Chinese Models

If you can’t stand the heat…

How Zhuhai firm Gree grew into an air-con giant in just two decades

If you can’t stand the heat…

No holidays: Dong Mingzhu

When Dong Mingzhu first arrived in Zhuhai as a saleswoman in 1990, Gree was a small (and struggling) air-conditioner manufacturer. She was given one of the least-promising sales territories as her patch, Anhui province. But within 18 months Dong was delivering. Sales broke $2.8 million, or just shy of a tenth of the company’s revenues.

Promotions came quickly. By 1994, Dong was head of sales. Two years later, she was deputy president, and by 2001 she was sitting in the chief executive office. Small wonder that Dong says she hasn’t taken a day off in more than 20 years. “I’ll rest when I retire,” she is said to have promised (see Who’s Hu in issue 65).

But hard work pays off. Last year Gree, which also makes air conditioners for companies including General Electric, Whirlpool and Carrier (i.e. under an OEM strategy), controlled more than 37.6% of China’s air-conditioner market, rendering it the market leader. Next up is Midea with 27%, followed by Haier with 5.9%.

Last year, Gree’s sales reached Rmb83.6 billion ($13.2 billion), a 37.5% increase year-on-year. It was also the most profitable appliance maker in China, delivering Rmb5.2 billion in net income (for perspective, Haier recorded Rm1.4 billion in profits). Gree expects sales to reach Rmb100 billion this year, and Rmb200 billion by 2017.

“She’s been through everything herself,” one of Gree’s sales managers says of Dong. “We never dare to say that something is impossible in front of her.”

Rewriting the rules

Indeed, over the years, Dong has tried to rewrite the rules of retailing in China. Before she took over at Gree, most appliance manufacturers were beholden to the larger retail chains like Suning and Gome. The retailers often offered steep pricing discounts without first informing the manufacturers. That is what happened in 2004, when Gome stores in Chengdu decided to reduce the price of Gree’s air conditioners without consulting the company. Dong was outraged, worried that the move would not only cheapen the brand but also lead to a price war.

So she acted in a way that many thought impossible: cutting Gree’s supply of products to Gome nationally. The industry was shocked. Gome was the biggest retailer in China at the time, so challenging it was seen as almost suicidal.

Instead Dong focused her attentions on developing Gree’s own sales network. She had noticed that the most frequent combatants in price wars were often Gree’s partners in wholesale distribution competing amongst themselves, so she pushed for distributors in the same provinces to merge, so that they would be easier to manage. Now there are just 28 sales companies across the country. Some are also responsible for operating many of Gree’s 10,000-plus directly owned stores.

Dong also demanded that all of her distributors buy Gree equity. “If they have shares in Gree, they will work harder to market the products,” she says. “We needed to do this to turn them into Gree people.”

Of course, the strategy has other advantages: by turning distributors into strategic investors, Gree makes it less tempting for them to undercut one another in pricing. According to Chief Executive China magazine, the sales companies now own roughly 10% of Gree between them.

For the record, Gome and Gree did patch things up – sort of. Today in provinces where Gree sales companies and Gome have a strong relationship, Gree will sell through Gome. But in Gree’s headquarters town of Zhuhai Gome stores battle it out with Gree-owned ones, and that is also the case in other provinces, too.

A culture of innovation

Engraved on a glass panel at the entrance to the headquarters in Zhuhai is a saying from Gree’s former chairman Zhu Jianghong in 2001: “An enterprise without core technology is one that has no spine. A man without a spine can never stand”.

Zhu made the comment after an unsuccessful trip to Japan to buy new technology. And since 2010, Gree has pledged to spend more than Rmb2 billion, or 2% of its revenues, on research and development annually, well above industry norms.

Gree is also the pioneer of the inverter air-conditioner. Unlike traditional air-conditioners that use compressors (that is, units that either work at a set capacity or switch off entirely), inverter air conditioners allow for a continuously regulated temperature.

Keeping its cool

While competitors like Haier and Midea have sought to diversify into microwaves, washing machines and even mobile handsets, Gree has steadfastly focused on air-conditioners. In 2009, the parent company, Gree Group, set up a unit to sell rice cookers, fans and humidifiers under the Gree name.

But product quality issues saw Dong grow worried that the new initiative could hurt Gree’s air conditioner brands, and she waged war with the parent firm. A compromise was brokered where the parent company agreed to lower its production volumes until it met more stringent quality thresholds.

Analysts also say that because Dong is focused on one product line, Gree keeps costs lower and reaps economies of scale.

This is reflected in the company’s bottom line: acccording to Manager magazine, Gree’s gross profit margin was at least five percentage points better than rival Midea’s.

The future

Gree has already made inroads into developing economies like Vietnam and Pakistan. But it has also set its sight on the US market and recently opened an office there.

“We want to bring Gree’s products to every corner of the world, but it’s not easy to plant a flag everywhere,” says Dong. “For example, the cost of setting up a manufacturing hub in the US will be very high, so we’ll first focus on developing countries where both wages, land and other operating expenses are lower.”

It remains to be seen whether Dong’s hard-nosed negotiating style would work in the US market in the same way that it has prospered in China. But few company insiders will want to bet against her…

For more on the company’s shareholder structure see WiC154.

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