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issue: January 2007 APPLIANCE Magazine

55th Annual Appliance Industry Forecast: Asia
Asia’s Giant Potential


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by Adite Chatterjee, India Correspondent

The Asia-Pacific region, anchored by China and India, continues growing into an appliance industry market and manufacturing giant.

Asia-Pacific economies grew at a faster pace in 2006, thanks to a strong performance by their export industries and higher investments.
A Reuters poll in October 2006 in the region found that economists have upgraded their growth forecasts for China, New Zealand, Singapore, Hong Kong, and the Philippines.
India, Asia’s fourth-largest economy, is expected to grow at 7.5 percent for fiscal year 2006-07, which is only marginally lower than the 8.4 percent growth in 2005-06.
The forecast for Australia’s growth in 2006 was pegged at 3.5 percent and for South Korea at 5 percent.
Economic growth in China is expected to slow down in 2006 to 9.5 percent as a result of monetary tightening measures.
Growth in emerging and industrial Asia is expected to reach 7.3 percent by end-2006, which is likely to decline slightly to about 7 percent in 2007, according to the International Monetary Fund’s (IMF) Asia and Pacific Regional Outlook from September 2006. The Outlook stated that, “The projected moderation next year reflects a modest decline in export growth, as growth in industrial countries, while remaining quite strong, slows. At the same time, with the interest rate cycle in Asia likely nearing its peak and the prospect of stability in oil prices, domestic demand should hold up well, even as export growth moderates.”
Japanese economic growth is expected to decline from 2.8 percent in 2006 to 1.8 percent in 2007, according to an economic update (June 2006) from the Pacific Economic Cooperation Council (PECC). Export growth in the Japanese economy is likely to taper off in 2007 from the 9.5 percent growth in 2006. “Domestic demand will slow import growth to 5.7 percent in 2006 with a sharp decline to 3.2 percent in 2007,” the PECC forecasts.
Inflation was less than 3 percent on average in the Asia-Pacific region. “Proactive monetary policy tightening and exchange rate appreciation have helped offset the impact of higher oil and other commodity prices,” says the IMF Outlook, while forecasting a “benign” inflation outlook for 2007.
Strong foreign direct investment (FDI) flows into the region are expected despite global monetary tightening. However, on the risks front, the IMF Outlook points to some near-term risks that could cause some concern for economic growth in the region. A sharper than expected slowdown in the U.S. could impact the region’s exports and thus domestic demand. Also, higher oil prices could have an impact on both growth and inflation. Another cause for concern is the fall in private consumption-to-GDP ratio in emerging Asia. On the positive side, though, the IMF Outlook points out that, “Though private consumption has fallen relative to GDP…real consumption growth is high by international standards.”
The large population of the region is of considerable significance in global sales of domestic appliances, said Euromonitor International. “The region accounted for 29 percent of global sales by volume in 2003 and was among the best-performing markets over the review period (1998-2003), recording an annual growth rate (CAGR) of 6 percent,” reported Euromonitor International.
What’s more, Euromonitor expects that “in 2008 Asia-Pacific will record the largest sales by volume, which are estimated to grow by more than 39 percent in the region over the 2003-2008 period, to exceed 506 million units.”
This growth is being driven by rising disposable incomes, improved supply of gas and electricity and decreasing unit prices of appliances.

The China Story

Asian growth—particularly that of China and India—is becoming more important to the global economy. China’s economic growth rate has averaged 9.5 percent over the past 20 years. Large-scale economic reforms have contributed to higher disposable incomes and a drastic reduction in poverty.
According to the Organisation for Economic Co-operation and Development (OECD) Policy Brief titled Economic Survey of China, 2005, “National income has been doubling every 8 years and this has been reflected in the reduction of the poverty rate to much lower levels. Indeed, by some accounts over half of the reduction in absolute poverty in the world between 1980 and 2000 occurred in China.”
The country faces challenges in sustaining the pace of economic development that it has set for itself. One of the major challenges is a rapidly aging population. However, “the continued evolution of economic policies, especially in the areas of allocation of capital, labor mobility, urbanization, and the creation of improved framework for the development of the private sector” are indicators that economic growth in China should be sustainable.
China, of course, represents a huge market for global marketers. The McKinsey Global Institute reported that, “Today 77 percent of urban Chinese households live on less than 25,000 renminbi (less than U.S. $3,200) a year; we estimate that by 2025 that figure will drop to 10 percent. By then urban households in China will make up one of the largest consumer markets in the world, spending about 20 trillion renminbi (approx. $2.5 trillion) annually—almost as much as all Japanese households spend today.”
By 2015, the Chinese upper middle class is expected to burgeon to some 520 million with a total spending power of 4.8 trillion renminbi  (approx. $613 billion). McKinsey forecasts that urban Chinese consumers’ consumption will undergo dramatic changes in the coming years and expenditure on household products—which was about 223 billion renminbi (approx. $28.5 billion) in 2004—will grow to 857 billion renminbi (approx. $109.5 billion) in 2025, a CAGR growth rate of 6.6 percent.

The Appliance Industry in China

The State Information Center put out the following information regarding the appliance sector in 2006:

• China’s home electrical appliance sector had a production output of 235.447 billion yuan (approx. U.S. $29.5 billion) in the first half of 2006, up 16.8 percent year-on-year. Production growth was lower by 7.46 percentage points than 2005.
• The output of washing machines stood at 13.7 million sets by the end of the second quarter of 2006, up 3.05 percent year-on-year. Growth was 11.2 percentage points lower than that in the same 2005 period. Output of air-conditioners stood at 472.9 million units, up 1.42 percent, and its growth was 25.99 percentage points lower than that in the same 2005 period.
• Production of color TVs hit 383.8 million sets, up 0.27 percent year-on-year. Nearly 3.9 million black and white TV sets were manufactured, which was 4.56 percent lower year-on-year. Video recorders totaled 4.9 million sets, down 13.48 percent. Nearly, 5.4 million DVD players were produced, recording a growth of 11.69 percent over the previous year.

