Haier Struggles to Overcome the China Slowdown

The white-goods maker has been hit hard by the rising cost of labor, raw materials, and oil, as well as the appreciation of the yuan

No one ever accused Qingdao-based Haier Group, the world's fourth-largest maker of white goods, and its charismatic CEO and founder, 59-year-old Zhang Ruimin, of not thinking big. And its Olympics Haier Experience Center, a giant bubble-shaped building set up in Beijing's Chaoyang Park during the recent Olympic Games that featured its futuristic "U-Home" technology, certainly highlighted that propensity.

The Center was designed to allow visitors to experience a day in a person's life in the future, all showcasing Haier's vision of the wired home, including nifty appliances like a refrigerator that will message one's mobile phone when it runs low on milk, and an "intelligent bed" that "will shut down the lights, the television, and close the curtains," said a company press release on Aug. 6th. Says CEO Zhang: "You must be connected to the world during the information era. We hope through this set of solutions, we can enable everybody, especially the Chinese, to enter the information era."

The reality, sadly, is a lot more earthbound. Even as its Shanghai-listed arm Qingdao Haier, the unit that comprises much of its refrigerators, air conditioners, and freezer businesses, reports strong results—revenues in the first half grew 10.44%, to $2.78 billion, while net profits reached $104.62 million, up 65.01%—its stock has swooned, down 59.8% from the beginning of the year. (The much larger Haier Group also includes TVs, mobile phones, computers as well as components, and the company's retail businesses and real estate; it says it had revenues of $16.2 billion last year but declines to release profit figures.) And its Hong Kong-listed arm, Haier Electronics, hit a 52-week low today and is now a penny stock, down 49% year-to-date at 85 Hong Kong cents. It's not clear when consumers will be ready for Haier's U-Home products.

Tough Times Ahead

Why the stock downturn? Qingdao Haier's strong revenue and profit numbers "have a lot to do with the booming economy and stock market of last year," points out Teng Bingsheng, a professor of strategic management at Cheung Kong Graduate School of Business in Beijing. "A lot of companies are starting to have difficulties, even though if you look at the first half [of 2008] their numbers are very impressive. It takes time for their real situation to be reflected in their numbers."

Rising labor and raw material costs, as well as the appreciation of the yuan, have hit margins in Haier's domestic business. Soaring oil costs are also making exports less profitable for the bulky white goods Haier ships abroad. Finally, its 10-year-long effort to push the Haier brand in developed markets, including by building a refrigerator plant in Camden, S.C. (BusinessWeek.com, 4/12/06), has not yielded the sales it once hoped for. "The whole company is facing huge pressures," says CEO Zhang. "The results [overseas] haven't reached our expectations."

To counter the pressure on margins, Haier is pushing sales of higher-end products such as its $1,000 line of energy- and water-efficient Luxurii washing machines and its $2,499 24.6-cubic-foot refrigerator, which it launched in the U.S. market earlier this year. "Since supply exceeds demand in the [white goods] markets, it is not realistic to raise prices," points out Zhang. "The only solution is to continuously raise the value-added of products."

Yuan Pressure

Haier too is trying to reach new consumers through linkups like the one signed in 2006 that allows it to sell its kitchen appliances at B&Q. And it's pushing its domestic reach by developing its own sales channels with around 5,000 Haier-dedicated outlets on the mainland today. That supplements its traditional reliance on local retailers like Gome and Suning. "They realized they have to beef up their own channels to keep up their own bargaining power with retailers," says strategy professor Teng.

To beat the high costs of shipping and pressure from the rising yuan at home, Haier has shifted production overseas to some of its regional facilities, including the Thailand refrigerator factory it bought in April last year in Prachinburi province, 170 kilometers east of Bangkok. That, too, fits into its strategy of boosting overseas sales from about one-quarter of total revenues now to more than half over the next few years. Despite disappointing sales in the U.S., Haier hasn't given up on the U.S. market and is planning more product launches there. "We transferred some of our production to Southeast Asia and are exporting products from there as well as selling locally," says Zhang.

Now, Haier is also actively considering overseas brand acquisitions as a way to boost its presence in foreign markets quickly. One possibility has been the purchase of General Electric's (GE) white goods unit, a prospect raised by GE CEO Jeffrey Immelt in late May when he listed the company as a potential suitor. "We surely are very interested in GE," says Haier's Zhang.

But being interested doesn't equal a successful takeover, of course. Just three years ago, Haier joined forces with private equity firm Blackstone and Bain Capital in a $1.28 billion bid for appliance maker Maytag (BusinessWeek.com, 7/4/05), but ultimately lost out to a higher bid from Whirlpool. "He is probably encouraged by Lenovo's reasonably satisfactory acquisition (BusinessWeek.com, 1/3/08) of IBM's (IBM) PC unit," says Teng. "But it is a long shot for Haier. It will be difficult to make it happen, and even if it did, it would be difficult to integrate the GE business."

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