A Chinese Electronics Empire, The Wire China, July 30, 2023.
A look at Chinese home appliance brand Midea Group and its growing global reach.
Hot weather in both China and the U.S. this summer may not be good news for the climate, but ought to be good for Midea — the Chinese company that’s long been a consumer electronics giant at home, and has become increasingly successful in the American market.
From its home base in China, Midea — a company with more than $50 billion in annual revenue and 166,000 employees — produces a range of home appliances, including air conditioners, refrigerators and microwave ovens, as well as the components needed to make them. The company’s acquisition strategy has helped to transform it from its humble beginnings more than 50 years ago — but more recently, has put Midea at the center of debates around Chinese investments overseas.
This week, The Wire traces the history of Midea Group from its start in southern China to its global reach today, and we talk to the head of its U.S. operations about its American expansion.
OPPORTUNITY KNOCKS
In 1968, a budding entrepreneur named He Xiangjian brought together 23 residents of a small town close to Foshan, in Guangdong Province, to start a business producing bottle caps, with only 5,000 renminbi ($700) in funds. Such private businesses faced the constant risk of closure during the turmoil of the Cultural Revolution. To keep his business going, He traveled across China on trains selling bottle caps, according to Chinese magazine Xinmin Weekly.
As China’s economy liberalized under Deng Xiaoping, Midea registered its trademark in 1981 and the company entered the home appliance industry. Midea’s home base in the district of Shunde, in Guangdong, was rapidly developing as a manufacturing hub. By 1990, Midea and two other manufacturers were responsible for more than 40% of the electric fans produced in the area, according to the local records office. Midea began to produce air conditioners in 1985, becoming a household name for the product by the late 1990s.
Midea has benefited from well-timed acquisitions. In 1999 it took a 60 percent stake in a Guangdong-based joint venture company that the Japanese electronics giant Toshiba had set up three years earlier to expand its capacity in China. The compressor manufacturing firm, now called GMCC & Welling, combined Japanese technology with Chinese management practices, rewarding employees through an efficiency-wage system. Today, GMCC & Welling sits within Midea Group’s industrial technology business division, which recorded revenue of more than $3.2 billion in 2022.
Source: The Wire China
In 2001, Midea acquired assets from the Japanese electronics company Sanyo and began producing microwave components at a magnetron factory. In 2018, the company set up a subsidiary called MR Semiconductor Ltd, describing the move as a way for it to break into the supply chain for chips used in home appliances, while also helping China improve its homegrown semiconductor capabilities.
We’re very interested in what we can do to shorten the supply chain.
Supply chain vulnerabilities are frequently highlighted as a risk in Midea Group’s recent annual reports, as U.S-China trade tensions and shortages of vital components such as computer chips weigh heavily on business.
“We’re very interested in what we can do to shorten the supply chain,” Kurt Jovais, president of Midea America, said in an interview with The Wire. Asked whether Midea would consider having a manufacturing base in North America, Jovais added that “we are always looking at our options.”
Below is a list of some of Midea Group’s most significant subsidiaries:
Source: The Wire China
KUKA CONTROVERSY
Midea has mostly avoided the “black goods” category of consumer electronics, including televisions and mobile phones. However, in 2016, it spent €4.5 billion ($5 billion) to acquire Kuka, a German robotics firm, helping it to benefit from the fast-growing electric vehicle industry. Today, Kuka robots are in use on the production lines of Tesla’s EV factory in Berlin, which opened in March 2022.
Kuka develops robots for industrial use and the company was not a supplier of equipment to the German armed forces. Still, the acquisition stoked concern in Germany, especially as Midea’s offer was significantly higher than any European investor was willing to pay. That raised questions about whether Midea’s interest in Kuka formed part of Beijing’s Made in China 2025 industrial strategy.
“Kuka was the eye-opener that Made in China 2025 would really change the game of Chinese acquisitions abroad, [making] them much more strategic [and] linked to industrial policy,” says Cora Jungbluth, an expert on China and the Asia-Pacific at the German think tank Bertelsmann Stiftung.
Neither Germany nor the European Commission formally objected to Midea’s acquisition of 95 percent of Kuka’s shares, but the controversy has since prompted the German government to rethink its investment screening mechanisms.
The Kuka case still reverberates. In June of this year, the Italian government raised the possibility of using its ‘golden power’, the name given to Italy’s investment screening mechanism, if Midea succeeded in its reported effort to acquire Electrolux, the Swedish home appliance maker. The deal for Electrolux, which employs thousands of Italians in production plants across the country, ultimately did not proceed amid concerns over potential regulatory hurdles, Bloomberg reported at the time.
POWER DOWN
Midea and its top two competitors in the home appliance industry — Gree Electric and the Haier Group — benefited hugely beginning in February 2009, after Beijing rolled out a three-year-long subsidy program to help rural consumers buy a range of electrical goods.
Today, the competitive outlook is more uncertain.
“Due to the trend of declining birth and marriage rates, the growth trend of traditional household appliance demand is not optimistic,” says Steve Bu, a Shanghai-based analyst at investment research firm EqualOcean. “Household appliance companies no longer engage in price wars and do not use low prices as a sales advantage. Instead, they produce differentiated products and use the advantages of big data to position different products for different groups of people.”
Source: The Wire China
Midea has compensated by becoming more international. By 2022, more than 41 percent of the company’s revenue came from outside China. In 2015, Midea Group’s American subsidiary expanded its on-the-ground presence in the U.S. by establishing a research and development center in Louisville, Kentucky. Two years later, it opened a center dedicated to emerging technology in Silicon Valley.
“The U.S. market now is the largest market for Midea outside of China,” says Jovais, the Midea America president. U.S. revenue increased from around $100 million in 2015 to between $1-$1.5 billion in 2022, he added.
“It certainly has been challenging, from a challenger brand position, in an industry which is dominated by very few, very strong players,” he says. Leading competitors in the U.S. include Whirlpool, Korean electronics giants Samsung and LG Electronics, as well as Haier from China, according to market advisory firm Mordor Intelligence. (In 2016, Haier acquired Louisville, Kentucky-based GE Appliances.)
Midea’s entry to the U.S. market benefited from it having a recognized brand name in other parts of the world, making it easier to start business relationships, Jovais adds.
A central component of Midea’s strategy today is the Smart Home concept, which invites customers to link their appliances to an app and control them from their smartphones. Such digitalization means companies like Midea collect more data from customers. U.S. lawmakers have voiced concerns about data collection when it comes to social media companies with links to China, like TikTok.
“We take a very conservative approach to very strictly managing customer privacy and data protections,” Jovais says.
Source: The Wire China