The Biggest Start-Up Factory In The World

Joost
Written by in Bucket list
- 12 min read

When writing our book "Corporate Rebels, Make Work More Fun,” we missed the initial publication deadline by about two years. Now, with our second book, we’ve managed to miss yet another deadline. Let’s talk about it.

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Our first book at Corporate Rebels described how we traveled the world searching for organizations that did things differently. We looked for pioneers—people who dared to break with traditional organizing and created purpose-driven, human-focused workplaces that are actually built on trust. What a concept.

This quest took us to five continents, 100 progressive organizations, and meetings with many pioneers.

The book we are now writing tells the story of one of them: Haier, the most pioneering company we’ve encountered so far. This Chinese company transformed itself from a poorly managed refrigerator manufacturer to become the world's largest start-up factory and has since—as a side gig—entered industries like healthcare, logistics, and finance. Simply put, their methods give them a competitive advantage.

But there’s much more to it than that.

The Haier Way

We’ve researched the “Haier Way” for years now and have since visited the firm in China many times. We really enjoy the open access and all of the in-depth, no-holds-barred interviews with CEO Zhang Ruimin, their entrepreneurial staff, management experts, and academics.

Over the last two years, we’ve intensified our research there as part of the book project. Specifically, our book focuses on the birth and evolution of Haier's pioneering management model called Rendanheyi.

We finished the first draft earlier this summer. But after a full edit was reviewed, we still weren’t satisfied. So, we've extended the initial deadline (summer 2021) by half a year for more research and a new revision of the manuscript.

So, just as with our Corporate Rebels book, we’re delaying the publication of the Haier book for a few months. Because we can.

We know they say once bitten, twice shy, but somehow that doesn"t seem to work for us...

Why a Haier Book?

So, why did we even choose to write about Haier in the first place? And why do we think the Rendanheyi model is so remarkable?

It's because they have challenged the status quo in large manufacturing for decades. And, in doing so, they’ve broken several traditions in management thinking—many of which had their roots in the last century.

Think way back to when Ford and Toyota were the pioneers in management thinking in manufacturing. They introduced ideas like the “division of labor,” “mass production,” “total quality management,” and “lean.” And not without success. These and other ideas boosted the performance of manufacturing firms on metrics like efficiency, quality, and waste.

But, at the turn of the millennium, and with the rise of the internet, traditional 20th-century management became seriously challenged. In the 21st century, emerging technologies like the mobile internet, the Internet of Things (IoT), and big data had even more impact on how manufacturers organize.

Haier actually pioneered its Rendanheyi model at this time, too. They distinguished themselves from traditional companies in at least three ways:

  • Radical decentralization
  • Internal market dynamics
  • Micro-community building

1. Radical decentralization

In the 20th century, most manufacturing companies relied on a hierarchy to organize and manage.

Rendanheyi breaks this structure.

It radically decentralizes the organization by removing most of the formal hierarchy, removing all middle managers, and giving all employees high levels of autonomy.

They replaced the hierarchical structure with a network of teams. The teams can be seen as independent start-ups operating under the Haier brand (or one of their other brands in the group, like Casarte, GEA, Sanyo, and Fisher & Paykel).

Each start-up aims to be as close to its customers as possible. Haier calls this “zero distance to customers.”

This concept may seem revolutionary to some, but it really shouldn’t be. Allow us to explain.

Zero distance to customers

The zero distance concept allows Haier to move its manufacturing from mass production to mass customization—also called “made-to-order” or "on-demand manufacturing.” With mass customization, Haier aims to deliver products and services that are modified to satisfy each customer’s need or desire.

Their radical decentralization strategy has "platform-ized" the company in a way that integrates and provides start-ups with all kinds of resources, incubates them to maturity, and then essentially launches them out of the Haier universe when they are ready to stand on their own feet… in a different universe.

Haier now consists of roughly 4,000 internal start-ups. Yes, four thousand. Of these, four are independently listed companies, two have reached unicorn status (i.e., valued over $1 billion), and 37 are considered gazelles. (The Financial Times defines a gazelle as a high-growth company able to increase its revenue by at least 20% annually over four or more years.)

This is no small feat. Incubating start-ups is difficult, as captured in the saying known as “surviving the Death Valley Curve.” For those who don’t know, the Death Valley Curve is the time from the moment a start-up begins operations until it finally generates revenue. We aren’t really sure what this has to do with the actual Death Valley itself, but it works.

