Haier Electronics Group Co, an arm of China's biggest home appliance maker, said yesterday that it plans to set up a wholly owned subsidiary to carry out marketing and logistics services in the third and fourth tier cities to capture surging demand in more rural areas of China.

The decision is in line with parent Haier Group's ambition to turn itself into a marketing-oriented company from an appliance manufacturer after profits were squeezed by fierce competition in the sector.

Haier Electronics, the flagship listed unit of Haier, said the new subsidiary will focus on distribution, logistics and after-sale servicing of air conditioners, refrigerators, washing machines and other home appliances, according to a filing with the Hong Kong Stock Exchange.

The new company will be registered in Shanghai with capital of HK$80 million (US$10.3 million). The investment will be funded by internal resources, Haier said.

Zhang Ruimin, chief executive officer of Haier, said the biggest pitfall in the white-goods business is low profit margins, which have fallen to between 2 and 3 percent.

Haier Group chalked up sales of 122 billion yuan (US$17.86 billion) in 2008 and 2.2 billion yuan profit.

The group is running its business at negligible profit when costs of maintenance services are included, said Zhang.

The company said it plans to outsource most of its manufacturing to reduce costs and focus on improving customer service and responding faster to changing market demands.

By the end of 2008, Haier had 29 manufacturing plants around the world. Haier Electronics reported 27 percent growth in first-half profits, thanks to burgeoning rural demand after the central government announced subsidies to encourage farmers to buy new appliances.

(Shanghai Daily September 16, 2009)