.Marketing Strategy for Haier Group to enter

into Brazil`s Home Appliance Market

By

Huang LepingRegional Studies

GSIS of Korea University2010470053

Global Marketing Professor: Lee J. Ernst

June, 2011

Table of Content

I. Background knowledge for reference

1. Introduction of Haier group

2. Haier’s businesses

3. Haier`s development stages

4. Haier diverse strategies for global expansion

5. Author`s concern

II. Macro-economic analysis& Market-level analysis

1. Macro-environment snapshot

2. General market summary

3. Market segmentation in Home Appliance market

4. Porter`s five force model for industry analysis

5. Competition in Home Appliance market

6. Haier`s advantages by SWOT analysis compared with LG Electronics.

III. Marketing strategy

1. Entry Motivation & Entry Strategy

2. Market segmentation& Target market identification

3. Market positioning

4. Marketing Mix (4P strategy)

5. Global organization

I. Background knowledge for references

1. Introduction of Haier group

Haier is the world’s 4th largest white goods manufacturer and one of China’s Top 100 IT Companies. Haier has 240 subsidiary companies and 30 design centers, plants and trade companies and more than 50,000 employees throughout the world. Haier specializes in technology research, manufacture industry, trading and financial services. Haier 2006 global revenue was RMB107.5 billion. Haier believes that the essence of globalization is localization. For Haier, this means a "Three-in-One" operational framework: complete localization of design, manufacture, and marketing. Haier aims to use local financing and employees to become a part of the local community while creating a global brand. Haier`s strength lies in Quality, Innovation and Customer Services.

As of this year, Haier has established 61 trading companies (19 outside of China), 8 design centers (5 outside of China), 29 manufacturing facilities (24 outside of China) and 16 industrial parks (4 outside

of China). In addition, the company maintains 58,800 sales outlets in over 160 countries. Haier is achieving its goal of building a global brand using the "Three-in-One" localization strategy.

Haier has established an extensive sales network around the globe. Key partners in perspective markets include:

China: Strategic alliance with Suning and Gome chain stores America: Cooperation with TOP 10 retailers, e.g. SEARS, Lowe's, HOME DEPOT, Best

Buy, PC-Richard, Wal-Mart, Sam's, Costco, Brands Mart and Target Japan: Cooperation with TOP 10 retailers, e.g. YAMADA, KOJIMA and JUSCO Europe: Cooperation with KESA, Media Market and Carrefour

2. Haier’s businesses include the following six units:

1) White goods(mainly refrigerators, air-conditioners, water heaters, washing machines, kitchen appliances )

2) Brown goods(color TVs, mobile phones, computers)3) Client solution business4) Equipment components manufacturing group5) Retailing6) Financing

Among the six business units, white goods unit is performing the best, especially refrigerators and water machines, as well as air-conditioning.

3. Haier`s development stages:

1) Brand building stage (1984-1991)2) Diversification development stage (1991-1998)3) Globalization stage (1998-2005)4) Global brand building strategy stage (2005-until now)

In the Globalization Phase, Haier is still based in China, radiating to the world; while in the Global Brand Building Phase, Haier aims to build a local Haier brand in each geographic area all around the world. Haier is in the fourth stage during which it emphases localization in all the regions.

4. Haier diverse strategies for global expansion

1) technology licensing agreement with Germany refrigerator manufacturer 2) Joint Ventures with Japan`s Mitsubishi and Italy`s Merloni for technology and design infusion. 3) Strategic alliance with local big appliance firms in India for jointly production or sharing marketing networks, such as Fedder Lloyd Corp, Whirlpool and Volats.

5. Author`s concern

Except for Latin America and South Africa, Haier has already established networks in five big regions which are Asia, Europe, North America, Middle East and Oceania.

For the concern of course requirement, and from the standpoint of Haier group, entry into Latin America could be the next step while the consumption level of South Africa still remains rather low

although it sees rapid growth currently. Among the countries in the LA region, Brazil is the biggest economic entity in terms of GDP volume in total. It becomes one of the most attractive destinations for FDI among emerging market economies since 2007. Currently many MNCs perceive it as a base for operation in LA, such as GE, Hyundai.

Continue…

II. Macro-economic analysis & Market-level analysis

1. Macro-environment snapshot

1.1 Economic aspect

Summary: Brazil is the largest economy in Latin America, with sustained economic growth and credible macroeconomic policies. A rising middle class have positioned the country as a leading recipient of foreign investment and an emerging player in global commerce. With a total population of 191.5million in 2009, Brazil`s average GDP per capital (PPP) is US$10,520. Brazil`s economy is services-based, with the services sector accounting for 68.5% of GDP in 2009 and industrial activity , agricultural sector accounting for 25.4% and 6.1% respectively. It has strong domestic demand, led by private consumption and public spending. Domestic demand will increase by 8.2% in 2010, compared with 2009.