According to the China-based Economic Information and Agency, the domestic household electric appliances sector in China faced a situation of oversupply during 2006. However, with a resurgence of the international appliance giants, the Chinese industry faced increasing difficulties in exports. New standards on energy consumption and environmental protection also pose challenges for the Chinese appliance brands and hence the conditions for overall recovery of the sector were not favorable during 2006. The Chinese Securities Journal, quoting figures from the SIC, reported that “compared with rising output, sales revenue of home appliances recorded a slowdown.” This was attributed to oversupply and decreased demand by urban consumers.
However, there is vast potential for appliance sales in China’s rural areas. According to the SIC, in the next 5 years, 32.8 percent of Chinese rural families plan to buy color TVs, 17.5 percent plan to buy washing machines and 21.1 percent plan to buy refrigerators.

The Indian Story

India is the fourth-largest economy in the world in terms of purchasing power parity (PPP) and is expected to rank third by 2010, after the U.S. and China. According to Ernst & Young, in 2005, the Indian economy with a GDP of U.S. $690 billion (or $3 trillion in PPP terms) was more than that of the U.S.
The middle class in India is fueling economic growth and disposable incomes are expected to grow at an average of 8.5 percent per year until 2015. India is a young country, with nearly 54 percent of its population below the age of 25. And out of 209 million households in India, there are 6 million “rich” households with a combined estimated spending level of U.S. $28 billion every year.
As disposable incomes grow, spending on consumer durables and other consumer products has been rising rapidly. According to the National Council for Applied Economic Research (NCAER):

• In 1995-96 the demand for color TVs was about 1.78 million, which grew to 4.58 million in 2001-02 and then to 6.29 million in 2005-06. By 2009-10 this demand is expected to reach 9.95 million.
• Demand for white goods grew from 3.43 million units in 1995-96 to 8.72 million in 2005-06 and is expected to reach 13.14 million in 2009-10.
• Penetration of white goods appliances is expected to grow from just 149 per 1,000 households in 1995-96 to 319 per 1,000 households in 2005-06. By 2009-10 an estimated 451 households out of 1,000 households will be owners of white goods.

India’s urban population is set to grow by 85 million over the next 10 years, further adding to the pool of middle class consumers. Currently, the top six Indian cities—Mumbai, Delhi, Chennai, Kolkata, Bangalore, and Hyderabad—contribute 14 percent of India’s GDP. In terms of population, their share is 6 percent. Foreign investment has largely been concentrated in these cities as they are the centers of business and finance. Apart from these cities, there are 61 other smaller cities—with populations of 500,000 and more—where 80 percent of India’s urban population lives. These cities contribute 14 percent of GDP.
Real estate development is a key driver of growth in these cities. The Indian government is expected to spend upwards of U.S. $150 billion to develop infrastructure, which is expected to give an enormous boost to the retail sector. The number of shopping malls is expected to rise from 158 in 2005 to 600 by 2010. The Indian government’s decision to liberalize the foreign direct investment policies in retail is expected to further increase FDI inflows into this sector.

Key Appliance Opportunities

The top 67 cities in India are also the key potential markets for appliance companies. According to NCAER, usage patterns of consumer durables in these cities reflect a growing trend for appliances such as refrigerators and washing machines. Ownership of refrigerators, for instance, in these 67 cities is much higher than the national average—492 out of 1,000 households in these cities own refrigerators compared to the national average of 134 to 1,000 households. Similarly, 316 households per 1,000 households in the top 67 cities owned washing machines compared to the national average of just 72 households among every 1,000 households.
Girish Rao, vice president, LG India told APPLIANCE, “2006 was a very good year for the appliance sector in India. Air-conditioners and microwave ovens grew by 24-25 percent. And even washing machines—which have traditionally seen poor sales—have seen moderate growth.”
The housing boom in the cities is fueling the demand for appliances. The increasing numbers of double-income families also bodes well for the sector. The frost-free segment of the refrigerator market is seeing spectacular growth as more urban families are replacing their old refrigerators.
According to Rao, consumers in the south and western regions of India go for high-end models of appliances while the north and east continue to prefer lower-end models and direct-cool refrigerators. He is optimistic that robust appliance sales will continue in 2007, particularly since changes in the electricity scenario is making it power accessible to more Indians in urban as well as rural areas.

Electronics’ Exponential Growth

The demand for electronic appliances is expected to grow exponentially. A recent market study commissioned by the India Semiconductor Association (ISA) and conducted by Frost & Sullivan has projected that India’s electronic equipment consumption, which was $28.2 billion in 2005, is expected to reach $126.7 billion by 2010 and $363 billion by 2015. It is estimated to grow at a compounded annual rate of 30 percent.
The main drivers of growth of the electronics segment are increased demand for DVD players, air-conditioners, microwave ovens, home theater systems, and other appliances.
In view of this, the Indian government has stepped up plans to give a boost to semiconductor manufacturing. Hyderabad has been chosen as the location for India’s first semiconductor fabrication plant in the private sector to be set up by SemIndia at a cost of $3 billion.
The movement towards “fabs” is expected to give an enormous competitive advantage to Indian manufacturing and place it in the same league as its rivals in Korea, China and other Asian countries.

 

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