Essay About Compact Refrigerators And U.S. Refrigerator Market

Haier International Strategy
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Pre-class Assignment 7: International StrategyTeam 13Fernanda Duarte, Zachary Levene, Antoine Roblin, Zhuo Wang        While the Big Three saw no promise in compact refrigerators because of their low margins, need for more distribution channels, and lower demand, Haier saw an opportunity to take advantage of this, create a niche market, and position itself within the U.S. refrigerator market. Focusing on compact refrigerators posed an economic advantage for Haier. Manufacturing compact refrigerators in the U.S. was expensive and had very small margins. However, Haier manufactured them in China, where cost of labor, materials, and depreciation and facilities are much lower. This allowed them to incur larger margins than their American competitors, especially because shipping compact refrigerators from China was relatively cheap compared to a standard refrigerator, allowing Haier to profit from this manufacturing model. The standard refrigerator market is saturated with competitors, and the Big Three holds 89% market share in this industry. At the same time, the industry was only growing at 2% per year. On the other hand, the compact refrigerator market kept growing due to the demand from college students and wine enthusiasts. Other demographic factors such as decrease in family sizes and continuous upgrade of living and office spaces increased demand for well-designed compact refrigerators. Compact refrigerators are distributed through a wide array of retailers including leading chains such as Wal-Mart and Target, but also small traditional discounters that serve different groups of customers. Haier’s leading technology and expertise in this segment allowed it to serve different groups of customers, and position itself in the US with compact refrigerators. One of Haier’s weaknesses in the US market was service part shortages and shipment problems. At the same time, Haier wanted to establish itself as an American brand, like Toyota had done in the past. For these reasons, Haier decided to open a plant in South Carolina. This provided Haier with several advantages that would not have been possible if they had opened it in Mexico or China. Firstly, shipping costs from China are too expensive for standard refrigerators, which result in much lower margins (7.7% in the US vs 2% in China). Productivity in American plants is also much higher than Mexican, with 40% productivity, and Chinese plants, with 70% productivity. Additional to costs, there are cultural differences between the US, China, and Mexico. While Mexico is a neighboring country, there are still differences in language and ethnicities. With China, the cultural differences are even larger, as well as the geographical distance which resulted in higher shipping costs and shortage problems for Haier. Economic distance was also gapped by opening the plant in the US, equipped with world-class equipment, adding value to Haier by being comparable to other American refrigerator companies.