China appliance makers flip the retail switch to survive

Chinese white goods makers like Haier Electronics Group are muscling in on their distributors and expanding into logistics and e-commerce in a bid to win the fierce battle for margins in the world’s biggest home appliance market.

This strategy shift is expected to hurt retailers such as market leader Suning Commerce Group and GOME Electrical Appliances Holding as slowing economic growth and increasingly thrifty, web-savvy consumers intensify the already cut-throat competition in the US$89 billion sector.

“It has become the norm for manufacturers to roll over to e-commerce and logistics distribution, hoping to enrich customers’ online shopping experience, while holding up profit margins without having them eroded by a middle-man,” said Linus Yip, chief strategist at First Shanghai Securities. “Apart from securing market share, it is more about surviving in the highly competitive market,” he added.

Chinese appliance manufacturers, already facing higher labour and operating costs, are currently vying with their distributors and online marketplaces for the same customers, who are, by and large, unwilling to pay a premium for local products.

Distributors often undercut manufacturers by offering discounts or financing for purchases, which in turn reduces the profit margins of everyone involved in the sector: second-ranked distributor GOME, backed by private equity firm Bain Capital, posted a loss for last year.

Now manufacturers like Haier, GD Midea Holding, and Hisense Kelon Electrical Holdings are fighting back.

The benefits of taking control of distribution and e-commerce are clear: manufacturers can expand into China’s vast interior where most of the sales growth is expected to come from without having to open physical outlets or share their already meagre profits with retailers.