Abstract: In the last two years, there has been a clear trend of consumption upgrading in the Chinese household appliance market; consumers are increasingly buying mid-range and high-end products with an eye for high quality, fashionable aesthetics, and energy-saving features. Inverter-equipped air conditioners, roller washing machines, side-by-side combination refrigerators, multi-door refrigerators, large flat-panel TVs, and high-quality kitchen products have increased market presence. Responding to consumers’ desires to “trade up”, Chinese enterprises have begun to upgrade and reorient their focus, lead by government policy. The market has become more competitive; however in some specialized industries where competition from Chinese-owned companies is insufficient, foreign brands have taken most of the market share.
In 2013, the main business income of the Chinese household appliance industry was close to 1.3 trillion yuan RMB, with 14%-15% growth compared to 2012; the total net profit was about 73 billion yuan RMB, with a growth of over 25%. This trend will continue in 2014. One of the main reasons for the economic growth was higher profits from consumption upgrading.
The main reasons for consumption upgrading:
1. Increase of urban resident income: In 2013, the annual per capita urban income was 29,547 yuan RMB, and the per capita disposable income was 26,955 yuan RMB, an actual increase of 7.0% discounting for inflation. The income of first-tier cities was significantly higher than average. In 2013, the per capita disposable income in Beijing was 40,321 yuan RMB, an actual increase of 7.1% discounting for inflation. Per capita consumer spending was 26,275 yuan RMB, increasing 9.3% yearly. For Shanghai, the per capita disposable income was 43,851 yuan RMB, an increase of 9.1% compared to the previous year; per capita consumer spending was 28,155 yuan RMB, with a growth of 7.2% compared to last year.
2. Policy influence: During the Third Plenary Session of the 18th CPC Central Committee, an urbanization model was outlined as follows: from "Urbanization" to "New Urbanization", and then finally "Urban-rural Integration". According to the predictions of the Office for National Statistics, each 1% increase in the urban population rate (taken as the urban population over total population) will lead to an additional 7 trillion yuan RMB of market demand. Taking the household appliance industry as an example, Jiang Feng, chairman of the CHINA HOUSEHOLD ELECTRICAL APPLIANCES ASSOCIATION, said that if the Chinese urban population rate were 62% in 2020, the sales of new household appliances in non-urban markets would add up to 4.5 trillion yuan RMB, with total sales of over 9 trillion yuan RMB. Seeking higher profits, some established household appliance enterprises are putting more newer and better products into third-tier and fourth-tier cities, expanding their focus from first-tier and second-tier cities. This has caused a "national upgrade" of Chinese household appliances, also resulting in increased purchases of high-end goods by consumers in first-tier and second-tier cities.
Consumer Research:
According to the “Chinese Midrange and Top Household Appliance Market Report”, upgrades and replacements accounted for 67.4% of all high-end household appliance purchases, while pursuing a higher living standard accounted for 43.70% of purchases. With respect to the prices of high-end products, the report shows that 42.8% of consumers are willing to buy TV sets priced $1,979-3,298 USD (12,001 yuan RMB~20,000 yuan RMB), 53.2% of consumers are willing to buy refrigerators priced $989-1,649 USD (6,001 yuan RMB~10,000 yuan RMB), 50.3% of consumers are willing to buy water heaters priced $660-989 USD (4,001 yuan RMB~6,000 yuan RMB), and 47.7% of consumers are willing to buy air purifiers priced $495-660 USD (3,001 yuan RMB~4,000 yuan RMB).
Retail Data Monitoring:
Data from China Market Monitor (a market research company in China): As of October, 2013, the volume of retail sales of three-door, multi-door and double-door refrigerators accounted for 48% of the total volume of refrigerator sales, representing an increase of 17.5% over the same period in 2012; In washing machine sales, the percentage of fully automatic washing machines sales grew from 70.5% in 2011 to 87.5%; The proportion of inverter-equipped air conditioners sold (as compared to total air conditioner sales) grew from 40.7% in 2011 to 53.4%.
The opportunities and challenges present in the mid-range and high-end markets:
Opportunities: The upgrading of the Chinese household appliance industry is already underway, and companies must actively respond in order to stay competitive. Most enterprises, especially the leading ones, have switched from focusing on market share and production scale to a strategy of emphasizing technical innovation, management improvement, design, quality, efficiency, development. The transition is mainly affected by three factors:
1) The upgrade in consumers' demands.
2) The guidance of government policies. Since October 1, 2013, the new energy efficiency standards for large household appliances, such as flat-panel TV sets, inverter-equipped air conditioners, washing machines, etc. have been formally implemented. For enterprises, the implementation of the new energy efficiency standards raises the requirements for bringing a product to market. On the one hand, companies are forced to focus more on R&D for new products; on the other hand, the change gives competitive companies a rare opportunity to increase their market share.
3) Corporate strategy: Some Chinese corporations have followed an OEM (Original Equipment Manufacturer) to ODM (Original Design Manufacturer) to OBM (Original Brand Manufacturer) trajectory, making each transition once acquiring the requisite technology and production lines.
Challenges:
While the demand and sales of high-end household appliances are rapidly growing, the brand competition in the middle and high-end household appliance market is relatively limited. Market development has been slower than expected.
1) In the relatively mature TV and white goods markets, the number of middle and high-end brands is small, and Chinese-owned brands are more numerous.
2) For small electrical household appliances, e.g. personal care market, although many brands exist, companies based outside China such as Philips and Panasonic still dominate the market.
3) In some rapidly growing new markets, the market structure is constantly changing. For example, there has only recently been a market for air and water purification products in China. Also, technical standards for these products were relatively few, and no mechanism existed to measure the purifiers’ in-use efficacy. Currently, the middle and high-end market of this field is mainly dominated by foreign brands.
Foreign brands taking the opportunity to enter China:
In 2014, a number of foreign brands of household appliances are stepping up their efforts to enter into the Chinese market, which is witnessed by the number of them appearing at Appliance World Expo (AWE). According to AWE’s sponsor, EGO, Vornado, Cuchen, iRobot, CADO, Nilfisk, Karcher, Ecovacs, SHHA, Jura, Daewoo, Luftmed, Austin-Mecent, Pentair, 3M, Cleansui, Quatius, and many more of which are not so well-known to Chinese consumers, will all be appearing before Chinese consumers in March at Shanghai. Some of these brands will be participating for the first time at a Chinese exhibition. In addition, many famous international brands in China, like Samsung, Panasonic, LG, Whirlpool, Siemens, Sanyo have invested many years into the expo. From their choice of AWE, Asia’s largest household appliance exposition, as their platform for promotion, one can see the degree of their interest in the Chinese market.
Conclusion: Consumer research and retail sales figures indicate that the Chinese market is ready for more high-end household appliances brands and products. The growth rate of the high-end appliance market far exceeds the average growth rate for the industry. However, when considering the competitive landscape, the medium and high-end market is not saturated as expected. In a market full of opportunities and challenges, China’s domestic brands have huge potential and strong policy support. For foreign brands, it is a great opportunity to expand their business presence in China.