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issue: April 2004 Appliance Magazine Special Section: BSH Bosch und Siemens Hausgerte GmbH

BSH Bosch und Siemens Hausgeräte GmbH
China Operations

China's Future for Appliances


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by Clint Stevens, China Correspondent

BSH China has built a reputation as the best in China in terms of quality and productivity, while building an efficient and comprehensive distribution and sales network.

The Chinese meaning of Nanjing is southern capital. Nanjing city, in the heart of Jiangsu province, has been used alternately with the northern and current capital, Beijing, throughout Chinese history.

 

ON LOCATION
APPLIANCE magazine traveled to Chuzhou, China and Wuxi, China to report on BSH's Chinese operations.
 

The emperors that chose Nanjing did so for its strategic central location that allowed convenient control of the whole of China's mainland. It seems BSH Bosch und Siemens Hausgeräte GmbH chose Nanjing as its Chinese headquarters for much the same reason - convenient access to the whole of China's vast market.

 
In BSW's prefabrication plant, washing machine cabinets are formed using a 400-ton automatic press that is completely enclosed and surrounded by a sound barrier - a precaution that is often overlooked in the usually deafening Chinese factories. APPLIANCE magazine photo.
 

BSH is set up with three subsidiaries in China: BSW Household Appliances, which produces high-quality washing machines in Wuxi, Jiangsu Province; BSH Home Appliances, which makes state-of-the-art refrigerators in Chuzhou, Anhui Province; and Jiangsu BS Home Appliances Sales in Nanjing, which acts as the company headquarters while handling all the marketing and sales functions for both factories. Both of the production facilities are strategically located within a few hours of Nanjing to take advantage of its central location.

One of the most difficult obstacles to overcome in China is building an efficient and comprehensive distribution and sales network. BSH has tackled this problem by opening one company and centralizing all marketing, sales, distribution, and planning functions. The Nanjing sales company, started in 1997, is jointly owned by the two factories, and it handles all sales and distribution for its products while acting as the company headquarters. According to Roland Gerke, president of BSH in China, "As legislation in China evolves, the final goal would be to come down to one company in China. But for now, the government-mandated structure is working."

BSH in Nanjing employs more than 1,000 people and a comprehensive network of regional, provincial, and city offices covering the entire country. BSH staff travels to the retail outlets, directly employing a promoter in every sales outlet where BSH products are sold. This face-to-face contact with the end-user is an invaluable source of market information. The promoter can listen to the needs, complaints, and reactions to new product features first-hand from the consumer on a daily basis. Using this valuable information, BSH is able to develop new products and add new features with benefits that the Chinese consumer appreciates and values. The promoter also reports daily sales figures that allow BSH to plan production and logistics schedules. Mr. Gerke says, "We chose Nanjing in the middle to be close to both factories and to allow better information sharing."

 
After washing machine assembly is complete, the appliances are leak tested and go through a fully automated robotic line, where they undergo function testing to make sure that everything is working properly. APPLIANCE magazine photo.
 
BSH in Nanjing has built a massive sales and distribution network. It has a strong presence in all cities with a population of more than 500,000, and 60 percent of the cities with more than 200,000 people. According to Mr. Gerke, "We cover maybe 450 out of 650 cities in China. About 40 percent of our network is outside of the classic coast region. The consumer in Wulumuqi (a city in China's furthest west province, Xinjiang) also has purchasing power. With the exception of Tibet, we cover everywhere." Building a comprehensive pan China distribution network has been one the most daunting challenges to international companies in China. BSH has managed to overcome that challenge and now commands a network that covers virtually all of China.

BSH Nanjing has also concentrated on building the best after-sales service network to go along with its reputation as a high-end appliance maker. Mr. Gerke says, "We can offer 24-hour service, and we usually try to make the service visit the same day we get the call. In other countries it is very difficult to achieve, but here we are quite hardworking."

Brand Strategy

Mr. Gerke sums up the Chinese consumer attitude when he says, "The consumer in China is very interested in getting value for the money, and is also interested in what benefits they can get from the features. They really read the promotional literature and get involved with the purchase."

