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issue: June 2004 APPLIANCE Magazine

China Report
Price War Inevitable in China’s Air-Conditioner Market


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Sean Zhang, China correspondent, APPLIANCE magazine.

Despite a consensus to stop cut-throat competition among the local air-conditioning traders, industrial sources said that the price war was likely to continue in China this year.

Appliance traders met at the 2004 Annual Forum of Air-Conditioning Trade held on March 24 in Guangzhou, Southern China. The event was hosted by Suning Appliance, a leading air-conditioner retailer in China.

Attendees voted 14 against 2 on a plan to readjust air-conditioner pricing upward. But in private conversations after the voting, most players had to admit that a price war was inevitable this year. As soon as the event ended, Suning announced a 4-week nationwide promotion activity to prepare for the upcoming summer.

Barely 2 days following the Forum, GOME, Suning’s competitor, declared in Beijing that it had already started preparations for a price war, as it had signed agreements in the capital with 16 major air-conditioner producers to buy air-conditioners with a total worth of 3.99 billion yuan (approx. U.S. $480.7 million). GOME’s actions strongly showed ambition for keeping its dominant position in China’s air-conditioner market.

Since the beginning of the year, air-conditioner producers have been encountering the two-pronged pressure of price war and cost hikes in raw materials, which has resulted in a drastic profit decline. “Thirty percent of more than 200 air-conditioner producers across the nation have already gone bankrupt or temporarily stopped production,” said Lu Renbo, a researcher of the Development Research Center of the State Council, or the country’s cabinet. He predicted that more than 50 percent of the brands in China’s air-conditioner market will disappear by the end of the year.

National Bureau of Statistics of China (NBSC) figures show that the country produced some 45 million air-conditioning units last year with total sales turnover of 83 billion yuan (approx. U.S. $10 billion), an 18-percent increase from last year. Export nearly doubled to a record high of 16 million units, showing an 87-percent annual increase. In terms of money, the year’s export totaled U.S. $12.5 billion, breaking the $10-billion dollars threshold for the first time.

Capacity of air-conditioner production facilities in China reached 60 million units in 2003, a figure said to exceed the global demand. “But domestic demand only amounts to 15 million units per year,” Mr. Lu said.

Huo Dufang, chairman of the China Household Electrical Appliances Association (CHEEA), warned that even though the international market has provided a great opportunity for domestic air-conditioner producers, the demand is “not unlimited.” Continuous expansion of capacity will translate into escalating competition and over supply.

As competition intensifies, 2004 will be a much tougher year for the producers, according to Zhong Shunhe, chief engineer of the China Home Appliance Research Center. “Only innovative companies can survive as they keep up with the technical progress and develop high-end products,” Mr. Zhong said. He urged manufacturers to put emphasis on technical improvement. Referring to the low-level competition that involves an investment war, a price war, as well as a sales war, Mr. Zhong said, “They are absolutely harmful to our air-conditioning industry in the long run.”

 

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