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Appliance makers embrace new era
By Keane Hoo |
October 24, 2012, Wednesday
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Print Edition
Print Edition
RECENT economic data from China have been weak. However, behind every cloud there is a silver lining.
With China looking to ramp up domestic consumption and move away from export-led growth, will Chinese home-appliance makers be able to rise to the occasion and play a part in re-engineering the Middle Kingdom's economic growth model?
A confluence of favorable factors has enabled Chinese appliance makers to forecast stellar earnings.
A case in point is Hisense Kelon, which is predicting a 50 percent to 100 percent year-on-year rise in earnings for the first three quarters, with earnings per share of between 0.36 yuan (5.7 US cents) and 0.49 yuan.
The maker of refrigerators and air conditioners posted a 32.9 percent annual increase in first-half net profit to 380 million yuan, with net profit margin up 1.1 percentage points to 3.8 percent.
Positive factors
Some of the positive factors were not company-specific. For instance, the recent drop in the prices of major raw materials was a boon for the entire industry. The 3-month LME price of aluminum closed at US$1,961 per metric ton on October 19, significantly lower than average aluminum prices of around US$2,530 per metric ton during the first eight months of 2011.
The drop in raw material prices enabled Chinese home appliance manufacturers to weather slowing demand after a few years of stimulus-led growth, and in some cases, record higher net profit margins. In addition, this helped Chinese home appliance makers to either increase production volumes or keep them at elevated levels.
According to CapitalVue, Chinese production of LCD TVs rose to 10.39 million units in August from 8.86 million units a year ago. Production of plasma TVs climbed from 233,000 units to 239,000 units in the same period.
The Sino-Japanese dispute over the Diaoyu Islands was an unexpected shot in the arm for the domestic home appliance industry. Local media reports and anecdotal evidence indicate Chinese consumers are eschewing Japanese brands in favor of local products.
Another boost for the sector came from an unlikely source - the government's property curbs to tame the real estate bubble and its focus on providing affordable housing for the populace.
As a result, some property developers, such as China Vanke and Shimao Property Holdings, focused on building smaller units to cater to first-home buyers heretofore squeezed out of China's property ladder by astronomical prices.
New homebuyers need to outfit their homes with appliances, providing a fillip to the industry in the medium term.
The government aims to complete construction of 36 million affordable homes by 2015. Work started on 7.2 million units during the first nine months of 2012, according to the Ministry of Housing and Urban-Rural Development.
To survive, Chinese home appliance makers need to compete across the market space, turn non-customers into customers, strive to redefine the industry-buying group and seek to find a competitive vacuum.
One way of achieving this would be to expand in overseas markets, either through acquisitions or organic growth - or both, as Haier Group has done.
The Qingdao-based home appliance giant ventured into the US market more than a decade ago and built the foundations for its future success by creating and meeting demand for an untapped market segment - mini-fridges for hotels, offices and homes.
Haier is continuing to seek new markets through acquisitions and won more than 50 percent of shareholder support on October 19 for its bid to take over New Zealand's Fisher & Paykel.
Global brands
A related challenge would be the need for Chinese home appliance manufacturers to create powerful global brands. A successful global brand would allow Chinese home appliance makers to leverage on their brand equity and give them greater leeway to develop product line extensions. The prerequisites for developing global brands include research and development skills, and large-scale manufacturing capabilities, both of which Chinese home appliance makers have in abundance. However, a key ingredient for success in branding is marketing and distribution capabilities.
Chinese home appliance makers may have to navigate the new competitive landscape with less support from the home market as stimulus policies are scheduled to expire next year. There are rumors of a similar scheme to encourage the consumption of small appliances in the countryside. Should this fail to materialize, pressures on the industry will undoubtedly be greater.
The road to ushering in a new dawn for China's home appliance makers will be one that is long and fraught with challenges. The ability to fight the good fight and finish the race is vital. The potential rewards are huge, and the domestic home appliance industry would do well to embrace the new paradigm.
