issue: January 2006 APPLIANCE Magazine
54th Annual Appliance Industry Forecast: Latin America
An Optimistic Turn
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by Erin Biesen, Assistant Editor
Latin American appliance industry insiders are optimistic about the year ahead, despite some difficult times in 2005.
Despite the challenges the industry faces, most of the Latin American economies are expected to experience growth in 2006. According to the International Monetary Fund's (IMF) Global Context and Regional Economic Outlook for Latin America and the Caribbean, "The Latin American region-which continues to benefit from strong commodity prices-is projected to grow above trend at 4 percent and 3-3/4 percent in 2005 and 2006, respectively."
Faced with issues of increased raw material prices and the digital craze that saw consumers buying electronics over traditional appliances, the Latin American appliance industry experienced a difficult year in 2005.
Pablo Moreno, president of the Asociación Nacional de Fabricantes de Aparátos Domesticos, A.C. (ANFAD) of Mexico City, Mexico, noted that the personal credit that is now available for consumers plagued the home appliance industry in 2005. Recently, Mexico's financial institutions opened up credit to consumers to buy almost anything they want. Moreno said that consumers are using this new credit to buy electronics such as plasma TVs. "They are not upgrading or changing their old appliances for new ones," he said. "We had a bad year for sales of refrigerators, washing machines and stoves." As of press time, he hoped the industry would end the year even, but thought that it would miss it by a point or two.
According to Paulo Periquito, president of Whirlpool Latin America, and vice president of Whirlpool Corporation, Brazil's economy experienced a slow down in 2005 and the gross domestic product grew 2.6 percent by the end of the third quarter of 2005. According to IMF's World Economic Outlook, domestic demand fell due to monetary tightening to contain inflation. Interest rates remained high and the real remained strong, which lead to the inflation. Periquito told APPLIANCE, "Specifically in Brazil, we anticipate moderate growth, slight purchasing power recovery, inflation under control and strong performance of Brazilian exports." He noted that Argentina continued with its economic recovery as well.
Michael Traub, CEO of BSH Continental Eletrodomésticos Ltda. and head of the Latin American Organization of BSH Bosch und Siemens Hausgeräte GmbH, also felt that 2005 was a rough year for the appliance industry. "I think projections that the big four players-Whirlpool, Electrolux, GE, and ourselves-had for the region cannot be met by any of the players," he said. This was due, first of all, to the volume problem, in which the industry projected unit sales growth this year of 3.5 percent and ended at 0 percent growth. In addition to this issue, there was an appreciation of the Brazilian real against the euro around 40 percent.
In 2006, the appliance industry will continue to contend with the global issue of increasing raw material prices. This has been an unavoidable problem for most companies using copper, steel, aluminum, and plastic. Last year, many materials had an average of 30-percent to 40-percent price increases, while the cost of steel shot up 100 percent in Mexico.
"Fuel had some influence on our polymer costs impacting mainly the refrigerator and washing product lines," said Periquito of Whirlpool. "The other lines were not impacted significantly; however, the whole industry is seeking alternatives to mitigate this impact."
"The price is now dropping, but steel is still far above the level it was at last year," said Moreno. "Raw material prices affect us substantially when you consider that in some appliances the cost of steel is 40 percent of the cost of producing the end product."
Increased prices for raw materials forced OEMs to raise the price of end products. Moreno stated that in 2004 appliance prices in Mexico rose about
6 percent and in 2005 they went up by about 8 percent. In 2006, he predicted, air-conditioner manufacturers in Mexico will raise prices 10 percent to 15 percent due to raw materials increases.
Many companies, due to costs evolution, need to pass the increase in prices along to the consumers. Others, such as Group SEB, are trying to find other solutions. Marcio Cunha, director for South America and Central America, said Group SEB, located in Lyon, France, is looking into ways to become more efficient and introduce new products with new concepts, showing to consumers and distributors added value in the product range. "We are expanding our R&D and advertising to reach out to the consumers with more innovative products," said Cunha. In putting more money into these areas, Group SEB hopes to be more price competitive in the market.
Moreno of ANFAD points to another potential challenge in 2006: there will be a lack of cash fluidity in the Mexico that might affect credit conditions for OEMs in the country.
There is the added element of this year being an election year for Mexico. "For around 60 years we had the same party in the presidency in Mexico and the term that is finishing changed that. The new party unfortunately hasn't been able to carry out the structural changes that the country needs," he said. "We are expecting the next government will make the structural changes that are necessary for Mexico to be more competitive."
BSH noted that there will be additional issues to consider this year. "There is pressure on the industry to improve cost position," said Traub. "These price increases that we have on the supply side means 2006 will be a tough year, and there is a need to balance the need to improve cost position and at the same time pass on prices to the market place."
"The challenge that we are facing for the next year is to reduce the timing for launching new products to strongly increase our reach of advertising to a larger area, such as Brazil and Argentina. It is important to reinforce the brands in those areas," Cunha of Group SEB stated. Group SEB will strengthen its portfolio to maintain a strong brand presence.
While the industry is facing several tough obstacles this year, it also has a variety of strengths to build upon. Companies are able to create innovative technologies and designs to spur continual demand for appliances.
Traub of BSH saw strength in the partnership between OEMs and retailers, even though traditional home appliances are being overshadowed by the digital technology craze in Latin America that had consumers spending more on DVDs, plasma TVs and mobile phones. "We provide the retailers with a stable base, fulfilling basic needs for consumers in cooking, cooling and laundry," he said. "The industry has the power to innovate and create new product concepts, which allows consumers to trade up with innovations, such as no-frost refrigerators and new cooking technologies."
The appliance industry in Mexico appeared to have numerous strengths that should bolster performance this year, including geography, labor conditions and good distribution channels. Moreno told APPLIANCE that many companies, other than the domestic manufacturers like Mabe, have moved production to Mexico to take advantage of these elements. "Whirlpool has been here for many years. There was activity from German capital companies like Bosch and Korean capital companies like LG, Samsung, Daewoo, and in 2005 we had Electrolux move to Mexico."
These companies hope to use a base in Mexico to open up new windows to Latin America and to North America distribution.
A New Day
When all is said and done, the appliance industry has reason to move on to the new year with optimism. BSH believed that Latin American appliance markets would recover with overall slight growth in 2006. "The market will recover slightly, especially in Brazil at the level of GDP growth, which is in the neighborhood of 3.5 percent and will get back to levels of 2004," said Traub. "Overall, Latin America will see 0 to 1 percent growth."
Moreno noted that unknown factors, such as the election, make ANFAD cautious about forecasting how the industry in Mexico will grow in 2006. However, it believes growth would be 2 percent to 3 percent. He said, "We are very positive about the reaction of the consumers for next year. We are really looking forward to a good year."