Haier at 30 Says It Is Embracing the Internet. What Is It Actually Doing? (Part 2)

In two or three years, will Haier still be an appliance company?

When a company reaches a round-number anniversary such as its 30th, it usually holds a celebration or looks back on its history. Haier did something different. In January this year it replaced its 30th-anniversary ceremony with a seminar on business-model innovation in the internet age. Nearly all the speakers were management scholars from China and abroad, old friends of Haier invited to Qingdao to lend their support to the latest "revolution" of Haier CEO Zhang Ruimin.

At the morning seminar and the afternoon pitch session of the maker competition, we saw almost none of the festive mood that usually fills a big company's celebration. In the speeches by Zhang Ruimin, rotating president Zhou Yunjie and the chief financial officer, we kept hearing phrases such as "the challenge from the internet," "assume you are wrong," "disruption" and "destroyer of the old model." In place of celebration there was a sense of tension and crisis, handed down from the top.

Haier never seems to have shaken off that tension and crisis. As we discussed in last week's report, Haier, and the whole home-appliance industry with it, faces enormous problems. Haier's answer is to change its management model for the fifth time, in the name of crisis.

You don't need to walk into Haier's industrial park to see the change. Right outside the seminar hall was a display area for new Haier products, and what we saw there did not match the popular image of a "refrigerator seller." Every product stand came with its own app, and staff eagerly invited visitors to try it on a phone linked to an interactive screen.

Next to the water purifier sits a slightly smaller device, the "Water Box," a smart companion to the purifier. Through a phone app, users can monitor the water quality in their homes in real time and replace the purifier's filter when needed. Unlike most Haier products, the Water Box first went on pre-sale on the Ririshun online store. It took only three months to go from an idea in February last year to a launch in May.

A niche product sold through crowdfunding calls to mind not a large appliance maker but a start-up short of cash.

In fact, the Water Box does come from a start-up, one incubated inside Haier. Its founder, Zou Hao, was a Haier employee and is now CEO of a separate company, Haifushun. The idea for the product came from users discussing water-quality monitoring on an online forum run by Haier's water-equipment division.

The Water Box team has just four people. Zou Hao put more than 400,000 yuan of his own money into the new company and became a shareholder. At first, he solved the problem of the water-quality monitoring module through personal connections, not company resources. Had investors at the pitch session not pressed him again and again on how much of the company Haier actually owned and what resources it provided, the Water Box would have looked like a fully independent start-up. Once the project was approved, team members stopped drawing salaries from Haier. Product requirements came from talking to users, and the team attracted investment and resources from outside Haier.

Zou Hao's goal is still for Haier to buy the company back after three years. But the way the product was developed, the way the team is built and the way it iterates are entirely different from traditional manufacturing.

The Water Box is one of Haier's showcase examples. Inside Haier, maker teams like it, or "xiaowei" (micro-enterprises) in Haier's own vocabulary, already number 212.

"In the future, Haier may be made up of micro-enterprises"

"Xiaowei" is a term Haier coined in the second half of 2013 for a new kind of project organization: start-ups that grow on Haier's entrepreneurship platform. There are two kinds. "Maker micro-enterprises" build a product line from scratch; "transformation micro-enterprises" come out of product lines that are already fairly mature. Haier plans to help incubate 1,000 projects a year by investing in them for equity.

"We have been working on curing big-company disease," Zhang Ruimin said last Friday in a conversation with Yu Minhong of New Oriental Education Group. Discussing Haier's latest change to its management model, he said: "Haier is now turning the company from a command-and-control organization into an entrepreneurial platform, where users pay the salaries and every employee's abilities are fully unleashed."

In the future Haier describes, only three kinds of people will remain inside the company: platform owners, micro-enterprise owners and makers.

One advantage of turning a large company into a cluster of maker teams is that it changes the traditional manufacturing process for launching new products.

Another fairly successful micro-enterprise is Thunderobot, a gaming laptop. It was not an upgrade or successor to any Haier computer. Its design came from user demand. Its three founders read through more than 30,000 negative reviews of gaming laptops on JD.com and listed the most common complaints: slow cooling, crashes, the blue screen of death and so on. On that basis, the team launched Thunderobot.

