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issue: January 2005 APPLIANCE Magazine

53rd Annual Appliance Industry Forecasts
Asia’s Mixed Bag Continues

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by BJ Spanos, Contributing Editor

When reviewing the 2004 economic performance in Asia and looking ahead to 2005, there continues to be a mix of good and bad news.

Economic growth in Asia is expected to increase by almost 8 percent in 2004, the strongest performance since the 1997-1998 financial crisis. Extremely strong domestic demand and trade growth in China has led the regional boom, according to the World Bank. Other factors contributing to the country’s growth include China’s worldwide exports growing 125 percent in 4 years, U.S. $54 billion in direct foreign investment, and nearly 60,000 new factories built by foreign companies, reports The Progressive Policy Institute (Washington, DC, U.S.).

Dongsheng Xu, director of the Chinese Household Electrical Appliances Association (CHEAA) confirms that 2004 was indeed a good year for China, including the appliance industry. “Appliances will set new records for main product outputs,” he projected.

China’s growth is expected to decelerate gradually from 8.8 percent in 2004 to 7 percent by 2006, which is welcome news as a slower growth rate would be more manageable, more sustainable, and would add a measure of stability to the region’s economy. Analysts believe that as China becomes more capable and the standard of living improves, manufacturing will become more expensive, which also will have a cooling effect. However, the World Bank warned that over investment and excess capacity could lead to a sharp downswing in new investment, which would result in a much more abrupt slowdown than forecast.

India is also driving economic growth in Asia and is becoming an attractive market for investors. India’s economy is projected to grow 6 percent in 2005, slightly up from 2004, with the strongest performance coming from the manufacturing and service sectors. While India still lags far behind China and Japan, over the long term, India is expected to continue its resilient growth and may very well rival China by 2015.

Korean government officials expect an economic slowdown in 2005, citing global economic slowdown, higher oil prices, and weak domestic demand. The World Bank estimates that an overall gross national product (GNP) growth of 4.9 percent in 2004, easing to 4.4 percent in 2005.

Consequently, “the appliance industry, being highly dependent on exports, is expected to have difficult times maintaining profits,” said M.Y. Shin, economy researcher for LG Electronics, Ltd. Korean appliance producers are being urged to foster a stronger parts industry and phase out Japanese imports. Also, the government is being encouraged to promote research and development and enter into free trade agreements with other countries to bolster exports.

“The continued Korean economic slowdown has prompted increases in exports, but the strengthening of the won against the U.S. dollar will accelerate the movement of production offshore,” noted Moonyong Lee, executive vice president and division head of Samsung’s System Appliances Division. “Korean companies are now at a crossroads and must make the transition to high-end products. Full-fledged expansion of plants around the world will mean growth in the appliance industry reminiscent of the ‘Korean miracle’ of the past.”

In December 2004, the Kaesong industrial park opened in North Korea, the first North-South economic collaborative effort. The advantages include inexpensive land and a labor force that is highly skilled, diligent, and willing to work for far less than South Korean counterparts. Kitchen appliance manufacturer SONOKO Cuisine Ware is one of 300 firms selected from more than 3,000 applicants to take part in this pilot phase.

Japan downgraded its industrial output outlook in October 2004 for the first time in 2 years amid a production adjustment in the electric product, digital home appliance, and device sectors. Consumer sentiment, however, strengthened during the third quarter due to improving attitudes about the job market. Japan is projected to grow at slightly less than 2 percent.

“Emerging from a long depression, Japan is still expected to stage a recovery for its expenditure along with exports and investment in equipment and plants in 2005,” said Mr. Shin of LG Electronics.

Nearly 70 percent of the 33 major appliance makers recently surveyed by Kyoto News in Japan said they expect the digital products boom to remain solid as new products and lower prices enhance demand. Nine companies said strong sales would continue through 2006, while eight others believe sales will temporarily decline in 2005 and recover in 2006.

As for Asia as a whole, “the market outlook is bright in 2005,” according Mr. Lee of Samsung. “China and Southeast Asia will experience high growth, and Samsung expects its sales to keep rising accordingly,” he said. “The company predicts sales of 2.5 billion won (approx. U.S. $2.4 million) in the region for the year.”

