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

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

Oct 12th 2013 | QINGDAO |From the print edition

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“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.

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.

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 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.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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