Thunderobot's new laptop now has a prominent spot in JD.com's smart-hardware crowdfunding section. In the new round of crowdfunding that began on April 6, it has already raised more than 4.88 million yuan, beating its target.

In 2014 alone, Thunderobot had sales of 250 million yuan. Before venture capitalists showed interest in January, Haier had already invested 1.87 million yuan in it. Wang Daomin, who runs Haier's maker competition, told QDaily that from the company's point of view, Haier's advantage as an investor is about more than money.

Wang Daomin compares Haier's maker program to a university. The makers are the students, and the "big shots" are the opportunities the careers office brings in. Investors come for profit; makers come for their own careers. The question people keep asking, "What if one day there is no Haier?", may one day stop being a question at all.

As of December 2014, Haier had set up 212 micro-enterprises in total, still well short of its goal of 2,000 self-managed business units. And realizing Zhang Ruimin's vision of the "platform enterprise" may yet take a struggle.

Over the past year or so, Haier's registered workforce has shrunk by 20,000. Those 20,000 were mainly middle managers who were laid off and employees who left to start their own businesses. Haier now explains its headcount this way: "This company does not know how many employees it has. It is made up of more than 2,000 self-managed business units. Besides registered employees, many more are online, so there are too many employees to count."

In a sense, incubating maker micro-enterprises has dissolved Haier's boundaries as a company and reduced the risk the company itself carries. Star micro-enterprises like the Water Box and Thunderobot are, after all, the exception.

Haier employees who spent years in a traditional industry have suddenly been pushed into the world of start-ups. Tech start-ups may be fashionable, but few succeed. Research by economists Ian Hathaway and Robert Litan shows that about 27% of US start-ups fail within a year. Tech start-ups, and hardware start-ups above all, are riskier still.

And Haier gives each micro-enterprise roughly one year.

From the "Rendanheyi" model (linking each employee directly to users' orders) that it began promoting in 2005 to today's "employees who are not makers should not exist," Haier's staff have carried the pressure of the company's transformation.

Transforming mature product lines

Beyond the maker micro-enterprises, Haier's more mature product lines are also changing how they work, moving toward smart, internet-connected products and faster response times.

The stand for the "Beiduofen" smart oven drew a crowd with its smell rather than its looks. The staff member demonstrating it baked cookies, cakes and even macarons from morning to night.

Staff told QDaily that the Beiduofen team has spent much of its time adjusting common recipes to the oven's actual temperature. Once a user puts the ingredients in according to a recipe, there is no need to set the time by hand. One tap on the phone screen and the oven bakes according to the recipe.

The display area had plenty of other smart appliances like this. One was a modular smart TV developed with Alibaba that users can control by voice. Another was the SmartCare smart-home kit, which links door and window magnetic sensors, smart plugs, gas-leak alarms and water-leak sensors. All of them have been brought into U+, Haier's unified smart-living operating system.

Haier was not especially late to smart appliances. In March 2014 it released U+, its own "smart-living operating system."

Ideally, the U+ platform will connect platform service providers, smart-appliance makers, smart-hardware makers and even local-services providers. Last October, Haier and SAIF Partners jointly invested 320 million yuan to persuade small and mid-sized companies and start-ups to connect their smart-hardware products to U+.

So far, more than 40 manufacturers and more than 50 products have joined U+ for unified management and data sharing. Most are start-up projects, but there are also big companies such as General Electric.

At the same time, Haier's appliances are also connecting to U+'s rivals. When Apple released its smart-home platform HomeKit, Haier was among the first appliance makers to support it, and the only one from China.

At the end of January this year, Haier announced a strategic partnership with Meizu and Alibaba to build a smart-home ecosystem.

Nobody knows what kind of smart home will overturn traditional appliances at a stroke. In the words of Li Li, general manager of Haier's smart-appliance business, all smart-home makers can do for now is "dig the hole, drive in the stake and wait for the rabbit."

Haier without appliances

Some of Haier's other moves might make you wonder whether, in two or three years, it will still be an appliance company.

In June 2014, Haier launched a new service called "vehicle micro-enterprises."

The vehicle micro-enterprises were incubated by Ririshun, Haier's logistics platform. They used to deliver Haier appliances to customers' homes and install them. Now every delivery truck has been refitted and turned into a "vehicle micro-enterprise."

