Source: CHEAA-run China Appliance Magazine (in Chinese)
Mounting pressure posed by continued low growth rate
As a milestone marking the 40th anniversary of China’s refrigerator industry, year 2018 is also expected to be toughest year of this field.
According to statistics from China IOL.com, refrigerator sector posted an output of 75.162 million units in 2017, a year-on-year rise of 0.8%, and sales volume of 75.072 million units, a year-on-year rise of 1.2%, of which domestic sales volume fell by 5.3% year-on-year to 44.801 million units and export volume grew by 12.7% year-on-year to 30.271 million units.
The market performance would’ve been worse if the export volume hadn’t skyrocketed to a historic high. After China’s consumption-stimulating policies on home appliances completely stepped out of the market in 2013, domestic demand for refrigerators has long been weak except for the second half of 2016 when domestic housing industry rose to a peak. After the government tightened its control over house purchasing in 2017, this advantage was gone.
According to National Bureau of Statistics, sales area of houses grew by 7.7% year-on-year to 1694.08 million square meters in 2017, of which that of residential houses rose by 5.3% year-on-year. It is a plunge compared to the surge of 22% in sales area of houses in 2016. What’s more, a drop in the number of people above marriageable age and a slide in active funds of dealers also deter the general demand for refrigerators, too.
After years of development, the negative impact of consumption-stimulating policies gradually went away. At both China’s first- and second-tier cities and third- and fourth-tier cities, large replacement demands provide a boost to China’s refrigerator industry. “A striking feature of replacement demands is buying upgraded products.” Our interviewee from Ronshen says.
In this context, sales value of refrigerators at domestic market grows faster than sales volume by times. According to estimated statistics of all channels from All View Cloud (AVC), retail sales value of refrigerators reached 93.9 billion RMB in 2017, a year-on-year rise of 3.9%, and retail sales volume 33.76 million units, a year-on-year drop of 0.6%.
But rising replacement needs do not take the load entirely off enterprises’ back. Starting from the second half of 2016, prices of raw materials including black and white polyurethane, copper and aluminum have been on a rise. As of the end of 2017, the price of black and white polyurethane has grown by 60%.
This put industry players under mounting pressure. Performance forecasts released by Whirlpool and Meling at the end of Jan 2018 showed a plunge in net profit. According to Whirlpool China, it was estimated to lose 80 million-110 million RMB in net profit and 436million-466 million RMB in performance with non-recurring profit and loss taken out. Meling estimated its net profit attributable to shareholders to be 5 million-50 million RMB, a plunge of 97.73%-77.30% year-on-year.
Looking at the whole picture, China’s refrigerator sector has been facing challenges posed by sluggish market demands and a price surge of raw materials, while embracing opportunities brought by consumption upgrading and rising export market demands in the past 2017. And because of this, industry players differed drastically in market performance, either expanding fast thanks to capitalizing on market opportunities, or struggling at the edge of a cliff.
Growing market competition
The fall of Frestec, a previous heavyweight of refrigerator sector, stirred the refrigerator industry in 2017. And Frestec was not alone. Brands that sprang up amid China’s consumption-stimulating policies are gradually stepping out. Statistics of offline channels monitored by AVC suggested that, the number of refrigerator brands dropped from 97 to 86 in the past 2017.
Based on our reporter’s rough calculation, top five brands of refrigerator industry took almost 70% of the domestic market share by sales volume, up by 8%-10% from 2016. As major refrigerator brands extend their air cooling products to 200L or less, and leading brands cut the price of side-by-side refrigerators down to 2000+RMB, medium and small brands are plunged into a survival crisis.
With core technologies and a rebalanced product mix to meet growing upscale demands, many industry players rise above adversity.
According to Haier, it has claimed the NO.1 position globally for the 10th consecutive year with a global market share of 17.3% in refrigerator industry in 2017. Domestically, it took a market share of 31.30%, up from 27.15% year-on-year. By retail sales value, it took 34.34%, up from 29.78% year-on-year. What’s worth noticing is that, Casarte, a high-end brand under Haier Group, filled the void left by weakening Japanese and Korean brands, accounting for up to 49.7% of refrigerators above 15,000 RMB by sales volume.
