Beyond China: Can a New Acquisition Help Haier Crack Japan?

It's not often that loss-making companies are enticing acquisition targets. But there is good reason why Haier Group has just shelled out 10 billion yen (US$132 million) for Japan’s Sanyo Electric, a company that's been in the red since 2005. While Sanyo is the world’s ninth-largest washing machine maker and the eighth-largest refrigerator maker in terms of volume, far more importantly for Haier is that it has a foothold in Japan.

Although Haier reigns as an appliance-making juggernaut at home in China, growth abroad has been tough. As attractive as it is for manufacturers worldwide, Japan, in particular, has been a hard market for Haier to crack. “The Japanese market is very difficult to get into unless you buy an established brand or business network,” says Mauro F. Guillen, a Wharton management professor. But, “of course, the Japanese market is very big and attractive.”

That's not lost on Haier, whose latest acquisition closed on October 17. Though it trails big-name brands such as Panasonic, Toshiba and Hitachi, Sanyo has an enviable track record that stretches back to when Toshio Iue set up a refrigerator business in 1952. Iue — the brother-in-law of Konousuke Matsushita, founder of Panasonic, which was Sanyo's previous owner — correctly bet on the firm's appliances being able to win the loyalty of overburdened Japanese housewives. Within three years, the brand became a top seller.

And despite its financial struggles, Sanyo has stood out as an industry innovator, launching a washing machine that cleans without detergent in 2001 and introducing its Aqua series, which launders clothes without water, in 2006. Such feats have proven popular, especially with Japanese consumers, in an age of belt-tightening and environmental awareness.

The challenge now for Haier is to leverage Sanyo's brand. Playing up the firm's Japanese roots could help Haier distance itself from what dogs many a Chinese company — a reputation among global consumers for products that are as cheap as they are shoddy. But achieving that feat will take time, notes Shaun Rein, managing director of China Market Research Group in Shanghai. Recent scandals both inside and outside China in sectors ranging from toys to pharmaceuticals haven't helped. “It took Toyota and Sony decades to be able to create the impression in the minds of Western consumers that they are innovative and have premium products," Rein says. "Now, Chinese companies like Haier are having the same difficulty.”

Barrier Breaking

Breaking down barriers is old hat for Zhang Ruimin, Haier’s CEO and chairman, who took over the helm of the struggling state-owned refrigerator factory in 1984. Corporate legend has it that back then, Zhang had workers take sledgehammers to 76 defective refrigerators to drive home the importance of quality. Haier has come a long way since, with total group sales last year reaching RMB 35.8 billion (US$5.6 billion), compared with RMB 11.2 billion of sales at Wuxi Little Swan, China's second-biggest washing machine maker.

But being big in China is one thing; being big globally is another. Haier is the world’s largest refrigerator manufacturer and the second-largest manufacturer of washing machines by volume, but that's largely due to an enormous home market, which accounts for most of the company's sales. To diversify geographically and expand outside China, Haier needs to smash its biggest barriers yet.

Global growth via acquisition hasn't been straightforward for Haier. An attempt to buy its way into the American market failed with an aborted bid for Maytag in 2005. Was the deal, as observers suggested at the time, scuttled by the political uproar caused by China National Offshore Oil Company's attempt to buy Unocal in the U.S.? That's hard to say. But the closest Haier has come to another North American foray since was reported talks to buy the Louisville, Ky.-based appliance unit of GE in 2008. (In the end, GE decided to hang on to the business.)

The Sanyo acquisition is focused more on Asia. Haier is buying Sanyo’s washing machine and refrigerator units in Japan and in six Southeast Asian subsidiaries. Products will be sold under both Haier and Sanyo brand names in Southeast Asia, and under Haier and Sanyo's Aqua brands in Japan. Haier also will purchase Sanyo's 40% share of Haier Sanyo Electric Company, a design and research and development joint venture.

But there's a small twist in the deal. As part of a larger restructuring, Panasonic was keen to sell Sanyo, apart from one key part — the brand's washing machine joint venture in China. Hefei Rongshida Sanyo Electric in eastern China’s Anhui province is 30% owned by Sanyo, with the remainder held by the Chinese partner, Rongshida Group, and its workers.The venture, which makes Sanyo washing machines, is doing well — but Haier, as market leader, clearly didn't see the stipulation as a deal-breaker.

Cost and Quality

Can Haier succeed where many have failed? Consider computer maker Lenovo. Similar to Haier, Lenovo wanted to become a global player. Buying a well-established foreign brand appeared to be the fastest route to that goal. But after Lenovo purchased IBM's[r1] worldwide PC business in 2004, the American firm lost market share in Japan. To regain ground, Lenovo then bought 51%of NEC’s computer business earlier this year.

It's been nearly 10 years since Haier's arrival in Japan. In 2002, it set up a sales unit in Osaka in western Japan, and formed a joint venture with Sanyo to market Haier’s white goods in the country. The strategy didn’t work, and the joint venture ended in 2007. “It was a complete failure because Sanyo's then chairman, Satoshi Iue, overestimated Haier’s ability to lower the cost of its products and control quality,” states Tomoo Marukawa, a China industry and economy specialist and professor at Tokyo University’s Institute of Social Sciences.

Wharton management professor Saikat Chaudhurinotes that although Haier has not been able to break into the Japanese market, they're not the only ones.  "American firms have also had a hard time penetrating that market," he says. A case in point: GE, which had only 0.5% market share in refrigerators in Japan in 2010, according to London-based Euromonitor International.

