Meeting rural needs takes Haier to the top

White goods giant Haier has established itself as the market leader among the mainland's rural consumers ... thanks to its vermin-proof appliances and a washing machine that doubles as a potato cleaner. The world's number one manufacturer of refrigerators and washing machines has been able to step up to the mainland government's challenge to stimulate consumption through innovation. The showroom at its 20,000 square metre Qingdao headquarters displays a range of everyday domestic appliances that have been adapted to the needs of the massive rural population. Some of the tweaks are fairly obvious and intuitive. The company's market research in villages found that rats were at the top of farmers' concerns, and this has resulted in a range of products with more durable wiring that can't be gnawed through and thicker backboards to prevent the vermin from getting inside. Another major complaint was the unstable electricity supply to rural areas, which prompted Haier to produce much more efficient products that could cope with varying voltage. The company also produces an affordable range of mobile phones that do not become disabled by nearby lightning strikes in thunderstorms, as farmers spend much of their time toiling outdoors. The phones can also be hooked up to landlines and are capable of receiving real-time information about agricultural trading. But the star of the showroom is a washing machine that deals not only with clothes but also with potatoes. According to Joel Backaler, head of operations for Frontier Strategy Group in the Asia-Pacific, this particular product is the culmination of a corporate culture that values customer feedback and innovation. Backaler said the potato washing machine came about because a farmer called Haier's customer service staff and complained that his washer was not working properly as it was clogged up with dirt. Technicians discovered the dirt was not from the farmer's clothes but from his potato crop - he had been using the machine to clean both. 'While many companies would have simply had their technician educate the farmer on how to use a washing machine properly, Haier's technician returned to headquarters and came up with an appliance that serves both purposes,' Backaler said. Another example involves water heaters. In 2008, a Haier research team found that one of the challenges facing dairy farmers was how to control the temperature of water that cows drink. While cows normally drink water at a temperature of between 15 to 20 degrees Celsius, in winter they need warmer water to maintain the quality of their milk. Also, pregnant cows need water heated to more than 35 degrees to boost immunity and improve milk quality. As well as water heaters not serving their needs, farmers also complained of a lack of running water and insufficient water pressure when it was being piped. Haier developed a system where water could be pumped from wells to a central tank where solar panels would adjust it to different temperatures and accordingly deliver it through different pipes. Other modifications were less practical. For example, the company found that rural customers preferred their 'white goods' to be red, due to the colour's auspicious meaning in Chinese culture. Haier's ability to innovate and adapt has brought huge rewards in the countryside, where it sought to capitalise on the government's rural subsidies scheme for electrical appliances, which began in 2007. The scheme was given a further boost by the Ministry of Commerce in March when it raised the upper price limit for subsidies to offer higher-end goods to wealthier farmers. Between January and April of this year, Haier's revenue in rural areas grew by more than 40 per cent, giving the company a 29 per cent market share compared to the 11 per cent held by its closest rival, Midea. Ministry statistics show Haier is the best-selling brand of fridges, washing machines and water heaters on the mainland, and has the largest slice of its rural appliance subsidy programme at 32 per cent. Since August last year, General Electric has been using Haier's mainland sales network, which reaches more than 70,000 villages, to distribute its appliances. Hewlett-Packard also has an agreement with Haier to sell to rural customers through the company's Haier Ri Ri Shun Home Appliance Shops network. But Haier's success has not been restricted to China. In terms of volume in the global market and geographical penetration, it has already made huge strides and the current fiscal retrenchment in the developed world could be a further boon to the company's prospects. According to statistics from market researcher Euromonitor, in 2001 Haier was the fifth-largest white goods maker in the world with a global market share of 3.72 per cent. Last year, the company moved into first place with its global market share rising to 5.1 per cent. It is also the largest by market share in the home laundry and refrigeration appliances markets. In contrast, Whirlpool's market share fell to 4.5 per cent in 2009 to second place. Some of Haier's rapid growth can be attributed simply to Western consumers buying less and Chinese consumers buying more in a market that is already dominated by Haier and a handful of other names. However, Tan Heng Hong, a consumer market analyst at consultancy Access Asia, says Haier is able to grab a bigger share of the market when consumers in developed markets are tightening their belts. 'Haier stands to gain from consumers in the developed world opting for lower-priced products,' Tan says. Peter Williamson, a professor at the Cambridge Judge Business School at Cambridge University, highlights two examples where Haier has been successful in innovating for foreign markets. In the first, it turned a niche product - basic refrigerators which also stored wine - into a mass-market product. 'The original was a high-end product that was sold at a high price to connoisseurs,' Williamson said. 'Haier re-engineered the product and brought the retail price down from US$1,700 to US$750 and distributed it through Sam's Club in the US, increasing the size of the market for that particular product by a few thousand per cent in just a few years.' In the second example, just as Haier sends employees to the countryside to conduct research, they also sent people to small offices and universities overseas to do market research on small fridges. As a result, they were first to come up with fridges that have a fold-out wooden top that can be used as a desk. 'Chinese manufacturers have lower break-even costs when launching new products to test the market,' Williamson said. 'Their fixed costs are much lower and product lines are much more flexible than of those of a company like Whirlpool.' Some companies and sectors are waking up to the benefits of embracing what is termed 'frugal innovation' - the ability to produce innovation at lower cost, shifting creativity away from the traditional domains of the developed world. Haier could be facing stiff competition in the innovation stakes, however. One member of staff in the Haier showroom said: 'The mice in the countryside are getting smaller and smaller and squeezing through the tiniest of holes.' Rewards of research Smarter thinking in rural markets leads to lower costs Haier built up its dominance in white goods in 2009 to become the world's No 1 producer, with a market share of: 5.1%