BUSINESS: A JACK WELCH OF COMMUNISTS

Humiliation was a company tradition. Each day at the Chinese appliance maker Haier, workers lined up on the factory floor before the start of their shift. The supervisor called out the name of the employee who had made the most mistakes the previous day--say, leaving a screw out of a refrigerator, working too slowly or scratching a fridge door during assembly. The guilty one then marched to a set of large green footprints painted on the floor, faced his or her co-workers and endured a several-minute-long lecture.

When Haier Group, based in the seaside town of Qingdao, built a factory thousands of miles away in Camden, S.C., the managers figured they'd use the same technique to boost productivity. American workers were indignant, and refused to submit to ritual embarrassment. The Chinese bosses relented, and eventually considered the episode one more lesson in their effort to build a global brand. "Now even the government is paying attention to developing China's own famous brand," says Haier chairman Zhang Ruimin. "It's not whether you want to or not. It's a must for [Chinese] companies, because we feel the pressure from the market."

Beijing aims to have at least 50 companies in the Fortune 500 by 2010. Last year 15 made the list, but China still doesn't have a household name to call its own. Many people think that Haier (pronounced Higher) could be the first. "Haier is the best brand, without a doubt, in China," says Wang Jing, general manager for Beijing Famous Brand Evaluation Co., a private firm. "The story of Haier is a good example to other Chinese companies."

Formerly called Qingdao Refrigerator Co., the firm was more than $10 million in debt in the early 1980s. Today Haier is one of the world's top five producers of household appliances, with 30,000 employees and more than $12 billion in revenue. CEO Zhang joined the company in 1984, when he was 35. An avid Jack Welch fan, Zhang is also an influential member of the Chinese Communist Party. He makes only about $800 a month, and last year earned a little more than $3,000 in bonuses.

Zhang's first new rule as boss of the company was to prohibit employees--who were unaccustomed to modern plumbing--from urinating outside the toilets. A quality zealot, he once took a sledgehammer and ordered workers to help him smash any refrigerator with the slightest flaw, bringing some employees to tears. "Haier was importing technology from Germany... I personally went there to meet with the Germans and compare products," Zhang recalls of his first trip abroad in 1984. He was embarrassed: "From speaking to the Germans, I realized that the quality of the goods represented not only a company, but the whole country. I figured I couldn't raise the entire worth of China, but I could raise the worth of this company."

Haier was among the first big Chinese companies to focus on customer care. Several astute servicemen noticed that Chinese customers--as they became able to afford nicer apartments--were scolding workers who scuffed their floors with muddy shoes. Haier ordered its workers to wear shoe covers when they entered a home. In a country where customer service was nonexistent, it was the equivalent of an American cable guy's showing up with tea service for two.

Haier grew overseas the hard way. It first entered developed markets, such as Germany and the United States, where Haier began selling refrigerators under its own name in 1999. In 2000, the company built a $40 million industrial park in South Carolina. That helped it avoid accusations of dumping, and deflected the anger of politicians and labor leaders who accuse the Chinese of stealing American jobs. In 2002, Haier purchased a landmark building in Manhattan for its U.S. headquarters, and later it built an office outside Wal-Mart's Bentonville, Ark., base.

Unlike many Chinese companies, Haier doesn't skimp on research. Last year it spent 4 percent of its revenue on R&D, which is on a par with similar U.S. companies. Haier even pays its design engineers according to how well their products do in the market. (Every Haier employee has a personal balance sheet that measures his or her quarterly contribution to the company.)

Yet the company faces many difficulties. It struggled for several years to build an efficient distribution network in the United States, and its ownership structure remains opaque. Part of the company is publicly traded on the Hong Kong and Shanghai stock exchanges. But no one really knows who owns the rest. Haier is what's called a "collective" company in China, a holdover from the days of Chairman Mao Zedong. Technically, the workers own it, but they receive no dividends and have no way of knowing exactly what they're entitled to. Even Zhang admits he's in the dark: "It belongs to the employees, but no one knows who owns how much."

Often, Chinese companies get bullied by local governments to buy money-losing firms. Haier has more power than most to refuse such "offers." But the company has acquiesced at times. The Qingdao government once pressured Haier into buying a pharmaceutical company, even though Haier had neither the in-house knowledge nor the distribution network to run a biotech company. The venture was a disaster. But it could have been worse. "The local government also offered us a bicycle factory and others," Zhang says. "Although the government was not very happy, we didn't take them." Part of becoming a Chinese global brand, it seems, is learning how to say "no."