Baby Steps for a Chinese Giant


By Dexter Roberts Even at the relatively late hour of just past nine in the evening, I was met at the airport by one of the friendly and capable deputy directors from the local China Foreign Affairs office. This is the government organization that deals with foreigners in the Middle Kingdom, including arranging interviews for traveling journalists. A sleek black Audi was waiting outside to whisk me to my hotel in the new section of Qingdao, the seaside town on China's Shandong penninsula.

Nice time to be visiting, I thought. I had escaped the 95-plus-degree heat baking Beijing for the coastal breezes of this lovely former colonial town, home to two of China's best-known companies. One is Tsingtao, the original spelling for the town I was in, and the name of the company making beer first brewed by Germans living here at the beginning of the 20th century. The other is the mainland's much newer star enterprise -- Haier Group, a $7.3 billion white-goods maker that has recently embarked on an ambitious overseas expansion, including a new American refrigerator factory in Camden, S.C.

PIERCED TEFLON. Despite the town's beautiful architecture and great seafood, I still had mixed feelings. Earlier this year, I had come to Qingdao to report on Haier. The result was a BusinessWeek article questioning the wisdom of the group's fast overseas expansion, rapid diversification, the nature of its dealings with its listed subsidiary, as well as its financial health (see BW, 4/1/02, "Haier's Tough Trip from China".)

The story, one of the first to question some of the strategies of this previously teflon-coated company, caught the interest of the Chinese media, with many newspapers and journals referencing it. Since then, Haier's stock has fallen some 20%. But when two people from the Qingdao Foreign Affairs office showed up in Beijing in late June, telling me that Haier's much-lauded chairman Zhang Ruimin wanted to meet me (he hadn't been available for my earlier interview), I knew that we would have something to talk about.

Was I nervous? Yes, especially when I started the interview with Zhang with a soft question about Haier's management system. The 53-year-old chairman didn't answer and instead brusquely asked whether I had other more important questions to ask. But Zhang's initial toughness gradually gave way to charm, as he answered every question fully, and then some, in what ended up being a two-hour long interview -- a significant chunk of time from a guy who runs one of China's megacompanies, with factories in 13 countries and offices around the world.

Zhang even gave BusinessWeek some heretofore unreleased information: In an effort to rebut the many questions raised about Haier's finances, he reported that the group's debt-to-asset level was 55% -- fairly respectable among China's usually loan-laden companies. "I have read many articles about us," says Zhang. "They always mention that Haier has developed so fast, so it must have a big loan burden, but they never mention how much in loans we actually have," he notes. Zhang then offered to provide BusinessWeek with a list of every loan that Haier has ever taken.

RANK AND YANK. The chairman also was at pains to explain how Haier is different from China's many stodgy, old state enterprises. (Haier calls itself a "non-state enterprise." In China's murky transitional economy, the outfit is classified as a collective enterprise and is technically owned by its employees.)

He explained how Haier's management system (yes, we finally did get back to that question) differs from most Chinese companies. In a system he called 10/10, Zhang outlined how every year the top 10% of employees would be held up as models (and would get paid more, accordingly), while the bottom 10% would face possible demotion or even firing. Last year, 13 division directors were punished with demotions or worse. "Through our management system, everyone gets payment according to own's one effort," he says.

Zhang is right -- Haier is a very unusual company in China. It's one of the first large Chinese enterprises to make salaries dependent on performance. It has moved to a Dell-like just-in-time system where "all of our products, when manufactured, already have consumers" lined up, claims Zhang. And through a revamped distribution system, it has cut its accounts receivable from more than 30 days to an average of 10. It has even been featured in a Harvard Business School case study -- the only Chinese company yet to earn that distinction.

NO STONEWALLING. It was also clear from talking to other Haier managers and employees that the group has successfully instilled a sense of pride and esprit de corps among its staff that's very much a rarity in China's former "iron rice bowl" economy. "There's no other company in China with an innovative culture and management team like we have," brags Zhang. And throughout Haier's development, "there has not been one dollar of invesment from the government," he says.

All in all, it was a lively and refreshing conversation. More often than not, stonewalling, or some variety of China's own special Communist bureaucratese, are all a journalist hears when talking to the heads of China's biggest companies.

I also left thinking that Zhang's reputation as one of China's best managers is probably deserved -- after all, this is a guy who built Haier from a small and ailing state factory some 17 years ago into what's now the world's No. 2 fridge manufacturer. He's legendary for taking a sledgehammer to faulty fridges some years ago to show the importance of quality to his employees.

