issue: January 2005 APPLIANCE Magazine
53rd Annual Appliance Industry Forecasts
Europe - The European Appliance Industry Is Feeling the Pressure
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by BJ Spanos, Contributing Editor
Rising raw material prices, continuing fears of price erosion, increasingly unreliable supply sources, and shrinking margins have the European appliance industry feeling the pressure.
Benchmark European prices for steel have almost doubled in 2004, with Luxembourg-based Arcelor SA, considered the world’s largest steelmaker, projecting prices will increase an average of 3 percent in 2005. Oil prices also have climbed to record levels above U.S. $50 per barrel, a nearly 70-percent increase compared to 2004 prices, which impacts costs associated with transportation, energy, and plastics. Oil is expected to average more than $40 per barrel in 2005. Further, supply chains worldwide have been stretched thin, which has manufacturers scrambling for reliable sources of materials and components.
“We are facing an unprecedented external environment [of] rapidly rising material and oil-related costs, as well as material and transportation shortages…orders of magnitude of price increases that have never been seen, certainly [not] in the last 30 years we’ve been tracking this,” said Jeff Fettig, chairman, CEO, and president of Whirlpool Corporation in a telephone call with analysts. “Looking ahead, we don’t expect this environment to improve significantly in the near term.”
Luigi Meli, director general of the European Committee of Domestic Equipment Manufacturers (CECED), concurred. “We do not expect any relevant change in market trends in the short period,” he told APPLIANCE. “We have too many critical factors—high prices for raw materials, limited confidence from consumers, additional legislative burdens, unfavorable exchange rate toward the dollar, and higher unfair competition. The unfavorable trends in the raw material prices have the highest impact on companies’ profitability.”
According to Troy Scragg, general manager of Fisher & Paykel Europe, manufacturers are making a considerable effort to take as much cost out of their products. “But with the market tightening up, the increases in cost of raw materials and transportation, I just don’t see how original equipment manufacturers—even the so-called low-cost manufacturers—can maintain reasonable margins without a price increase to consumers,” he said. “We’re seeing some indication of this. Manufacturers from Asia are looking at price increases, and if they raise prices, others will follow. Asia has traditionally been the first off the chalks when it comes to price decreases. This holds true for all market segments and in all areas of the world,” Mr. Scragg added.
In Europe, Whirlpool has implemented a 3- to 5-percent price increase effective in all European markets for all freestanding and built-in products, and other manufacturers are expected to follow suit. Mr. Scragg expects prices in Europe to rise 2 to 5 percent, maybe as high as 7 percent.
“Prices will go up in order to off-set the increase in steel prices,” confirmed Jacob Broberg, vice president of Corporate Communications for Sweden-based Electrolux. “Since we buy raw materials on a global basis, it is not possible to say that one country or another will be more affected.”
Alfonso Patruno, head of Communications at Italian appliance maker Merloni Elettrodomestici added: “It is necessary for greater market transparency for steel and plastics to ensure that prices are subject to the open market in order to maintain European competitiveness.”
With respect to the cost of oil, the unprecedented rally of the euro in recent months against the U.S. dollar has proven to be a double-edged sword. On one edge is the concern that a stronger euro will defuse the moderate, export-driven economic recovery in some European countries by making exports more expensive and less competitive. On the other edge is some relief from high oil prices.
“The rising cost of oil is partially compensated in Europe by the exchange rate of the euro to the U.S. dollar, which has mitigated the negative consequences on costs for logistics and distribution,” said Mr. Meli of CECED. Even so, the high price of oil remains a key concern for European economies. The U.S. has indicated that is not likely to intervene anytime soon to stop the dollar’s fall against the euro.
Stephen J. Duthie, manager of Global Communications at Whirlpool Corporation added: “Companies that deal best with rising steel and gas [oil] costs over the next 12 months will be the winners coming out of this cycle.”
Fighting Pressures with Branding and Innovation
Pressure from low-priced imports is nothing new to the European markets, especially with respect to consumer electronics (see June 2004 European Report, “European CE makers deal with Asian pressures”). However, Mr. Scragg of Fisher & Paykel believes the situation seems to be stabilizing.
“Flooding the market with units doesn’t work anymore,” Mr. Scragg said. “The cost of creating an overabundance of supply and selling those units at ridiculously low prices is just not possible to maintain in the long run, particularly in the current economic climate. The two big market drivers and challenges for 2005 will be pricing and energy.”
Mr. Patruno of Merloni said that in order to deal with emerging markets like China and India, the European and Italian industries have to focus on the power of brands. “The astonishing economic growth of China could be worrying in terms of price competition, but the quality and the style of Italian and European production is the key that differentiates any investments and consumption,” he said.
While Mr. Broberg believes that “the increased cost of steel will make is easier to keep prices up next year,” a more important strategy for success is to avoid the “commodity trap.”
“We must convince the consumer that price is not everything and that it is worth paying for a brand delivering real solutions to real needs,” he said. This means delivering innovation and building strong brands at increased speed.” Along the same line, Mr. Patruno emphasizes the importance of getting consumers to start spending their money again.
Mr. Fettig of Whirlpool also stresses the importance of innovation as a key factor to success in 2005: “We’ve seen a very positive acceptance in the marketplace for consumer-relevant innovation.”
Mr. Scragg added: “The industry’s strength in Europe and elsewhere is innovation. There are a lot of exciting new products in the makings and consumers are more aware. The companies that will succeed in 2005 will be those that bring competitively priced, innovative products to market and with well-executed plans, which will inspire a faster rotation of appliances than the industry has seen in the past.”
Outlook for 2005
“The performance of the European [appliance] industry is in line with the overall economic growth in the region and is strongly connected to the economic growth trends,” Mr. Meli said. The World Bank reported that real gross domestic product (GDP) in Europe and Central Asia increased by an estimated 7 percent in 2004, a sharp acceleration from the 5.9 percent performance in 2003. Regional growth is forecast to moderate over the near-term, with output rising by 5.6 and 5 percent in 2005 and 2006, respectively. PricewaterhouseCooper has predicted that Ireland will lead the European Union with a 5-percent economic growth in 2005.
Another area that is looking up is Turkey. According to the Organisation for Economic Co-operation and Development (OECD), “after hitting the most severe crisis of its recent history in 2000-2001, the economy bounced back and is now among the fastest growing economies in the OECD.”
The World Bank believes that prospects in Turkey should be bolstered by the implementation of significant reforms, which could ultimately reduce inflation to historically low levels and bring the fiscal deficit down to a more manageable rate. Fiscal consolidation and tightening of monetary policy has helped bring inflation down from 68 percent in 2001 and 18 percent in 2003 to only 9 percent in 2004, the World Bank said. Even so, the OECD cautions that it is still “too early to determine what extent the rebound reflects a transition to a higher medium term growth path.”
Overall, the European appliance industry is upbeat about the coming year, but with realistic goals and expectations. “In 2005, we will probably continue to see very good growth in Eastern Europe, while in Western Europe markets will continue to be up only slightly,” Mr. Broberg of Electrolux projected.
Mr. Scragg added that while the appliance market overall in Europe is very tight at the moment, he expects moderate growth next year, with negative growth in Germany compensating for stronger growth in other countries. “Although Germany has the second-largest single appliance market in the world, growth just isn’t happening there because of the current economic conditions,” he said.
“Eventually—maybe not in 2005—we will see a weeding out process much as has been seen in other industries, with a bit more consolidation,” Mr. Scragg added. “I see it as the only way forward. Consumers will accept price increases in 2005, but won’t allow it in subsequent years. They’re too used to low-cost appliances.”