issue: January 2008 APPLIANCE Magazine
Forecast India, China, Middle East
Another Growth Year in 2008
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by Adite Chatterjee, India Correspondent
Despite the impact of sluggish U.S. economy, appliance industries in China, India, and the Middle East should continue growing in 2008.
One of the crucial factors that impinged on business cycles worldwide in 2007 was the subprime mortgage crisis in the United States. However, the Asia-Pacific region should be able to weather the impact of a significant slowdown in the U.S. economy in 2008, according to a report from Standard & Poor.
Although there is a wide range of growth rates prevalent across the Asia-Pacific, and countries are at different stages in their interest-rate cycles, the common characteristic of the region can best be described as steadiness, S&P reported.
China’s large reserve of foreign exchange is expected to enable the country to counterbalance its external risks. Soaring investment in fixed assets will fuel rapid Chinese economic growth for at least 10 to 15 years, said Wang Qing, chief economist of Morgan Stanley’s Asia-Pacific region.
The Indian economy is expected to continue to grow at a robust rate in the coming years, though Indian exports may decline if the United States slows down. “The spillover effects of the U.S. financial crisis to the Indian economy may not be significant enough to overwhelm the positive economic momentum already in place,” said Asha Bangalore, vice president and economist at the Northern Trust Bank, Chicago.
India: Reforms Fueling Economic Growth
According to the Organization for Economic Cooperation and Development (OECD), India has emerged as the third-largest economy in the world, after the United States and China and just ahead of
Japan in purchasing power parity terms. India accounts for nearly 7% of world gross domestic product (GDP). India’s GDP grew by 9% in 2007, an achievement that has come about largely due to reforms in its financial markets. Policy changes that have led to the reduction in the number of industries reserved for very small firms and the decision to progressively lower tariffs to an average of 10% have also given a boost to the entry of foreign suppliers. Foreign direct investment in the manufacturing sector has gone up largely due to an easing of rules by the Indian government. Fiscal discipline, too, improved significantly during 2007, with the passage of fiscal responsibility laws for the central government and 25 state governments. The ratio of debt-to-GDP fell from 82% in 2004 to 75% by March 2007.
The OECD’s “Economic Survey of India, 2007” states that “GDP per capita is now rising by 7.5% annually, a rate that leads to its doubling in a decade. This contrasts to annual growth of GDP per capita of just 11⁄4% in three decades from 1950 to 1980.”
Reforms undertaken by the government to promote privatization in certain industrial sectors have led to dramatic changes. For instance, the Indian telecommunications network has become the third largest in the world. New initiatives to boost infrastructure in the country have also been initiated. Electricity generation capacity, which is a key input for the manufacturing sector, is set to rise by 6% annually over the 2007–2012 period, and is slated to be the second-largest absolute increase in capacity in the world, according to the OECD’s Economic Survey of India. The government has also set in motion a slew of taxation reform initiatives. The effort to streamline the wide array of indirect taxes at the central and state levels would have a huge beneficial impact on the manufacturing sector and enhance manufacturing activity in different locations across the country. The government is also committed to introducing the value-added tax (VAT) system across all states by 2010 in a bid to remove barriers to interstate trade.
India’s Consumption Trends Shaping Durables Sales
Mobile telephone has been one of the high-growth sectors in recent times in India. New cell phone connections and handsets sales have given a huge boost to the sector. According to one estimate, 3 million handsets are sold every month and this is expected to grow until 2010. Industry observers remark that 100 million handsets could be sold annually until 2010. Presently, the demand for new cell phones is being met largely by imports, but this is likely to change in the coming years, presenting a huge opportunity for OEMs in India.
Urban India is fast adapting to digital lifestyles. Personal computers are no longer just meant for office use. They are becoming an inevitable asset in urban Indian homes. With digital devices like mobile phones, digital cameras, and media players being added to the list of must-haves in middle-class Indian homes, the computer is emerging as a key appliance. Notebook computers too have begun to register high sales in the Indian market. Notebook PC shipments in India grew at a whopping 104% over 2005. Research firm Gartner estimates that the PC market in India has grown at 20% in 2007, twice the growth rate of the global PC market.
Plasma TV sales have seen enormous growth during 2007 and this is likely to be a hot product category in 2008 as well. According to industry estimates, plasma TVs are growing at 166%, topped only by the growth rate of 276% for LCDs. The total industry growth for flat-panel displays (LCD and plasma combined) is estimated to be about 230%.
“With growing income levels and easy availability of credit facilities, both plasmas and LCDs are making their way into people’s homes,” says Girish V. Rao, vice president, sales and marketing, LG Electronics India Ltd. “Due to low penetration, rising disposable incomes, and easy finance options, there’s tremendous opportunity for expansion in India, both for LCDs and plasmas.”
Another opportunity that could have a tremendous impact on the OEM sector is the growth of organized retailing in the country. “Organized retailing in the country will shift the focus from major brands to private-label brands where OEMs will begin to play a much larger role,” says Kishore Khanna, managing director of the Evershine Group, which is among the key OEM players in India.
Rao of LG agrees. “Organized retailing will of course have an impact on the way business is done in India. However, it is still in a nascent stage. LG in India has established a very large and loyal customer base for itself in the last decade and we are very optimistic about the future.”
