09 Apr 2015

China’s Indigenous Innovators: How Haeir Is Shaking Things Up

Haier, the world’s biggest appliance-maker, has implemented a radical new business approach in order to turn itself into a machine for innovation.

Under the leadership of Zhang Ruimin, profits have soared as this China-based firm implements a structure that allows talent to rise to the top and great ideas to be developed.

What does this mean for Chinese innovation in the future?

Haier used to be known for cheap and shonky domestic appliances; a reputation that has now been completely turned around. When he was appointed to lead the firm in the mid-eighties, Zhang Ruimin handed out sledgehammers to his team and publically destroyed faulty fridges. At that time, one in five of the appliances they manufactured failed to work.

Since then, Haeir has become known worldwide for reliability and marketing savvy, and Zhang has become something of a household name. The successful manufacturer now rivals even Japan manufacturing excellence in the appliance market. Zhang has championed branding and quality during periods when Chinese manufacture has been associated with neither. He’s also pushed hard to raise service standards in a market where customer service wasn’t always taken seriously. His plans for expansion overseas were always more ambitious than rival domestic firms, heading to the challenging Western markets ahead of cosy Asian neighboring ones in order to challenge rivals on quality of manufacturing.

Under his leadership Haier also found new niches to occupy, such as affordable wine fridges, and is now judged one of the world’s most innovative companies by Boston Consulting Group.

Rethinking company structure

When Zhang took charge, the firm had a fairly predictable structure with 80 thousand workers divided into the usual divisions such as sales, finance and manufacturing. The present firm is instead organized into two thousand self-managing teams, which take responsibility for their own profits. Performance-related pay has been implemented and Haier encourages these autonomous teams to seek outside rather than internal resources for support such as research partners.

Teams are encouraged to identify opportunities, which are voted on by customers and fellow employees to determine which the company explores. Free movement between teams means that talent tends to be recognized and to rise to the top. Good management has also helped Haier gain an edge by taking over multiple rivals with weaker management teams during the nineties.

But it’s in his radical business structure approach that Ruimin is really breaking boundaries in China. He’s proposed to completely eliminate the company’s middle level of management with the aim of making the firm more responsive to customers. Rather than clinging to ideas of corporate control, Zhang pushes for an unsteady environment as he views this as both more flexible and more dynamic. He rejects the idea of running his company top-down “like an emperor”.

At Haeir the ambition is to become a data-driven company, using customer data to build ever more relevant products. Zhang’s idea is to use the company as a mere platform for innovation, transforming Haier into a kind of incubator where employees are pitted against one another to come up with the best and most innovative ideas.

One of these companies-within-a-company is Thor, started by a small team within Haier’s PC department. By analyzing many thousands of user comments and complaints, they developed a new gaming laptop that’s been valued at many times Haeir’s initial investment and has already won external venture funding. Haier’s innovative structure is also being used to refresh old company products and revise its logistics process: no stone is left unturned by the radical business approach.

Step aside Steve Jobs

Along with Alibaba’s Jack Ma, Zhang joins a new wave of Chinese business gurus whose ideas have started to emerge onto business leadership bookshelves once exclusively occupied by western managers such as Steve Jobs. Zhang is significant because he’s pushing forward the idea of the ‘indigenous inventor’, using innovation and excellence to move Chinese manufacturing beyond its old reputation for shoddy goods using designs copied from the West. It’s a trend identified by Rupert Murdoch just earlier this year, who wrote that the country was moving from just copying Western things to much more impressive innovation.

Zhang’s view is that businesses of the future are not being well-served by overly rigid and hierarchical structures that dampen innovation and prevent good ideas reaching the top decision-makers. Interestingly, he’s linked this old hierarchical business structure to the decline in Japanese manufacturing. Haier is certainly beating the Japanese appliance manufacturers at their own game, with profits soaring.

Government-backed innovation

Rising labor costs in China mean that the country is not able to rely on cheap outsourced manufacturing driving the economy forever. The latest five-year government plans have all attempted to foster indigenous innovation, mostly by subsidies in strategic industries and money for R&D. But in no country on earth has the state ever been known as a good innovator. It’s far more likely that real innovation will come from outside the state’s involvement.

State involvement could even get in the way of natural innovation, by throwing resources at favored industries and firms and starving ‘outsider’ firms without political connections of capital. So far the results have been mixed when it comes to government-sponsored innovation in China.

But many argue that China is merely following a well-trodden path. Other countries that first emerged on the market as specialist in cheap manufacturing have since gone on to develop a more respected manufacturing reputation. These include Japan and Taiwan. What’s clear is that, in several key fields, Chinese industry will soon emerge ahead of Western rivals in terms of the technological capability they possess.

It’s still very apparent that there needs to be serious changes to intellectual property regulation if native innovation is to begin to emerge. At present there is a strong disincentive for Chinese firms to invest in R&D when they stand to lose out to rivals copying their innovations. It’s likely that this is one of the many issues that will need to be overcome if Chinese industry is to restructure itself around innovation.



 
 

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