Each refitted truck carries a GPS tracker, a POS terminal and a customized tablet. A back-end system assigns orders according to the area each truck covers, and the trucks grab orders much as drivers do on Didi's ride-hailing app. A truck's chance of winning an order is tied directly to its past ratings from users.

Ririshun's logistics network already has 90,000 vehicle micro-enterprises. Most are third-party vehicles brought in through a franchise model rather than trucks Haier owns. The 180,000 drivers who work for them are called "online employees," not formal Haier employees.

Unlike SF Express, Ririshun handles only large appliances. Over more than a decade it has built 93 distribution centers across China and guarantees home delivery within 24 hours in more than 1,500 districts and counties.

In March 2014, Ririshun Logistics took an investment of 1.857 billion Hong Kong dollars from Alibaba to jointly build a complete delivery and installation system for appliances and other bulky goods. More important, a logistics platform that once served only Haier appliances now delivers large appliances for big e-commerce platforms such as Tmall and JD.com. And its installation service is not limited to products Haier makes.

Ririshun, however, faces the same problem of management reach. Spreading a logistics system out costs far more than the visible part. On one side, it has to build a network that reaches counties, townships and even villages. On the other, Haier's 42 industrial and trading companies around the country have already been converted into micro-enterprises, and delivery is shifting to vehicle micro-enterprises too. How to control the cost of communication among these loose, independent units, and how to manage a complicated mix of registered and outside workers, all make Ririshun's prospects harder to read.

Finance becomes a major source of income

In 2014, Haier Group's global revenue reached 200.7 billion yuan, and profit rose 39% year on year. But that performance did not rest mainly on traditional appliances. Zhang Ruimin admitted as much in an earlier interview: "Haier's profit growth still comes mainly from finance and other parts of the group."

Last August, Haier Group formally set up an internet-finance start-up business group and began a direct-investment partnership with Alibaba's Small and Micro Financial Services Group, putting up a first batch of 30 million yuan in loans for small and micro-business customers. Before that, in supply-chain finance, Haier had worked with China CITIC Bank to build an "online e-commerce supply-chain finance platform," which provides financing to more than 10,000 distributors on its Ririshun platform. Its recently launched "Hairongyi" platform starts from Haier's own industrial chain, giving companies funding and better ways to raise money.

Haier Yundai, the second microloan company to receive a nationwide license, mainly lends small sums to the agents and distributors that work with Haier around the country. At first this money could only be used to trade Haier-related products. After the partnership with Meizu, however, Haier Yundai launched an "M+ Finance" program. A Meizu employee familiar with the matter told QDaily that Meizu's several hundred specialty stores across China can also borrow from it to finance their stock of Meizu products. A distributor pays only a deposit up front to take delivery, and repays the rest of the loan within a set period.

The Meizu deal can be seen as Haier Yundai's first step into supply-chain finance for mobile phones. It also shows that Haier's finance platform no longer serves only Haier.

Compared with the internal start-up teams, whose prospects are still unclear, innovation in supply-chain finance and consumer finance may be the truly interesting part of Haier's internet strategy.

Zhang Ruimin keeps stressing an ideal of "Haier as a platform," but both outsiders and people inside Haier worry about the micro-enterprise model. If Haier splits into one independent company after another, not only do the company's boundaries blur, but its brand, data and users will also have to be pulled together again. Over the past year or so, Haier's executives and micro-enterprise owners have said again and again that they want to get close to users and use "internet thinking" to integrate the company. "Internet thinking" is a murky thing: plenty of people talk about it, and very few have ever seen it.

Next to all this, Haier's announcement in January 2014 that it would stop buying magazine ads looks less important. At an internal annual meeting, Zhang Ruimin once declared: "No product that lacks the best user experience across the whole process should be produced; no transaction on a platform without value-creating interaction should exist." Haier will keep working with new-media advertising and with advertorials inside magazines. The decision may have little to do with Haier itself. It only shows that hard-sell print ads have stopped working, and Haier noticed and turned the decision into a bit of marketing.

Whether or not these strategic shifts succeed, Zhang Ruimin got at least one thing right: "There are no successful companies, only companies of their time. Not every company can keep in step with the beat of its era."

Still, whether past experience can grow enough "makers" remains a hard question that no one has yet worked out.