A pretty good harvest

Haier’s technicians were initially puzzled by a spate of calls from customers claiming their washing machines were faulty. However, after they went to repair the machines, the technicians figured out that the problem wasn’t so much with the appliances, as with how they were being used.

Yes, to the surprise of Haier executives, it was discovered that farmers were using their machines to wash potatoes. The mud from the spuds was blocking the pipes and causing the machines to break down. That’s not something you can imagine anyone from Whirlpool or Electrolux giving much thought to.

Indeed, some manufacturers might even have claimed the customers had violated their warranty, points out Philip Carmichael, Haier’s Asia-Pacific president. But Haier’s management took a different tack. China’s biggest appliance maker not only fixed all the ‘faulty’ units – it then redesigned its washing machines so that they were actually capable of washing potatoes.

This is obviously an example of savvy customer service, and it also demonstrates an innovative streak in Haier’s corporate culture. But perhaps most important of all is what it says about the growing importance of China’s rural consumers. And Haier is not alone in realising this. The government desperately hopes farmers can help rebalance the economy – stimulating domestic demand and lessening the country’s dependence on exports.

For the past year, the country’s leaders have been operating a project called ‘Home Appliances for the Countryside’ with this goal in mind. And data has just emerged from which we can gauge its success.

First off, how does it work?

The programme kicked off with much fanfare in February last year – and featured in the very first issue of WiC. With exports to Western Europe and the US collapsing, China’s manufacturers were facing a tough time. Why not, reasoned government planners, get the country’s 737 million rural residents to take up the slack? After all, that largely untapped market was notionally bigger – in population terms – than the EU plus America, where there are just 705 million consumers.

Government statistics held out hope that ‘Home Appliances to the Countryside’ had huge potential. Take those washing machines (or potato cleaners) as an example. At the time of the programme’s launch, it was calculated that only 46 in every 100 rural households owned one. If that proportion could be raised to 50, that would equate to around 10 million washing machines – i.e. half of China’s total output of the appliance.

The way to make this happen? Incentivise farmers to buy. What emerged was a gigantic subsidy scheme that saw rural consumers receive a 13% rebate on the sticker price of televisions, computers, and mobile phones as well as white goods (air conditioners, refrigerators and washing machines). The Chinese love a bargain, and this was a case of the government saying ‘buy now, pay less’.

Did Chinese firms support the plan?

In the immortal words of Sarah Palin: you betcha. In fact, they more than supported it – a host of Chinese manufacturers and retailers practically refocused their entire expansion strategy towards the countryside.

Suning, one of the biggest electrical appliance retailers, commissioned a survey that discovered that one third of rural households had an annual income above Rmb20,000 ($2,920). It vowed to open 1,000 rural shops within five years and has been opening a new store every two days on average.

Or take Lenovo, the computer maker. It came up with the idea of promoting its PCs as the ideal wedding gift for farmers. It began organising group weddings at luxury villas – any rural couple could attend so long as they’d bought one of Lenovo’s computers.

Then again, the strategy went well beyond organising a few mass nuptials. The PC firm has said it aims to recruit enough sales staff to cover 320,000 villages. It wants to replicate its success with farmers like Zhai Jianshe, a 48 year-old from Wuji county in Hebei. A satisfied customer, he told the China Daily: “Now I can check market information through my PC and choose the best time to sell my corn.”

Thanks to Lenovo’s partnership with the Ministry of Agriculture, farmers can surf commodity price databases for free. Lenovo also partnered with China Telecom to provide a free one year internet connection. And in an innovative move, it is offering free online education programmes to farmers’ children. Lenovo’s ‘rural desktops’ are innovative in another sense: they use up to 50% less power than regular models, and are designed to withstand voltage fluctuations and humidity. The grand ambition: to sell five million computers in rural markets within three years.

So has it worked?

Wen Jiabao spoke of the ‘Home Appliances for the Countryside’ project in the report he gave this week to the National People’s Congress. The Chinese premier described the results as “good”.

Between February and December, the incentives had led to the sale of 37.6 million household electrical appliances, he reported. The biggest slug of sales came from refrigerators (15.6 million), followed by televisions (8.8 million). However, sales of washing machines were also strong (5.8 million) and air-conditioners now cool 3 million more rural homes. In addition, around 1.3 million computers were sold; while 1.8 million rural households took advantage of the rebate to buy a mobile phone.

All in all, a resounding success?

Not entirely, says China Business News. The government forecast the programme would generate Rmb150 billion of sales; but it came in well below target at Rmb69 billion ($10.1 billion). The newspaper also visited a village in Shandong province where only one third had used the subsidies, and many complained the home appliances weren’t suitable due to erratic electricity and an intermittent water supply.

One 24 year-old villager – who got a Haier TV as a wedding gift – said he could only watch five channels, and wanted to know when cable would get installed.

Has the programme ended?

No, Wen said that it would be extended for another year, but with an important difference. The range of products eligible for the rebate will widen. Last year, for instance, you could only get the rebate if you bought a mobile phone that cost less than Rmb1,000. This year the rebate will apply to phones costing up to Rmb2,000. Similarly the programme can now be used to buy televisions costing up to Rmb7,000 rather than Rmb3,500. That should help manufacturers sell more big screen LCD- TVs, for example.

According to Xinhua, analysts forecast even better sales in 2010 – since far more products now qualify for rebates. They also point to the fact that even more manufacturers are eligible now. Last year 300 got the go-ahead to offer the rebates; that number has surged to 478.

Any foreign firms on that list?

Interestingly, only 28 are foreign. But interest is growing. This week the Wall Street Journal reported that GE had signed a pact with Haier to sell its own household appliances through the Chinese firm’s rural sales network. Haier, incidentally, saw its own sales in the countryside rise 30% last year, and forecasts similar growth in 2010.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.