Wednesday, November 21, 2007

Interview: cool approach to building an empire

BIZCHINA / Zhang Ruimin

 Interview: cool approach to building an empire

Updated: 2006-03-14 13:52

Haier Group is China's biggest white goods maker, and the fifth largest
in the world. Incorporated in 1984 as a producer of refrigerators, Haier
makes household and electrical appliances around the globe, spanning
15,100 varieties of items in 96 product lines, and exporting products to
more than 100 countries.

Chairman and CEO Zhang Ruimin, who has been at Haier's helm for some two
decades, has overseen the company's transformation from a small factory
into a global corporation with annual revenues of US$12.1 billion in
2004. Last year Fortune magazine ranked him No. 6 among Asia's "Most
influential business leaders."

In a discussion for China Knowledge @ Wharton with Wharton management
professors Michael Useem and Marshall W. Meyer in March 2005, Zhang spoke
about his globalization strategy and other issues.

Useem: What leadership skills were most essential for building the
company in its early years, going back now almost two decades? Could you
also describe the distinctive leadership skills required by the company
in more recent years?

Zhang: Twenty years ago, when Haier started, it was a small factory on
the verge of bankruptcy, and it had only 600 people. At that time, the
top priority for the leaders was to make quick, tough decisions and ask
subordinates to execute them accurately. Our management style had to be
militaristic: We worked like marshals and generals and asked people to
carry out our instructions. This was because our biggest concern was to
boost the confidence of our workforce. As leaders we needed to hold
ourselves accountable for all our decisions, which we required our people
to execute very quickly. We followed Frederick W. Taylor's theory of
scientific management in those days because the technology and morale of
the workers were low and often disrupted.

As Haier developed, it evolved from 600 to more than 50,000 employees.
The company's market has expanded from being local to global. It is
impossible today to rely upon a single person or just one management team
to make decisions responding to the challenges in the global market.
Therefore, we have made multiple efforts to enhance our position. The
first is flattening our organizational structure. With this, we will be
able to adapt more quickly to the evolving markets and respond more
efficiently to changes. The second approach has been to build small
operating teams within the company, which we call MMCs (Mini mini
corporations). These MMCs can respond more swiftly to the needs of their
respective markets and win more customers by independent innovations.

Useem: You have made thousands of decisions over your career. Would you
identify the most difficult decision made during your nearly two decades
at the helm of Haier. And could you identify the single most important
decision you've made during your entire career?

Zhang: At Haier, we have made many decisions but the toughest one is the
next one. We think the most challenging decision is the follow-up
decision you have to make after having made a decision. Since the
marketplace is changing so fast, companies are often tied, or
constrained, by their own previous right choices. This could, however,
lead to failure if your next big decision were to be based on the mindset
of the previous one.

According to statistics, the average lifecycle of a company is only three
to four years in China. Once a company has achieved good results, often
it tends to grow complacent and doesn't move any further. Its previous
decisions constrain the next ones, but my view is that in this
information age with a fast-changing marketplace, your decisions have to
be able to keep up with change. To take an analogy from boxing, you can't
beat your rival with a single attack; you have to win through with a
combined strategy. We ought to break through our self-restrictions, to
conquer ourselves, not be chained by our own previous victories and old
mindset. That explains why the most challenging decision for us is the
next decision after the right decision.

As for the most important decision in my career, that took place in 1991
to 1992, when we decided to build an industrial park to produce multiple
products. Before that, the refrigerator was our only product ?and it was
a bestseller. Many consumers had to buy our products in the black market
by paying extra 1,000 yuan on top of the original 1,700 price. We made
huge profits in those days. Lots of people expected us to stay in that
mode, but we anticipated that the market would be saturated one day. So
in 1991 we made a very important decision: To set up an industrial park
to expand our product range from refrigerators to washing machines, air
conditioners and other home appliances.

The budget required for that was 1.5 billion yuan. We had only 80 million
yuan in our coffers at the time, and the government would not finance us,
because Haier was not a SOE (state-owned enterprise. If we had not done
what we did at the time, we would have lost a huge opportunity. So our
decision was made. That decision was risky, but it came at the right time
as well.