"All of our achievements have been based on Haier always taking the consumer and the market as our focus," says Zhang. Haier "is not like other companies that once they have problems, they will go to the government for help."

SUING A CRITIC. Zhang's bold talk and confident demeanor wasn't aimed just at BusinessWeek: CNN had also come and interviewed Zhang at his invitation. A Voice of America interview was scheduled as well. The Financial Times, which featured a critical article shortly after BusinessWeek's appeared, was also offered an interview with Haier's CEO. Clearly, Zhang and Haier have moved into full damage-control mode following the spate of negative coverage, and central to their strategy was Zhang's charm offensive with the foreign media.

But let's not all start applauding yet. Haier still isn't ready to welcome all critical inquiry -- particularly when it's homegrown. It has just sued a Chinese analyst for defamation and demanded that he pay $36,000 in damages for a couple of articles he published online about Haier. In this David-and-Goliath matchup, the underdog is 25-year-old Chen Yicong, an analyst with an online consulting company, Beijing Fayhoo Information Technology, a joint venture between China Southwest Securities and the China Construction Bank.

Chen, who has been writing articles about China's listed companies on a freelance basis for print and online media for more than a year, had little warning before three representatives of Qingdao's Laoshan district court showed up in his Beijing office in early July. They handed him a subpeona requiring that he appear in court in Qingdao on July 26.

PEACEFUL SETTLEMENT? "Of course, I was a little scared and surprised," says the bespectacled, boyish-looking Chen, who graduated in international economics from People's University in Beijing. "I wish I had a chance to talk to Zhang Ruimin myself and explain that I don't have any malicious intentions," he says. To date, Haier has not responded to a letter that Chen sent it suggesting they find some way to settle the dispute out of court.

Now, the analyst has obtained some pro bono help from two Chinese lawyers, one of whom recently defended China's best-known financial investigative magazine, Caijing, in a defamation suit brought by a different company (the lawyers lost the first round and are now appealing). Through his lawyers, Chen has requested more time to prepare for the court case and is waiting for a response.

Meanwhile, he's nervous about going up against a corporation that almost all of China's top leaders have visited at one time or another and have long heralded as a model for the rest of the country's enterprises. "I have no car, no house, no savings. I don't know what to do," says Chen. "It would take me more than 10 years of saving to pay off this amount."

EASY TARGET. The analyst thinks Haier has singled him out because he's a freelance writer -- a small fish. He's certain that it's trying to make him an example to scare off anyone contemplating writing something not wholly favorable about it in the future.

Haier is suing just Chen as the author, not either of the online companies or the small magazine that published his piece. To date, it hasn't taken action against any other Chinese media that have written arguably more critical articles -- including well-known publications like Southern Weekend and South Wind Window -- not to mention foreign media. Chen's piece was quoted in a FT article published on June 25, and it appears that this was what attracted Haier's wrath. Apparently, the group had never heard of Chen or seen his analysis of it before the FT's reference.

For his part, Zhang claims to welcome most critical coverage: "We don't respond to most media reports. We just read them and learn from them," he says. But in Chen's case, legal action was taken because "what he wrote is totally different from the facts," the chairman explains.

GLOWING ENDORSEMENT. Meanwhile, the China Securities Regulatory Commission, the country's equivalent of the U.S. Securities & Exchange Commission, has come out publicly defending Haier's reputation. Chen and other analysts think this is aimed at bolstering China's stock market in advance of the crucial Party Congress to be held this fall. In a recent trip to Qingdao, Yang Hua, a director at the regulatory body declared that his agency "is very confident about Haier's credibility."

As if this statement of support weren't enough, Yang continued: "Haier is not only Qingdao's Haier, or Shandong's Haier, it's all of China's Haier. It's a famous brand of our country, and we should all cherish it."

So how does it all add up? Haier as a symbol of China's corporate future may be a noble sentiment. And for Haier employees -- and many Chinese -- to take pride in its recognized achievements is natural and normal. I left my interview thinking that China needs more managers like Zhang, if the country ever wants to transform its many ailing enterprises into internationally competitive players. This is particularly crucial with China now in the World Trading Organization.

But as long as the mainland's enterprises, stuck halfway between their state-run, planned-economy past and free-market future, try to stifle critical information and manage the economy from the top down, China won't truly become a world-class economic superpower anytime soon. Let's hope that otherwise impressive entrepreneurs and companies figure that out quickly. Roberts is Beijing bureau chief for BusinessWeek


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