PRD pioneers: Midea
No analysis of the PRD would be complete without a look at the companies that have transformed the region’s prospects. It goes without saying that a lot of businesses have been founded in the PRD, particularly in Shenzhen in the years after it was designated as a special economic zone. Here we have chosen five of the firms that offer exemplary cases of pioneering business success.
Four of them hail from Shenzhen: Tencent, Huawei, BYD and DJI. They respectively dominate the internet, telecoms, electric carmaking and drone production. We chose DJI as an example of a younger firm, and a highly symbolic one: drones are the first category in consumer electronics to be invented and led by a Chinese brand. Tencent is a dominant internet and social media player, while BYD is well placed to take advantage of China’s electric car revolution. Huawei has become one of the world’s leading makers of telecoms infrastructure and is increasingly building its consumer brand via innovative smartphones and smart watches.
However, we begin with Midea, a firm founded earlier than the other four and one of the classic entrepreneurial success stories from the nascent days of Deng Xiaoping’s Reform and Opening Up policy. Midea is an emblem of the PRD’s rise as a manufacturing powerhouse. The home appliances maker also speaks to the evolution underway in the PRD’s economy as it moves from cheap labour to smart manufacturing.
Lower profile than most tycoons in China, He Xiangjian is the country’s most generous businessman, according to the latest study from Harvard University’s Kennedy School, which reports that the 73 year-old founder of Midea donated Rmb400 million (about $63 million) last year, mostly to social welfare causes.
A business that started in Shunde in 1968 as a workshop making bottle tops, Midea is now a multinational home appliance manufacturer and one of China’s most successful private firms.
By the early 1980s He’s factory had diversified into making fan parts and then launched an electric fan of its own, called the Pearl. In 1981 the company was renamed and shortly afterwards it began to produce air-conditioners, registering the Midea brand in 1999. With sales of Rmb111 billion ($17 billion) in the first three quarters of 2015 – its current financial year – Midea’s business empire now encompasses refrigerators and washing machines too, as well as a range of smaller household appliances.
He Xiangjian retired from his role as chairman of Midea Group four years ago, breaking with local convention by handing his position to a non-family member and professional manager, Fang Hongbo. Midea has done things differently for decades, since becoming the first township enterprise to list on the Shenzhen stock exchange in 1993. In the years that followed, it was reshaped into a company controlled by its senior management rather than the local government. There was a relisting in Shenzhen in 2013, crystallising the restructuring of He’s personal stake and the handover of the reins to his senior executives.
The year that He Xiangjian founded his first factory, a bottle-top maker in Shunde
HSBC’s analysts say that this has helped Midea develop the best incentivised management team in the sector, which holds more than 9% of the company’s shares through direct equity stakes and share option schemes.
HSBC also argues that China’s white goods sector deserves more attention from investors because its companies are going to reap the financial returns of advances in smart appliances, while continuing to benefit from a level of industry consolidation that sees Midea, Gree and Haier control more than half of the market between them.
Midea’s strategy has seen it steadily diversify its product portfolio and it now enjoys a leading market share in smaller appliances like microwave ovens and rice cookers. Most of its income continues to come from larger appliances, however, where it ranks number two in air conditioners and washing machines as well as in water heaters and number three in fridges.
It has also been reducing its reliance on original equipment manufacturing for other brands and moving towards selling more of its own products, says Kevin McGeary, corporate communications manager at Midea.
An early stage of this transition has focused on business-to-business sales, where Midea now offers its own air conditioning brands to commercial customers like airports, hotels and sports stadia. An example: under its own brand, Midea won the contract for commercial air conditioning at this year’s Rio Olympics.
Building brands at consumer level is going to take longer, McGeary told WiC, but Midea is partnering with established players to deepen its experience in more developed markets, including a joint venture with German giant Bosch that started selling appliances in Europe this year.
Joint ventures in other markets, including Brazil and India, have also helped to introduce the Midea brand to new customers.
Midea took longer to turn to international markets than many of the foreign-invested manufacturers in cities such as Dongguan and Shenzhen. But it is staunchly global in its ambitions today, with more than a third of its revenues from exports last year. As it has grown, it has expanded its production from its home base in Guangdong into six other Chinese provinces, and launched international bases in Vietnam, Russia, Egypt, Brazil, Argentina and India.
Currently, operations are strongest in Southeast Asia and the BRICS economies, McGeary says. Progress as an original brand manufacturer in the United States is at an earlier stage, although Midea has signalled its intent in the American market by launching a research and development facility in Kentucky. Recently it was reported to be in the running for General Electric’s appliances business in the US, although the division was then sold to its local rival Haier, from Qingdao.
In the meantime Midea has been establishing itself as a likely leader in ‘smart home’ technology, as China’s appliances firms explore alliances with the country’s tech giants in pursuit of what promises to be a major market.
In March 2014 Midea signed a partnership deal with Alibaba Group to develop a smart air conditioner, and later in the year it sold 1.29% of its equity to the smartphone maker Xiaomi for Rmb1.3 billion as part of a plan to profit from the growing use of internet-connected mobile devices. To capitalise on the partnership, Midea launched its M-Smart smart home strategy, so as to enable 30 different product categories to become interoperable.
The deal with Alibaba draws on the Hangzhou-based company’s cloud computing unit to allow customers to activate their appliances over the internet, with the additional benefit of a customised sales channel through Alibaba’s TMall. The tie-up with Xiaomi aims to integrate a fuller range of Midea’s products through customer smartphones, with the initial coverage focusing on smart rice cookers that remind their users to set timers, recommend quantities for meals and advise on sugar levels for diabetes sufferers.
The partnership has also produced an intelligent air conditioner that adjusts the ambient temperature to suit the body condition (as monitored by one of Xiaomi’s wearable devices, an electronic bracelet that talks to Midea’s iYouth air-con brand).
Another area where Midea is taking the lead is ‘smart manufacturing’, particularly the introduction of more automation to its production lines.
“Obviously, the days of cheap China and cheap manufacturing are disappearing fast,” McGeary told WiC. “Midea has been responding to the changes for a while and coming into line with government policies that encourage investment in more automation.”
Two joint ventures have been established with the Japanese robotic firm Yaskawa. “One is based around more automation in how Midea makes its products, while the other looks more at developing robots as products themselves,” McGeary says.
Midea started to automate more of its air conditioner manufacturing in 2011 and it now has four unmanned production lines at its main air conditioning base. Total labour costs have fallen by 70% as a result, and the deployment of more than 800 robots across the production process for the group has also improved quality, guaranteeing a 99.9% pass rate.
See next page for more PRD pioneers…
© ChinTell Ltd. All rights reserved.
Exclusively 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.