issue: January 2007 APPLIANCE Magazine
55th Annual Appliance Industry Forecast: Latin
Finding the Key
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by Lisa Bonnema, Senior Editor
With continued growth in the forecast, the Latin American appliance industry confronts a list of challenges while hoping to capitalize on an emerging market.
It goes without saying that Latin America’s economy has been experiencing above-average growth the last few years. In 2004, the region saw record growth of almost 6 percent, and expansion has continued since then. According to the International Monetary Fund (IMF), Latin America’s GDP for 2006 is estimated to reach 4.8-percent growth, and 2007 is expected to show similar results with 4.2-percent growth.
While high prices for key commodity exports have continued to help the region’s economy, IMF said domestic demand has become the main engine of expansion. Private consumption is expected to account for more than two-thirds of Latin America’s economic growth in 2006 and 2007, the organization said. Rapidly growing Argentina, for example, continues to see increases in consumer purchasing power, even as it deals with double-digit inflation. Mexico’s housing boom and credit programs are also creating demand, encouraging consumers to purchase larger ticket items such as appliances and consumer electronics.
And the Latin American appliance industry expects more growth in the year ahead. “The general outlook appears to be cautiously positive for 2007,” said Fflur Roberts, a senior analyst at Euromonitor International. “Many of the problems hurting the industry in 2005-2006 remain, but the continuing adaptation of manufacturers and consumers should enable appliance sales growth to surpass 2006 figures.”
Latin America’s three leading appliance makers—Whirlpool, BSH and Electrolux—seem to be optimistic. In its third-quarter 2006 results, Whirlpool Corp. stated that it expects 2006 full-year shipments in the region to increase 10 to 15 percent. For 2007, BSH Bosch und Seimens Hausgeräte GmbH, whose Latin American operations are based in Brazil, estimates industry growth of 3 to 5 percent. Winston Merchor, director of Marketing and Exports at Electrolux do Brasil, told APPLIANCE the company expects “stable growth” for the Latin American appliance industry in the coming year. “Continuing positive conditions are hoped to allow economic growth in the region and a good climate for appliance sales,” he said.
The Latin American appliance industry anticipates a moderate 2007 as high rates of growth cool down and competition heats up. “Growth will tend to moderate from the higher levels it has enjoyed over the last 2 years due to an expected slowdown in the U.S., which has economic implications for the region and the forecasted reduction in the global growth,” noted Pablo Moreno, president of the Asociación Nacional de Fabricantes de Aparatos Domésticos (ANFAD) of Mexico City.
Roberts of Euromonitor said manufacturers might see a slowdown in consumer spending in some of Latin America’s fast-growing regions. “The recovery of economies like that of Argentina from the economic disaster of 2002 is reaching its end, and it seems likely that manufacturers will no longer be able to count on the consumer bonanza that took place as Argentineans made up for lost time,” she said. “However, in the scope of Latin America as a whole, it should be noted that this decline will contrast with the improving purchasing power that is enabling Mexicans and Brazilians to buy appliances on a broader scale each year.”
Another area of concern is increasing competition. “Imports from China have shown a strong increasing trend beginning in 2003-2004, especially in countries like Brazil and Chile, which has the effect of lowering prices for consumers, but also cutting margins for manufacturers,” Roberts said. “Governments have played a strong role in the penetration of imports, as when Chile signed a free trade agreement with South Korea in 2003 that opened the door for LG, Samsung and Daewoo, as well as a more recent agreement with China that may shake up the small appliances market in 2007.”
Of course, in other cases, governments have discouraged trade. Argentina, for example, has limited trade of large appliances with Brazil in order to protect its local industry. “Another example of a difficulty for manufacturers is price caps imposed by the Argentinean government to keep products affordable to consumers, which have strongly discouraged the import market,” Roberts said.
BSH believes the Brazilian appliance export market may suffer in 2007, as manufacturers feel the impact of an over-valued currency. “This will lead to reduced volumes in exports and higher pressure in the domestic Brazilian market,” said Jean Dufour, BSH’s chief sales marketing officer for Latin America. “Due to the strong currency in Brazil, we had to readjust volumes in export to other Latin American countries and for exports outside Latin America.”
Increased competition, of course, only means continued pressure on pricing. This may be a double-whammy for manufacturers that have already raised prices to combat raw material costs. “The industry will have the full impact of increased commodity pricing (steel, plastics and compressors), which will subsequently lead to price increases in the market,” confirmed Dufour of BSH. “This…might lead to lower growth figures than in 2006.”