Purchasing consumer durables is also on the rise among both urban and rural households. According to a recent National Council of Applied Economic Research study, nearly 48% of rural households in India borrow money from banks and other financial institutions to purchase big-ticket appliances and consumer durables, while 54% of urban households do the same. This trend is expected to further boost sales of consumer goods in the coming years.
China’s Economy Continues to Surge Ahead
There is no let up in the economic growth of China. After averaging growth of about 10% in 2006, GDP growth in China touched 10.4% in 2007. While export growth is expected to slow down in 2008, this could be offset by faster domestic demand growth. According to the OECD outlook, by 2008, China’s current account surplus is expected to reach 10.5% of GDP ($368 billion) with inflation around 1.5%.
Industrial production in China accelerated during 2007, with the total value added of big industrial enterprises registering 18.5% year-on-year growth, according to official figures released by the National Bureau of Statistics of China. Among the 39 industrial divisions, the fast-growth industries were mainly petroleum processing, electrical machinery, steel and iron, transport equipment, electric power, building materials, chemical industry, medicine, chemical fiber, beverage, and textiles. Industries that witnessed a drop were the nonferrous metal industry, processing of agricultural products and nonstaple products, communication equipment, mining and processing of nonmetal ores, paper making, and extraction of petroleum.
China’s Demand Growth to Boost Consumer Retail Sales
A nationwide survey of 59,000 urban households in China indicated that per capita disposable income of urban residents had reached 10,346 yuan (approximately $1400) in the first three quarters of 2007, up by 17.6% over the same period in 2006. The per capita expenditure of urban residents was 7395 yuan (approximately $1000) in the first three quarters, up by 14.1% year-on-year.
Rural incomes too are registering rapid growth. Income growth in rural China outstripped urban income growth in the first nine months of 2007. A survey of 68,000 rural households revealed that the average cash income per person reached 3321 yuan for the first three quarters of 2007. After accounting for inflation, it grew 14.8% a year over the same period in 2006. During 2007, consumer sales in domestic markets of China grew rapidly with the total retail sales of consumer goods reaching 6382.7 billion yuan (as of September 2007), a year-on-year rise of 15.9%. Sales of household appliances and video appliances rose by 20.3% in 2007 over the previous year.
At the recently concluded 17th National Chinese Communist Party Congress, China’s president Hu Jintao set the goal for the country “to increase its domestic share in the world market.” A spokesman for the Chinese National Bureau of Statistics, Li Xiachao, said at a news conference that the government is making progress in its efforts to ease dependence on exports by encouraging Chinese consumers to spend more. “Consumption is expected to keep growing, rapidly becoming an important factor in pushing economic growth,” he said.
A combination of changing demographics, rising education levels, and labor market dynamics is expected to transform China into the third-largest consumer economy. As lower-income groups decline in size, the lower and upper middle class will begin to grow. The numbers of the lower-middle-income segment will overtake the poor and constitute nearly 45% of the urban population by 2009. After 2009, there will be an upsurge in the number of households entering the upper-income brackets. Urban consumer spending is expected to grow five times in real terms from $446 billion per year in 2005 to $2.3 trillion in 2025, according to a study by the McKinsey Global Institute.
Middle East Forecast
The Middle East economies are growing at a healthy 6.5% annually and the region is expected to continue to grow at this rate in 2008, thanks mainly to the continuing high oil and nonoil commodity prices. However, average inflation in the region has reached 8–9%. Saudi Arabia’s central bank chief said that domestic housing and global food and commodity prices have led to high inflation rather than the declining value of the dollar. Inflation in Saudi Arabia touched 5% in September 2007, a record of sorts in the past decade with annual rent costs jumping 11% and food 7.2%.
In the Gulf Cooperation Council (GCC) countries, investment spending will expand to at least $800 billion over the next five years, with major projects in the oil and gas sectors, infrastructure, and real estate. Morgan Stanley estimates that GDP for the GCC plus Egypt and Jordan will reach $957 billion in 2007 and $1045 billion in 2008, more than twice the 2002 figure of $484 billion and approximately the same size as the Indian economy.
The real estate boom across cities in the Middle East continues unabated. According to one estimate, the volume of new office space in Dubai will increase from 1.6 million m2 presently to 5.6 million m2 in 2009. Construction of huge new megamalls and expansion of the current megamalls are also planned. Similarly, in Doha, capital and port city in Qatar, more than 16,000 new apartments will be available by 2010 while retail space availability is also set to increase—from 450,000 to 1.13 million m2 between 2007 and 2012. Riyadh is also witnessing huge investments in retail space.
For appliance manufacturers, the real estate boom translates into a huge opportunity. According to media reports, a combined total of more than 3000 luxury apartments in Dubai and Qatar will be fitted with Bosch and Siemens appliances over the next two years in deals worth over $15 million. Heiko Fischer, managing director of BSH Middle East, was quoted as saying: “The project side of our business in this region is becoming increasingly lucrative for us, with our estimated market share for kitchen-furnished apartments within the GCC at 20% and growing.”
Another indicator of the market for appliances is the growing consumer spending in the Middle East countries. Some examples:
- A survey by the Arab Advisors Group found that nearly 94% of households in Kuwait own satellite TV receivers.
- Cell phone subscribers in Kuwait are heavy users of e-commerce with spending of $356 million in a 12-month period.
Given the urge to splurge in the region, appliance manufacturers can expect to boost their sales volumes in 2008.