The factory was a collective enterprise whose ultimate authority was the municipal government,
although the workers collectively held ownership of its assets and shared any profits after the
payment of local and national taxes and appropriate reinvestment in the company. Unlike the
government’s authority over state-owned enterprises, it did not own or have any claim—other than
taxes—on a collective enterprise’s assets or profits. The government could influence senior staffing
and major business decisions, however. Poor performance, labor disputes, or mismanagement of
funds were all grounds for the dismissal of senior managers by the local authorities.
In 1984 there were about 300 refrigerator manufacturers in China, most producing poor-quality
products. Zhang believed that Chinese consumers would be willing to pay more for higher-quality
products and reliable service. Inspired by the workmanship of German products that he saw during
a 1984 trip to Germany, Zhang remarked “Our people aren’t more stupid than Germans. Why can’t
we do the same as them?” and promptly entered into a technology licensing agreement with German
refrigerator manufacturer Liebherr. Haier later imported freezer and air conditioner production lines
from Derby of Denmark and Sanyo of Japan. Joint ventures (JVs) with companies such as Japan’s
Mitsubishi and Italy’s Merloni infused Haier with more foreign technology and designs. “First we
observe and digest,” Zhang explained. “Then we imitate. In the end, we understand it well enough
to design it independently.”
One of Zhang’s biggest hurdles was getting workers to understand that Haier’s commitment to
quality was unlike that seen at other Chinese companies. To get his message across, Zhang once
pulled 76 refrigerators off the line, some for minor flaws such as scratches, and ordered staff to smash
them to bits. “That got their attention,” laughed Zhang. “They finally understood that I wasn’t going
to sell just anything, like my competitors would. It had to be the best.” Haier promoted personal
accountability by having poorly performing workers stand on a pair of yellow painted feet on the
factory floor at the end of the workday to explain their failings to assembled colleagues.
Haier made a profit of RMB 1 million in its second year, when its refrigerators sold in three major
Chinese cities. Despite overwhelming market demand and soaring prices for refrigerators, Haier
resisted mass production, focusing on quality and brand-building instead. In 1988, Haier won a gold
medal for quality in a national refrigerator competition. In 1989 China’s refrigerator market faced
oversupply, but rather than cut prices as its competitors had, Haier raised them. Zhang discovered
that the Haier brand commanded a 15% premium, even during a price war.
By the early 1990s, oversupply was no longer an issue. “At that time, demand outstripped supply,
and we didn’t have a big-scale operation. So we were focused on the China market. We didn’t think
about building our brand in the international market yet,” explained Yang Mianmian, Zhang’s right
hand since 1984 and later named group president. “Our target is to become a first-class brand. We
need to have a fairly large scale in order to achieve this,” added a Haier marketing executive. “If this
brand is not of large scale, it will not be successful.”