BSH in China is committed to taking the top end of the appliance market. In China, it only utilizes the Siemens brand and has been able to build broad awareness and a very strong reputation for high-end products, advanced features, and top quality. Competing exclusively at the high end of the market place has allowed BSH to maintain its profit margins while other companies struggle through protracted price wars in a very crowded industry. As China's economy has continued to grow disposable income, Chinese consumers have increased demand for higher quality products, while demand for low-end products is concentrated in the countryside. Mr. Gerke tells APPLIANCE, "We market only high-value, high-quality, top-end products in China." Adds Herbert Pawlig, general manager of BSH China, "Innovation defines Siemens' approach to China's crowded market." While this strategy puts the company's products out of reach of the vast majority of Chinese consumers, it also allows it to better satisfy the needs of a well-defined market segment with the most advanced features, top quality, and modern aesthetics.

Marketing Initiatives

BSH in Nanjing has recently put together several innovative promotions to build the Siemens brand in China. "In Qingdao, Wuxi, and Nanjing, we did a promotion where we had 100 washing machines installed outside in the public square in front of the department stores for 10 days and anyone could come and use them," Mr. Gerke says. "We did this to promote the front-loading technology and water conservation."

At the West Lake in Hangzhou, BSH dedicated a statue as a monument to the work done to combat China's struggle with SARS. BSH commissioned local artists to paint refrigerators and then donated them for auction, along with other art collected from the populace. The proceeds were used to build the statue. All local media covered the dedication, as it was part of a larger event commemorating the fight against SARS.

BSH also has conducted a large road show for the last 2 years. The show visited 20 cities last year from the western province of Sichuan to Jilin in the Northeast. On some days the show received more than 5,000 visitors. The traveling show has three tents with built-in kitchens and appliances on display, as well as live entertainment such as singing and dancing. People lined up to get a card to go through the tents.

Another promotion included sponsoring a paper crane folding competition and donated thousands of cranes to a football association before a championship game, along with the commissioning of artists to paint another set of refrigerators that were then auctioned off. The money was used to start a midwife program in small remote villages in Yunnan province in Southwest China.

Expansion

Not content with its product base, BSH in China has plans to expand. Mr. Gerke says, "We have concentrated on building our distribution network, and we can use that as a base to launch other products. We will further enlarge our product base. I see a good opportunity with good products and our expertise." BSH has already begun marketing a new storage type water heater.

When asked about the over capacity that plagues much of the appliance industry in China, Mr. Gerke quickly answers: "Capacity does not mean competitiveness. A lot of outdated factories will not survive, but maybe their deaths will be slower because they can still do business in the rural areas. There will be more consolidation. To build capacity is maybe the smallest problem you face in China."

BSH is confident that it has and will have innovative products, technology, brand, and distribution network to succeed in China's competitive market. "We need to win the battle every year in China. The market is changing so fast," Mr. Gerke says.

Washing Machines

BSW Household Appliances Company (BSW) is located in the city of Wuxi in Jiangsu province halfway between the sprawling metropolis of Shanghai in the east and Nanjing in the west. Located on the east side of Wuxi city, 120 km from Shanghai, BSW set up its company in the Wuxi New District an industrial zone opened by the Wuxi government in 1994 to attract foreign investment and promote economic growth for the city. In the 10 years since the industrial district opened, it has attracted more than 400 companies from around the world with a total investment of U.S. $11.5 billion.

 
Line workers assemble refrigerator cabinets at BSH's factory in Chuzhou, China. APPLIANCE magazine photo.
 

BSW, founded in 1994 with an investment of $30 million, was one of the first companies in the Wuxi New District. Production of front-loading washing machines began in October 1996. BSW employs about 400 people, with 9.6 percent in Quality, 6.8 percent in R&D, and 72.5 percent in Manufacturing and Administration. The total production capacity in three shifts is between 500,000 and 600,000 units annually. Production was planned at 272,000 units for 2003, but the facility will produce more than 320,000 units due to the jump in demand for front-loading washing machines.

BSW was established as joint venture with Little Swan, one of China's largest washing machine makers. Mr. Pawlig of BSW tells APPLIANCE, "BSH owns 60 percent of the joint venture company in Wuxi, while Little Swan owns the remaining 40 percent and controls two management positions: human resources and manufacturing operations. Other than that there is no connection."

In May 1998, BSW achieved ISO 9002, in 1999 it was awarded China's Environmental Protection Labeling Certificate, and in December 2000 the factory reached ISO 9001 and ISO 14001 status.

Products

As part of its commitment to supplying only the high-end products in China, BSW produces only front-loading washing machines using the latest European technology. Mr. Gerke says, "The front-loader is on the move around the world. In Korea, Japan, and even in the U.S. market, the front-loader is gaining ground. To meet water conservation requirements, we can only use the front-loading technology. We believe this is the better technology - measurable by performance - and we do our best to promote the concept. We have around 30-percent market share of the front-loader market in China. We are about even with Haier in the front-loader market; Haier sells more units, but we sell for more value."