In 1992, Deng Xiaoping's speech during his visit to Southern China had
accelerated economic reforms in China and the capital market in China had
also begun to develop. We tried to get listed in the Shanghai Stock
Market. With the funds raised there and other profits from some
successful projects, we were able to build and finance the industrial
park which paved the way for our years of rapid growth. Today we have 13
industry parks across the world. For Haier's development, that decision
was a key step.

Useem: As Haier has been in the U.S. and other markets beyond China for
some time, doesn't it require a different kind of leadership capacity for
people, especially the ones who report to you to be able to manage on a
more global basis?

Zhang: It's true that the company is growing very rapidly. Haier's
footprint today spreads across every continent. As such, the company has
realized that employment has become a major bottleneck. The approach we
have employed is to localize in Manhattan by hiring a local manager to
run the business. In the factory in South Carolina, too, we employ a
local manager. On the other side of the coin, Haier has also sent people
from its headquarters to its overseas corporations. Our charge to these
Chinese managers is to enhance their capabilities in a global
environment, and we also encourage them to be independent and innovative
in a different market.

For example, the target we gave the manager who runs our American
business operation is that he has to be able to compete head-on with the
home appliance giants in the American market such as GE and Whirlpool. He
has to make Haier popular among American customers in the U.S. market.
Therefore, they have to make every detailed decision themselves. That is
to say, we don't want Chinese managers to keep coming back and asking
questions about why and how they should do something. We want them to
find about solutions that can increase our competitiveness in that
market. In other words, we set up a target, but they have to decide
themselves in their context on how to reach there and by what innovative

Meyer: Now that the Haier CCT listing (in Hong Kong) has been approved,
will this listed entity be Haier's flagship-listed company? What
additional assets will be injected into Haier-CCT (renamed Haier
Electronics Group)? And finally, does the Hong Kong listing imply any
lack of confidence in Chinese capital markets?

Zhang: Although we produce a wide range of home appliances, we have a
relative advantage in white goods, where our business is ranked No. 4
worldwide. Our target is to become No.3 and eventually to be No.1 in the
global market. To achieve this goal, we have to be in an international
capital market. In terms of the above, the Haier CCT listing in Hong Kong
is the flagship company for Haier China. In addition, the newly listed
company, in which we own 50.3% of the shares, has been renamed the "Haier
Electronics Group" - one signal for our vision to make it a flagship

We have injected 100% of the operating assets of Haier's mobile and
turbo-machine business into the new company to give us a holding
position. Our next step which is awaiting approval from regulators will
be transferring the assets of our A shares Shanghai listed company of
white goods to the new corporation.

The reason we chose to list in Hong Kong is not because we have no
confidence in the mainland capital market but due to its own limits. As
you may recall, back in 1991 to 1992, we gained significant funds and
support from the Shanghai stock market. However, Haier's vision is to
become an international company with a global brand. Just as our product
markets are global, so must our capital markets be. The Shanghai A share
stock market could not meet this demand. So we moved to Hong Kong in
order to make our stockholder structure more international, which will be
very helpful for our corporate governance and operations. Our goal is to
globalize both our product and capital market that supports each other
and ultimately make Haier a well-known global brand.

Meyer: As Haier goes about building a global Chinese brand, what are the
lessons learned? And will other Chinese firms learn these lessons? And
can U.S.-based business schools like Wharton learn and teach these

Zhang: The cultural gap or the communication problem is actually the
greatest challenge for Haier when it expands overseas. Although we have
localized our management team, we feel that cultural differences still
make a big difference. For example, when we aimed to be one of the top 10
retailers in the U.S., our American managers thought it would be
impossible to get there in such a short time. However, we managed to find
a very good approach and worked only in niche markets with niche
products. For instance, we introduced one product tailored for students
and another appliance for the use in the living room. These niche
products have won the recognition of consumers, and our reputation has
been growing. The point here is that though localization is very helpful,
the communication and cultural gap issues need to be resolved along the

As for your second question, the issue isn't what other Chinese companies
can learn from Haier. In fact, Haier has learned from the experience of
other Chinese companies. In the early days, lots of Chinese corporations
moved overseas with relatively prudent steps, first setting up a branch
office; then sending a team there; and assessing the market gradually.
However, during the time they try to understand the market completely and
build the business, lots of opportunities have already been missed. So
Haier decided on another approach: We hire local managers who make the
company more adaptive and faster in building up our operations.

