Haier Group is China’s biggest white goods maker, and the fifth largest in the world. Incorporated in 1984 as a producer of refrigerators, Haier makes household and electrical appliances around the globe, spanning 15,100 varieties of items in 96 product lines, and exporting products to more than 100 countries. Chairman and CEO Zhang Ruimin, who has been at Haier’s helm for some two decades, has overseen the company’s transformation from a small factory into a global corporation with annual revenues of $12.1 billion in 2004. Last year Fortune magazine ranked him No. 6 among Asia’s “most influential business leaders.” In a recent discussion for China Knowledge@Wharton with Wharton management professors Michael Useem and Marshall W. Meyer, Zhang spoke about his globalization strategy and other issues.

Useem: What leadership skills were most essential for building the company in its early years, going back now almost two decades? Could you also describe the distinctive leadership skills required by the company in more recent years?

Zhang: Twenty years ago, when Haier started, it was a small factory on the verge of bankruptcy, and it had only 600 people. At that time, the top priority for the leaders was to make quick, tough decisions and ask subordinates to execute them accurately. Our management style had to be militaristic: We worked like marshals and generals and asked people to carry out our instructions. This was because our biggest concern was to boost the confidence of our workforce. As leaders we needed to hold ourselves accountable for all our decisions, which we required our people to execute very quickly. We followed Frederick W. Taylor’s theory of scientific management in those days because the technology and morale of the workers were low and often disrupted.

As Haier developed, it evolved from 600 to more than 50,000 employees. The company’s market has expanded from being local to global. It is impossible today to rely upon a single person or just one management team to make decisions responding to the challenges in the global market. Therefore, we have made multiple efforts to enhance our position. The first is flattening our organizational structure. With this, we will be able to adapt more quickly to the evolving markets and respond more efficiently to changes. The second approach has been to build small operating teams within the company, which we call MMCs (Mini mini corporations). These MMCs can respond more swiftly to the needs of their respective markets and win more customers by independent innovations.

Useem: You have made thousands of decisions over your career . . . could you identify the most difficult decision made during your nearly two decades at the helm of Haier. And could you identify the single most important decision you’ve made during your entire career?

Zhang: At Haier, we have made many decisions but the toughest one is the “next” one. We think the most challenging decision is the follow-up decision you have to make after having made a decision. Since the marketplace is changing so fast, companies are often tied, or constrained, by their own previous “right” choices. This could, however, lead to failure if your next big decision were to be based on the mindset of the previous one.

According to statistics, the average lifecycle of a company is only three to four years in China. Once a company has achieved good results, often it tends to grow complacent and doesn’t move any further. Its previous decisions constrain the next ones, but my view is that in this information age with a fast-changing marketplace, your decisions have to be able to keep up with change. To take an analogy from boxing, you can’t beat your rival with a single attack; you have to win through with a combined strategy. We ought to break through our self-restrictions, to conquer ourselves, not be chained by our own previous victories and old mindset. That explains why the most challenging decision for us is the next decision after the right decision.

As for the most important decision in my career, that took place in 1991 to 1992, when we decided to build an industrial park to produce multiple products. Before that, the refrigerator was our only product -- and it was a bestseller. Many consumers had to buy our products in the black market by paying extra 1,000 yuan on top of the original 1,700 price. We made huge profits in those days. Lots of people expected us to stay in that mode, but we anticipated that the market would be saturated one day. So in 1991 we made a very important decision: To set up an industrial park to expand our product range from refrigerators to washing machines, air conditioners and other home appliances.

The budget required for that was 1.5 billion yuan. We had only 80 million yuan in our coffers at the time, and the government would not finance us, because Haier was not a SOE (state-owned enterprise. If we had not done what we did at the time, we would have lost a huge opportunity. So our decision was made. That decision was risky, but it came at the right time as well.

In 1992, Deng Xiaoping’s speech during his visit to Southern China had accelerated economic reforms in China and the capital market in China had also begun to develop. We tried to get listed in the Shanghai Stock Market. With the funds raised there and other profits from some successful projects, we were able to build and finance the industrial park which paved the way for our years of rapid growth. Today we have 13 industry parks across the world. For Haier’s development, that decision was a key step.