The annual washing machine volume in China is 11 million units. The twin-tub semi-automatic model still dominates the market in rural areas, but they are completely non-existent in the cities. Currently, front-loaders make up 10 percent of the total market, but if one examines the urban market, that share jumps to about 25 to 30 percent. In market research by an institute, 50 percent of respondents in Beijing said they would like to buy a front-loader. Adds Mr. Gerke, "We believe that the front-loading market will double in 3 to 5 years."

BSW exceeded its planned production for 2003 by 15 percent because demand for the front-loader washer is increasing faster than anticipated. The growth in this segment has caught the attention of the competition. "Other manufacturers are entering the front-loader market; especially the Japanese and Korean companies," says Mr. Gerke.

Up until now, the largest obstacle to increased market penetration for the front-loader washing machine has been the price. In China, the average price for a front-loader is around 2,500 RMB (approx. U.S. $300), while the average cost of a top-loader is close to half that at about 1,000 RMB (approx. U.S. $120). Price is still one of the most important considerations in a country where the average monthly income is still well below 1,000 RMB.

"We will not produce the top-loader," Mr. Gerke says. "BSW is committed to our front-loader strategy. The Asian-style top-loader makers are not making the margins, and this is another reason we are committed to the front-loader."

The Siemens brand recently introduced its Slim Line products to the Chinese market. The Slim Line washing machine is only 40 cm by 60 cm and can handle a 4.5-kg load. The small footprint makes this line very well suited to the Chinese market, where relatively small apartments are still the norm. The Slim Line concept originated in Eastern Europe for the same reason, and BSH soon found that it was a popular model in London and other large cities where urban residents had limited space. In China, the Slim Line is taking market share from the traditionally more popular Asian top-loader. The appliance uses only 49 L of water per wash. Compared to the 100 L per cycle averages of Asian-style front-loaders and the 150 L of Asian-style top-loaders, the Slim Line represents a huge water savings. This is much needed relief for the over-used water resources in countries like China.

BSW also produces a front-loader washer with a built-in dryer in China. Although clothes dryers are not popular at all in China with the vast majority preferring to hang everything outside to dry, this market is beginning to grow with the affluent urbanites.

The Siemens front-loaders offer numerous features the Chinese consumer has come to appreciate. A built-in water heater allows the machine to kill germs and bacteria.

Quality Standards

The factory in Wuxi is held to the same strict quality and environmental standards that are set by the BSH worldwide headquarters in Munich, Germany. Through continuous research and development, quality and environmental protection is constantly improved. Over the past 10 years, BSH has focused many efforts on the environment to where now, its products are almost 100-percent recyclable. Product development teams must always include core members from the environmental protection and quality departments. "It is really a comprehensive approach, starting with product development and materials continuing to supplier management and improvement, and later, field development during production and continuous improvement during the product life cycle," says Mr. Pawlig.

The Wuxi organization has R&D professionals directly connected to the central R&D for laundry in Berlin, Germany. While other manufacturers have exported outdated production lines to China to produce an inferior product specifically for the Chinese market, all BSH products are based on the latest European platforms and built to the same quality levels as produced in Europe. The China facility now exports some of its production.

About 75 percent of the cost of each unit is in materials. "With that much cost in the materials, we need to improve the whole supplier base in China to constantly improve our competitiveness," says Mr. Pawlig. "We go in and show them how to continuously improve quality and productivity." In 2003, combined supplier audits were implemented worldwide by the Munich headquarters. A team with core people from Quality, Environmental Protection, R&D, and Finance audit each supplier to ensure they meet the strict standards required. This team works with each supplier on the areas where they need improvement until they have the personnel, systems, and procedures in place to continue to meet ever-increasing quality, productivity, and environmental standards.

BSW exports 10 percent of the Chinese-made units to other markets under the various brand names BSH uses. According to Mr. Pawlig, "We could not export unless our machines were made to the same stringent quality standards that are followed in all our facilities around the world." The production must also be cost competitive to export, so local sourcing of content becomes important.

Localization

To compete in China's world of over-supply and price-first competition, localization is key. Even when producing a high-end line, the price must be right. Up until now, BSW has been able to source about 75 percent of product content in terms of quantity and value locally. The motors and some of the electronics are still imported. Local motor production still can't reach the tolerance requirements, so the motors can't reach the lifetime requirements. Some of the stainless steel for the drums is imported from Europe, but BSW also has a local supplier in Shanghai - Krupp Thyssen Stainless Shanghai.