Midea, with a growth rate of more than 20% by sales volume for three years in a row, become the fastest growing brand in refrigerator industry. This stunning performance solidifies its position as the runner up. Midea had a plan of taking on Haier’s position in refrigerator sector in 2020. This could probably come true if Midea maintains its growth of 20% in the upcoming three years.
BSH’s performance is another highlight of the sagging refrigerator sector. Committed to mid- and high-end market for years, BSH further expanded its presence in upscale refrigerator sector in 2017, and its efforts get paid off. Sales value of refrigerators carrying the brands of Bosch and Siemens grew by 20% as Japanese and Korean brands gradually went down.
In fact, the rises of these brands are in large built on improved products and a rebalance of product mix. Those with little or slow strategy adjustments, consequently, suffered a blow.
A change in market landscape
Although the overall market size does not change much, the structure is drastically different than before. In our interviews, every one of our interviewees points out that the surging demand for upscale products will be an inevitable trend. As we mentioned earlier in this article, a change in consumption concept, coupled with a rise of replacement needs, is fueling the market demand for mid- and high-end products.
At e-commerce platforms, this trend is also clear-a structural change of product mix is happening. This, on one hand, results from online consumers’ changed consumption preference, and on the other hand, thanks to the joint efforts of e-commerce platforms and manufacturers in promoting high-level products. Taking 30% of the market by sales volume, online channels are driving this sector to go further upscale.
Accommodating to this trend, Haier, Midea and BSH have all adjusted their product mix, which gradually changes the landscape of the market.
Haier went all out in 2017, rolling out several side-by-side and multi-door refrigerators at competitive prices. Its high-end brand Casarte also put blockbusters such as F+ refrigerators on the market in 2017, expanding presence in the market of upscale refrigerators priced above 15,000 RMB.
Committed to improving products in recent years, Midea has seen its mid- and high-end products winning recognition. In year 2017, Midea completely phased out its direct cooling products of small sizes, and expanded its air cooling products to 200L. Meanwhile, its multi-door and side-by-side products have grown to account for 40% by sales value.
As an experienced player in high-end market, BSH’s multi-door and side-by-side products take up around 70% of its refrigerator business by sales value, meaning it is almost dropping the three-door products.
These similar strategies of industry leaders lead to some changes in market landscape: (1) Small-capacity air cooling refrigerators are expanding in the market. Brands offering only small-capacity direct cooling products could be sidelined. (2) Three-door refrigerators, seen as low-end now, are losing market space. (3) Side-by-side refrigerators, at lower prices, are gaining popularity. (4) Multi-door products become the frontier of innovation, where many brands are stepping up their efforts.
Transforming is the only way out
As mid- and high-end market becomes the main battle field of competition, those who are not able to transform could be sidelined.
We learn from many top managers of refrigerator enterprises that, the prospect of this sector is not positive in 2018, with the low growth expected to continue. Yet there are still some market potentials to be tapped, which come from:
(1) Urban areas. Amid the tightening housing policies, mobile populations with no house under their names become the main consumers in urban areas. Statistics from multiple sources show that, the purchasing power of mobile populations is growing fast. Many of them are of middle and high class, generating large demands for mid-end products.
(2) Third- and forth-tier markets. The negative impact of consumption-stimulating policies in 2008-2012 has faded after years of development, leading to a round of replacement demands that is ready to be unleashed in 2018. With renewed consumption concept, these markets will no longer be a place full of low-end products, but rather, emerging markets that is embracing quality, branded, and mid-end products. What’s more, an explosive growth of house sales in third- and forth-tier markets last year is expected to power the home appliance demands in 2018. And as e-commerce operators expand to these areas with more stores and service stations established, some high-end brands such as Siemens get a chance to reach the markets where they had little presence before.
(3) Niche markets. Currently, products designed for senior citizens, kitchens and living rooms are developing, bringing benefits to industry players amid the increasingly homogeneous market.
After analyzing market and competition landscapes, we could safely say that, technology upgrading and a mid- and high-end strategy is probably the only way out for refrigerator makers to survive and thrive.