He added that operations are returning to normal at Samsung plants in Indonesia, China, and Thailand, ensuring a stable supply of goods and production cost competitiveness. “However, the current weakening of the U.S. dollar will affect the global economy and competition will be severe in the American market,” Mr. Lee noted. “The effect is seen as negligible in the European market (where deals are based on the euro).”

Global Uncertainties May Dampen Growth

“Although 2004 has been a strong year, recent data suggest that the recovery in East Asia has peaked, and the economic activity is shifting into lower gear,” said World Trade Organization Regional Chief Economist Homi Kharas in a video presentation to audiences across Asia. “The impact of higher oil prices could shave 0.5- to 1-percentage points off growth rates in the region next year, with countries like the Philippines, Thailand, and Korea at the upper end of the range,” he said.

“I don’t think this [appliance] industry has even seen the order of magnitude of cost increases and shortage issues with both materials and transports that we have seen for most of this year, and we expect to continue for next year,” said Jeff Fettig, chairman, CEO, and president of Whirlpool Corporation, in a telephone conference call with analysts. “Probably the most concerning factor in the whole arena has been ocean freight, which is part of this global logistic supply chain issue where there have been constrained and significant cost increases.”

In the case of Korean companies, Mr. Shin said that besides rising prices of oil and raw materials, export conditions have worsened due to exchange fluctuations, and some companies might incur additional costs caused by environmental control. “However, continuous sales growth is foreseen as product demand in the premium market is not affected by economic depression,” he noted.

Further complicating matters are worries about China, including rising inflation, underground loans, money circulating outside the banking system, and too much foreign investment. In an effort to stabilize investment growth and to cool the economy, The People’s Bank of China raised its benchmark 1-year lending rate in October 2004 to 5.58 percent from 5.31 percent and its deposit rate from 1.98 percent to 2.25 percent for the first time since 1993. Financial analysts expect additional rate hikes in 2005.

Bad export debt may also dampen China’s economic growth in 2005. Chinese exporters are owed up to $100 billion, which is equivalent to 20 percent of China’s 2004 projected export earnings. Only 11 percent of exporters have credit-control systems and only 20 percent of China’s international trade is guaranteed by bank letters of credit, according to China’s Ministry of Commerce. As a result, exporter bad debt ratio is estimated to be more than 5 percent and growing at a rate of $15 billion annually. This issue is especially important to the appliance industry, as China’s appliance makers are among the most active exporters.

On a positive note, a new monetary regulation in China, which became effective in November 2004, allows subsidiaries of Chinese and foreign multinational companies to borrow Foreign Exchange (FOREX) funds from peer companies. The Chinese State Administration of Foreign Exchange believes this new regulation will help Chinese multinational firms that experience funding shortages in overseas markets.

“The appliance industry in China is concerned about the banking system, but we do not worry a lot,” Mr. Dongsheng of CHEEA told APPLIANCE. “The Chinese government is doing its best to handle this problem, and the Chinese economy is performing well, so China has the ability and resources to handle the situation.”

Jacob Broberg, vice president of Corporate Communication, The Electrolux Group added: “We have been investing in China for many years and will continue to do so. Even if the Chinese market tends to be overheated, it will continue to grow at a steady [pace]. China also will be an even more important base for sourcing components to Europe.”

Environmental Regulations: Adapt or Be Left Behind

The cost of complying with the European Union’s Directive on Waste Electric and Electronic Equipment (WEEE) and the Directive on the Restriction of the Use of Certain Hazardous Substances (RoHS) in Electrical and Electronic Equipment, which go into effect in 2005 and 2006, respectively, will present a major challenge to Asian manufacturers. While some fear added costs will lessen their products’ price advantages, others see these regulations as the cost of doing business and an opportunity.

“Obviously, these laws will require a supporting infrastructure in some manner, and each manufacturer will have to consider these laws in the design and distribution of their products,” R. Craig Breese, president of Maytag International, told APPLIANCE. “There will no doubt be additional costs, and while the net impact over time will be extremely difficult to ascertain, pricing to consumers would likely increase in the end.”

Mr. Shin added: “It is important to be able to understand and to immediately adopt worldwide environment protection trends to apply to the appliance industry, [which] ultimately will lead to developing environmentally friendly products and reinforcing companies [that are] following the rules to become more competitive.”

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