A U.S.$5.4 billion deal for General Electric’s home appliance division is about to propel China’s largest appliance maker, Haier Group, into the long-dreamed-for high-end market in America.
The sale, announced in mid-January but now awaiting regulatory approval and a green light from Haier’s directors, would end the Chinese company’s lengthy quest for a respectable U.S. market share—a quest that dates to 1999, when it broke into the U.S. market with a brand of low-end mini-refrigerators.
By snapping up GE Appliances, which manufactures a wide range of white goods, from freezers to dishwashers, Haier plans to quickly expand its share of the U.S. market, where its previous market share stood at only 2 percent. Annual U.S. sales could grow more than 10-fold, as GE Appliances posted U.S.$5.9 billion in revenues in 2014 compared with Haier’s U.S. sales of U.S.$500 million.
The pending deal is not without controversy. Some industry analysts in China say Haier may have paid too much, given that Swedish appliance giant Electrolux had offered just U.S.$3.3 billion for GE Appliances in September 2014. That offer was withdrawn after U.S. antitrust investigators raised a red flag.
Haier’s bid apparently topped offers from South Korea’s Samsung Electronics and LG, Turkey’s Arcelik A.S., and Chinese appliance maker Midea Group.
But Haier’s bankers appear to be solidly behind the buyout. A person close to the deal who asked that his name be withheld said that state-owned China Construction Bank, government policy lender China Development Bank, and Bank of America Merrill Lynch have agreed to finance the buyout and offered a U.S.$6 billion line of credit to Haier.
The price tag also makes sense from a foreign exchange perspective, said Zhou Qun, General Manager of the China business consultancy GfK China.
“Haier sees overseas acquisitions as its most efficient investment,” he said. “The U.S. dollar is likely to rise more, so it’s reasonable for Haier to spend U.S.$5.4 billion.”
Liang Haishan, a Haier vice chairman who led the company’s negotiations with GE, said every company participating in what became a fierce bidding war saw GE Appliances as a potential pillar for global expansion. Indeed, he said, the publicly listed Haier division that would officially absorb the American company—Qingdao Haier—is slated to become the main platform for the parent’s overseas assets.
Haier first considered buying GE Appliances in early 2008, Liang said. A takeover of this or another established brand was seen as a logical step after it became clear that the Haier brand was a hard sell in America.
“The acquisition decision was not made recently,” he said. “It’s most difficult to generate brand awareness among American consumers, especially in the higher-end market.”
From Niche to Now
Haier’s global ambitions were initially fulfilled with its U.S. expansion in 1999 and through the opening of a U.S.$30 million refrigerator factory it built in the U.S. state of South Carolina. Today, the plant produces white goods that major retailers including Walmart and Best Buy sell to U.S. consumers nationwide.
Rather than go head-to-head against America’s homegrown appliance makers, such as domestic industry leader Whirlpool, Haier initially focused on mini-refrigerators and other niche products for low-end consumers.
After the appointment of American executive Adrian Micu as chief of the company’s U.S. operations in 2014, Haier adjusted its business strategy in hopes of breaking into America’s high-end appliance market. To that end, it stepped up spending on research.
Last July, Haier opened a research and development center in the U.S. state of Indiana. A month later, the company said it would spend U.S.$72 million through 2020 to expand production at its U.S. facilities. An even stronger research focus is likely if the takeover goes through. “The purchase of GE Appliances will boost R&D capacity, services, and logistics for Haier’s U.S operations,” said Liang.
Next comes marketing, which would be streamlined by the fact that Haier would have the right to put the GE label on appliances it builds for 40 years. “Brands must be promoted as valuable products,” said Liang.
Haier is also counting on the deal to broaden its customer base and distribution channels in the United States. A Qingdao Haier statement noted that GE Appliances operates eight distribution centers around the country, and it’s also cultivated good relations with major retailers. Moreover, the GE unit has been a major supplier of appliances for property developers, real estate management companies, and hotel chains.
Haier’s ride into the U.S. market is coming at an opportune time, as the nation’s home appliance market is enjoying modest growth. The market expanded at an average annual rate of 4.7 percent from 2012 to 2014, research firm Euromonitor International says. Growth is expected to slow slightly to 3.3 percent from 2015 to 2020.
Last year’s gross earnings at GE Appliances increased 47 percent from the 2014 level, according to Qingdao Haier’s statement.
For Haier, business prospects certainly look a lot better in the United States than at home. According to GfK, China’s white goods sales increased just 2 percent year-on-year in 2015, compared to 8 percent growth in 2012 and 2013.
The economic slowdown in China contributed to a 6 percent decline in global revenue for Haier last year from the 2014 level, the company announced in January, to about 189 billion yuan. Nevertheless, the firm reported a 20 percent increase in profits between 2014 and last year to 18 billion yuan.
GfK’s Zhou, who expects domestic challenges to mount for Haier over the next few years, has recommended the company expand its China sales network to include more small cities, where there may be more opportunities for growth.
Nevertheless, the company is now no different than many others in China whose “major challenge is the overall market slowdown,” Zhou said. And the GE Appliances deal is coming at a time when Haier has the cash and capacity to promote its business overseas, he said.
The company cut its teeth on overseas deals in 2012, when it bought the New Zealand appliance maker Fisher & Paykel. Liang said that the successful takeover helped convince GE executives to accept Haier’s bid.
The Fisher & Paykel takeover proved that Haier can integrate its Chinese way of doing business with a foreign company’s culture in terms of decision making, product research, and sales.
“Western companies usually have unified standards for decision-making,” said Zhou. “But Chinese companies depend more on an individual executive’s decisions and apply different standards.”