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THE GREAT REFRIGERATOR RACE
It was crunch time. On June 2, two Whirlpool Corp. engineers walked into a testing lab in Cortland, N.Y. They had eight hours to scrutinize data showing that their prototype had failed miserably. At stake: a year and a half's worth of work, plus a $30 million prize and big-time bragging rights for the manufacturer that could create and sell a refrigerator that was both environmentally friendly and energy efficient.
Whirlpool, America's second-largest refrigerator maker, had beaten out its archrival, giant General Electric, and a dozen others to become one of two contest finalists, along with Frigidaire, the No.3 maker. But now, just two days before the final deadline, Whirlpool had been told a compressor in its prototype at the testing lab had failed.
The story of Whirlpool's all-out effort to win the contest illustrates a new twist on industrial policy. Its backdrop is a movement among environmental and other groups to use market forces and public-private coalitions, rather than litigation and laws, to promote social and environmental goals. At the same time, the contest also provides insight into ways to reinvigorate some U.S. manufacturing industries. By dangling what came to be known as a $30 million "Golden Carrot" before a group of manufacturers that had weathered over a decade of consolidation and restructuring, the contest spurred them to explore important new technologies and examine their product-development processes. And it prompted the two finalists to design more efficient refrigerators, which should make them more competitive.
The notion of the contest began in 1989 when the National Resources Defense Council (NRDC), a few utilities, and the Environmental Protection Agency got together to explore ways to cut energy consumption. They knew that refrigerator makers would soon be revamping their product lines for EPA-mandated improvements in energy-efficiency and an impending ban on ozone-depleting chlorofluorocarbons (CFCs). The NRDC and the utilities, which find it cheaper to promote energy-savings than to pay for new power plants, wanted to see the fridge makers go even further and faster than the EPA requirements, since refrigerators can account for up to 25% of a household's electricity use.
Instead of calling for new laws, they came up with the Super Efficient Refrigerator Program Inc., or SERP. It is funded entirely by 24 utilities that provide electricity to about 21% of U.S. households. The winning refrigerator must achieve two goals: eliminate CFCs and boost energy efficiency by at least 25% over current regulations. What makes the contest so tough is that the goals fight one another: In the last 20 years, refrigerator makers have cut energy consumption 50% mainly by using CFCs.
SLOW PAYOUT. Steep as the technical hurdles are, merely creating a winning icebox won't be enough. Instead, the contestants must address a complex combination of product development, manufacturing, and marketing challenges: The victor must convince the judges that it can build and sell enough refrigerators between January, 1994, and July, 1997, to produce the total kilowatt-hour savings it promises as part of its bid. To make sure the winner delivers those savings, the $30 million prize won't be handed out in a lump sum but in the form of a rebate of about $100 for each of the 250,000-plus fridges to be sold. The rebate will help the winner keep the consumer price of the SERP models in line with rivals' price tags.
The winner will be announced June 29. While keeping certain proprietary data on its technology off the record, Whirlpool allowed BUSINESS WEEK to follow its efforts. Frigidaire discussed its efforts only after completing its entry (page 81).
As plans for the contest became known in 1990, Whirlpool executives weren't even sure they should enter the race. They had enough on their hands just coping with slowing sales and bracing for the tough new EPA rules going into effect in 1993. Vincent P. Anderson, an engineer with an MBA, got the job of scoping out the contest. Anderson, then 33, had been head of the company's longstanding efforts to gradually phase out CFC coolants, so he was a natural choice. The Evansville (Ind.) native had grown up in the business: His father and one brother were engineers at the Whirlpool refrigerator plant there.
In March of 1992, Anderson drafted Bob Ho to join his group, which came to be known as the Golden Carrot Project Team. Born in Hong Kong and educated in Minnesota, the 44-year-old Ho worked in product design, planning the 1993 models. Anderson began by asking Ho the obvious question: What could Whirlpool do to win this thing, given what was cooking in the company's R&D labs?
For an answer, Ho began trying out different combinations of technologies. Some were exotic: One that eventually went into Whirlpool's SERP prototype was an adaptive defrost control that uses "fuzzy logic" software to save electricity during the defrost cycle. Ho figured the energy savings at 3.5% or more. He was also already at work redesigning the defrost drain for some 1993 models. A simple change in its shape yielded energy savings of up to 1%.
