Menu

Business Oct 12th 2013 edition

Chinese industry

Haier and higher

The radical boss of Haier wants to transform the world’s biggest appliance-maker into a
nimble internet-age firm

Oct 11th 2013

Give this article
QINGDAO

“NO URINATION or defecation in the working area.” That admonition was among 13
rules that managers felt necessary to post on the walls of a shambolic fridge factory
in Qingdao in the early 1980s. After several senior managers failed to turn it around,
in 1984 the municipal government of the Chinese city appointed a young employee,
Zhang Ruimin, as the firm’s boss. The gamble worked. Since then a lousy local firm
has turned into the world’s biggest appliance-maker.

Most think of Chinese companies as peddlers of cheap, undifferentiated kit or mere

copycats. In contrast, Haier is recognised globally for reliability and marketing
know-how. Mr Zhang had spent time in quality-obsessed Germany, where he
observed that even manhole covers were precisely made and numbered. It made a
deep impression. Incensed that a fifth of the products his plant turned out were
defective, in 1985 he handed out sledgehammers and joined employees in smashing
76 faulty fridges in public view. That won him national celebrity and was the start of
the firm’s transformation.
 ADVERTISEMENT

Now comes Mr Zhang’s latest radical notion: eliminating the firm’s entire middle
management. But surely it is barmy to tinker with a successful business model? A
close inspection of the firm’s rise reveals that Mr Zhang has never adhered to
conventional wisdom.

Haier became China’s biggest fridge-maker in 1999 in part by acquiring lots of

lossmaking local rivals. Mr Zhang looked for firms with strong products and
markets but inept leadership—“stunned fish”, he calls them—that could be turned
around by superior management. His un-Chinese obsession with quality and
branding helped, earning his products a premium even during periodic price wars.
He also emphasised top-flight service, rare in China, promising that machines
would be free if not delivered within 24 hours.

Mr Zhang also defied Chinese notions of how to expand overseas. Rather than go
first to less competitive regions like South-East Asia and Africa, Haier long ago
pushed into America and Europe. Mr Zhang wanted the firm to learn how to meet
the demands of the world’s most sophisticated consumers. Haier’s quality exceeded
norms set even by Japan’s exacting standards bodies.

By listening closely to demanding consumers, his firm’s fast and frugal engineers
came up with clever products like mini-fridges built into computer tables (for
students), freezers with a slightly warmer compartment (for keeping ice cream soft)
and horizontal deep freezers with two tiers of drawers (for Americans too lazy to dig
to the bottom). Haier also developed new niches, such as affordable wine fridges,
ignored by Western rivals obsessed with economies of scale. It is now pioneering
wireless charging of appliances.

ADVERTISEMENT
The results of Mr Zhang’s unconventional strategy have been breathtaking. Haier’s
revenues have shot up fourfold since 2000, topping 160 billion yuan ($26 billion)
last year (see chart). Pre-tax profits rose more than sixfold over the same period. It
was judged the eighth most innovative firm worldwide, ahead of Amazon among
others, in a ranking drawn up last year by the Boston Consulting Group. And now
KKR, a private-equity giant, is investing in the firm. It has stumped up $500m for a
10% stake, if the rumours are correct.

Most bosses would be satisfied with such a record, but not Mr Zhang. Though in his
60s, he still works nearly every day and he rarely takes a holiday. And far from
resting on his laurels, he is occupied reinventing his business. The point of killing
middle management is to make the firm more responsive, he says: “In the past,
employees waited to hear from the boss; now, they listen to the customer.”

Previously, the firm’s 80,000 or so workers toiled in traditional and distinct areas
like manufacturing, sales and so on. Now, they are organised into 2,000 zi zhu jing
ying ti (ZZJYTs)—self-managed teams that perform many different roles. Each is
responsible for profit and loss, and individuals are paid on performance. In the
past, managers relied on internal support services for, say, research or marketing. To
 p , g pp , y, g
encourage open innovation, the firm insists the new ZZJYTs must attract outside
partners and resources.

If ambitious employees spot an opportunity, they are free to propose an idea for a
new product or service. A vote, which can include not just employees but suppliers

and customers, decides which project goes ahead. The winner also becomes the
project’s leader. He forms his team by recruiting from across the company;
employees are free to join or leave ZZJYTs. Mr Zhang says the goal is “a free market
in talent, so the cream rises.”

He explains why such disruption is necessary: “If we don’t challenge ourselves,

someone else will.” If that sounds like talk straight out of Silicon Valley, in a sense it
is. He is convinced that if Haier is to flourish in the internet age, it must become a
services company. He even thinks it can mine user information to become a “big
data” firm, to serve customers even better.

How exactly does Mr Zhang intend to strike a balance between the chaotic
entrepreneurial energy released by the ZZJYTs and the need for corporate control at
the top? “We don’t need to balance!”, he says with a smile. “An unsteady and
dynamic environment is the best way to keep everyone flexible.” If you doubt his
seriousness, just consider the catfish.

Yang Lin, who started at the firm 12 years ago as a technician, won the contest to
become the head of the team for automatic top-loading washing machines. He
works extremely hard, he says, not only to earn his bonus but also to stay ahead of
the catfish. That is what the firm calls the person with a rival idea who came second
in the voting. He works on the victor’s team but watches for any chance to unseat
him.

Does this upset Mr Yang? “I can’t run things like an emperor,” he reflects, “but I don’t
mind. In fact, I’m a catfish to other teams myself.” It’s fish-eat-fish at the heart of the
world’s most successful white-goods firm.

This article appeared in the Business section of the print edition under the headline "Haier and higher"

Reuse this content The Trust Project

MONEY TALKS

Expert analysis of the biggest stories in economics, business and markets

 E pe t a a ys s o t e b ggest sto es eco o cs, bus ess a d a kets
Delivered to your inbox every week

example@email.com Sign up

More from Business

Stockmarket listings in America

Going public? Here is a how-to guide

Deutschland AG

The revival of Berlin Inc

Gimme! Gimme! Gimme!

Universal Music is a hit

Subscribe Reuse our content

Group subscriptions Help and contact us

Keep updated

Published since September 1843 to take part in “a severe contest

between intelligence, which presses forward, and an unworthy, timid
ignorance obstructing our progress.”

The Economist The Economist Group

About The Economist Group

Advertise Economist Intelligence

Press centre Economist Impact
Store Economist Events
Working Here
Which MBA?
GMAT Tutor
GRE Tutor
Executive Jobs
Executive Education Navigator
Executive Education: The New Global Order
Executive Education: Business Writing

Terms of Use Privacy Cookie Policy Manage Cookies Accessibility Modern Slavery Statement Do Not Sell My Personal Information

Copyright © The Economist Newspaper Limited 2021. All rights reserved.