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issue: January 2007 APPLIANCE Magazine

55th Annual Appliance Industry Forecast: Europe
Putting Optimism into Practice


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by Lisa Bonnema, Senior Editor

The European appliance industry saw growth in 2006, and most expect the same in 2007, provided that OEMs continue to address issues such as pricing and competition.

Europe’s economy finally showed clear signs of recovery in 2006. According to the European Commission (EC), GDP growth in the euro area reached an annualized rate of 3.4 percent in the first half of the year—the fastest pace in 6 years. The even better news was that “domestic demand took over as the main source of growth,” according to an October statement from the EC.
The upswing is also expected to last, even if at a slightly slower pace. In its Economic Outlook No. 80, the Organisation for Economic Co-operation and Development (OECD) forecasts the euro area to register a real GDP of 2.6 percent in 2006. Both 2007 and 2008 are expected to be just slightly below that rate at 2.2 percent and 2.3 percent, respectively.
“Exports and investment have been the main drivers, but there are signs that households have started to boost spending as well,” OECD stated. The organization warned, however, that consumption is expected to underpin the recovery going forward, with business and residential investment spending playing less of a role than has recently been the case.
The European appliance industry is taking its cue from the economy and is heading into 2007 with optimism. “Looking back, the market in Western Europe has been positive and rather stable, being mainly fueled by [appliance] substitution,” said Luigi Meli, director general of European appliance industry association CECED. “The year 2006 closes with a homogeneous positive sign in every key country—Spain and the UK performed better than average. We do not expect that such a trend would change in 2007; therefore, our outlook is moderately good.”
Jean Dufour, chief sales and marketing officer at Germany-based BSH Bosch und Seimens Hasugeräte, said the company expects the Eastern European appliance industry to grow more than 5 percent in 2007 and Western Europe to achieve about 2-percent to 3-percent growth.
Even though saturation levels are high in Western Europe, many attribute the region’s growth to positive developments in Germany. With about 39 million households and one-fifth of sales volume, the economic health of Germany is vital to the European appliance market. Reinhard Zinkann, co-proprietor of Miele & Cie KG, told APPLIANCE that his company expects total sales of electric household appliances in Germany to top 6.5 billion euros in 2006. This represents a strong 4-percent increase over 2005, when the market actually declined by 1 percent.
While it is true that Germany has entered what OECD is calling a “sustainable recovery,” it is heading into 2007 with some challenges.
“There is some uncertainty about the development of…Germany,” Dufour of BSH said. “As of 2007, an increase of the sales tax by three percentage points might have a negative impact on the market. But nobody is sure about what will happen.”
Indeed, the value-added tax (VAT) increase is the largest in Germany’s history and will bring the country’s sales tax to 19 percent. The goal of the increase is to cut the budget deficit and reduce unemployment insurance premiums, but many feel the tax will actually hurt the economy as consumers cut back their spending in 2007. At press time, most economists expected consumers to “move up” their purchases to 2006 to avoid the tax—a trend that may cause a drop in demand in the coming year.
One issue that may affect appliance sales across all of Europe in 2007 is continued energy price increases, which may decrease consumers’ disposable income. High energy prices also directly affect manufacturers, resulting in increases in production and logistic costs.
Other economic challenges Europe may experience in the coming year include interest rate hikes and the impact of a slowdown in the U.S. economy and in world trade, according to the EC. Even so, the Commission stated: “The broad basis of growth and the fact that it is firmly underpinned by accelerating domestic demand should increase the resilience of the economy to these adverse developments.”