Anyway, it’s often difficult to raise additional finance during this window, as the business model has not yet been "proven.” Thus, as it implies, Death Valley is a challenging period marked by a heightened risk of failure.

The incubation rate at Haier is also impressive. At the time of writing, Haier said its incubation rate was 49%—higher than the industry standard of 10%. Okay, a lot higher.

That’s why we’ve nicknamed Haier “The biggest start-up factory in the world." It’s a nickname that may very well be literal.

2. Internal market dynamics

In the 20th century, most manufacturing companies relied on internal bureaucracies to coordinate activities. These activities, and the performance of employees, were usually controlled and monitored by superiors.

Furthermore, rewards were typically decided by fixed labor contracts. Profits made by the firm, via the activities of employees, were mostly shared with shareholders and not the employees—the ones who actually created the value firsthand.

Rendanheyi breaks many of these conventions. To coordinate the actions of thousands of autonomous start-ups efficiently and motivate employees, Haier relies on different processes.

It has introduced internal market mechanisms to align the actions of all start-ups in the firm and introduced blockchain-enabled contracts between them to formalize the coordination of the collective.

And, they actually focused on stimulating initiative and entrepreneurship by their employees. Yes, of course, the firm still monitors their activities and performance, but the emphasis is on making them responsible for their own choices, actions, and results.

Haier is convinced that by giving employees more autonomy, responsibility, and self-governance, the organization will remain manageable for top management in increasingly uncertain business environments. And it obviously seems to be working.

The firm believes that the number of freedoms granted to its employees is necessary to motivate people to make the right decisions. Employees who make decisions that turn out to be successful in the market can anticipate high-powered rewards.

Haier says of this: "Everyone is their own CEO.” This may sound like cheesy breakroom poster material if it were at another company, but Haier literally believes it. And practices it. And again, it obviously seems to be working.

The market rewards Haier’s start-ups for the value they create for customers via profit-sharing mechanisms that ensure the firm stays away from only focusing on maximizing shareholder value. Instead, it aims to reward anyone who adds value to customers. Haier calls this "maximizing human value.”

Maximizing human value

As we all know, when start-ups are successful, employees working for them and those who helped them become successful reap benefits individually. And as we saw above, some of the start-ups have definitely become very successful. Several employees involved in start-ups that IPO-ed in recent years are now millionaires.

This internal market mechanism works both ways, however. When employees make poor decisions and are unsuccessful, they bear the consequences themselves, in line with individual responsibility.

As a result, Haier employees are motivated (and allowed) to make most of their choices. But the market, not the organization, decides if these are the right choices.

Still, Haier's CEO Zhang Ruimin says that maximizing human value is the core of its Rendanheyi model. In fact, he argues it should be the core of all business models. He believes business is all about people.

“People create value, and people are different,” says Ruimin. “So, different people will produce different results. This is the human factor. Things like factories, equipment, and even capital cannot create value. The only factor that creates value is people,” he continues.

“That is why people are the key to any business. If you put people aside, the balance sheet will be of little use."

3. Micro-community building

In the 20th century, most manufacturing companies were designed as closed systems. There were solid borders that clearly distinguished what happened inside the firm from what happened on the outside.

Moreover, it was clear who was part of the company and who was not. But with the rise of new technologies (like IoT) the interconnection of all things is possible—and the physical borders of and between companies will gradually disappear.

Rendanheyi anticipates this by opening the borders of the organization to allow everybody who can create value for the customer to join. It values internal start-ups as much as external partners.

In fact, Ruimin wants Haier to be a business without boundaries. He believes any business must be open and interactive. And Rendanheyi aims to turn the organization from a closed system into an open one.

In this view, the success of manufacturing companies will not be decided by the resources and capabilities it owns, but rather by its inherent ability to successfully and rapidly find—and make use of—any resource through connections to all kinds of stakeholders. Whether these are in or outside the porous borders of the firm is not important. Hence, one of Ruimin’s famous quotes: “The world is Haier's R&D department.”

Haier's start-ups are encouraged to collaborate with others (both internal start-ups and external partners) through the porous borders of their organization. In addition, they are encouraged to create micro-communities with stakeholders that help them create value for customers. Haier calls this "ecosystems for co-creation and win-win.”