1.2 Regulation aspect

1.2.1. Political economy

Currently, the political stability has been maintained for a long period and it is perceived this trend will continue in the long run. The level of Politics transparency is quite low by scoring just 3.7 while the 10 is the best. World Bank`s Doing Business 2010 survey ranked Brazil in 150th place among 183 countries in terms of the ease of doing business.

1.2.2. FDI regulation

Foreign capital may freely enter Brazil and is legally treated like local capital. Legally registered companies-foreign or domestic-enjoy the same rights and privileges, and they compete on an equal footing when bidding on contracts or seeking government financing. Brazil law allows mergers, acquisitions and corporate re-organizations. An investor can purchase an existing company by buying its shares or even incorporating a new company to which the shares will be transferred. But it may not be allowed to do so via a share purchase on the stock market without prior authorization from government bodies.

Regarding land acquisition, foreign-controlled companies and business may not own land in specified areas: within 150km of Brazil`s national borders; directly on its coasts; or in any other geographical areas designated and defined as sensitive for national security zones. Establishing a branch of a foreign company requires authorization by presidential decree, which usually involves lengthy delays.

1.2.3. IPR regulation

Brazil government recently replaced its legislation on intellectual property. It started to attract ever-greater amounts of licensing, including use of trademarks, technology transfer and franchising. Property rights protection is reasonably sound. In the 2011 International Property Rights Index, Brazil is placed 64th out of 129 countries surveyed. It ranks eight out of 22 countries in the region. Brazilian patents, copyrights and trademark laws are generally considered to meet international standards.

1.2.4. Corporate Tax

It is effectively 34%. Companies pay corporate income tax, income surtax and a social contribution. Corporate income tax is 15%. The income surtax is 10% on profits above BRL240, 000 per year. The social contribution is charged at 9%. Resident companies pay tax on global income. Non-resident firms pay tax on Brazilian-sourced income only.

1.2.5. International trade agreement (Trade bloc)

Brazil is a full member of the Common Market of the South, a regional trading bloc in South America, which currently includes full members, such as Argentina, Brazil, Paraguay, and Uruguay and associate members, such as Bolivia, Chile, Colombia, Ecuador and Peru. Venezuela is in the process of becoming a full member.

2. General market summary (Home Appliance Market)

The Brazilian household appliances market had total revenue of $15.1 billion in 2009, representing a compound annual growth rate (CAGR) of 7.9% for the period spanning 2005-2009. Electricals and electronics retailers’ sales proved the most lucrative for the Brazilian household appliances market in 2009, with total revenues of $12 billion, equivalent to 79.8% of the market's overall value. In comparison, sales by hypermarkets, supermarkets, and discounters generated revenues of $2.2 billion in 2009, equating to 14.9% of the market's aggregate revenues.

3. Market segmentation in Home Appliance market

3.1. By product distribution in 2009

We could see that, home appliance retailers are the main distributors in Brazil, second comes Hypermarket, Supermarket. These are the two main distributors in Brazil.

3.2 By Product category in 2008

Cooking appliances, refrigeration appliances and Washing machines in total take up almost 87% of the market share. They are the main home appliance items consumed by Brazilians.

4. Porter`s five force model for industry analysis(Suppler=Manufacturers; Consumer=Individual buyers; Rivalry=Retailers)

4.1. Bargaining power of suppliers---moderate. Due to 1) Low switching costs for consumers

2) Tend not to forward integrate 3) Tend not to rely on retailers for marketing and sales4) Some retailers manufacture their own-branded goods (usually low-end products) for low

Income customers 4.2. Bargaining power of consumers—weak, due to 1) High brand awareness but low switching costs, and low customer loyalty for suppliers 2) Fairly high product differentiation 3) Focusing on quality/efficiency/cost increases bargaining power4.3. Threat of new entrants—strong, due to 1) Easy to access suppliers 2) Strong market growth attractiveness 3) Price competiveness due to high bargaining power over suppliers4.4. Threat of substitute products—moderate, due to 1) Air drying of clothes &hand washing of dishes 2) High cost of electricity 3) Second hand products 4) Freecycle Network providing usable product for free 5) Low switching costs for buyers4.5. Competitive rivalry within the industry---moderate, due to 1) Maintain relationships with a wide range of suppliers---low dependency on suppliers 2) Diversified retailers don`t rely only on home appliance sales 3) High degree of product diversity 4) Exit barriers are relatively low 5) Strong domestic demand growth

5. Competition in Home Appliance market (leading competitors)

5.1 AB Electrolex

5.2 Panasonic Corporation

5.3 Bsh Bosch Und Siemens Hausgerate

5.4 GE Company

5.5 LG Electronics. Inc

(** Market share of each remains unknown due to lack of resources or payment for access.)

