Blazing Refrigerators

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China's top appliance maker aims to show that its old-school model can succeed in a new, new world

In the era of baby-faced dotcom billionaires, mainland Chinese fridge manufacturer Wang Gouduan is proving you don't have to be a Netrepreneur to take on the world. His is a more old-fashioned success story. Wang had never seen a fridge until he visited the Guangzhou trade fair in 1983. He had only seven years of formal education and at the time was managing a decrepit, state-owned rice-cooker factory in the Guangdong province backwater of Rongqi (pop. 60,000). Since then the chubby-jowled 50-year-old ex-cadre has transformed his township enterprise into China's largest and most successful refrigerator maker. Last year his Guangdong Kelon Electrical Holdings Co. sold $677 million of refrigerators, air-conditioners and other white goods, gobbling up nearly a quarter of the domestic market. In the U.S., Wal-Mart offers Kelon's minibar-style fridges, and the Chinese company is pushing into Europe and Southeast Asia.

Now, with China poised to enter the World Trade Organization, Wang has a make-or-break opportunity. Some analysts believe entrepreneurial Chinese companies such as Kelon could suddenly come under pressure from the foreign and local competition that will emerge as China's economy is forced to liberalize. But Kelon insists China's wto entry will not harm- and may even enhance-its position. Executives argue it is already competing on level terms against U.S. companies like Whirlpool, which manufactures in China, and will also benefit from falling tariffs in its export markets. We just have to become even smarter, says Wang. Like many other non-Internet Chinese companies, Kelon will soon find out if its older model still works in a new economy.

Until now the company has been as hot as a fridge maker can be. Kelon has repeatedly won awards as the best-run and most investor-friendly company in China, ahead of such luminaries as China Telecom and computer giant Legend. Says analyst Charles Wyman of investment bank Credit Suisse First Boston: Kelon is the best managed company in China. That helps explain the company's stellar returns:since 1994, profit attributable to shareholders has risen by more than 500%.

The company grew from humble roots. In 1983, with demand for its rice cookers flat, Wang, partner Pan Ning and a few other cadres cast around for a new product to manufacture. When they saw their first fridge, says Wang, we immediately recognized the opportunity. Both believed that Deng Xiaoping's policies would make Chinese richer. They had little else-neither funds nor an understanding of the technology. For seed capital, Wang and his colleagues scrounged a meager $11,500 loan from the Rongqi township government. The Kelon team took a Japanese-made fridge to pieces to see how it worked, then reverse-engineered it. To gain permission to manufacture their new model-a right then held by a few dozen state-owned factories-Wang and Pan lugged their prototype 2,000 km to Beijing to show the Minister for Light Industry. Winning over consumers was easier, given the poor quality of fridges then on the market. A big hit was an early two-door design-China's first. Kelon's Rongsheng (pleasant music) model soon became one of China's top brands, renowned for reliability and after-sales service. By 1991, Kelon had become the country's No. 1 fridge maker. Five years later, the company was the first of China's 185,000 town-and-village enterprises to go public, raising $100 million through a Hong Kong listing. When the company held a second listing in Shenzhen last year, it was oversubscribed 88 times.

But the years of ever faster growth may be at an end. The market for refrigerators in China's cities is nearly saturated. Kelon alone produced 2.2 million last year, making it one of the world's top manufacturers. A sluggish economy and increased competition brought about by economic reforms are squeezing profit margins. Despite record sales last year, the company reported a 1.3% fall in operating profit. It has responded by targeting China's secondary cities and rural areas, where refrigerators are so rare that many owners proudly display them in the living room, not the kitchen. The company has also branched out into air-conditioners, which it hopes will become China's next consumer-appliance fad. Says Rachel Tsang of Vickers Ballas Securities in Hong Kong: What Kelon has done is revolutionary. The future may depend on whether it can start another revolution. And there's no reason to suppose it won't, if Wang Gouduan and Kelon keep on humming.