In 1984, the Qingdao General Refrigerator Plant was one of 300 or so collectively owned domestic white goods manufacturers turning out shoddily made appliances sold to local Chinese consumers on a take-it or-leave it basis. (White goods refer to household appliances that were historically white in color, such as dishwashers, washing machines and dryers, refrigerators, and room air conditioners.) A product of the economic system constructed by Chinese Communist Party Chairman Mao Tse-Tung, it, like its competitors, never worried about concepts like profit, quality, or consumer preferences. Nearly bankrupt and having had three managing directors resign in quick order, in desperation Qingdao authorities asked the deputy manager of the household appliance division of the municipal government, Zhang Ruimin, to see if he could keep the company afloat. He succeeded in this task beyond anyone’s expectation, becoming a business “rock star” of the magnitude of Steve Jobs or Jeff Bezos: today the company, which changed its name to the Haier Group in 1991, is the world’s largest producer of white goods, with \($37.2\) billion in sales in 2017.
When Zhang Ruimin assumed the leadership of the refrigerator factory, China was beginning an era of dramatic economic and political change.
After Chairman Mao’s death in 1976, political chaos ensued as rival groups within the Chinese Communist Party struggled to fill the power vacuum. A new leader, Deng Xiaoping, emerged victorious at the end of 1978. A political pragmatist, he was famously quoted as saying it doesn’t matter whether a cat is black or white; what’s important is that it catches mice. Through this adage, Deng was communicating to his fellow Communist party members and to the public at large that he was less concerned with maintaining the ideological purity demanded by Chairman Mao and more concerned with increasing the economic welfare of the Chinese people.
Zhang Ruimin was convinced that Chinese consumers deserved better products than those churned out by state-owned factories that were more interested in satisfying production quotas laid out by the central planners than in meeting consumer needs. To convey the message to the 800 workers at the Qingdao General Refrigerator Factory that poor quality products would no longer be tolerated, he pulled 76 refrigerators off the production line that had flaws—some major, some merely with scratches.
In front of the assembled employees, Zhang ordered workers to sledgehammer the flawed refrigerators to smithereens. This dramatic action sent a clear message to the workers and to consumers that his commitment to quality was real.
Zhang’s next step was to build the company’s technology base. After visiting German factories in 1984, Zhang entered into a technology licensing agreement with Liebherr, a German refrigerator manufacturer, and signed joint venture agreements with foreign white goods producers like Japan’s Mitsubishi and Italy’s Merloni. Within two years he had returned the company to profitability. In 1988, Haier’s commitment to quality was officially recognized when Haier won a gold medal for producing high-quality refrigerators. Zhang’s efforts were also acknowledged by consumers, as the factory’s products soon commanded a 15 percent price premium over products produced by its domestic rivals.
Municipal officials then asked Zhang to take over other failing appliance makers, including factories that manufactured microwaves, air conditioners, and freezers. He incorporated these new operations into Haier, replaced their leadership, and instilled his commitment to quality in their workforces. By 1998, Haier was the leading seller of air conditioners, refrigerators, and washing machines within the booming Chinese market.
Haier’s next step was to build a national distribution and dealership network. The economies of scope generated by the broadening of its product line were crucial in this effort. Trucks delivering a washing machine to a local distributor could also transport refrigerators or other white goods as well, lowering the company’s per unit logistics costs.
Moreover, this network allowed Haier to learn of and be responsive to the differing needs of customers in China’s 23 far-flung provinces, 4 municipalities, and 5 autonomous regions. For example, Haier managers received complaints from rural peasants in Sichuan province that their washing machines were malfunctioning. They discovered that the washing machines were clogging because the peasants used their appliances to wash their sweet potatoes and peanuts as well as their clothes. An American manufacturer might have responded by voiding the product’s warranty. Haier’s response was different: it reengineered the washing machines to accommodate the needs of this market segment.
Indeed, it prided itself on its reputation for carefully listening to and giving customers what they wanted.
Haier first entered the international marketplace in the early 1990s as a contract manufacturer, producing white goods for Western companies that then put their own brands on the product. For example, in 1994 it teamed with Welbilt Appliances, a New York-based importer of low-end appliances, to provide compact refrigerators to the U.S. market under the Welbilt label.
However, Zhang recognized that the profit potential as a contract manufacturer was limited. Rather, he wanted to make Haier a global brand. In 1995, Haier entered into a joint venture in Indonesia to produce air conditioners and refrigerators; two years later, it established a joint venture in Serbia to manufacture air conditioners. In 1997 it began exporting refrigerators to Germany under the Haier brand and established a joint venture in the Philippines to manufacture and market Haier-branded white goods. These actions were taken to implement his “three thirds” strategy, in which Haier’s long-term goal would be to produce and sell one-third of its output in China, produce in China but export the second third, and produce and sell overseas the last third.
In formulating his international strategy, Zhang also determined that he wanted to focus on the developed markets, where customers were more demanding, rather than in emerging markets, where competition and consumer expectations were less. This approach, Zhang believed, was necessary if Haier was to learn how to compete against established white goods giants like Ericson, Bosch, Siemens, Whirlpool, and GE. To this end, in 1999 Haier and Welbilt’s owner teamed to create a new subsidiary, Haier America. Haier America invested \($40\) million in South Carolina to manufacture white goods for the American market. However, rather than take on directly established American companies like GE, Whirlpool, and Frigidaire, Haier chose a niche strategy, serving segments of the American market that had been ignored by these larger competitors, such as dorm refrigerators, wine chillers, room air conditioners, and the like. Zhang believed that once American consumers valued and respected the Haier brand, Haier could then market to them more expensive and more sophisticated Haier-branded products......

Case Questions

1. Why did Zhang destroy perfectly good refrigerators— although perhaps with a scratch or two on them—in such a public manner?
2. Assess the “three thirds” strategy. Considering China’s low manufacturing costs at the beginning of the century, does Zhang’s goal of shifting a third of the company’s production outside of China seem sound?
3. Do you agree with Haier’s strategy to enter the U.S. market by focusing on low-cost niche markets like dorm refrigerators, wine chillers, and room air conditioners? Was this a good way for Haier to get its foot in the door in the American market, or would it permanently mark Haier as a producer of cheap goods in the mind of the American consumer?
4. Over its brief history, Haier has internationalized its operations through contract manufacturing, exporting, joint ventures, and foreign direct investment. Why do you think it used so many different modes of entering foreign markets?