Haier's Tough Trip from China
Quick--think of a Chinese multinational. Not so easy, is it? Despite China's growing economic clout, the mainland is mostly bereft of companies with global heft. There is, however, one that would like to lay claim to the title: the Haier Group, a $7.3 billion appliance maker.
Founded 17 years ago in Qingdao, on China's eastern coast, Haier is now the country's leading maker of washing machines and the world's No. 2 refrigerator maker. While Haier still retains a socialist aura--it is technically owned by its employees--the so-called collective enterprise has been held up as a model corporation by no less than Premier Zhu Rongji and lionized in the overseas press as one of China's best-managed companies.
Now Haier wants to extend its global reach. Over the past half-dozen years, the company has built 13 overseas factories from the Philippines to Iran to Camden, S.C., where it opened a $40 million fridge-making facility in 2000. Haier is locating its new Americas headquarters in the heart of U.S. capitalism: midtown Manhattan, where, last July it bought the landmark Greenwich Savings Bank building for $14.5 million. "Our target," says Chai Yongsen, executive vice-president in charge of Haier's overseas operations, "is to become the No. 3 appliance maker in the world," after Whirlpool Corp. (WHR ) and Electrolux (ELUX ).
Good luck. While the company has made remarkable strides, white-goods analysts and competitors say it is suffering serious growing pains. For instance, some of Haier's overseas acquisitions seem less than prudent. And the company has been spreading itself thin by diversifying into such far-flung industries as financial services and personal computers. Moreover, Haier is said to be borrowing heavily to pay for its expansion. Just how heavily is hard to say, because its secretive executives won't talk about debt. And earnings? The company says all divisions are profitable, but no details are forthcoming. Says an American retail consultant based in Beijing: "Haier is an enigma."
Still, it's easy to see why the company is willing to pull out all the stops overseas. After largely having China to itself for more than a decade, Haier has run into competition from a plethora of domestic upstarts, as well as such foreign rivals as Siemens (SI ), Samsung Group (SSNLF ), and Electrolux. A price war that has pushed down appliance prices by 10% since last year has probably eaten into Haier's margins. "This year will be bloody" in the appliance sector, says Huang Fanghua, an exec at Gree Air Conditioner International, which is closing in on Haier.
To keep its exports growing, Haier has entered into a slew of strategic alliances over the last few months. In February, the appliance maker signed a joint venture with Taipei-based Sampo Corp. under which it will jointly produce and distribute appliances, including televisions and refrigerators. Sampo's products will sell in China, Haier's in Taiwan. And in January, it signed a similar deal with Japan's Sanyo to sell washers and refrigerators. Haier also has agreed to make digital TVs with Korea's LG Electronics and mobile phones with Hong Kong-based CCT Telecom.
To overcome the increasingly thin margins in China's white-goods market, Haier is also trying to move into high-end products such as computers and CDMA mobile phones--a long shot, say analysts. Then there's Haier's foray into financial services, on which it has spent an estimated $120 million over the past 12 months, mostly to buy shares in mainland securities and banking companies. One is Wuhan-based Changjiang Securities, which is forming China's second joint-venture investment bank with France's BNP Paribas (BNPQY ). Last year, Haier signed a $24 million, 50-50 joint venture with New York Life International to begin selling a range of insurance policies on the mainland. Haier stands to make a great deal of money from these businesses, says the American consultant. Because China's "securities and insurance businesses are so protected," he comments, "the profit margins are astronomical."
Still, many analysts are convinced that Haier has put its eggs in too many baskets, and that it ought to be focusing on its appliances, which don't have a reputation in the U.S. and Europe. "Haier has to build up its image," says Frank Oerthel, a market researcher at appliance maker Bosch and Siemens Hausgeraete in Munich.
And while Michael Jemal, president of Haier America, says he has "zero interest" in competing on price, his products are clearly aimed at the lower end. Haier's most popular appliance in the U.S. is a $115 mini-refrigerator for college dormitories that is a best-seller at Wal-Mart Stores Inc. (WMT ) "As a brand name, Haier doesn't work," says Nicholas P. Heymann, an appliance industry analyst at Prudential Securities Inc. in New York. "People may buy their dorm refrigerator, but I don't think they'll spend a lot of money on an appliance from a company they've never heard of." Haier wants to hit $1 billion in U.S. sales by 2005. Last year it managed $200 million.
Moreover, in its rush to expand overseas, Haier is making some questionable investments. Last summer it paid $7 million to buy a refrigerator factory in Modena, Italy, from Italian appliance maker Menghetti Spa. Not only has Haier shifted production to a country with relatively high costs, but the factory it bought is hardly state-of-the-art. "That was the stupidest step they could have taken," says a German appliance retailer. "It would be a miracle if [they] get a reasonable product out of the factory." Says Haier spokeswoman Wang Shirong: "The most advanced factory may not necessarily be the suitable one for Haier."
Then there are the concerns about the company's finances. It's hard to see how Haier is funding its expansion from China profits. "Internationally, they must have a negative cash flow," says the U.S. consultant. "So they have to have funding from their China operations, but they've been losing market share. Where's the money coming from?" Moreover, analysts are asking if Haier is inflating the profit and revenue numbers at a Shanghai-listed subsidiary by shifting assets between the parent and the subsidiary. Haier refused to comment on these allegations.
Finally, Haier's culture of secrecy may hurt it as it moves overseas and pursues a U.S. stock listing, a goal the company hopes to meet within three years. Although Haier's executives agreed to be interviewed, they refused to answer a number of questions about finances. "Haier is extremely sensitive with news," says a Shanghai analyst who refused to give her name for fear of upsetting the company. "It doesn't matter whether it's good news or bad." But as skeptics ask tough questions about Haier's expansion, the company's Teflon-coated reputation is wearing thin. Welcome to the real world.
By Dexter Roberts in Qingdao, with Michael Arndt in Chicago, and Andrea Zammert in Frankfurt