Euromonitor reported that by 2010, Haier had only a 0.2% share of Japan's major electric appliances market, with sales totaling 10 billion yen. Even that share was hard won, and happened only after the company began selling mini refrigerators and washing machines not sold by Japanese manufacturers.

Haier's share in Japan's washing machine market is currently close to zero, and will be around 15% thanks to Sanyo, says Cristina Baus, a Euromonitor consumer applianceanalyst. Panasonic led the market in 2010 at 34.9%, while Toshiba had 24%, Hitachi 17.9% and Sharp 12.5%. As for Haier’s main strength — refrigerators — it had 0.8% market share in Japan in 2010, which will grow to 8.1% due to the Sanyo acquisition. That still puts Haier significantly behind a number of rivals — Panasonic held 28.5% of the market last year, followed by Mitsubishi Electric at 17.1%, Toshiba at 13.7%, Hitachi at 12.5% and Sharp at 11.1%.

Where Haier may make headway is by marrying its ability to squeeze costs with Sanyo’s technology, notes Rein, author ofa forthcomingbook titled, The End of Cheap China. Baus adds that Haier, “could gain a good competitive advantage against local manufacturers in Japan if it manages to introduce a portfolio of low-cost and energy-efficient appliances to the Japanese market, something that Sanyo's technological edge … could provide."

The Chinese company is inheriting 3,100 Sanyo employees, including 310 workers based in Japan. Adjusting to a new employer could be a big shock for some of them. “The biggest challenge is the integration of Sanyo into Haier and the retention of key Sanyo staff members,” according to Katherine Xin, a management professor at China Europe International Business School in Shanghai. “I do not think Haier will keep Sanyo the same way it has been running. Haier will try to change Sanyo and lower costs." But Xin warns: "When you start integration, you cannot avoid conflict.”

Rein agrees, despite the fact that Haier generally has a good track record of hiring local senior management to run its overseas businesses. “When you buy a big company like Sanyo, they have pride in their culture," he says. "That could be a big problem. When Lenovo acquired IBM, it was really a disaster because there was a lot of tension between them.”

Haier will also have its work cut out further adapting its products for Japan. For example, Rein notes, "Chinese generally do not use ice cubes in drinks, so you do not have to have a big ice cube box in refrigerators,” unlike in Japan. “What you have in Japan is great technology and tools specific for the Japanese market," adds Rein, who has advised South Korean clients on how to localize their products for China.

Korean companies have been struggling to get a foothold in Japan's consumer electronics market for more than 30 years, with limited success. Seoul-based Samsung, one of the world’s fastest-growing IT and consumer electronics companies, entered Japan’s white goods market in the 1980s, but then abandoned the effort in 2000 in order to shift to audiovisual equipment.

Korean and Chinese manufacturers have made the mistake of relying on product designs that imitate their Japanese rivals rather than being innovative, says Marukawa of Tokyo University. Finicky Japanese consumers might set aside their doubts about the quality of those foreign brands, but usually only if the prices are competitive. “They might sell well if the price were 30% lower than Japanese ones. But [companies have] not had the ability to lower costs [by] so much,” he states.

In the rare cases in which foreign manufacturers have won over Japanese consumers, they usually have done so through unique technologies. The ever-popular iPhone is the most obvious example. Vacuum cleaner maker Dyson of the United Kingdom and Delonghi of Italy, whose heaters are a top seller in Japan, have also done well because their design concepts are different than what's already on the market. “Foreign brands face difficulties in marketing, but if their products have a special creativity and are different from any in Japan, they can easily overcome that,” Marukawa says.

Time on Its Side?

Haier's plan now is to use a dual-brand strategy. Its own machines, made in China, cost about 30,000 yen in Japan, while the Sanyo Aqua machines sell for more than 50,000 yen. “Haier should definitely capitalize on the Sanyo brand equity to succeed in Japan," Baus notes. "Sanyo is perceived as a technologically savvy brand with a strong focus on producing energy-efficient appliances. This should be Haier’s main focus.”

Unlike Lenovo, which was contractually obliged to not use the IBM brand name on its PCs within five years its acquisition, Haier has some breathing space, says Wharton's Chaudhuri. “Haier does not have to face that pressure. They can choose when to phase out Sanyo’s brand." In the meantime, he adds, Haier could deploy a “back end” approach, by adopting Sanyo's best practices and processes to improve Haier’s own product offerings.

Eventually, however, Haier will have to decide whether it will drop the Sanyo and Aqua brands. “Haier will have to work hard to build up its own brand so it will be strong enough to stand by itself,” Baus notes.

For Southeast Asia, which accounts for 26% of Sanyo’s global sales volume, the strategy for success appears more clear-cut. While Haier’s presence in the region is fairly limited, Sanyo is a well-established brand among mid- to high-end consumers. Excluding China and India, the region accounts for 11% of the world’s sales volume for major appliances, making the market almost the same size as that of Latin America. “For a company the size of Haier, missing out on this market would be a mistake,” says Baus.With its new acquisition, Haier gains a 5% share in washing machines and 10% in refrigerators in Indonesia, 14% in refrigerators in Thailand, 13% in refrigerators in Philippines, and in Vietnam, 42% in washing machines and 68% in refrigerators, according to Baus.

It's likely that other Chinese companies will be watching to see how Haier handles the acquisition. Chinese firms now have the financial wherewithal to snap up global brands, particularly those that have been hit by the downturn and are available at bargain prices. “In the coming years, many Chinese firms will be taking advantage of low valuations to acquire foreign brands and shortcut the brand-building process,” Rein says. The shopping spree is just beginning.

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