The goal of localization applies to the staff as well. The company has only four team members from overseas; the rest of the 385 staff members are all local Chinese.

Production

The washing machine factory is separated into three main areas: Pre-Fabrication, where parts and sub assemblies are made; Painting, where all parts are powder coated; and Final Assembly, where all the parts come together and the final product comes off the line packaged and ready to ship.

At the pre-fabrication plant, the first station produces the washer's stainless steel drums. The steel is rolled out, cut, and moved into the Italian equipment used to form the drum shape. The drum must be perfectly balanced and completely free from burrs, so it spins evenly without damaging the clothing. Mr. Pawlig says that BSW made a large investment for drums. "We have strong competence in stainless steel to produce the drums," he says. "The process is 100-percent operator controlled." As the drums are finished and checked, they are moved by an overhead conveyor to assembly.

Further in the prefab plant the cabinets are formed. The cabinets are made by a 400-ton automatic press that is completely enclosed and surrounded by a sound barrier - a precaution that is often overlooked in the usually deafening Chinese factories. Next, a transfer line takes the metal sheets to produce the housing. The machinery goes through 10 automated steps to make the U-shaped housing. Finally, it is sent to the completely automated welding station. As the cabinets come off the line, they are sent directly to assembly. BSW does carry a small number of finished cabinets in inventory. It has an automated buffer zone to store finished cabinets until needed in assembly.

Painting

Pre-paint consists of nine steps to ensure that painted surface will hold up throughout the product's lifetime. First, the cabinets go through pre-degreasing, degreasing, and two rinses. Then they are activated and zinc-plated to increase the paint's adhesion. Finally, they are rinsed a third time before the pre-paint dip. A drying oven is used before the powder coat is sprayed on. After the powder coating process, a lab checks the chemical properties of the paint as well as the adhesion and thickness.

Assembly

The assembly line is divided into sections, and each washing machine must meet a series of quality points in order to continue to pass down the line to the next section. The goal is First Pass Yield (FPY), so that a machine is never taken off the line.

"The washing blocks (or oscillating system) are the heart of the washing machine. To produce a quality washer, you have to have very good blocks," Mr. Pawlig says. BSW pays special attention to the production of the washing blocks. The air ratchets used to assemble them ensure exact torque control when assembling the washing block. The objective is to make a machine that is completely trouble free for more than 10 years of use. As the blocks are put together, they move down the line to the "wedding place" where the block and cabinet are joined until death do they part.

BSW utilizes the Kanban parts flow system to keep the assemblers stocked with just enough parts. The racks are arranged with two lines of slanted shelves for parts bins - one facing in to the assembler and one facing out. As one bin is emptied, it is turned around to slant facing out, so it is obvious that more parts are needed at that station. The various suppliers have workers stationed in the BSW factory stocking the assembly line. It is a pull system, so the suppliers are not allowed to put a part on the line until it is needed on the shelf for the assembler.

After assembly is complete, the washing machines are 100-percent leak tested. Then, the machines go through a fully automated robotic line and are 100-percent function tested to make sure that everything is working properly. Up to 5 percent of all washing machines have to go through a production-independent product audit test using European test equipment standards.

As the finished units move to the end of the assembly line, they are packaged. A bar code control system allows 10 different models to be packed at the same time. The packaging materials must be better in China than Europe to prevent damage in shipping. The roads in some areas of China are very poor, and the logistics service providers often do not use the most advanced materials handling methods, so the rates of damage during transit are very high.

At the BSW factory, there is space for only 1 day of finished production in the warehouse. All finished goods are shipped immediately to the company's Nanjing distribution center.

Refrigerators

Up the road in Chuzhou, Anhui Province BSH Home Appliances produces refrigerators. It was founded in 1996 as a joint venture, but now is a wholly owned foreign enterprise. Originally, the partner was the Yangzi Group. Now, Yangzi Group's business focus has shifted to machinery and the rapidly expanding automobile industry. Therefore, BSH took over its shares and now owns 100 percent of the company. This type of industry change in China is not rare. Midea, formerly know as MD, is a large player in the home appliance industry and has also recently started producing buses.

The refrigerator factory introduced ISO 14001 last year. It has also achieved a high growth rate - more than 20 percent for the last 2 years - and will increase capacity in 2004. Dr. Xiao Tian Zhou, the head of Research and Development tells APPLIANCE, "We have positioned our products at the highest market segment for price and quality, and we want to maintain that position. We don't want rapid growth in quantity if that entails diluting our reputation as the top producer in China."

