Can the Maytag repairman learn Chinese?
Behind the $1.28 billion bid by China's Haier Group for U.S. home-appliance icon Maytag Corp. is the toughest challenge facing the Chinese companies that already make most of the world's appliances and electronics: how to transition from low-cost, often no-name manufacturers to respected global brands.
In recent months, a string of Chinese electronics makers with little international name recognition have attempted to vault into U.S. and European homes by buying Western brands. Chinese television-set maker TCL Corp. did it first, taking control of the manufacturing operations of RCA brand owner Thomson SA of France. Then computer maker Lenovo Group Ltd. bought the personal-computer operations of New York-based International Business Machines Corp. earlier this year. And this month, Taiwanese electronics maker BenQ Corp. took over the cell phone operations of Germany's Siemens AG.
Chinese companies are on a buying spree because they sense "it's now or never," said Paul Gao, a Shanghai-based partner at consultant McKinsey & Co. "They have reached a bottleneck in their next stage of development."
Yet the evidence is mixed that this approach will succeed.
Established foreign companies buy U.S. brands all the time. Britain's BP PLC bought Amoco Corp., slowly phasing in the BP name, and Royal Philips Electronics NV of the Netherlands bought Magnavox and eventually replaced that nameplate in many markets.
But other Asian manufacturers have had success building their U.S. customer base organically, at great cost and over many years. With products such as the Walkman and giant flat-screen TV sets, Japan's Sony Corp. and Samsung Corp. of South Korea, have won over U.S. consumers.
Fifteen years ago, Korea's Hyundai Motor Co. was mocked for its shoddy craftsmanship. Now it tops quality surveys and produces some of the most popular autos in the U.S. market.
Japanese and Korean manufacturers benefited from government-protected markets in the 1980s and '90s that allowed them to finance their international push with rich profit from home. Companies in China, which has largely opened up its consumer market, do not have that luxury. "The Chinese companies simply cannot afford to wait until they dominate the domestic market and slowly grow their international presence," Gao said.
Wooing American shoppers is a slow and costly process that almost no Chinese manufacturers, used to selling on price, have mastered. Almost a decade ago, Konka Group Co., then China's biggest TV maker, made a big push into the United States and seemed to make progress for a while with a low-cost line of sets. But it never gained the marketing savvy or name recognition it needed, and it retreated to its home market, where it has slipped to No. 3.
Buying an established company offers Chinese firms immediate access to new technology, experienced marketing executives and coveted distribution channels at a time when America's retailing industry is consolidating.
But most of all, Haier (pronounced HIGH-er) wants the Maytag brand. Made famous in America through commercials since the 1960s featuring a lovable, lonely repairman, Maytag has an 80-year-old relationship with U.S. consumers that drives the company's business as much as the technology in its appliances. Maytag also owns other well-known U.S. brands, including Hoover and Jenn-Air.
Haier would be unlikely to put the Maytag repairman out of work. Madison Avenue executives say Haier would want to preserve Maytag's name and heritage. That is why it, along with partners Blackstone Group LP and Bain Capital LLC, is offering a premium over a bid from Ripplewood Holdings LLC.
"Haier's target is Maytag's prestigious brand name as well as its mature sales channels," said Pan Chengli, an economist and independent director of Haier's Shanghai-listed subsidiary.
Haier, which grew from a government-owned refrigerator factory to become China's largest appliance maker, may be the one Chinese brand, along with Tsingtao beer, made by Tsingtao Brewery Co., that U.S. consumers recognize. Long a big seller of mini-refrigerators in the United States, the group last year generated $12.2 billion in sales around the world.
The company has predicted that by 2006, its U.S. sales will reach $1 billion. In 1999, the company opened a factory in South Carolina to assemble some of the appliances that Haier says make up 2 percent of all full-size refrigerators in the United States, 16 percent of window air conditioners and 8 percent of portable fans.
Having fought hard for its U.S. foothold, Haier appears unlikely to give up its name. If it wins Maytag, Haier plans to follow Lenovo's approach with IBM, said Pan, though Haier management has declined to comment on its marketing plans. As part of the IBM deal, the two computer makers agreed that Lenovo can use the IBM brand on its PCs for five years, though Lenovo is planning to shift to its own name in 18 months.
That means it will have to build up its own name in a hurry. It has plunked down an estimated $65 million to associate itself with the Winter Olympics in Turin, Italy, in February and the Summer Games in Beijing in 2008. It also will start pairing IBM's ThinkPad name with its own.
Haier probably also would seek a way to use both its name and Maytag's, Pan said. That could allow the company to assign the names to different product lines or tiers.
The biggest challenge will be figuring out how to use each brand, said Michael Ip, the Asia-Pacific managing director of WPP Group PLC branding consultancy Landor Associates, which is advising Lenovo on its transition: "What does Haier bring to Maytag? How do you position the two so there is no overlap and you maximize efficiencies?"
Part of the answer lies in how Americans will respond to a Chinese brand. A study conducted last fall for WPP's Ogilvy & Mather Worldwide in the United States, Britain and France found that Western consumers are open to Chinese brands -- if they offer something unique. While about 36 percent of the U.S. consumers in the survey associated Chinese brands with low-cost products, 26 percent also associated them with innovation, and 24 percent with advanced features and value.
Well beyond getting the branding right, China's new global players must pull off some ambitious marriages. In the case of TCL and RCA, executives say they have encountered more financial and operational difficulties than they expected. Factory costs in Europe and North America are running higher than anticipated, forcing the company to delay its target for bringing the operations into the black.
The biggest hurdle has been finding enough people who can bridge Chinese and Western business cultures. "Maybe Haier has the people," said Vincent Yan, a managing director for TCL. "We needed cross-cultural people with the right business experience. Those are very hard to accumulate."
Qiu Haixu and Evan Ramstad contributed to this report.