6. Haier`s advantages by SWOT analysis compared with LG Electronics

6.1. Haier`s SWOT analysis

6.2 LG SWOT analysis

6.2. Haier`s competitive advantages

1) Strong diversified capability result from its increasing investment in R&D activities2) Sensitive awareness and quick responsiveness of consumer tastes3) Efficient production management and quality control system 4) Strong support by Chinese government (Ambitious to be the first globally prestigious nation brand)

5) High localization degree is recognizable

III. Marketing strategy

1. Entry Motivation & Entry Strategy

1.1 Entry Motivation

1) Subjective: Leader`s vision to build Haier as a competitive global brand with a strong positin in the international market; “One-third domestic sales, one –third export, and one-third produced and sold abroad”, but currently the domestic sales make up of the majority of sales, with less than 20% of the revenue comes from overseas sales.

2) Objective: Fierce domestic competition by domestic and global players; Over-suppply situation exists and remains domestically; Haier already succeed in domestic market by above 30% market share in its main product sales; lucrative profit to operate in emerging markets, such as Latin America, especially Brazil with continuous high GDP growth rate since 1990s.

1.2 Entry Strategy

1) First step: Market test by exporting products directly from China headquarter. Reasons:

A. There is already successful model by Chinese home appliance company (Gree) which adopted “export first then buildup branch and manufacturing center domestically ” strategy ;

B. Exporting first could text company brand acceptance, consumer taste, price sensitiveness and competition degree.

2) Second step: Establish Haier (Brazil) Limited Company locally and through Joint venture, builds

manufacturing center in Special Economic Zone in Brazil. Reasons: A. Production center concern: Brazil has eight free trade zones (FTZs) in total, of which the most

important for foreign investors is the Manaus FTZ, which covers nearly 4,000 square miles in the middle of the Amazon basin. Here, goods originating outside the country enter without attracting customs levies or any import taxes. Goods may also be exempt from certain other taxes. What`s more, the exchange rate is so fluctuated and Yuan value is ever appreciating which will increase the export cost of products. Local production becomes rational.

B. Joint Venture concern: Through joint production, Haier could reduce the fixed cost and save the investment for building distribution network and marketing; shorten initial production period.

C. Company style concern: Instead of setting up a branch or subsidiaries, limited liability company would avoid burdensome legal registration process and reduce time lengthy of entry

period. Establishing a branch of a foreign company requires authorization by presidential decree, which usually involves lengthy delays. Limited-liability Company is the most popular

corporate structure since it is easier to set up and has fewer public-disclosure requirements than any other corporate legal forms.

2. Market segmentation& Target market identification

2.1 Market segmentation by income categories:

Class A&B: monthly earn more than R$ 4.591 Class C: monthly earnings between R$ 1.064 and R$ 4.591 Class D&E: less than R$1064

Market features: Rise in Purchasing power of lower/ middle class

According to research conducted by Bain (consulting) and Euromonitor, the Brazilian economy can be divided into three distinct sections. At the top of the consumer pyramid, are classes A&B which combined constitutes 15% of the Brazilian population (2007).In the middle is class C with 46% in 2007, up from just 34% in 2005. And, below are classes D&E which constitutes 39% in 2007, down from 51% in 2005.

2.2 Target market

1) Power of women:

There is increasing number of women in the marketplace. The percentage of women active in the economy in Brazil has increased from 41.4% in 1999 to 43.8% in 2006, and is expected to continue increasing to 45% by 2010. In addition, the money available to spend for women increased 7.1% vs. just 2.6% for men (from 200-06).

Market opportunities: no matter working women or housewife, they are the main purchasers of home appliance. Hence capturing women consumers with low and middle income level will be very feasible and lucrative .

2) Power of Single

There is increasing number of singles living away from their parents. According to Euromonitor (and Bain) research, the number of singles living alone in Brazil increased from just 3.2 million in 1996 to 6 million in 2006, and is expected to increase further to 12 million by 2016.

Market opportunities: by single building up their living alone, the demand for home appliance will increase in urban cities. And the majority of singles are low or middle incomers. Currently, the urbanization ratio of Brazil almost reached 87%, the highest in the world. Hence, the demand from single residents will be very prosperous.

In total, the demographic shift made appliances sales reached $5.8 billion dollars in 2007. And home appliance market will benefit from such demographic changes, which is expected to have 36% growth till 2012.

