Online Extra: Haier: "Local Resources" Are Key Overseas

The appliance giant's CEO and chairman, Zhang Ruimin, on why higher production costs abroad are worth while to establish its brand

Haier Group is one of China's most acclaimed companies and best-known brands. With overall revenues of $10 billion and overseas sales reaching $1.2 billion last year, this appliance maker has also become China's most globally ambitious company. Haier, which already has 22 overseas factories, from the Philippines to Iran to Camden, S.C., sells its popular minifridges at Wal-Mart (WMT ) and other retailers across the U.S.

CEO and Chairman Zhang Ruimin recently spoke with Beijing Bureau Chief Dexter Roberts at company headquarters in Qingdao in China's Shandong province. Following are edited excerpts of their conversation:

Q: What are your goals for this year?


This year we will try to increase the volume of our products sold in the U.S. We will try to modify our products to meet the American people's demands. Currently, the white-goods sales in the U.S. are mainly dominated by the top-five retailers, so now we are trying to enter into all these chains -- Sears (S ), Lowes (LOW ), Home Depot (HD ), Best Buy (BBY ), and Costco (COST )

Q: Is it challenging to develop relationships with these overseas retailers?


It is very hard for us to enter into the top chain stores because they have very strong relationships with our rivals. So we've introduced products with a good quality-to-price ratio.

Q: How do you manage design?


We mainly design our overseas products overseas. For example, the 21-cubic-foot refrigerator that we sell in the U.S. market is designed specifically for the U.S. and is produced in our U.S. factory.

When we enter into overseas markets, if we don't use local resources, we cannot design and produce the products that satisfy the needs the local consumers' needs. In the past we tried to design our products in Qingdao and sell them to the U.S. These products looked like American products, but once they were released on the market we discovered that there were minor details that didn't meet the needs of American consumers.

Q: What is the advantage of having a factory in the U.S.?


If we just look at the cost, we don't have much advantage. Only for our large refrigerators are shipping costs really high. But if we look at the long term, overseas production for Chinese companies will be a trend. Last year China got more anti-dumping cases from the U.S. than any other country. With China in the World Trade Organization and as Chinese companies export their products but don't invest in overseas markets, there will be more and more anti-dumping cases. This will force Chinese companies to not only export products but also export capital.

Q: Do you expect mergers and acquisitions to play a role for your overseas expansion?


So far we don't have the plans to merge with a big overseas brand. If we buy another brand and use it in overseas markets, that is not good for the development of our own Haier brand. For now we will continue with our Three-in-One strategy: that is to put design, production, and sales all in one country.

Q: What does the government in China have to do to encourage Chinese companies to go global?


The first thing is deregulation. Currently we have too many restrictions in doing overseas businesses. When we have to pay foreign currency to our foreign partners, for example, the procedures are very complicated. So these procedures should be simplified.

But more important than government help, for a company to go overseas it must first build up its own capabilities. For example, a company must establish a global procurement network, a global design network, and a global production network.

Q: What are the challenges that Chinese companies face when they go overseas?


I feel that the largest challenge for Chinese companies when they go overseas is their lack of a global marketing and distribution system. When Chinese companies go into a new market, they must first find someone to sell their products. Because Chinese products aren't well recognized by local retailers, they must try hard to penetrate new markets.

Q: How do you expect revenues and profits, both domestically and overseas, to grow going forward?


In 2000, our profit was $169 million, and in 2001 it was $242 million. That means that within two years we doubled our profits. This was our fastest-growing period. But in 2002, our profits dropped to $145 million -- those are our profits from manufacturing. That was because we increased our investments in overseas markets and in our exports and because of the price war in the Chinese electronic appliances market.

Many white-product manufacturers even suffered more than us -- they lost money or even got knocked out of the market altogether. Last year, our profits began to increase again and reached $193 million -- about a 30% increase. For the sales revenue forecast for next year, we're hoping to see 15% growth in revenues and hope the profit can increase by 20%, to $242 million.

I predict that overseas profits growth will be a little bit slower than the overall company's profit growth. In some mature overseas markets we will make profits, but in entering new markets we may also at first lose money. This is in line with international experience. For many foreign companies when they first come to the Chinese market, they, too, are prepared to lose money, for at least the first several years.

    Before it's here, it's on the Bloomberg Terminal.