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issue: January 2006 APPLIANCE Magazine

54th Annual Appliance Industry Forecast: Asia
Boom Town

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by Erin Biesen, Assistant Editor

The Asia Pacific region experienced large-scale economic growth due to low interest rates and a growing demand for Asia's exports.

LG Electronics' Economic Research Institute (LGERI) said "The Japanese economy, which entered an adjustment period from the second half of 2004 to mid-2005, shifted into a recovery cycle since the second half of 2005, and is expected to continue a slow yet steady recovery strength."

The excessive debts, facilities, equipment, and manpower, which lead to the recession, are almost resolved, according to LG Electronics. "Japanese financial institutions have improved their financial soundness and the Japanese employment market is seeing distinctive signs of recovery," it stated.

The Southeast Asian nations that experienced enormous growth in 2004 reported an economic growth rate of around 5 percent for 2005. India's economy experienced a steady growth rate of 7 percent in 2005. China experienced a growth rate of nearly 10 percent.

South Korea will reportedly sustain economic growth in the 4 percent to 5 percent range for 2006, according to the Organisation for Economic Co-operation and Development (OECD).

Low interest rates will be a strength for the industry in 2006. Bloomberg reported, "Tax cuts and low interest rates are encouraging local households to spend more, while higher wages in China and faster economic growth in the U.S. are helping drive demand in South Korea's two largest export markets." This is prompting companies such as Samsung to expand, which creates growth in South Korea.

Dr. Peter Götz, senior vice president of sales for Asia Pacific for Bosch und Siemens Hausgeräte GmbH (BSH), said that Asia Pacific's economy is growing faster than other economies, such as Europe. "In Asia Pacific we saw no negative impacts in 2005. In 2006 we are quite confident that the markets are developing and will continue to be quite stable," he said.

The International Monetary Fund's (IMF) Asia-Pacific Regional Outlook - September 2005, reported that in 2005 some emerging countries in Asia experienced decelerations in growth because of lowered domestic demand. Export growth was cut in half between the ASEAN4, which includes Indonesia, Malaysia, Philippines, and Thailand, and the NIEs, which includes Hong Kong, Singapore, South Korea, and Taiwan, which also caused decelerations in economies.
According to the IMF report, Korea is the exception, with its domestic demand growth forecast to rise about 1-3/4 percentage points to reach 3-1/2 percent. "Households are now finally in a position to increase their spending, after 2 years during which they focused on reducing excessive debt accumulated during a 2000-2002 credit boom," the IMF report noted.

Dominating Growth

China experienced the most dramatic gross domestic product (GDP) growth in Asia last year, reaching almost 10 percent. According to Atul Vir, president of Equator Appliances, Asia is going to be economically dominated by China, followed by India. "Both these countries are seeing great increases, especially in sales of appliances," he said.

A report from Bloomberg noted that the rise in salaries in China and the migration of rural workers to the cities led to the increase in demand for consumer durables. Wage increases made mobile phones and computers more affordable. According to Bloomberg, "Per capita disposable incomes in urban areas rose 9.8 percent in real terms to 7,902 yuan (approx. U.S. $978) in the first 9 months [of 2005]. Per capita cash incomes in rural areas increased 11.5 percent to 2,450 yuan (approx. $303)."

China has also been the country where companies turn to set up production facilities. While many OEMs worldwide are faced with the issues of increased prices in raw materials and oil, they are looking at ways to cut costs. One solution is to move production to China in search of lower manufacturing costs.

"A lot of manufacturers based in Japan and Korea are starting to produce in China as well," said Dirk Hoffman, vice president of International Sales for China for BSH. "So industry performance will be driven by capacities and manufacturing capabilities in China."

Manufacturing migration is occurring in other places around the world. In Europe, many of the companies seeking low cost production are turning to China and Turkey, while in the U.S., many companies are turning to Mexico and China.

As of press time, Hoffman said that China's economy is expected to have growth of 8 percent to 9 percent in 2005, but will begin to slow down, despite companies rushing to set up manufacturing there.

Consumer Prices

Rising costs for raw materials and oil are hurting profits. Many companies will pass along the increase to consumers. "A rise in raw materials prices will not be a strong driver of price hikes of premium products," Kyu-Tae Kim, general manager of the marketing strategy team of digital appliance company LG Electronics said. "However, mid- and low-price products will experience upward pressure on prices due to worsening profitability following rising raw materials costs." The company said that markets in China and India have a wide range of mid- and low-priced appliances, which will see an impact from the rise in raw materials prices.

"As a company we work on an assumption that we will have to raise prices on average world wide more than 5 percent, maybe as much as 7 percent or 10 percent," said Hoffman of BSH. "There will be different pricing in different markets, but every country will follow that road."

The "Wal-Mart Effect" is what Vir, whose company will begin selling products in India, sees as an issue spanning the industry worldwide. Wal-Mart campaigns that it has the lowest prices on the market, and many OEMs are starting to follow in these footsteps. "If your prices are better it does give you an edge over the competition. I would say the origin of the product has ceased to be such an important factor," Vir told APPLIANCE.

Solid Future

Major appliance sales in Asia are being negatively impacted by the rise in sales of consumer electronics. Even as traditional appliances take a backseat to plasma TVs, mobile phones and other digital equipment, many are hopeful that the industry will still experience growth.

"Many different companies are now producing mobile phones-there are a lot of new kids on the block in these other industries, but there are also a lot of companies disappearing in these industries," said Hoffman. "We know the appliance industry is a very solid, stable, branded industry. There are long-term, global players that have laid a foundation in consumer awareness.

Consumers know to expect quality and highly efficient, innovative products." Kim of LG noted that global enterprises should continue to push to restructure to continue growth strength. "LG will concentrate its capabilities on developing and selling premium products, and continue efforts to secure global production bases in areas at an appropriate distance from each region's market to secure raw materials cost competitiveness," he said.

Kim also noted some trends that are prevalent in the industry. Products that are devoted to saving time and easy-to-use features, as well as robotic appliances, will continue to grow as they cater to busy lifestyles. Energy-efficient products, health trends and digital networking will also lead the industry. Vir noted, "When you have low interest rates that means home construction, which means more people are buying homes and more appliances are being installed in those homes; therefore, more appliances are being produced."

LGERI reported that Japan should experience an economic growth rate of 1.8 percent for 2006. According to the institute, "The consumer price increase rate will likely see a plus growth for 2006, thus allowing Japan to shed its deflation cycle."

Similar to 2005, in 2006 India is projected to have a 7 percent growth rate, and the Southeast Asian nations generally are expected to post about 5 percent growth.

Vir of Equator Appliances is optimistic about the economy and the industry in 2006. "We feel very positive and we are going to continue to see growth in our industry and for our company."


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