3. Market positioning

3.1 Identification of brand image

Haier already spread its operation across five regions, including North America. Due to the close trade connection between Brazil and the US, consumers already learned about Haier, therefore there is certain degree of brand awareness of Haier among Brazil consumers, which could ease the marketing effort. Haier enjoys moderate market share in the US with reliable quality and reasonable price, it posit itself as middle-end products compared with other large global renowned companies, such as Whirlpoor, GE, LG and so on. These big global players also dominate large market share in Brazil, leaving small room for Haier to play. Hence, precise positioning is vital for Haier`s entry. Key images: “Middle- end products”, “Reasonable price but first-class quality”

3.2 Strategy adaptation

Due to weak brand recognition and high brand awareness of Brazilian consumers, the best strategy for Haier to compete with global plaers is to penetrate niche market started from its strong products, such refrigerators, air-conditioners and washing machines, and then diversify its product ranges across the entire home appliance by conducting sufficient consumer taste research.

4. Marketing Mix (4P strategy)

4.1 Product

As mentioned before, refrigerators, air-conditioners and washing machines are the best products Haier produce. In the initial stage, Haier should just focus on the sales of these products by moderate modification adapting to niche market consumers` taste. For example, regarding the singles, Haier could market compact refrigerator and compact washing machine by leveraging its experiences succeeded in other markets.

4.2 Price

The price of products initially should not charge too high and should remain reasonable for the targeted customers—women and singles. They used to be sensitive to price changes due to family budget and income concern. In the export process, Haier could mix the pricing strategy by price skimming and price scanning. After that, it should calculate different reasonable prices for customers.4.3 Place

There are four main cities in Brazil: São Paulo, Brazilia, Rio de Janeiro, Bihia. The majority population is locating in these big cities. For example, the population of São Paulo reached 11,244,369 and Rio de Janeiro comes next with 6,323,037. São Paulo is the 10th richest city in the world, and is expected to be the 6th richest in 2025. According to data of IBGE, its gross domestic product (GDP) in 2006 was R$ 282,852,338,000, equivalent to approximately 12.26% of the Brazilian GDP and 36% of all production of goods and services of the State of São Paulo.

T he location of company and the main distribution network should start from these big cities in order to gain initial customers recognition and awareness. Hence the location could be in the capital—Sao Paulo or Rio de Janeiro which lately becomes a very hot place for FDI, especially real estate investment since it became the host of FIFA World in 2014 and the Olympics Games in 2016.

As mentioned before, home appliance retailers are the main distributors in Brazil, second comes Hypermarket, Supermarket. These are the two main distributors in Brazil, accounted for almost 95% of the distribution channels. Hence, Haier should establish diverse and dynamic distribution relationship with different retailers, as well as secure as many as exclude contract with Hypermarkets, supermarkets. Itself should also establish its own network.

4.4 Promotion

1) International event effect

Brazil will host the FIFA World Cup in 2014 and the Olympics Games in 2016. These two big events will give Haier great chances to raise its reputation nationwide by sponsoring these events. Brazil is expected to invest massively in new infrastructures. Haier could bid for the electronic appliances provider for Olympic villages and competition areas, such as Indoor Stadiums. It could also cooperate with the local experienced consulting company to conduct marketing

2) E-Marketing and E-Commerce

The market for internet services in Brazil is the largest among Latin American countries by absolute number of users. Internet access has expanded to reach 67.5m users by May 2010(about 30%), according to Ibope Nielsen Online. E-commerce activity spans a broad range of activities. Internet transactions in Brazil vary from the simple online purchase of a vise variety of goods to online banking services. Brazilians are the heaviest users of the internet in terms of hours spent on social networking sites. According to the global Nielson study conducted in April, 2010, 86% of Brazilians internet users visit social networking sites, the highest percentage among surveyed countries. The average value of B2C transactions was R375 in 2009, and this had risen to R379 by January 2010. Sales of books and magazines led B2C transactions in 2009(15%), followed by appliances (14%), and health, beauty products, software and electronics. M arketing and selling through internet will be very profitable

3) Diverse tools: TV, Billboard, newspaper adverting; Sponsorship; Sales promotion; Public

relations; Trade show

5. Global organization

In March 1999, Haier began to transform the Group’s pyramid structure into a matrix structure focused on project operations. Under this matrix, the horizontal axis consists of functional departments, and the vertical axis consists of projects. The new structure maintained all the divisions and their R&D, procurement, and sales departments, but the divisions now needed to interact with other divisions on certain projects. From mid-August to October 1999, Haier implemented a revolutionary organizational change—it created three major interactive processes with divisions under each. These processes include development or core, functional or supporting, and product.

Under such structure, regarding the Development or Core Process, the heads of these new divisions report directly to the Haier Group president. Regarding Functional or Supporting Process, the heads of the divisions, such as wide R&D, human resources, and customer relations divisions report directly to the Haier Group president.

Appendix