Leaving the factory

Shandong-based manufacturer Haier is one of the best-known white goods manufacturers in China’s crowded market, but the company’s production lines may soon be grinding to a halt. In March, Chairman and CEO Zhang Ruimin announced that Haier was leaving direct manufacturing and concentrating on building the company’s brand and service network.

Despite Haier’s fame as a manufacturer, the move was not unexpected, said Kent Kedl, general manager of Technomic Asia, a market strategy consultancy.

“It’s a very natural progression. I don’t think that’s a surprise… that’s the way all brands need to go. They start off with the manufacturing [and then] move to being a product developer and marketer.”

A natural progression it may be, but many observers question whether Haier will be able to carry out its transition. The company itself declined to speak to CHINA ECONOMIC REVIEW.

Haier, the world’s fourth-largest white goods manufacturer, has a presence in over 160 countries, and enjoyed sales revenues of US$3.8 billion in the first nine months of last year. The company had a 9.1% share of China’s electrical goods market in 2008, placing it second behind microwave oven producer Midea, according to Euromonitor International.

Observers said its manufacturing success could place it in a good position to focus on product development. Furthermore, China’s white goods manufacturing industry is mature enough that Haier can outsource manufacturing without worrying about quality problems.

Haier’s real challenge will come in the area of branding and building recognition overseas. The experiences of other Chinese firms that have tried and failed in international markets may suggest slim hopes.

Lenovo no-go

Lenovo is perhaps the most famous example, having acquired IBM’s PC brand and its manufacturing division in 2004. The company stopped using the brand in 2007 – two years earlier than planned – because revenues from the acquisition were higher than expected. However, the switchover did not go well. International consumers did not take to the Lenovo brand, and this year the company announced that it was shifting its focus back to China.

Haier may have the cash to stage a large-scale marketing campaign abroad, but it might not fare any better than Lenovo. As Tom Doctoroff, Greater China CEO of JWT, noted, putting money into marketing a brand is not enough. “Haier is still very much a [short-term] sales organization,” he said. “Marketing organizations back short-term sales with long-term equity to a point where they are able to command a price premium… There’s no evidence that Haier has made much progress in reinforcing that value added – both on an emotional level and on a functional level.”

This short-term mindset is a major barrier for Haier to achieve a global brand status against major Western players such as Whirlpool, which have established brands, logos and points of difference.

Paul French, chief China representative for market research firm Access Asia and regular contributor to CHINA ECONOMIC REVIEW, said the company will also encounter a problem that has confronted many foreign manufacturers that want to sell their products in China: producing goods that are suitable for local target markets.

Hard sell

Haier has had some success in niche areas, notably in small refrigerators for university dormitories. It is in such markets – as well as in emerging economies where Haier’s existing level of quality and service give it an advantage – that the company could find the best opportunities.

But any venture overseas could present the company with numerous hurdles, even if Haier meets regulatory requirements. French believes the company will have difficulty setting up distribution relationships with major retailers in the US and Europe, where stores are finding it hard to sell the models they already have.

Success for Haier could still come if it takes its time, and invests in market research and in improving its corporate structure to become more competitive. However, JWT’s Doctoroff thinks a necessary cultural shift is still a long time off.

“I don’t think it’s going to happen until the new generation comes into power…  You’re really talking about another 10 years at the minimum,” he said.