CapitalVue provides China capital market, fundamental and time-series databases. Read more on www.capitalvue.com.
With China looking to ramp up domestic consumption and move away from export-led growth, will Chinese home-appliance makers be able to rise to the occasion and play a part in re-engineering the Middle Kingdom's economic growth model?
A confluence of favorable factors has enabled Chinese appliance makers to forecast stellar earnings.
A case in point is Hisense Kelon, which is predicting a 50 percent to 100 percent year-on-year rise in earnings for the first three quarters, with earnings per share of between 0.36 yuan (5.7 US cents) and 0.49 yuan.
The maker of refrigerators and air conditioners posted a 32.9 percent annual increase in first-half net profit to 380 million yuan, with net profit margin up 1.1 percentage points to 3.8 percent.
Positive factors
Some of the positive factors were not company-specific. For instance, the recent drop in the prices of major raw materials was a boon for the entire industry. The 3-month LME price of aluminum closed at US$1,961 per metric ton on October 19, significantly lower than average aluminum prices of around US$2,530 per metric ton during the first eight months of 2011.
The drop in raw material prices enabled Chinese home appliance manufacturers to weather slowing demand after a few years of stimulus-led growth, and in some cases, record higher net profit margins. In addition, this helped Chinese home appliance makers to either increase production volumes or keep them at elevated levels.
According to CapitalVue, Chinese production of LCD TVs rose to 10.39 million units in August from 8.86 million units a year ago. Production of plasma TVs climbed from 233,000 units to 239,000 units in the same period.
The Sino-Japanese dispute over the Diaoyu Islands was an unexpected shot in the arm for the domestic home appliance industry. Local media reports and anecdotal evidence indicate Chinese consumers are eschewing Japanese brands in favor of local products.
Another boost for the sector came from an unlikely source - the government's property curbs to tame the real estate bubble and its focus on providing affordable housing for the populace.
As a result, some property developers, such as China Vanke and Shimao Property Holdings, focused on building smaller units to cater to first-home buyers heretofore squeezed out of China's property ladder by astronomical prices.
New homebuyers need to outfit their homes with appliances, providing a fillip to the industry in the medium term.
The government aims to complete construction of 36 million affordable homes by 2015. Work started on 7.2 million units during the first nine months of 2012, according to the Ministry of Housing and Urban-Rural Development.
To survive, Chinese home appliance makers need to compete across the market space, turn non-customers into customers, strive to redefine the industry-buying group and seek to find a competitive vacuum.
One way of achieving this would be to expand in overseas markets, either through acquisitions or organic growth - or both, as Haier Group has done.
The Qingdao-based home appliance giant ventured into the US market more than a decade ago and built the foundations for its future success by creating and meeting demand for an untapped market segment - mini-fridges for hotels, offices and homes.
Haier is continuing to seek new markets through acquisitions and won more than 50 percent of shareholder support on October 19 for its bid to take over New Zealand's Fisher & Paykel.
Global brands
A related challenge would be the need for Chinese home appliance manufacturers to create powerful global brands. A successful global brand would allow Chinese home appliance makers to leverage on their brand equity and give them greater leeway to develop product line extensions. The prerequisites for developing global brands include research and development skills, and large-scale manufacturing capabilities, both of which Chinese home appliance makers have in abundance. However, a key ingredient for success in branding is marketing and distribution capabilities.
Chinese home appliance makers may have to navigate the new competitive landscape with less support from the home market as stimulus policies are scheduled to expire next year. There are rumors of a similar scheme to encourage the consumption of small appliances in the countryside. Should this fail to materialize, pressures on the industry will undoubtedly be greater.
The road to ushering in a new dawn for China's home appliance makers will be one that is long and fraught with challenges. The ability to fight the good fight and finish the race is vital. The potential rewards are huge, and the domestic home appliance industry would do well to embrace the new paradigm.
CapitalVue provides China capital market, fundamental and time-series databases. Read more on www.capitalvue.com.
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