Useem: As Haier has been in the U.S. and other markets beyond China for some time, doesn’t it require a different kind of leadership capacity for people, especially the ones who report to you -- to be able to manage on a more global basis?

Zhang: It’s true that the company is growing very rapidly. Haier’s footprint today spreads across every continent. As such, the company has realized that employment has become a major bottleneck. The approach we have employed is to localize in Manhattan by hiring a local manager to run the business. In the factory in South Carolina, too, we employ a local manager. On the other side of the coin, Haier has also sent people from its headquarters to its overseas corporations. Our charge to these Chinese managers is to enhance their capabilities in a global environment, and we also encourage them to be independent and innovative in a different market.

For example, the target we gave the manager who runs our American business operation is that he has to be able to compete head-on with the home appliance giants in the American market such as GE and Whirlpool. He has to make Haier popular among American customers in the U.S. market. Therefore, they have to make every detailed decision themselves. That is to say, we don’t want Chinese managers to keep coming back and asking questions about why and how they should do something. We want them to find about solutions that can increase our competitiveness in that market. In other words, we set up a target, but they have to decide themselves in their context on how to reach there and by what innovative approach.

Meyer: Now that the Haier CCT listing (in Hong Kong) has been approved, will this listed entity be Haier’s flagship-listed company? What additional assets will be injected into Haier-CCT (renamed Haier Electronics Group)? And finally, does the Hong Kong listing imply any lack of confidence in Chinese capital markets?

Zhang: Although we produce a wide range of home appliances, we have a relative advantage in white goods, where our business is ranked No. 4 worldwide. Our target is to become No.3 and eventually to be No.1 in the global market. To achieve this goal, we have to be in an international capital market. In terms of the above, the Haier CCT listing in Hong Kong is the flagship company for Haier China. In addition, the newly listed company, in which we own 50.3% of the shares, has been renamed the “Haier Electronics Group”, one signal for our vision to make it a flagship company.

We have injected 100% of the operating assets of Haier’s mobile and turbo-machine business into the new company to give us a holding position. Our next step which is awaiting approval from regulators will be transferring the assets of our A shares Shanghai listed company of white goods to the new corporation.

The reason we chose to list in Hong Kong is not because we have no confidence in the mainland capital market but due to its own limits. As you may recall, back in 1991 to 1992, we gained significant funds and support from the Shanghai stock market. However, Haier’s vision is to become an international company with a global brand. Just as our product markets are global, so must our capital markets be. The Shanghai A share stock market could not meet this demand. So we moved to Hong Kong in order to make our stockholder structure more international, which will be very helpful for our corporate governance and operations. Our goal is to globalize both our product and capital market that supports each other and ultimately make Haier a well-known global brand.

Meyer: As Haier goes about building a global Chinese brand, what are the lessons learned? And will other Chinese firms learn these lessons? And can U.S.-based business schools like Wharton learn and teach these lessons?

Zhang: The cultural gap or the communication problem is actually the greatest challenge for Haier when it expands overseas. Although we have localized our management team, we feel that cultural differences still make a big difference. For example, when we aimed to be one of the top 10 retailers in the U.S., our American managers thought it would be impossible to get there in such a short time. However, we managed to find a very good approach and worked only in niche markets with niche products. For instance, we introduced one product tailored for students and another appliance for the use in the living room. These niche products have won the recognition of consumers, and our reputation has been growing. The point here is that though localization is very helpful, the communication and cultural gap issues need to be resolved along the way.

As for your second question, the issue isn’t what other Chinese companies can learn from Haier. In fact, Haier has learned from the experience of other Chinese companies. In the early days, lots of Chinese corporations moved overseas with relatively prudent steps, first setting up a branch office; then sending a team there; and assessing the market gradually. However, during the time they try to understand the market completely and build the business, lots of opportunities have already been missed. So Haier decided on another approach: We hire local managers who make the company more adaptive and faster in building up our operations.

