Chinese innovation and the Haier model

The man who helped turn a Chinese state-owned fridge maker into a global white goods giant plans to transform the company into a platform for innovation.

When you walk into a Chinese bookstore, the most visible section is usually one full of books about how to become rich. It’s usually packed with books from management gurus such as Steve Jobs, Peter Drucker and Sony co-founder Akio Morita.

However, things have started to change. Book shelves once reserved for venerated Western gurus are making space for new Chinese business heroes. Jack Ma, the founder of the e-commerce giant Alibaba, is on top of list. There are also less familiar names such as Ma Huateng of Tencent and Zhang Ruimin of Haier, the world’s largest maker of white goods. 

This changing of the guard at Chinese bookstores is a sign of a subtle yet fundamental shift taking place in China -- the rise of indigenous innovation. For years China has been seen as a mere copycat of Western technology and know-how, but some Chinese businesses are shedding this stereotype and taking on their established peers.

American business academics and management consultants have also started to take note of the emerging wave of innovation in China.  The MIT Sloan Management Review devoted an entire issue late last year to examine the trend. Harvard Business Review also carried articles about Chinese innovation.

The chairman of News Corp (the publisher of Business Spectator) Rupert Murdoch was also suitably impressed with pace of innovation in China after a visit to the country earlier this year. He tweeted that China was a "country moving from just copying Western things to much impressive innovation and also business models with vast mass market".

Zhang Ruimin, the chairman of Haier group, is one such groundbreaker. He is a household name in China and turned a state-owned fridge maker on the verge of bankruptcy into the world’s largest and leading producer of white goods. The company has expanded aggressively under his leadership and bought iconic Kiwi brand Fisher & Paykel in 2013.

In a long opinion piece littered with references to celebrated management theorists like Adam Smith, Frederick Taylor and Alfred Chandler, Zhang says he wants to turn Western management theory on its head and transform Haier into a giant platform for innovation.

Zhang wants to destroy the traditional corporate structure, though this means more than simply getting rid of middle management and flattening the chain of command.  He wants to turn Haier into a giant incubator and transform employees from executors of orders into innovators.

“The company is only a platform for innovation and every employee can be their own boss,” according to an op-ed he penned that appeared in the influential Chinese business magazine Caijing.

This may seem like a revolutionary idea but how does he plan to achieve it? As a maker of white goods, the old structure revolves around research and development and sales and marketing. In his brave new world, Haier will dismantle traditional structures in favour of open platforms where people can bring in their own ideas and resources to develop new products and services.

One of the interesting examples is Leishen, or Thor, one of Haier’s newly incubated companies. It was started by four employees from the company’s PC department. They developed a new brand of laptop designed specifically for internet game users in China after painstakingly analysing 30,000 user comments and complaints.

The unit generated 250 million yuan in revenue and has already attracted an initial round of venture capital backing from outside of Haier. The unit is already being valued at between 100 and 150 million yuan and Haier’s initial investment was only 1.9 million yuan.

Thor is an example of Haier employees starting something fresh and completely new. The company has also created platforms to rejuvenate existing product lines and services as well improving Haier’s logistics chains.

For example, Haier relies on an open platform of 90,000 delivery trucks to distribute its products. All these trucks are plugged into the company’s information management system. The system works like taxi-booking app Uber, that is, trucks can respond to call outs and customer feedback will determine whether they get more orders in the future.

Zhang wants Haier employees to become innovators. He is mindful of the Japanese experience and thinks that the Japanese corporate structure is too rigid and too hierarchical. As a result, Japanese companies have lost their mojo. He says in the age of the internet, the company must respect its employees and encourage them to innovate.

His dream is to turn Haier into an open ecosystem. “Forest will live forever, plants will die every day but they will be replaced with new plants everyday as well. Every employee is like a tree and everyone can be a start-up. The boundary of this company will be great and they can suck in seeds, water and fresh air. They will grow strongly,” he wrote.

It’s still too early to say if Haier’s daring attempts to completely overhaul itself will be successful. What is important is to take note of the ground breaking innovation taking place in China. Western companies were caught off guard by Japanese car makers who pioneered many new business models and processes. This should not happen again.

Early results from Haier are very promising, the company’s revenues increased 11 per cent last year to 200 billion yuan and profit was up 39 per cent to 15 billion yuan. Even more astoundingly, its e-commerce sales accounted for more than a quarter of revenue, an increase of 2,391 per cent.  Every CEO should be envious of such a result.

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