Roberts, on the other hand, feels many consumers are getting used to the higher price points, giving way to a better 2007. “Given that by 2005 manufacturers had largely responded to the increased costs and passed those on to consumers where necessary, it can be expected that consumers will adapt yet further to higher prices and they will discourage consumers less in 2007 as in previous years,” she said.
Moreno of ANFAD said that although the majority of commodities are in a downward trend, the actual levels are still very high and suppliers will most likely be unable to offer cost reductions. “Some companies might be experiencing [vendor] contract renegotiations that have been delayed from 2006, so their actual cost increase might be higher than the general market,” he added.
So how do OEMs deal with these pressures? Roberts advises appliance companies to position products at either the low end or high end of the price spectrum. “As Chinese imports and other factors transform the market, it may be necessary for established manufacturers to either increase their ability to compete on price by tending toward the economy end of the market, or to make investments in advertising and establish themselves as a high quality option,” she explained. “The latter route seems less likely to work, given that the potential market for premium appliances remains low in most countries despite economic growth.”
With all of these issues at hand, it is no wonder that industry experts have conflicting forecasts for the various Latin American countries. All seem to agree that growth in most areas will be slower than past years, but it is unclear which countries will take the lead.
Moreno expects Argentina, Colombia and Venezuela to lead the percentages in growth, while Brazil and Mexico will be more stable. He attributes the slowdown in Brazil to excess capacity and segment saturation, while Mexico will feel the effects from a U.S. slowdown.
Roberts, however, forecasts Mexico to have the most growth. “The country has seen the strongest benefits from the credit and housing boom, as well as the fact that many manufacturers have located production facilities in the country, thereby reducing prices and improving distribution,” she said. “Chile is likely to see lower growth due to the fact that the country has the largest per-capita GDP in the region and has a more mature base and higher household penetration of key products.”
BSH said it is bullish in the Andean region, which includes Colombia, Ecuador, Peru, and Venezuela, but is concerned about development in Argentina in 2007 due to government-imposed price freezing.
In terms of product segments, most industry insiders agree that products with low penetration rates will lead sales in 2007. “We see especially strong demand in frost-free refrigeration across the continent and washing machines, which have a low saturation rate,” said Dufour of BSH.
“Improving economic conditions make products like microwave ovens and split-system air-conditioners accessible to more consumers in the region,” noted Merchor of Electrolux.
Roberts believes that the credit and construction booms put large appliances in general in a favorable position. “Access to credit has allowed many consumers to purchase appliances for the first time and others to replace old appliances and obsolete models, while the large amount of new housing…has created a great deal of space that can be filled with modern appliances,” she said.
The Next Step
According to IMF, Latin America’s improved performance doesn’t change the fact that it is one of the slowest-growing regions among the emerging markets. “The long-term challenge for Latin America remains to unlock the region’s clear growth potential,” IMF said.
And so the challenge is on for appliance manufacturers—how do they tap into this growing market? BSH said the key is increasing productivity, passing on material price increases to the market and selling higher value-added models. “In 2006, we launched new cooking and cooling products across the continent,” noted Dufour. “Eighty percent of our product lines were launched during the last 12 months. This innovative power will help us to stay competitive in 2007.”
Electrolux’s plan is to continue bringing consumer-focused products to market. “In 2007, we will continue growing with our strategy of innovation based on consumer insight,” Merchor told APPLIANCE. “We are also investing to make the Electrolux brand stronger than ever in our markets.” Specifically, the company plans to rollout a premium range of Electrolux ICON brand products in the region.
Whirlpool seems to be using innovation as a weapon and recently introduced three new products with premium features to the Latin American market. In Argentina, the company launched a new line of side-by-side refrigerators featuring interior antimicrobial technology. For the Brazilian market, the Consul brand launched two refrigerator models with water dispensers, said to be an “aspirational” feature for the country. The Brastemp brand has introduced a high-tech microwave in Brazil.
Roberts believes appliance companies can take control of the market by continuing to move production capacities closer to sales points, decreasing both labor and distribution costs. “This will continue the process of closing down costly factories in the United States and moving to Mexico, already begun by companies such as Whirlpool and Electrolux,”she said.
She also thinks it is necessary to increase prices and watch costs: “Companies may be at the mercy of governments in regards to regulations and free trade, but small measures like purchasing cheaper parts and otherwise streamlining production costs may enable companies to overcome challenges to the industry.”