This is certainly a contrarian philosophy in a lot of ways, so let’s unpack that for a moment.

Ecosystems for co-creation and win-win

In the 20th century, relationships with external partners were guided by competitive thinking (think of companies that work with suppliers who simply offer the lowest prices.) A more collaborative type of thinking guides relationships within Haier’s micro-communities.

In these micro-communities, contracts (so-called EMC contracts) are signed between the different parties in the community. However, these deviate from the traditional one-on-one supplier-customer thinking, often characterized by relatively fixed contracts.

In the Rendanheyi model, all parties that are part of the micro-community interact with each other, sign a collective contract, and share benefits based on how much value they create collectively for customers.

As such, Haier aims to create many micro-communities of internal and external stakeholders to co-create value for its customers. They try to create an environment where all stakeholders, internally and externally, are integrated into one large ecosystem where they work to create more value for the customer. As a result, they are able to share the benefits.

Under this model, the revenues made by the Haier Group are no longer those their internal start-ups generate but also the revenue generated by all other stakeholders that have joined the Haier ecosystem.

Strength in numbers, right?

Haier's management Innovation

Taken individually, the characteristics of radical decentralization, internal market dynamics, and micro-community building are not novel management innovations in and of themselves.

Similar characteristics and practices have been pioneered elsewhere. For example, radical decentralization practices exist at the Dutch health care organization Buurtzorg, the Swedish bank Handelsbanken and the Russian supermarket chain VkusVill.

And we’ve seen similar internal market mechanisms at Swedish consulting firm Centigo, and similar micro-community building practices at the Spanish ner Group. (And we discuss more examples in our Corporate Rebels book, which you should obviously read.)

Haier combines all three characteristics and practices them on a completely new scale involving thousands of people in manufacturing settings.

Blending Western and Eastern management thinking

Ruimin integrated the essence of Chinese traditional culture with modern Western and Eastern management thinking to develop these innovative concepts—and with great success. As a result, in recent years, Haier has become recognized as one of the most pioneering firms on the planet and has since attracted the attention of many in the management world.

And now they’ve captured yours.

In our book, we describe in depth how the above innovations are practiced at Haier. We also detail examples of Haier’s internal start-ups, micro-communities, and the ecosystems they have built.

We also describe many best practices they have pioneered. And we share stories of how Haier employees experience life in the Rendanheyi model.

We conclude the book by identifying and describing how Rendanheyi-inspired models are currently being introduced and pioneered in other cultures (e.g. GEA, Sanyo, Fisher & Paykel, Haier Russia), and in other companies (e.g. Fujitsu Europe, Zappos, Tianbao Group & Bosch Power Tools).

Stay in the loop

The new publication deadline for our Haier book will be around the winter of 2022, and it really seems that this deadline will stick this time.

Believe us, we can’t wait to get this out, even though we actually are waiting. So, want to stay in the loop about everything involving this book project? Of course you do. You can subscribe here.

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Replies (4)

Giles Slinger

Giles Slinger

Haier's changes that you are describing align closely to the work of the Regenerative Alliance, which also aims to put people, and the value that they create, first. The Regenerative Alliance compares well with Haier (and other Corporate Rebels) in its attempt to lead change in the corporate system. This matters because bigger system changes are needed, but they can only be done by working together: Western economies, AND China, and Russia - for example establishing common standards, agreeing regulation of externalities like carbon.

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Mariann

Mariann

Very interesting! Given that failure rates are for startups in general are very high, I wonder, what is the percentage of survival rate of these internal startups? Also, how does individual initiative connect with overall company strategy - or is this considered to be fully emergent?

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Tree Bressen

Tree Bressen

I've been a fan of your work for some years now. Nonetheless, the articles on Haier always come across as so boosterish that they raise my skepticism. I would trust your reporting on this company more if you also discussed their flaws and shortcomings.

Every choice or approach has trade-offs; and there are many irreconcilable tensions in organizational life . . . polarities (as Barry Johnson brilliantly describes them) that must be balanced and lived with over time, rather than overcome or dissolved. I hope your future book brings more complexity to your consideration of Haier, rather than just more cheerleading.

| | 2 | Flag
Kirsten

Kirsten

How are the rewards distributed? Do you cover that in the book too?

| | 0 | Flag
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