Further, many Chinese companies in the early days moved to developing
countries first and then to the wealthier markets. For Haier, in
contrast, our strategy was to go for the advanced markets first, i.e.
U.S. and Europe. We think that our competitors are very strong in the
developed countries, and if we put ourselves in that backdrop we can see
our problems more clearly. It's like competing in the Olympics: if you
want to improve yourself, you put yourself in a pack of best competitors
and compete with them.

Regarding the benefits that Wharton and other business schools in the
U.S. can derive from the Haier case not only are there lots of challenges
for Chinese companies moving overseas, the same is true of any
multinational that happens to move to a new market such as China. Some of
these companies come to Haier for help in finding out why, unlike Haier,
they cannot benefit from the Chinese marketplace. I believe the main
issue is that they are too complacent. They took for granted that their
original business model would be as effective in Chinese markets. But
it's a different story, as the rules of the game are different from their
home countries. Let me give you an example: Many MNCs have followed their
home practices of hiring: huge compensation for professional managers.
But in reality it doesn't generate good results in China, as some of the
managers they hired are not as qualified as they might have expected.
Therefore I think that for Wharton and other business schools, the lesson
may be that a successful business model in one marketplace may need to be
adapted to fit in another marketplace.

Meyer: Haier would like almost every manager to be a profit center as
part of the SBU (strategic business unit) system, or what you just called
the MMC model the mini-mini corporation. Could you please comment on the
feasibility and progress of the initiatives directed toward making every
manager responsible for the bottom line?

Zhang: It is true that at Haier we have beaten the odds for a long time.
In this information age, you have to be vigorous and swift to thrive. For
Haier, we initiated the BPR (Business Process Redesign) program in
September 1998 and we plan to take 10 years to achieve our goals. For the
first five years from 1998-2003 our goal was to flatten the
organizational structure. That means we will break apart the silos in our
company: the previous superior-subordinate relationships have been
changed to a market-oriented relationship. For example, the sales and
marketing unit used to have more power than the production unit. But
since we introduced BPR, the two are in an equal position. If the
production capacity is 10,000 units and the sales team will be blamed for
taking in orders less than the full capacity; the sales unit may ask the
production unit for compensation if the latter cannot deliver the goods
on time.

The second phase of our journey from 2003-2008 will be to convert
everyone in the company to an independent and innovative manager with
their own balance sheet. These efforts involve three more steps: (1) Set
up a target for every individual; (2) Provide the necessary resources and
support to the individuals; and (3) Establish individualized balance
sheet includes information like input and output. For example, if the
person takes in 10 products, each worth 10,000 yuan, he will have a
deficit if selling them for only 90,000 Yuan or, earn profit for the
company if he can sell at a price higher than 10,000. With this program,
we expect everyone to become a profit center instead of always asking for
resources from the company.

Our main challenges in implementing this initiative are, first, that it
is difficult to define targets for each individual; the IT applications
in our business processes are not sophisticated enough to count profits
and losses for each individual; and finally, though people are willing to
execute our strategy and increase their skills, so far their competence
is still inadequate.

Knowledge@Wharton: Where does Haier want to be five years from now? What
are the principal risks that might prevent the company from reaching
those goals? How is Haier dealing with those risks?

Zhang: Where does Haier want to be five years from now? To build Haier as
a competitive global brand with a strong position in the international
market. However, from the depths of my heart, what I really think is
important is to make everyone in Haier an independent and innovative
entity who brings his full potential and value into play. If people are
just staying there taking orders, the company will be as cold as a
machine. As Peter Drucker, the father of management studies, once
commented, the purpose of an organization is to help an ordinary person
make extraordinary contributions. Everyone is commonplace, but the
organization offers you a platform to make you extraordinary.

What is our principal risk in reaching those goals? I think the biggest
problem is in our own minds. Some executives in Haier have become
complacent because of the company's good performance. Haier is not a big
name internationally but in China we are doing pretty well. So lots of
people are too slow in responding to the market change or they just
expect yesterday's model will work today. The other challenge is in the
BPR system, which requires a high level of capability from our employees
but many of them can't follow it. We believe this will be a major
challenge in the long run.

(For more biz stories, please visit Industry Updates)

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