The Whirlpool team's toughest problem was replacing CFCs, which are used in two ways. CFC-11 helps produce the foam that insulates a refrigerator, while CFC-12, commonly known as Freon, is the actual refrigerant.
Anderson set up a system filled with HFC-134A, a substitute for Freon. He had the very narrow capillary tubes that carry the refrigerant specially made out of glass. At the hairpin curves of the capillaries, where the inside diameter was less than 0.3 inch, Anderson could see a slight buildup of gunk. It was like watching a person's arteries clog. "This is the engineer's worst nightmare--a very slow failure," said Anderson. Undetected, it could result in millions of breakdowns and huge recalls years from now. "It could break the company," said Anderson. The Whirlpool team knew the culprit wasn't HFC-134A itself but a lubricating oil in the compressor, the heart of a refrigerator. They finally found an oil that wouldn't cause the buildup.
HARD DECISION. Ho and the team moved quickly through a number of other technologies. A new compressor, redesigned specifically for HFC-134A with a higher-efficiency motor and valving changes, squeezed out several points more in energy savings. On the other hand, a supplier's promising but expensive technology didn't deliver the expected energy gains. Anderson nursed it along for months, but would ultimately decide it wasn't up to snuff just seven weeks before the final bid was due in June, 1993.
By August, 1992, Anderson had two possible bids. One was conservative, using only tried-and-true technologies, while the other pulled out the stops. In a senior management meeting that month, Jerry Weinstein, a Whirlpool vice-president, convinced the group to go for the second, more risky bid by invoking the specter haunting the company: GE. "Will we be able to look ourselves in the mirror if GE wins it because we didn't enter the most aggressive bid possible?" he asked.
On Dec. 8, SERP announced the two finalists: Whirlpool and Frigidaire. Anderson and his team were stunned--not because they were in, but because GE was out. With roughly 35% of the market compared to Whirlpool's 25% and Frigidaire's 17%, GE had a natural advantage in the contest. The way the rules were written, 75 of 100 points in the bid went for total kilowatt hours saved, determined by energy-efficiency gains per fridge multiplied by the number of units sold. Since GE already sold the most refrigerators in a business where market shares change at a glacial rate, Anderson feared it stood the best chance of convincing the judges that it had the muscle to sell more of the newfangled fridges. GE says it doesn't know why it lost, and SERP won't comment.
PATENT SEARCH. Now squared off against each other as the two finalists, Whirlpool and Frigidaire began meeting almost monthly with a group from SERP to hammer out details of the final bid rules. The Whirlpool team held one such meeting last Mar. 30 in Fort Smith, Ark., the site of one of the company's three U.S. refrigerator plants. After the SERP representatives left for the airport, the Golden Carrot team's anxiety seemed to crest. "How are we doing?" a local manager asked the team. "I wish I knew," Anderson sighed. "It's a void." The Fort Smith executive fretted: "This train has left the station big-time. If we don't win, senior management of Whirlpool is going to be concerned."
Upon reflection, though, Anderson and the others started to feel pretty confident. Whirlpool had analyzed Frigidaire's 1993 models and conducted a worldwide patent search to see if its rival had some whiz-bang technology up its sleeve. It couldn't find any. That left hanging only the other half of the contest's equation: sales. If Whirlpool could hold its market-share advantage while increasing its energy savings by at least the same amount as its rival, it had a lock on the contest.
Anderson was more worried about ETL Testing Laboratories Inc., the independent lab whose judgments would be crucial to the contest. Although they didn't question ETL's engineering competence, its refrigerator-testing business had dried up when the industry consolidated a decade ago, and its spending on testing gear had consequently lagged. Mostly, Anderson and Ho fretted over how the judges would react to test results different from those used by Whirlpool as the basis for its energy-use claims. ETL says its refrigerator-testing data are accurate.
Last May 12, Whirlpool management ironed out the final version of the team's bid in a teleconference. Anderson offered three detailed options for Whirlpool and three estimates of what Frigidaire would bid. His conclusion: Frigidaire would have to gain a huge chunk of market share, lose money, or both, to get anywhere near Whirlpool. Weinstein and Neil Lynch, general manager of the Whirlpool brand, were still worried.
