Bottom line: Chinese appliance makers and Internet companies need to focus their smart device efforts on one or two key alliances each, or risk spreading their resources too thin.
Smart devices look set to become a theme of the New Year, with new reports that domestic appliance giants Haier (HKEx: 1169) and Midea (Shenzhen: 000333) have formed major new tie-ups to develop the space. Similar alliances began accelerating in the second half of last year and are aimed at developing the “Internet of Things”, which envisions an interconnected world where devices and their owners can talk to each other at any time over a wide range of wired and wireless networks.
Names like Haier, Midea and Gree (Shenzhen: 000651) are smart to pursue such alliances, which will be critical to their future product lines and key to their long-term survival. But their sudden rush to form a wide range of tie-ups with such a diverse group of partners looks slightly driven by panic and a herd mentality.
Such a bandwagon approach is typical in China, where companies often jump on the latest market trends without doing enough homework to form detailed and focused strategies on how to proceed. To avoid that this time, these appliance makers that are some of China’s most successful brands should slow their efforts and focus on forming a few strategic alliances. That will help them to avoid diluting their resources and ending up with warehouses full of poorly designed products that nobody wants.
The development of smart devices, which run the range from refrigerators and air conditioners to wrist watches, is part of a global trend that combines advanced technology with increasingly sophisticated telecoms networks. Such a potent combination lets devices and their owners talk to each other, for instance allowing a smartphone to detect that its owner is on the way home from work and instructing the air conditioner to turn itself on to cool down his apartment before he arrives.
Many of the new alliances in China have paired device makers with Internet companies, which can provide communication channels needed to make most smart devices work. But other companies from traditional industries are also joining the trend.
Media reported on the latest pair of alliances late last week, including one tie-up between Midea and JD.com (Nasdaq: JD), China’s second largest e-commerce company. The other saw Haier pair with Evergrande, (HKEx: 3333) one of the nation’s top real estate developers.
In announcing its alliance, Midea said it hoped to become the first appliance maker to log 10 billion ($1.6 billion) in annual sales over JD’s popular e-commerce platform by co-developing smart devices and also by selling more appliances to consumers in smaller cities. (Chinese article)
At nearly the same time, Haier announced the signing of its own strategic alliance with Evergrande, with an aim of 30 billion yuan in sales over the next 3 years. (Chinese article) That alliance was broad and consisted of 4 main parts, including one that would see Haier install smart appliances in new Evergrande properties and upgrade appliances for smart functionality in existing properties.
These 2 tie-ups are just the latest in a growing series in the space. Haier was one of the earliest to recognize the trend more than a year ago, when it formed an alliance with social networking powerhouse Sina Weibo (Nasdaq: WB) to develop smart air conditioners. Haier was back in the headlines just a few months later at the end of 2013, when it formed a major tie-up that saw its Hong Kong-listed unit receive 2.82 billion yuan in new investment from e-commerce leader Alibaba (NYSE: BABA).
Since then, Alibaba has also tied up with Dutch appliance and electronics giant Philips (Amsterdam: PHG), and PC giant Lenovo (HKEx: 992) has announced its own intention to develop smart air purifiers, smart glasses and smart routers with unspecified partners. Smartphone sensation Xiaomi has also joined the crowd, recently launching its own new line of smart air purifiers and also announcing last month it would invest $200 million in Midea as part of another smart device alliance.
The New Year is almost certain to see the announcement of more similar tie-ups, as everyone jumps onto this growing trend. The wide array of alliances announced so far covers a broad range of business partners and product strategies, reflecting the newness of the sector and uncertainty about how to proceed into such a new area.
Before the situation becomes overheated and spirals out of control, companies like Midea, Haier and Gree need to pause and put more thought into where each thinks the industry will go. They should then form one or two key alliances in pursuit of that direction, rather than many smaller partnerships that will only become distractions and hurt their efforts to become leaders in the field.