. Haier has built its success on rapidly growing Chinese market,
growing demand for higher quality goods, JVs, and a distinct internal culture. However with China’s
entrance in the WTO, competition both domestically and internationally will challenge Haier’s vision to
become the world’s largest white goods producer, becoming China’s first true MNC.

HR Issues
Paramount to Haier’s enterprise culture, are layers of re-enforcing elements which emphasize taking on
personal accountability. Domestic acquisitions have resulted in resistance to this strategy. Existing
workplace culture of acquired companies as well as government mandates of employee retention, may
negatively impact production quality and dilute existing culture. Haier’s international expansion rely
heavily on “local partners”, who understand local markets and have existing experience working with
top brands. Challenge in international growth thus becomes securing top talent and the necessary
human capital.

SCM Issues
Haier has proven successful in creating efficiencies through acquisitions of unsuccessful companies and
aligning group-wide “development divisions 1.” Domestically, retail distribution has become dominated
by private chains like GOME and Walmart where there is more emphasis on the bottom-line, bringing in
more foreign competition and reducing profit margins. This reduces Haier’s supplier power, allowing
foreign competitors to bypass existing supplier-buyer relationships and compete on price and brand.
Haier’s current advantage is its distribution network and reorganized logistics. Efficiencies are created
through JIT purchasing of raw materials and product distribution to a wide network of retailers not only
in the saturated Eastern sea board, but also in underserved Western regions and rural populations
(diagram 1). This has reduced input costs, improved scale and volume, and reduced inventory cycles;
supporting Haier’s advantage in innovation and rapid market response. Haier must continually be weary
1
capital flow (finance), commerce flows (sales), material flow (logistics), overseas (global operations)
of foreign competitors neutralizing these points of parity through JVs or gaining access to these
networks through higher bids. Domestic competitors have also learnt to develop niche markets, opting
to focus on 1-2 specialized products, similar to Haier’s international expansion strategy. Additional
concern for Haier’s international expansion would be Haier’s focus on product differentiation and rapid
response (currently 96 product categories and 15,100 specifications). Although this may be currently
viable due to maximizing parts commonality and relatively lower variable labour costs in China,
expansion into developed markets will challenge this strategy. Consumer demand may vary significantly
between small geographic regions; quickly turning advantage to weakness as economies of scale is lost.

Marketing Issues
“As a brand, Haier doesn’t work”- U.S industry analyst

Key to Haier’s international expansion will be dispelling negative perceptions that may be associated
with a Chinese brand. Haier’s current strategy relies on JVs, and local expertise to promote its products.
Given China’s status as an emerging market, with high end manufacturing still in early stages of its life
cycle, Haier will need to break out of the “Chinese” brand stereotype to establish itself as a
multinational to compete with major players. Although Haier’s investing 10% of its revenue back into
marketing, more importantly, Haier will need to identify the market segment of local markets, develop
correct strategies to target the market as well as using the appropriate marketing mix.

Accounting/Finance Issues
Per exhibit 3b, significant margin declines in 2002 due to aggressive domestic price wars and
aggressively marketing and sales overseas. Given higher operating costs for expansions in foreign
markets, it is reasonable to see a drop in profit margins and return on equity/assets. However other
indicators such as gross/operating margins, asset/inventory turnover, cashflow as well as balance sheet
all show very robust financial positions throughout Haier’s early international expansionary phase. Goal
of “3 Thirds” is showing signs of success (diagram 2), as the other “2 thirds” are both increasing in
revenue and percentage of total revenue. Domestic sales is still increasing, however percentage of total
sales is diverging towards this goal. Haier continues to dominate and grow in domestic white goods
market, but more encouraging is the growth of “others” in U.S. markets with Haier now at 1% of this
market.
Options
1. International expansion in all markets using JVs, supported by a strong marketing budget.
Domestic markets should focus on rural areas where sales penetration is still quite low, and take
advantage of Haier’s established distribution system to reach these markets which competitors
can not readily match.
2. International expansion should focus only on developed markets to reinforce the Haier brand in
markets requiring higher standards with most competition. Expansion in developing markets
should be put on hold. Domestic growth same as option 1
3. International expansion focus on developing markets where brand and quality is less critical.
This allows faster and cheaper gains in global market share. With greater global market share
and international recognition, entry into developed markets can be more readily facilitated by
larger marketing campaigns and more access to distribution channels. Domestic growth same as
option 1.

Recommendation and Analysis

Critical to Haier’s success as a MNC is defining the Haier brand and people’s perception of Haier to be on
par with brands like GE. Only by growing Haier’s market share in developed markets where quality is
held to the highest standards, can Haier pull itself away from pre-existing stereotypes. Only then can
Haier fully expand internationally under its own brand and reduce its heavy marketing budget burden.
With an established brand, there will be less reliance on constant product differentiation reducing
economies of scale and reduce self neutralization of its own products. Domestic growth should leverage
Haier’s efficient logistics system and wide distribution network to push into underserved Western
regions (diagram 3) as well as establish the Haier brand in rural areas, where international brand
reputation will have less impact to the average consumer. This SCM advantage should be maximized
before domestic as well as foreign competitors through JVs are able to neutralize it.

Word Count: 1000

100
90
80
70 Refrigerators (Urban)
60 Refrigerators (Rural)
50 Air Conditioner (Urban)
40 Air Conditioner (Rural)
30 Washing Machine (Urban)
20 Washing Machine (Rural)
10
0
1 2 3 4 5 6

Diagram 2. Haier Group Approximate Revenue Breakdown in US$ millions

14000
12000
10000
8000 Overseas Made and
Sold
6000 Exports from China
Domestic Sales
4000
2000
0
1998199929992991200220032004

Diagram 3. Population Density Map of China