Source: CHEAA-run China Appliance magazine

The sudden outbreak of coronavirus dealt a heavy blow to the offline market of China’s refrigerator industry, while boosted overseas demand to a huge high. The industry has been on a roller coaster amid the coronavirus. With uncertainties of overseas market and a fall in domestic market, the mounting sales pressure is creeping up on industry insiders. One of my interviewee, a senior executive from a refrigerator manufacturer, says, “The increased market scale is only the surface. We’re really walking on eggshells.”

The surprises of 2020

Looking back at the past 2020, China’s refrigerator industry experienced an unprecedented V-shaped development pattern.

The outbreak of coronavirus in the first two months of 2020 put refrigerator industry as well as suppliers throughout the supply chain on hold. In February, pessimism loomed over the industry with a multitude of tough issues ahead such as production resumption, supply and logistics. Haier and Midea, two frontrunners of the industry, both suffered a struggling work resumption as they both have a refrigerator factory located in Wuhan, the then epicenter. In this context, refrigerator output fell by nearly 30% in Q1, hitting a historic low, based on what I learned from multiple sources.

But surprisingly, the industry took a turn for the better in the following 9 months. With coronavirus effectively contained domestically, refrigerator manufacturers fully resumed work and production to meet the pent-up domestic demands (especially the strong rebounding demands during the “618” Shopping Festival), and the delayed overseas orders. Meanwhile, as the pandemic got worse across the world, overseas demands for refrigerators rose. With overseas refrigerator manufacturers struggling to resume production, China provided steady supply of refrigerators. To meet the rising overseas demand, the production schedule of refrigerators has been very tight in H2 2020.

For this reason, the yearly output of China’s refrigerator industry achieved a positive growth as of the end of 2020. As I learned from multiple sources, the annual output of refrigerators (freezers excluded) came to 85 million units, up by 7% year-on-year, of which exports registered 42 million units, up by 20% year-on-year.

In fact, the growth rate for the combined output for H2 alone was up to 40%. It is estimated that the factories would keep working at full capacity in Q1 2020.

While exports ballooned, domestic sales have been under huge pressure. As I learned from multiple sources, domestic shipping for 2020 came to 43 million units, down by 2% on a yearly basis. From January to November 2020, domestic retail sales volume of refrigerators came to 30.56 million units, down by 1% year-on-year, and domestic retail sales value 83.5 billion Yuan, down by 1.9% year-on-year, according to All View Cloud. The growth mainly came from the pent-up demands from H1. In fact, domestic market still lacks of a strong growth engine.

Skyrocketing raw material prices push SMEs into a survival crisis

At a time full of change and turbulence, the brand landscape of China’s refrigerator industry does not change much, with Haier taking the lead, Midea, Hisense and Meling following behind, and Homa topping the list by export.

But sales pressure from domestic market is creeping up on enterprises. Offline market suffered an unprecedented batter during the pandemic. It puts the squeeze on enterprises whose major distribution channels are offline, and brings profit to brands whose major channels are online.

My interviewee from Haier says, statistics from China Market Monitor shows that domestic retail sales value and volume of refrigerators at offline channels fell by 11.1% and 16.8% respectively as of the 50th week of 2020, of which Haier fell by 5.8% and 7.2% respectively. Despite the shrinkage, Haier still accounted for the largest share of the market at 39.3%.

With offline market hart hit, Midea steps up its efforts in online operation while digitalizes the management of offline channels to improve efficiency. From May 2020, it achieved a 20% growth of refrigerator sales volume for almost every month, making it the fastest growing mainstream enterprise by domestic sales volume in 2020.

Haier and Midea aside, enterprises with domestic sales volume of million units bears huge sales pressure amid the pandemic.

With large-sized enterprises under pressure, small and medium-sized refrigerator manufacturers are actually on the edge of survival. The crisis surfaced from the beginning of the outbreak. SMEs have been struggling to deal with multiplying issues such as production resumption, employee recruitment and the price surge of raw materials.

The soaring price of raw materials was mainly due to two factors: the surging refrigerator demands across the world, and the price hikes from raw material suppliers who cash in on the situation. For example, MDI was charged 14,000 RMB/ton at the beginning of 2020. In October, the price exceeded 19,000 RMB/ton, a growth of nearly 40%. Plus, the prices of steel, plastics and copper are jumping too.

It puts vulnerable SMEs into a delicate situation. An interviewee from a small-sized refrigerator manufacturer says, small brands could hardly withstand the soaring price of raw materials, especially when big brands lower product prices for online traffic. The profit margin for SMEs was very narrow.

Refrigerator brands got further concentrated in 2020 as a result of multiple factors. Top five brands of refrigerator industry (by output) accounted for more than 70% of the market, leaving an increasingly narrow space for SMEs, as I learned from multiple sources.

Outlook for 2021

Speaking of the outlook for 2021, most enterprises keep a cautiously optimistic attitude, and believe that replacement needs will be the mainstream of the market. A top manager of a refrigerator manufacturer points out in the interview that, “refrigerators are durable consumer goods. Last generation products are mostly still good for use. In this context, tapping into replacement demands through innovation is what the industry needs to do currently.”

As third and fourth-tier markets are still price-conscious, refrigerator industry players are in a dilemma. They need to take on the challenge of vitalizing traditional offline markets by balancing the pricing of online and offline channels, and improving the profit margin of third-tier and fourth-tier markets at the same time.

Domestic retail sales is expected to grow by less than 5% while combined domestic output is expected to remain the same level as last year, according to forecasts from multiple sources.

International markets are still full of uncertainties. Currently, production for overseas orders has been scheduled for the Q1 of 2021. But there will be a lot of factors at play such as freight, raw material price, international trades and the pandemic.

But industry insiders are worried if overseas markets’ dependence on China will last long. Plus, though large-capacity models have seen a surge in exports, the percentage of it is still rather low and the profit is quite thin. And the surging demands from overseas market might overdraw future needs in advance.

Through my interviews, I find that though some enterprises feel like walking on eggshells, the majority of industry players believe that coronavirus brings more benefits than harms to refrigerator industry. The surging demands and raw material price will urge the industry to improve efficiency and update core competitiveness.

The future of refrigerator industry will be better.