Source: CHEAA-run China Appliance magazine
Water heater enterprises were caught unprepared by the sudden outbreak of coronavirus, though the sluggish 2019 had prepared them for tough years ahead. As a category that needs home installation, the sector was hard hit by the outbreak in Q1 with market size suffering a big shrink. But as coronavirus get contained gradually within China, the sector is on the path of recovery.
A big shrink in market size
The gloomy market of 2019 triggered a price war among industry players, particularly those from the highly competitive electrical water heater sector where even the mainstream brands rolled out cheap models online to gain ground. This dealt a deadly blow to small and medium-size enterprises.
As to gas water heater sector, product upgrading has become a clear trend despite the lackluster overall market performance. With “zero cold water” (immediate hot water supply) being a highlight of 2019, most medium and high-end products use it as a strong selling point. Unfortunately, the upgrading did not turn the tide.
The expectation towards 2020 has been low amid the sluggish market situation, and it got even lower after the outbreak occurred. My interviewee from a domestic water heater brand believes that, the outbreak further intensifies market competition while homogenous design and excessive production capacity fuel the price war.
Electrical water heater sector saw retail sales value of 4.73 billion RMB in Q1, down by 32.5% year-on-year, and sales volume of 4.156 million units, down by 23.7% year-on-year, while gas water heater sector saw retail sales value of 3.62 billion RMB, down by 48.1% year-on-year and retail sales volume of 1.932 million units, down by 39.9% year-on-year, according to All View Cloud.
Online channels posted stronger sales than offline channels during the outbreak. According to All View Cloud, online retail sales value of electrical water heaters grew up by 23.7% year-on-year to 2.39 billion RMB in Q1 and retail sales volume up by 26% year-on-year to 2.477 million units while online retail sales value of gas water heaters fell down by 13.2% year-on-year to 1.23 billion RMB and retail sales volume down by 1.2% year-on-year to 0.897 million units.
It is believed that the main battlefield will be shifted to online channels in short term considering the effect of the outbreak. My interviewee from Midea points out that, “Online market is going to be the main battlefield of 2020. We’ll continue to improve our product competitiveness at online market and provide products that are smarter and healthier.”
The intensified price war
The price war gets even more intensified in 2020. With all models fell in price in general, 80L models dived most in price at online channels while 40L models most at offline channels. My interviewee from a domestic brand points out that, the industry has entered a stage where existing market becomes the main battlefield. This, plus the highly competitive online markets, intensify market competition.
Speaking of the price war, many interviewees working in electrical water heater sector believe that, there’s really not much room for price cut as the average price of electrical water heaters has already been quite low. To change this situation, mainstream brands are actively exploring. My interviewee from Midea reveals that, Midea will continue to diversify product lines and roll out stronger products. Gas water heater players are also sacrificing price for sales after the sector suffered a near 50% dive in shipping in Q1 due to the coronavirus. Yu Wei, head of Marketing and Product Planning of Rinnai, believes that, the price war is inevitable based on the current situation of the industry and it will phase out some players. “I believe the industry will be more condensed as the fittest players will survive after the price war.” He adds that, the survivors will be those who have money, technology, manufacturing capability and management capability.
Looking at the price range in Q1, I find that, gas water heaters suffered a general price cut at online channels while 11L models and 16L models dived most at offline market.
For Q1, “zero-cold-water” models saw a clear fall in price. Some brands even halved the price to gain an edge. Statistics from All View Cloud show that, the average price of “zero-cold-water” models fell to 2,509 RMB from 4,569 RMB in 2019 at online channels, and 3,923 RMB from 5,448 RMB at offline channels.
Homogenization shall take the main blame. My interviewee from Midea believes that, “zero-cold-water” products are highly homogenized, and the price war of this category will go on throughout the year. He adds that, “our products are strong enough to survive the price war. Plus, we update our products to meet consumers’ changing demands. This is really where our confidence comes from.”
New opportunities from replacement needs
The economic recovery has become the priority after the coronavirus gets contained. Many provinces of China issue consumption coupons to boost consumption while several departments and platforms encourages live-streaming sales. Plus, most appliances bought during China’s “Home Appliances to Rural Areas” shall be replaced now. My interviewee from Haier points out that, “Initial estimates show that, nearly 18 million households need to replace their old appliances.”
It’s worth noting that, stimulus policies from local governments will also boost market demand. For example, Guangdong province releases a document regarding measures to boost consumption in rural areas on April 15, which encourages manufacturers to conduct a new wave of “Home Appliances to Rural Areas” based on their retail stores, and the finance department of Guangdong province will provide subsidy for consumers who buy 4k TV, air conditioner, washing machine, refrigerator, computer, mobile phone, rice cooker and water heater.
Despite this, consumers’ purchase power and confidence are not high. An industry insider points out that, the overall sluggishness will affect consumers’ buying power. He adds that, “those who planned to take 5,000 RMB to buy a water heater now probably turn to 3,000 RMB products. For this reason, we’re considering rolling out medium-end and low-end products to reflect this change.”
A rising demand for healthy showering experience
The outbreak further raises consumers’ healthcare awareness, making healthcare a primary consideration when consumers buy products. This lead to a rise of anti-bacterial water heaters. In fact, healthy showering has already been a critical trend of the electrical water heater industry. With anti-bacterial materials, silver ion bacterial-killing technology, high temperature anti-bacterial function, and clean-water showering concept applied by industry players, consumers’ demand can be met.
For gas water heater makers, health-oriented function is also a priority. Yu Wei reveals that, Rinnai has always been dedicated to offering healthy, comfortable showering experience for consumers. He adds that, immediate hot water supply and constant temperature are still critical trends of the sector. “Zero-cold-water” (immediate hot water supply) models will still be the major battleground of the sector, though the average price suffered a big drop.
Amid the outbreak, water heater enterprises face huge pressure in inventory and capital flow. To get through this, the industry need to step up R&D, optimize product design, and offer differentiated functions to get through this critical time.