It has been two years since Haier Group enjoyed the status of top global manufacturer within major appliances, after acquiring Fisher & Paykel in 2012. Thanks to the fast and continued growth of the Chinese economy, Haier has been able to gain share, with its long-established position in its domestic market. However, the cessation of the subsidy program in 2013 is likely to shrink Chinese consumer confidence and demand for appliances in 2014 or even longer. Additionally, the economic growth of China has resulted in wage and production cost increases, which will not be beneficial for Haier as a Chinese manufacturer. To add to its challenges, the recent acquisition announcement of Indesit Co Spa by Whirlpool Corp indicates heightened competition and Whirlpool is likely to win back the status of top manufacturer in major appliances. Should Haier start to press the panic button and if so, what are its solution options?
Do Prosperity Opportunities End in China?
Euromonitor International projects that sales of major appliances in China will experience slower growth over 2013-2018. This is due in part to the end of the subsidy program which the Chinese Government originally implemented to drive domestic consumption. As a result of this program, major appliances yearly volume sales growth went from 0.3 %to 6.2 % in 2013. As much as Chinese consumers clearly appreciated and benefitted from the program, manufacturers will now have to face a slowdown in demand as consumers will not be inclined to upgrade their appliances until the machines break down and need to be replaced. Though China’s economy is still booming, with one of the largest gross domestic products (GDP) in purchasing power parity terms globally, consumer spending is low. Furthermore, considering that more than 70% of its total major appliances sales come from China, Haier will need to seek alternative sales sources.
The other key concern for Haier is cost and price alignment. As the majority of its production is generated from within China, Haier for a long time has been able to compete effectively with affordable products not only in China, but also in other countries such as the US and Japan, given its lower labour costs. However, as wages within the manufacturing sector have been recording sharp increases in recent years , China will soon lose its competitive edge as a low cost production site for appliances manufacturers.
Some manufacturers, such as Whirlpool, BSH Bosch & Siemens Hausgeräte GmbH, and LG Corp, are considering reshoring manufacturing to their home countries - or have done so already - or considering moving to alternative cheap locations, such as Vietnam and Indonesia. Given that outside of China, Haier’s low pricing has been its main selling point to consumers, Haier’s long term operational plan should be reviewed unless there is a drastic change in its product positioning, moving up the value curve.
Merging Wars Over Top Rank
With Whirlpool acquiring Indesit in July 2014, the competitive landscape will see changes. Earlier in 2012, Haier’s acquisition of Fisher & Paykel led to leadership changes as the shares gap was marginal between Haier and Whirlpool until 2011. Specifically, Fisher & Paykel enjoyed a strong position in Australasia and Asia Pacific and also gave Haier a foothold in the premium segment. Following this acquisition, Haier is believed to have been on the lookout for more well-positioned acquisitions while at the same time, looked to apply Fisher & Paykel’s technology and knowledge to its mass products to move up the value chain. To date, its “Made in China” tag continues to undermine its attempts to break into the higher value markets, as consumers - especially in developed markets – are slightly sceptical of product durability.
Whirlpool’s recent acquisition will hit Haier hard; Whirlpool will reclaim the top manufacturer spot, and will also have expanded geographical coverage. Haier’s international presence is limited outside of its domestic market and Indesit’s considerable presence in Europe will definitely add more firepower to Whirlpool. Furthermore, both Whirlpool and Indesit have established brand portfolios cutting across the mass to premium platform.
Global Major Appliances Shares Comparison 2013 – Haier Group vs Whirlpool Corp
Source: Euromonitor International
Haier’s Next Step
Haier has been quick to acknowledge the market challenges it faces, and is seeking to downsize to save on costs and be more efficient operationally. At a press conference in June 2014, Haier’s CEO Zhang Ruimin announced that the company is undergoing a major transition and there are plans to cut about 10,000 of its 55,000 employees by the end of 2014.
At the same time, Haier appears fully committed to its research and development investments. With its focus on product innovation, the company needs to keep an eye on improving its product quality and marketing its improved brand positioning in order to appeal to consumers outside of China. Haier needs to recognise evolving consumer demand and its first key selling point needs to be centred on product quality, alongside affordable pricing, to gain share in international markets in the longer term. Meeting the demands or expectations of consumers outside of China will be the most important factor, given the company’s immediate need to reduce its overreliance on the Chinese market.