Products

BSH Home Appliances has targeted the highest end segment of China's market. In Shanghai, BSH sells the same number of refrigerators as Haier, but the Siemens models are more expensive so it accounts for a higher dollar amount. BSH is number two in terms of value in China's urban areas. "The average sale price is a two-digit percentage higher than the second most expensive brand and that is where we want to be," says Dr. Xiao Tian Zhou.

 
BSH says it chooses the best suppliers in order to maintain high quality. Its three approved refrigerator compressor suppliers, for example, include Embraco, Matsushita, and Zanussi. APPLIANCE magazine photo.
 

"We came out with a true 'zero-degree' feature in the Chinese market 2 years ago," says Mr. Gerke. "It allows vegetables to stay market fresh for up to 10 days. We had a promotion where the refrigerators were sealed for 10 days, and then we opened them in public squares in various cities and distributed the fresh vegetables. In Chinese cuisine, fresh vegetables are very important, and families often go to the market daily, so this feature was very well received. It is not so easy to copy. The temperature has to be maintained above 0°C and less than 2°C. If it goes below zero, everything will freeze."

BSH is the leader in zero-degree technology. Acis Demandt, general manager of BSH in Chuzhou adds, "The food will last three-times longer than in a normal refrigerator. It has been a huge success. It is one of the most expensive units on the market and every month it's in the top 25 best sellers. Other manufacturers have tried to copy it, but it is a fairly complicated system using electronics to precisely control two magnetic valves and two fans."

BSH was the first in China to use the WTS platform for refrigerator production. Mr. Demandt says, "By using the same platform and many common parts virtually throughout the product range, less investment is required to quickly develop and bring to market new models with new features. This is one of the keys to our success."

One of the new features BSH will introduce is frost-free. "No frost is very difficult to achieve while maintaining energy efficiency," Dr. Xiao Tian Zhou says. "BSH will introduce a no-frost model in 2004 that exceeds China's Class A energy standard."

Production Standards & Quality

To maintain the reputation as the producer of the most advanced refrigerators, BSH strives to constantly improve production standards. BSH is the only refrigerator maker in China that paints the evaporator components that are assembled inside. The powder coating protects them from the moisture and ensures long life. "We only use components that will last as long as the lifetime of the product," Mr. Demandt says. "One example is the electronic display. Other companies use displays that they know can't last. Our philosophy is to have products that are reliable 10 to 15 years. We never sacrifice our long-term success for profit today."

The commitment to producing the best products on the market is transferred over into the company's commitment to its employees. "For a modern company, the personnel are the most important asset, so we have one building dedicated to training," Mr. Demandt says.

Dr. Xiao Tian Zhou adds, "We are a pioneer in key technologies in China. There are three key points for performance: energy consumption, noise level, and design. BSH is number one in China in energy efficiency; 50 percent of our models fall in the A range of China's energy consumption standards. We also have the best average noise level at 35-36 DBA. Our design is very modern with straight, clean lines and a strong continuity throughout the line."

Localization

BSH has achieved a very high level of localization without sacrificing refrigeration quality. More than 97 percent of all refrigerator parts accounting for 85 percent of the value are purchased locally. About 37 percent comes from the same province. The steel for the cabinets still comes from Germany, Korea, and Japan, but other than that, virtually everything is locally produced. The magnetic vales are also imported to meet the company's safety standards.

"BSH chooses the best suppliers to produce the best quality," notes Dr. Xiao Tian Zhou. "BSH has three approved suppliers of compressors: Embraco, Matsushita, and Zanussi. Together, those three companies make 5 million compressors a year in China for the Chinese market. China produces about 17 million refrigerators a year; 10 to 11 million units for the domestic market and about 6 million for export. So the rest of the compressors must be made by local manufacturers. The U.S. imports approximately 2 million units a year in both Chinese brands such as Haier and international brands that are produced in Chinese factories."

BSH in China

BSH is increasingly taking over the top end of China's appliance market. The quality products from the company's washing machine and refrigerator factories have already established the Siemens brand at the top of the heap. The company has built a reputation as the best in terms of quality, and that factor is allowing it to get a premium price for its products. In the southern capital, the Nanjing sales and distribution company has effectively overcome the biggest obstacle in China, building a nationwide comprehensive and efficient distribution network. Using the strategic Nanjing headquarters as a base, BSH is poised to take over and control the top of the appliance market throughout China.

 

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