This CEO Wants to Hold Chinese Products to a Haier Standard

Zhang Ruimin was a young Chinese bureaucrat on the way up when, at age 35, he was transferred by the Qingdao municipal government’s household appliance division to become general manager of the Qingdao general refrigerator factory.

“The factory was suffering great losses. It seemed an impossible task,” said Zhang, now chairman and CEO of the Haier Group, the largest appliance maker in China, remembering that day back in 1984. “There seemed like nothing to do except try to establish some sort of quality control, to somehow make the refrigerators coming out of that factory better.”

What Zhang did is now part of Chinese business legend. He went through the plant’s inventory and found 76 refrigerators that were outmoded, incomplete or otherwise defective. Then he had factory workers line them up and he called the entire workforce together for a meeting. Instead of giving the employees the pep talk they had expected, Zhang took a sledge hammer and proceeded to smash every last one of those 76 refrigerators to bits.

“To be substandard is unacceptable. That should be the message to every business,” said Zhang, who appeared April 3 at the East-West Dialogue of the Wharton Global Chinese Business Initiative. Speaking through an interpreter to Wharton students and faculty, Zhang described the difficulties of making a business work in China.

When Zhang took over the original Qingdao factory, he decided he would have to wean it off any sort of state funding. “The way of the government in factories was to have reservoirs,” he said. “Reservoirs hold a lot of inventory, hoping that some day someone will want it. Our idea was to have a river, with goods flowing out, and very little, if any, inventory.”

But in order to get to his river, he had to find funding sources outside the traditional government-oriented system. And in order to get that funding, he would have to prove that his factory could sell refrigerators.

The only way he could see that happening, Zhang said, was to start making better refrigerators. But there seemed to be little incentive on the part of his workers to do so. “You couldn’t be fired,” he said. “My first rule in the factory was that no one could urinate on the floor. So you see how hard it was going to be. Since I couldn’t even fire anyone for urinating on the floor, I put them on two years’ probation.”

While probation didn’t mean all that much in practice, it – along with the symbolic refrigerator-smashing – gave notice to the workers that Zhang was serious about doing things differently.

Finally, he said, the workers bought into his way of operating. Better refrigerators started coming out of the Qingdao factory. Zhang began selling them in a bigger and more sophisticated market, Shanghai, where the demand for a better refrigerator was greater. The scheme worked and investors from Shanghai started putting money into his operation.

Eventually, Zhang started a washing-machine factory, then other factories for microwaves, dishwashers and vacuum cleaners. The company later moved into freezers, air conditioners, TVs, electric irons, air purifiers, gas cookers and mobile phones, among other products. From $400,000 in sales that first year, the Haier Group had sales of more than $2 billion in 1999. That year, the Financial Times selected Zhang as one of its 30 most-admired international CEOS.

Haier now has a factory in South Carolina, and Zhang said he has hopes of doing well in the American, European and Middle Eastern markets.

“We had a three-step goal, each one taking about seven years,” said Zhang. “The first was to establish a brand name. It was new in China to have quality design in appliances. In 1984, there were 300 refrigerator factories, most of them making bad products. We wanted to distinguish ourselves and eventually we did.”

His second step in establishing his company in China was to diversify, but only within his sector. “In China, the idea is to make what you make and put out volume,” he said. “But since we were basing ourselves on quality instead of quantity, we decided that if someone bought a Haier Group refrigerator, then maybe they would look to buy something else from us.” He spent the next seven years buying or establishing factories in other appliances and electronic consumer goods.

For the last several years, Zhang has been concentrating on step number three – globalization. “We feel it is time we push into the global marketplace,” he said. “And our feeling is that we have to tackle the hard markets first [like the U.S. and Europe] and then later go onto the easy markets.”

Zhang emphasized the importance of being local when it comes to manufacturing in other countries. He said that almost all of the top management and workers at his South Carolina factory are United States natives. “We can talk about our culture, about the ways Chinese do things, but in the end, we have to respect Western ways in their market or we will fail,” he said. Zhang particularly admires General Electric, which he said has decided to diversify mainly in known businesses and strive for quality in each one.

Now that China has slowly begun to open up its business climate, Zhang will be focusing on melding Western business practices with the traditional Chinese. He likes the idea of having a spiritual core – a particularly Eastern concept – in which everyone is encouraged to strive to make all products better.

But he chafes at the recent Chinese notion of egalitarianism. “That is the rice bowl approach,” he said. “Everyone should be encouraged to innovate, and those who contribute more to the product should benefit more.” Still, he wants to acknowledge all employees, even a factory floor worker, when he or she does something out of the ordinary. Consequently, Haier names products, parts or even manufacturing practices after the employee who is responsible for the innovation. That way, Zhang said, everyone knows they have a chance to become someone special in the organization.

As in Eastern practice, a Haier employee is rarely fired. You are expected to want to stay for life; to Zhang, that is a good thing. “People who come to a company only for money will often be dissatisfied,” he said. “That is not good for anyone, or the company.”

When he retires in eight years, he added, his company will not falter. Most of his managers are young (average age 26) and they are full of vitality and innovation. “There is plenty of opportunity for growth in Chinese business,” he said. “I am confident that the Haier Group will be dynamic for a long time.”

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