China’s home appliance makers to profit from replacement cycle
Analysts say the appliance sector can keep expanding even in a weak property market, as most new products sold will replace used ones
For Chinese home appliance companies, future growth depends on whether their new products can excite consumers enough so they want to throw away their old fridges and washers.
Despite the slowdown in new home sales – a key driver of new appliance shipments – the profit outlook remains robust for the country’s top white goods makers as they boost investment in smart functions and product design, as well as social media marketing, to attract affluent consumers, according to industry experts.
Sales of home appliances have seen weak or negative growth in the past few years and confidence in the sector has been further dampened by signs that China’s property market is cooling.
In November, property sales growth slowed to 7.9 per cent from the 26.4 per cent year on year growth rate recorded in the previous month – the slowest pace in a year. The tier-one cities of Beijing, Shanghai and Guangzhou even showed a year on year decline of 8.5 per cent in November, according to a report by HSBC.
“It is generally believed that property transactions lead white goods demand by six months,” said HSBC analyst Lina Yan. “The market is concerned about the potential negative impact on appliance demand from the slowdown in the property market, especially from the second half of 2017.”
But analysts point out that the appliance sector can keep expanding even in a weak property market, as most of the fridges, air conditioners and washers sold in coming years will replace used ones.
From 2017 to 2019, replacement demand will account for about 92 per cent of electrical appliance sales, while only 8 per cent is expected to be from new households, according to estimates by HSBC.
“As urbanisation growth tapers off, we expect new urban household formation to slow down, and new home related appliance sales along with it,” Yan said. “However, property sales growth and appliances sales growth are likely to decouple as their underlying drivers diverge.”
The change in growth driver has prompted China’s leading appliance manufacturers to focus less on quantity and more on functions, design and brand reputation.
Horse Liu, analyst at IHS Markit Technology’s home appliance intelligence service, said the companies have been developing more expensive, high-end products so their revenues can keep growing amid dwindling sales volumes.
“The replacement demand is not that stable,” Liu said. “People don’t have to throw the old ones away.”
“When they decide to do that, they want [appliances] that are better, more practical, more attractive in looks, with higher energy efficiency and lower noise levels.”
Jin Jiabin, a 54-year-old white goods salesman in the south western city of Chongqing, said people wanting to upgrade appliances became his main customer group about two years ago.
This younger, more affluent consumer group are more demanding, Jin said. Even in small towns and villages, people want air conditioners that can purify indoor air and be remotely controlled.
“Unlike the older generation, they don’t want the cheapest things,” Jin said. “We have a fridge with a shiny glass surface, and people are willing to pay several hundred [yuan] more just for that.”
Such technological and design upgrades can greatly increase the profit margins of home appliance companies.
According to a 2016 report by UBS, Chinese consumers said they were prepared to pay around a 1,600 yuan (US$232) premium for smart fridges, washing machines and air conditioning units, but the smart modules that enable the technology cost less than 100 yuan.
Some of the largest appliance makers have been spending heavily on developing new functions for the most basic home gadgets.
Midea, a supplier of fridges and rice cookers, has partnered with electronics companies – Xiaomi in 2014 and Huawei Technologies in July 2016 – to speed up connected appliances development, according to market research firm Euromonitor.
In 2015, Midea launched a connected air conditioner that can monitor consumers’ body temperature via Xiaomi’s smart wearables and automatically adjust its settings accordingly.
This week, Qingdao Haier announced that e-commerce giant Alibaba Group would take a stake in Haier’s television arm, a move the appliance company said would facilitate developing its smart home ecosystem.
Haier has been working on a “smart life” platform which enables consumers to use a mobile app on their smartphone to monitor the air quality in their apartments and the expiry dates of the food in their fridges.
Alibaba is the owner of South China Morning Post.
Meantime, brand reputation has become more important when consumers are choosing their second or third fridge, analysts say.
Appliance makers are increasingly turning to social media to win the hearts and minds of China’s young, internet-savvy consumers, who are driving the replacement cycle.
On Weibo, China’s version of Twitter, Haier’s account has attracted more than 500,000 followers for lighthearted posts such as “what dream did you have last night” and “it’s getting cold, Haier air conditioner gives you hugs”.
Midea even created its own social media emojis featuring an animated girl with blue hair and a bobby pin carrying the company logo.
“Now it’s time to win old customers back,” analyst Liu said. “The companies are trying hard in establishing good brand image so their users can be more sticky.”