Air-con makers feel copper cost heat
This year's hot summer in much of the northern hemisphere was cold comfort for China's air-conditioner makers.
Their peak selling season in April and May coincided with a sharp spike in the price of copper. The average air conditioner contains five kilograms of the stuff.
Opinions differ on how severe an impact dearer copper will have on the handful of Chinese producers that do most of the OEM (original equipment manufacturing) for the big North American and European brand names.
China supplies about 75 per cent of the world's air conditioners, according to BSRIA, a consultancy in Britain.
Almost everyone agrees, however, that the critical impact of higher raw material costs will be felt by dozens of small manufacturers that continue to hold out against the consolidation trend in the industry. 'A lot of Chinese air-conditioner companies this year will be thinking about survival, not profits. Small companies will find it difficult to survive the storm,' said William Hoe, deputy general manager of privately owned Galanz, China's third-largest air-conditioner exporter.
The company owns the world's largest air-conditioner factory in Zhongshan, Guangdong, sitting on a two million square metre lot and capable of churning out up to 6.5 million units per year.
Now Gree Electrical Appliances, China's overall air-conditioner sales leader, has unveiled plans to augment its capacity with a 500.8 million yuan factory that will produce up to three million air conditioners from next year.
The top 10 manufacturers accounted for 77 per cent of China's production in the first half, up from 71 per cent last year, according to industry data.
'The big players are building capacity because they have seen the small players are not doing well. They want to take market share from these smaller players,' said Zhou Cheng, an analyst at Bank of China International.
In 2002, China had about 300 air-conditioner brands. Perhaps only 50 remain, according to BSRIA analyst Lea Feng.
'Some brands have pulled out of the market in the past 12 months. It won't be surprising if more companies go the same route. We expect further consolidation in the next 12 months. Companies with no economies of scale cannot make enough profits to survive,' Ms Feng said.
Small producers can no longer count on growth at home to compensate for their weakness in the export market.
Last year more than 20 million air conditioners were sold in China, more than in the United States (16 million), Japan (eight million) and Europe (six million).
However, mainland sales are likely to be flat this year because Beijing's austerity measures have cooled the property market, curbing demand for household air conditioners, Mr Zhou said.
From April to May, copper prices shot up from 43,000 yuan to 83,000 yuan per tonne; though off those highs they remain up by almost 80 per cent since the start of the year. This surge has added about US$25, or 16.7 per cent, to the average factory price of US$150 per machine, Mr Hoe said. 'A lot of clients withheld orders at the peak season because they were waiting for copper prices to fall. The copper price rise occurred right at the peak season so the impact was particularly severe. The increase may remove some companies from the market,' he said.
Exporters to the European Union must absorb a further 5 per cent increase in costs due to the July 1 introduction of more stringent environmental standards for the chemicals and metals used in electrical appliances.
The cost of Chinese air conditioners sold in the EU will rise 30 per cent this year, estimated Mr Hoe. 'We and other Chinese air-conditioner companies face a drop in European orders of 50 per cent to 60 per cent this year.'
Last year, Europe accounted for 40 per cent of Galanz's US$250 million of foreign sales.
The company said its exports would show little or no growth this year - but this was not a problem.
'Galanz's strategy is not to chase big profits but to be No1 in the world air-conditioner market in five to eight years,' Mr Hoe said.
To make up for declining European orders, the company will focus on fast-growing, year-round markets such as India, Southeast Asia and the Middle East.
Shenzhen-listed Gree has reason to be more sanguine about this year's export market. In the first half, air-conditioner exports soared 76.67 per cent to 3.98 billion yuan, almost 33 per cent of revenue.
'Raw material price rises will definitely have an impact but since we are a big company the impact will be relatively small,' company spokesman Huang Fanghua said.
Mr Zhou agreed that the impact of high copper prices on the three largest producers - Gree, Haier and Midea - would be mild, perhaps cutting gross profit margins by three percentage points.
'The big boys have more bargaining power with copper suppliers,' he said.
Even Galanz, the No3 exporter, is a dwarf compared to Gree, whose production scale is four times larger.
'Gree's research and development and its brand offset copper costs,' the analyst added. 'R&D makes a huge difference in quality.'
For example, Gree makes air conditioners equipped with air purifiers, a product that entered the mass market only two years ago and has proved popular among health-conscious consumers in the United States and Europe.