Material Still Matters

Raw material costs have certainly affected the appliance industry the last few years, and it appears the issue still weighs heavily on the bottom line of European appliance makers. “Compared to 2005, raw material prices have increased in all regions,” said Anders Edholm, spokesman for Sweden’s AB Electrolux. “The overall high price levels will continue to have an impact on the industry [in 2007].”
Meli of CECED agreed: “Raw material and components count for about two-thirds of an appliance’s industrial cost. The impact of their price increases will, therefore, be significant. This is a major challenges for our region.”
The main question seems to be how much raw material costs will affect margins in 2007. Edholm thinks it may be too difficult to tell at this point. “There are several factors to take into consideration,” he said. “Depending on how companies have hedged, what kind of contracts they have and, of course, how prices will develop will determine what impact raw material costs will have in the coming year.”
Ann Bird, a market research analyst at UK-based IMS Research, feels appliance makers have already felt the worst of material cost increases. “The steep price increases in 2006 came quite unexpectedly and caught the industry off-guard,” she explained. “For 2007, even if the prices for raw material remain at the current high level, at least the manufacturers are prepared to have included this element into their plans.”

Controlling Costs

Even if raw material costs stabilize or even decrease, European appliance OEMs continue to search for new ways of dealing with the cost pressures of a highly competitive market.
It is certainly no secret that European appliance production is quickly moving to lower-cost regions such as Turkey, Eastern European nations and Russia. Electrolux made headlines in 2006 with the closing of its Nuremburg AEG laundry plant, moving production to Italy and Poland. Indesit Company broke ground in 2006 on two new laundry appliance plants in Poland, with production scheduled to start up in the first half of 2008. BSH has started construction work in Russia for a refrigerator factory and continues to invest in its Polish factories.
Movement to Asia also continues. This past July, Italy-based Candy Group signed an agreement with Jiangmen Washing Machine Factory to acquire 75 percent of Jinling Electrical Co. Ltd.  Under the agreement, Candy will manufacture washing machines in Jinling’s factory and produce both Jingling and Candy brand washing machines in China.
Bird of IMS believes the strategy of moving production is vital for European companies looking to stay competitive. For 2006, she says appliance makers needed to “sustain the West and march into the East.” For 2007, she said the strategy should change ever so slightly: “Sustain the West and grow from the East.”
Sustaining in the West means companies are looking within their four walls to save costs. Edholm said Electrolux has launched several internal cost-saving programs to curb at least part of the effect of increasing raw material prices. “We have launched EMS, Electrolux Manufacturing System, which will increase efficiency in production through, among other things, reducing scrap,” he said. “Another action we are taking is to challenge what materials are used in our products. In many cases we have been able to switch materials without having to compromise on quality.”
No matter how hard manufacturers try to fight it, Fflur Roberts, a senior analyst at Euromonitor International, believes that price increases are inevitable. “As these costs are increasingly eroding margins, manufacturers will have little choice but to pass them onto consumers,” she said, citing Whirlpool’s 2005 price increases of 3-percent to 5-precent across Europe. “Price increases are expected to continue into mid-2007. However, from then onward, prices are likely to stabilize when the investment in new factories in Eastern Europe begins to be recovered.”

Proactive Plans

Looking ahead, European appliance manufacturers seem to agree that cost is only part of the success equation. In order to compete, innovation must also be factored into the business plan.
Electrolux, which has received much attention for its cost reduction efforts, is a prime example. Throughout the last 2 years, the company has been moving 25 percent of its total European volumes to new plants in low-cost countries, but at the same time it has almost doubled its R&D spending.
“Electrolux is extremely focused on consumer wants and developing products to satisfy those,” Skantorp told APPLIANCE. “We strongly believe that if we do that, it will help generate our future revenue stream. If we have the wrong product at the wrong time, we spend our money at the wrong place and that will work against us. Everything hinges on us developing the right products.”
So what will be the recipe for success in Europe in 2007? Dufour said BSH’s key objectives include strong brands, outstanding design, product advantages, a powerful sales force, efficient processes, and cost-effective product designs.
Of course, only time will reveal the winning recipe, but some key ingredients for 2007 are clear—cost control, smart pricing, and innovation based on differentiation. With these nuggets in the bag, it looks like European appliance makers can finally enter the new year with optimism and confidence.

 

 

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