Utilities, they argued, seemed to believe that consumers would flock to energy-efficient refrigerators even though Whirlpool's experience showed that wasn't true. Indeed, its bid assumed that its market share would remain the same. But would the judges simply believe Frigidaire if it said its market share would double with the superefficient models? "They wouldn't have to do it, they'd just have to say they'd do it, to win," grumbled Weinstein. Nervous, the group decided to use a technology twist to enhance Whirlpool's bid slightly.
JAWS OF DEFEAT? Anderson's team met with SERP officials for the last time on June 2. The team unveiled a plan to track refrigerator sales in order to make sure the units, and their energy savings, went into areas served by the contest's sponsors--another key requirement. Next, Phyllis Woolley, the team's ad specialist, explained Whirlpool's marketing plans--the final four points in the contest. The folks from SERP seemed impressed.
Then, Terry Stat, SERP's liaison with ETL, dropped his bomb: The compressor in a Whirlpool prototype ran at 100% for a while at the lab, then simply shut down. In addition, the laboratory's early test data could not confirm the company's claims of efficiency. "It sounds like a compressor failure to me," said Stat. Anderson stared at the conference table in front of him in shock. This was too much. He began to massage his temples with his fingertips. "I think you might want to have Bob Ho go up there," said Stat.
Anderson's quiet voice barely betraying his frustration, he offered to send SERP a six-page letter listing Whirlpool's concerns about ETL's procedures. ETL wasn't the problem, countered Gary Fernstrom, SERP's CFO from Pacific Gas & Electric Co. "The major issue here is the failure. I think you should get up there and find out what caused that."
Within two hours of arriving at the ETL lab, Ho relaxed. ETL's subsequent test results were in line with his own. Scanning the readouts for the failed unit just before it shut down, he got an idea. When he and a colleague hooked up the unit, they quickly confirmed his diagnosis: The prototype's hand-wired cooling fan wasn't turning. The compressor continued to run, but the override circuit detected too much heat and, to prevent a possible fire, turned off the unit. No compressor failure whatsoever. Just the fan, jury-rigged for the prototype.
'IT'S DONE.' On June 8, Anderson sent off Whirlpool's bid--bumped up yet again. After another Weinstein pep talk, the team had found a way to squeeze more units out of the factory, increasing the kilowatts saved. "It's done, it's frozen," Anderson said. "Now, we just sit back and wait." He left June 15 on a two-week camping trip with his family and in-laws around Lake Michigan.
The SERP utilities believe that regardless of who gets the $30 million, everyone wins. Other refrigerator makers will have to come up with efficient offerings to compete with the victor's model. And the contest has succeeded in pushing technology. If Whirlpool wins, the company will immediately sign purchase orders for equipment to tool up for a key new technology, something it wouldn't usually do so promptly without the promise of the prize money. "We've won before the first one is sold," exults Charles Montoya, a SERP director and executive at the Los Angeles Water & Power Dept.
Asked what he would tell the team if Whirlpool doesn't win, Chairman and CEO David R. Whitwam pauses, then says: "I'm not good at giving losing speeches. I don't think I've ever given one." He'll soon find out if he needs to learn.THE CONTEST FOR A LEAN, GREEN, COOLING MACHINE
The Super Efficient Refrigerator Program (SERP)
Whirlpool and Frigidaire, a unit of Sweden's Electrolux
Winner to be announced June 29
24 utilities (encouraged by the Environmental Protection Agency)
$30 million, winner take all; payment comes in the form of a cash rebate to
the manufacturer per refrigerator sold
Winner must manufacture and sell over 250,000 refrigerators between January,
1994, and July, 1997, that are free of ozone-depleting chlorofluoro-carbons
(CFCs) and at least 25% more energy-efficient than 1993 federal standards
There are 100 points:
75 POINTS for kilowatt hours saved--as determined by energy-efficiency gains
per refrigerator, multiplied by number of units sold
21 POINTS for a tracking system that pinpoints who buys the new refrigerators
and where (ensuring sales are within the sponsoring utilities' markets)
4 POINTS for vigorous sales and marketing strategies
DATA: BUSINESS WEEK
James B. Treece in Evansville, Ind.