Further, many Chinese companies in the early days moved to developing countries first and then to the wealthier markets. For Haier, in contrast, our strategy was to go for the advanced markets first, i.e. U.S. and Europe. We think that our competitors are very strong in the developed countries, and if we put ourselves in that backdrop we can see our problems more clearly. It’s like competing in the Olympics: if you want to improve yourself, you put yourself in a pack of best competitors and compete with them.

Regarding the benefits that Wharton and other business schools in the U.S. can derive from the Haier case not only are there lots of challenges for Chinese companies moving overseas, the same is true of any multinational that happens to move to a new market such as China. Some of these companies come to Haier for help in finding out why, unlike Haier, they cannot benefit from the Chinese marketplace. I believe the main issue is that they are too complacent. They took for granted that their original business model would be as effective in Chinese markets. But it’s a different story, as the rules of the game are different from their home countries. Let me give you an example: Many MNCs have followed their home practices of hiring: huge compensation for professional managers. But in reality it doesn’t generate good results in China, as some of the managers they hired are not as qualified as they might have expected. Therefore I think that for Wharton and other business schools, the lesson may be that a successful business model in one marketplace may need to be adapted to fit in another marketplace.

Meyer: Haier would like almost every manager to be a profit center as part of the SBU (strategic business unit) system, or what you just called the MMC model -- the mini-mini corporation. Could you please comment on the feasibility and progress of the initiatives directed toward making every manager responsible for the bottom line?

Zhang: It is true that at Haier we have beaten the odds for a long time. In this information age, you have to be vigorous and swift to thrive. For Haier, we initiated the BPR (Business Process Redesign) program in September 1998 and we plan to take 10 years to achieve our goals. For the first five years from 1998-2003 our goal was to flatten the organizational structure. That means we will break apart the silos in our company: the previous superior-subordinate relationships have been changed to a market-oriented relationship. For example, the sales and marketing unit used to have more power than the production unit. But since we introduced BPR, the two are in an equal position. If the production capacity is 10,000 units and the sales team will be blamed for taking in orders less than the full capacity; the sales unit may ask the production unit for compensation if the latter cannot deliver the goods on time.

The second phase of our journey from 2003-2008 will be to convert everyone in the company to an independent and innovative manager with their own balance sheet. These efforts involve three more steps: (1) Set up a target for every individual; (2) Provide the necessary resources and support to the individuals; and (3) Establish individualized balance sheet includes information like input and output. For example, if the person takes in 10 products, each worth 10,000 yuan, he will have a deficit if selling them for only 90,000 Yuan or, earn profit for the company if he can sell at a price higher than 10,000. With this program, we expect everyone to become a profit center instead of always asking for resources from the company.

Our main challenges in implementing this initiative are, first, that it is difficult to define targets for each individual; the IT applications in our business processes are not sophisticated enough to count profits and losses for each individual; and finally, though people are willing to execute our strategy and increase their skills, so far their competence is still inadequate.

Knowledge@Wharton: Where does Haier want to be five years from now? What are the principal risks that might prevent the company from reaching those goals? How is Haier dealing with those risks?

Zhang: Where does Haier want to be five years from now? To build Haier as a competitive global brand with a strong position in the international market. However, from the depths of my heart, what I really think is important is to make everyone in Haier an independent and innovative entity who brings his full potential and value into play. If people are just staying there taking orders, the company will be as cold as a machine. As Peter Drucker, the father of management studies, once commented, the purpose of an organization is to help an ordinary person make extraordinary contributions. Everyone is commonplace, but the organization offers you a platform to make you extraordinary.

What is our principal risk in reaching those goals? I think the biggest problem is in our own minds. Some executives in Haier have become complacent because of the company’s good performance. Haier is not a big name internationally but in China we are doing pretty well. So lots of people are too slow in responding to the market change or they just expect yesterday’s model will work today. The other challenge is in the BPR system, which requires a high level of capability from our employees but many of them can’t follow it. We believe this will be a major challenge in the long run.