The financial year (FY for short) of China's air conditioner industry runs from September to August of the following year. With a slump of 12.4% in market size year-on-year, the weak performance of 2015 financial year (Sept.2014-Aug.2015) entailed a number of problems, such as high inventory and price war, which lowered the expectation of industry players and observers for FY 2016. But out of surprise, the performance of FY2016 dazzled them all.

Air conditioner market picking up

Air conditioner market has been picking up in FY 2016, with sales volume of 48.22 million units, a year-on-year growth of 8.1%, and sales of 159.2 billion Yuan, a year-on-year growth of 5.3%. Online sales has maintained strong, with sales volume and sales increasing by 63.7% and 68.5% respectively. Accounting for 16.6% of the whole market after a year-on-year increase of 5.6%, online sales boosted the whole market in general, but squeezed the offline market in particular.

Chart 1 presents the monthly year-on-year sales growth of air conditioners for FY 2016, with two lows at October 2015 and May 2016, when two traditional offline promotions "May 1st" and "October 1st" took place, and two highs at November 2015 and June 2016 when two emerging online promotions "Double 11" and "618"was on. From this we could safely conclude that consumers are turning from traditional offline promotions to online ones.


(AC in this chart is short for air conditioner)

Factors behind the recovery

What underlies the recovery of air conditioner market for FY 2016 are three factors: product upgrading, weather and price.

Product upgrading is the first and foremost factor behind this recovery. According to statistics from All View Cloud (AVC), the number of first-time buyers and those looking for better products to replace their existing ones are almost the same for FY 2015. At the start of FY 2016, predictions went that the number of the latter would ramp up. In response to this possible change, industry players upgraded their product mix to unleash this potential demand, expanding share of energy-efficient and easy-to-use products. Currently, air conditioner industry is on an apparent trend towards products with variable frequency, high efficiency, pleasing style and smart functionality.

Inverter air conditioner segment is taking a larger share of the market according to statistics from FY 2008-2016. For FY 2016, inverter air conditioners represent 65.3% of the market, an year-on-year increase of 2.6%.

Another highlight of FY 2016 in product upgrading is an increased share of products rated Grade 1 (high) in energy efficiency. For FY 2015, Grade 1 products almost all came from standard setters and second and third-tier brands barely had any Grade 1 mounted inverter products because of their brand positions and the high cost of Grade 1 products. For FY 2016, second-tier brands launched strong promotion for Grade 1 products. As a result, the market share of Grade 1 mounted inverter air conditioners and freestanding inverter air conditioners saw a year-on-year jump of 12.6% and a year-on-year growth of 4.4% respectively.

Beijing's subsidy policy for energy efficient products kicked in at the end of 2015. With a cap of 800 Yuan, this policy provides 12% subsidies for Grade 1 products and 8% for Grade 2 ones. With this policy underway, the average price of Beijing's Grade 2 mounted inverter products (3,188 Yuan after subsidy) is only about 300 Yuan higher than Grade 3 ones, and the average price of Grade 2 products (3,365 Yuan after subsidy) is only 500 higher. This fueled a 41% growth of Grade 1 products in Beijing, a year-on-year increase of 31%, much faster than other places in China.

What's also noticeable is an upgrade in style and smart functionality. For FY 2016, freestanding air conditioners with an artistic style represented 53.3% of total sales.

With a sales penetration of 16.1%, smart air conditioners experienced a robust growth. Air conditioners, compared to refrigerators and washing machines, are more easy-to-use and offers more human-machine interactions, thus securing the highest penetration rate among these three categories. In addition, with a drop in the cost of Wi-Fi modules and more smart solutions offered, smart air conditioners have great room to grow and its penetration rate is expected to further ramp up to reach 25% in the forthcoming FY 2017.

Weather is a factor contributing to the recovery too. After experiencing a year-on-year fall for the first season, the industry entered its high season in March 2016. Weather has arguably played a crucial part in the strong performance of June and July. As it turned warm, sales of air conditioner market heated up too. Statistics from Bureau of Meteorology suggest that hot days of this summer came two weeks earlier than last year and the temperature was the third highest recorded since reliable measurements began to be taken in 1961, driving the demand for air conditioners greatly. FY 2016 saw a great reduction of stock. In high season, some distribution channels even went out of stock.

Last but not least, price also plays a part in the performance of FY 2016. The average price of air conditioners slid because of the price war in FY 2015, but it has been going up since the high season of March 2016, powering a surge in sales (chart 2). The air conditioner industry is stepping out of the shadow of price war and see a trend of price hiking. This is relevant to several factors such as stock, price of raw materials, product upgrading, etc.

Air conditioner industry has been plagued with high stock during 2015 and in the second half of 2015, industry players started to reduce production systematically. This strategy, together with low price promotions, produced strong results, cutting stock to less than 30 million units from 40 million units.

Price of raw materials, such as copper, steel and plastic, has been going down in 2015. This reduced the cost and contributed to the price war of 2015. But with a rebound in the price of raw materials in 2016, industry players started to think about back out of price war.  

Outlook

The number of potential first-time buyers remains high. According to statistics from National Bureau of Statistics, ownership of air conditioners per 100 households in urban areas is 107.4 units and in rural areas 34.2 units. In addition, statistics from China Academy of Social Sciences suggests that China's urbanization is continuously expanding presence, reaching 56.1% in 2015 and is expected to reach 60% in 2020 and 70% in 2030. With urbanization underway, air conditioner market has much further room to grow.

Replacement demand for air conditioners remains large too. According to statistics from AVC, air conditioners sold for replacement in 2015 are mainly to replace products between 2005 and 2013, those in 2016 are for products between 2001 and 2009, and those in 2017 are expected to replace products between 2002 and 2010. And since year 2000-2010 have seen great sales, the forthcoming years are expected to see a robust sales growth.

With issues such as high stock and price war properly solved, the performance of FY 2016 greatly boosts the confidence of industry players. Air conditioner industry, with large market demand in the forthcoming years, is expected to see a continued growth moving forward so long as industry players upgrade their product mix in response of the market demand.