Source: China Appliance (CHEAA-run magazine)
The crazily high sell-in volume and high temperatures in the past two years have prompted residential air conditioner sector heat all the way up, attracting a flock of new entrants including Mi, MBO, KEG, Kling, Sharbo and Konka.
FY 2017: the craziest year ever
In its nearly 30 years of history, air conditioner sector has never seen a fiscal year as crazy as FY 2017（Sept 2016-Aug 2017）. During this year, the whole industry has been in a fever, creating an astonishing high record.
In the past fiscal year, what China Appliance reporter heard most from compressor makers, manufacturers and distributors are “not able to meet the demand”. Compared to the slow growth rates of refrigerators and washing machines, also categories of white goods, the fever of air conditioner sector is unprecedented and abnormal.
Amid this fever, records are refreshed. According to statistics from ChinaIOL.com, aggregate sell-in volume of residential air conditioners in FY 2017 posted 135 million units, a year-on-year rise of 37.6%, of which domestic sell-in volume posted 82.04 million units, a year-on-year rise of 59.7% and export sell-in volume 52.96 million units, a year-on-year rise of 11.8%.
As to retail sales, statistics from China Market Monitor suggests that, domestic retail sales volume of air conditioners have grown by 27.6% year-on-year to 54.93 million units, while domestic retail sales value climbed by 33.2% to 187.5 billion RMB. Statistics from State Information Center shows that, domestic retail sales volume posted 56.22 million units, a year-on-year rise of 28.5% while sales value grew by 30.5% year-on-year.
Based on China Appliance reporter’s analysis of data from multiple sources, air conditioners installed from construction channels in FY 2017 has increased to 18 million-20 million units. Thus, the total installed air conditioners in domestic market in FY 2017 would come to around 75 million units-with no doubt, a new record.
Based on half-year reports released by listed companies, Gree, Midea, Haier, Chigo, and TCL saw a fast growth in revenue of air conditioners. Particularly, Gree, Midea and Haier’s revenue in air conditioners all witnessed a growth rate of more than 40%.
Non-listed companies also posted record-breaking figures. “We are out of production capacity.” “We have surpassed the sales volume of last year.” “We have reached the sales volume goal set for year 2017.” Our reporter heard these often from air conditioner brands often this year.
To understand this unusual surge, we must look back at the industry development in the past three years. The inventory of air conditioner sector was as high as 40 million units as of the end of FY 2015. In the following FY 2016, enterprises further stocked up. In August 2016, the last month of FY 2016, China was widely hit by high temperatures, cutting inventory down to around 20 million units.
This has made an impact on enterprises in early FY 2017. On one hand, reduced inventory relieved their sell-in pressure. Yet on the other hand, many enterprises further stocked up after winning their last bet on stocking up in 2016.
Real estate market played another crucial role in this surge. Statistics from National Bureau of Statistics show that, 2016 has seen the sales area of residential buildings grow by 22.5% year-on-year. This drove air conditioners installed through both construction channels and retail channels spike up greatly.
The increment in figure mainly came from retail sales of third-tier and forth-tier markets. With power grid network expanding coverage, urbanization accelerating its pace and an increased income of migrant workers, the demand of third-tier and forth-tier markets are unleashed thanks to enterprises’ long efforts. Statistics from multiple sources show that, sales of air conditioners in third-tier and forth-tier cities grew way faster than that of first-tier and second-tier cities.
What’s more, as raw material prices climb and China’s grip on environmental protection tightens, enterprises forecast there would be a rise in air conditioner price, thus are preparing their production and selling-in in advance.
Last but not least, high-temperature weather in most regions of China played the last push.
As of the end of FY 2017, total capacity of China’s air conditioner industry surpassed 200 million units, yet enterprises are still complaining of their “limited capacities”, and planning to expand production. Haier released its plan of expanding a capacity of 15 million units, building India plant and several other plants. Aux’s new plant with a capacity of 7.5 million units would come to stream in Dec 2017. Changhong decided to expand its capacity to 8 million units up from 4.8 million units. Besides, Gree, Midea and TCL are also expanding capacity. KEG is preparing to build its first air conditioner production line.
As of FY 2018, total capacity of China’s air conditioner industry might surpass 250 million units, according to a conservative estimate.
Would the market be capable of absorbing this much?
An unnamed officer from the senior management of an air conditioner enterprise told China Appliance reporter an optimistic estimation: urbanization and an increased demand driven by it would propel domestic sales volume of air conditioners to more than 100 million units, and the total sales volume would surpass 200 million. “We must jump on the bandwagon.”
This is a risky bet. What drove the sales surge in the past two years are variable. Open statistics show that, as of June 2017, 60 cities of China have issued stringent policies to tighten up housing market. Based on past experience, this signals a “cold” year for air conditioner industry. Besides, high-temperature weather is not a guaranteed element.
Despite all the variables, what really makes the whole thing dangerously risky is enterprises’ optimistic attitude. Through interviews made by China Appliance, we can see their reasons: a rising middle class, an accelerated urbanization, low penetration in third-tier and forth-tier cities, peaking replacement needs in first-tier and second-tier cities, etc.
FY 2017 ended with a reasonable inventory, ensuring the sell-in volume of 2018 to some extent. Yet, some high officers shared their worries under the table with our reporter: “despite all the enabling factors, could the market manage a domestic installed volume of 75 million units amid the cooling housing market?”
China Appliance reporter estimates that, the sell-in volume of air conditioners in FY 2018 would maintain a slight increase but retail sales volume would slide. The capacity expansions of brands, a flock of new entrants, deepened channel reform and leading enterprises’ transformation might result in an industry reshuffle.