issue: January 2006 APPLIANCE Magazine
54th Annual Appliance Industry Forecast: Europe
Getting Back on Track?
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by Erin Biesen, Assistant Editor
There are hopes that 2006 will see Europe get back on track to a slow recovery, even though it experienced a difficult year in 2005 with minimal growth.
The European Union reported a gross domestic product (GDP) growth of 1.2 percent for 2005, according to the International Monetary Fund (IMF). Andrea Sasso, chief commercial officer of Indesit Company, Milan, Italy, said that the white goods sector did not have one of its best years and, as of press time, expected final results that were flat or even down 1 percent or 2 percent.
"In the United Kingdom, we are talking about a market going down about 10 percent, and markets were down in Portugal, the Netherlands and Poland," said Sasso. "These are the four countries that are most affected not only in white goods, but also in general macroeconomics.
High interest rates were a problem that the European economy faced in 2005. Towards the end of the year, the interest rate raised to 2.25 percent, which was the first raise in 5 years.
Still, Dr. Peter Götz, senior vice president of sales for BSH Bosch und Siemens Hausgeräte GmbH, Munich, Germany, feels that the appliance industry is on a good track to recovery. "We had a 2005 increase on the unit side of roughly 2 percent," he said. "On the other hand, we had a price decrease, also roughly between 1.5 percent and 2 percent."
BSH expected the European economy to improve in 2005, but due to the downturn in the economies in Spain until September and in the United Kingdom it experienced a difficult year.
According to Kyu-Tae Kim, general manager of the marketing strategy team of Digital Appliance Company for LG Electronics, located in Seoul, Korea, "This industry had a slow market growth and slow changes in products, but the global top-tier companies saw their growth rates exceed the market growth rate by a large difference." As of press time, LG said it would post a two-digit growth rate in 2005, which was higher than its typical growth rate.
Electrolux reported strong third quarter earnings in 2005 and noted that unit sales of appliances rose over the previous year, boosted by good volume growth in Eastern Europe and an improved product mix. Western Europe sales declined because of lower demand in several markets and a continued weak trend in private label appliances in Germany, according to the
Third quarter results for Whirlpool showed European sales of U.S. $811 million in 2005, which was an increase of 4 percent from the previous year. "We saw continuing momentum in the build-in segment of our business in Europe, coupled with very strong Whirlpool brand performance across the European markets, which drove this revenue improvement," said Jeff Fettig, chairman, president and CEO of Whirlpool Corporation, Benton Harbor, Michigan, U.S., in a statement. "The general market conditions in Europe remain challenging."
The United Kingdom experienced lower than expected 2005 GDP for several reasons, including higher interest rates, oil price increases and the cooling housing market, according to the IMF's World Economic Outlook.
Lowered consumer confidence was one of the many issues that created a decline in the United Kingdom's economy. Sasso said that this was not only evident in the white goods sector, but also in other segments. Portugal, the Netherlands and Poland experienced the same lack of confidence. Last year was Poland's first year in the European community and Sasso said, "We are thinking it was a negative trend in terms of price increase. Next year, they could recover."
Continuing price wars among the OEMs forced Europe retail prices down 1 percent in 2005, as in the 2 previous years. "In the next 2 or 3 years we think that these decreases in price will be even worse," said Sasso. "We are estimating 1.5 percent decreases as Chinese and Korean companies target Europe and the market becomes even more competitive."
Some are concerned that these price issues are taking away from the creative aspect of making appliances. Marci Kosann Dew, president for Faber, Wayland, Massachusetts, U.S., told APPLIANCE, "I feel consolidation drives the world to think about price more, which I'm not sure is a good thing. It stresses price as opposed to innovation."
Even as the cost of raw materials and the cost of transportation increased, the appliance industry tried to reduce operating costs and keep appliance prices low in order to keep up with the competition.
As raw material and transportation costs increased, companies searched for other ways to cut cost. Turkey, similar to China, experienced growth throughout the last several years as European appliance companies moved manufacturing to Turkey in hopes of cutting costs. They moved not only production facilities, but also tech centers, call centers and distribution centers to Eastern Europe and countries such as Turkey and Russia.
"Turkey is becoming more and more aggressive as it tries to become the factory for Europe, just like China is trying to be the factory for the rest of the world," said Atul Vir of Equator Appliances, located in Houston, Texas, U.S. Dew said, "In order to position yourself as a manufacturer that is able to survive the turmoil that exists now, you've got to be more nimble. You've got to be able to find lower cost production bases, maybe using those lower cost production bases for a lower value product, and then maintaining higher value product in the higher cost production venues, but even then pursue ways to lower costs."
While companies gravitate to these lower cost venues, the economies of those countries are benefiting. Turkey is forecast to maintain GDP growth of 6 percent for 2006. According to the Organisation for Economic Cooperation and Development's (OECD) Economic Outlook, investment drove this growth and private consumption reached a more sustainable pace.
The air-conditioning market in Turkey, where it was previously considered a luxury item, grew dramatically in 2005. According to a report in JARN (Japan Air Conditioning, Heating & Refrigeration News), the air conditioner market size exceeded 500,000 units in 2004 and is forecast to reach 1 million in 2008. The report stated that the market for air-conditioning in Turkey experienced such demand "due to an unsaturated market and relatively good economy."
Russia's economy experienced growth of 5.9 percent in the first 9 months of the year, according to Reuters. Kim of LG Electronics said, "The Russian economy, with international oil prices flying high, will continue a 6 percent growth rate into 2006. Before and after its entry into WTO, the Russian economy will improve its internal and external economic climate."
For greater Europe, the 2006 projections are for GDP to grow roughly 2 percent or 3 percent. "In the western countries the trend will be more or less flat as it has been in the last 3 years," said Sasso of Indesit Company. "In Russia, we continue to estimate a better rate of growth, but less than the previous year." He expected Russia's 10 percent growth rate of 2005 would decline to roughly 5 percent and 7 percent in 2006.
The OECD Economic Outlook reported for all of Europe, "Domestic demand is seen to be the engine of growth, with both private investment and consumption picking up. The unemployment rate is projected to decline slightly to 8-3/4 percent."
Several other countries that saw little or no growth in 2005 will experience the same in 2006. "There is a certain risk in the United Kingdom that the household appliance market will be negative next year. In Spain, the market is not performing as well as in recent years," said Dr. Götz. "In France, there is no positive signal for the development of the market."
He said BSH experienced positive growth in 2004 and 2005, and was able to increase market share. "We were able to have growth despite the negative development of the market, and we will experience continued growth through 2006."
Some companies and European countries will increase sales in 2006. However, 2006 will prove to be another difficult year for the European appliance industry.