After many years of growth, China's home appliance industry has entered a mature consumption stage.
After many years of growth, China’s home appliance industry has entered a mature consumption stage. A lack of new demand has plagued the market in recent years, and the outlook for 2020 isn’t rosy.
In 2018, the sales volume of China’s home appliance market in all channels was 810.4 billion yuan, according to public data. In 2019, this figure dropped to 803.2 billion yuan, a decrease of 7.2 billion yuan. Entering 2020, the sudden coronavirus outbreak has depressed demand further.
Insufficient domestic demand, slow sales of external orders
China is the world’s largest home appliance manufacturing and exporting country. The outbreak of the coronavirus epidemic has brought unprecedented challenges to China’s domestic demand and export orders. Home appliance companies have been “resuming work and then taking a holiday” since March.
On April 5th, the latest omni-channel AVC data showed that this year’s Q1 refrigerator, air conditioner and washing machine sales declined. The overall retail sales of the white goods market decreased by about 45%. Air conditioners led the pack: Sales dropped 58.1%; refrigerators fell by 28%; and washing machines by 35.9%.
The China Electronic Information Industry Federation reported electronics production for Q1 2020 fell by 14.7% year-on-year, and total profit fell by 87.0% year-on-year. The output of computers, mobile phones, monitors, and televisions has fallen sharply, as has export value.
Under the double blow of stagnation in domestic consumption and cancellation of foreign orders, rumors of successive layoffs of two billion-level Chinese home appliance companies, Hisense and Midea, broke out in the media in April. Although Hisense responded that the number of layoffs was inaccurate, it is taking measures such as executive salary reduction and employee layoffs. Hisense’s overseas business accounts for more than 40% of its overall sales.
Hisense denied the layoffs but said the company was “suspending the payment of 30% of the monthly salary of executives.”
Gree Electric Chairman Dong Mingzhu said “February sales were basically zero, with a direct loss of 20 billion yuan.” This is almost equivalent to Gree’s full-year net profit in 2019. Another domestic appliance giant, Haier Zhijia, a subsidiary of Haier, accounted for 47% of its overseas business in Q3 last year.
In fact, before the epidemic, forecasts for the home appliance industry were not optimistic with overcapacity and serious inventory backlog. The epidemic is a “black swan” which has exacerbated the downturn.
Some analysts said that some second- and third-tier brands may close down this year. Market consolidation will hurt the vitality of second- and third-tier companies. This epidemic may be the straw that breaks the camel’s back.
Q1 earnings are bleak
On April 14, the financial reports of home appliance listed companies were released one after another, and the overall performance was dismal.
Hisense’s Q1 financial report shows that the home appliance business expects Q1’s net profit to be between 0 and 126 million yuan, a year-on-year decrease of 70% -100%.
In fact, two years before Hisense’s profit fell, there was already a harbinger. In the first three quarters of 2019, the operating income of Hisense Group, the listed entity of Hisense Group, was 23.644 billion yuan, down 2.91% year-on-year, and its net profit was 265 million yuan, down 21.10% year-on-year. In addition, Hisense’s annual net profit in 2017 and 2018 both showed a downward trend.
Traditional TV manufacturers Konka and Changhong’s performance was even worse. Konka Group’s Q1 loss was 220 million to 240 million yuan, with a profit of 85.567 million yuan in the same period last year; Changhong Meiling Q1 lost 250 million to 290 million yuan, a year-on-year decrease of 513.04% -579.13%.
Both companies said in their financial reports that the company’s performance was mainly affected by the coronavirus, increased operating costs, blocked logistics and transportation, and weak consumer demand.
Gree Q1’s performance can be described as “miserable.” Gree Q1’s net profit is 1.33 billion yuan to 1.17 billion yuan, a year-on-year decrease of 70% -77%.
In 2019, Gree Electric Appliances’ revenue increased slightly by 0.24% year-on-year to 2005.08 billion yuan, and its net profit fell 5.84% to 24.672 billion yuan. In contrast, Gree’s net profit in 2017 and 2018 achieved growth of greater than 40% and 10%, respectively.
Gree Electric said that the decline in performance was mainly affected by two aspects. First, it was affected by the epidemic situation, delays in the resumption of production, sales of air conditioners were blocked, and installation activities could not be carried out. Secondly, industry competition has intensified.
Gree launched a stock repurchase program on April 12. Gree intends to use its own funds to repurchase the company’s 3 billion-6 billion shares in a centralized bidding transaction. Prior to this, Gree Electric’s stock price once fell by 25%. At the same time, on April 9, Gree Electric’s debt financing tool with no more than 18 billion yuan was approved.
In 2019, Q1 Midea’s revenue increased by 7.8% year-on-year, and net profit by 16.6%. So far this year, Midea has not announced its Q1 financial report, but at the end of February announced plans to apply to the China Interbank Market Dealers Association to register debt financing instruments with a total amount of no more than 20 billion yuan. The situation is not optimistic. Prior to this, Midea Group has started a new round of stock repurchases, and the estimated repurchase amount will not exceed 5.2 billion yuan. It is understood that Midea’s share repurchases in February and March cost 3.2 billion yuan and 701 million yuan, respectively, to stabilize stock prices.
Kitchen appliances company Vantage Co., Ltd. released this year’s Q1 performance forecast, which showed that during the epidemic, the resumption of customer terminal stores continued to be postponed; the number of visitors to the store was significantly reduced; and the closure of the city caused inconvenience in home installation. In yuan, it reported a year-on-year decline of 60% -70%.
The weak demand for home appliances also affected the home appliance retail industry. A few days ago, Suning.com released a Q1 quarterly report that showed that it lost 400 million to 600 million yuan.
Suning said due to the epidemic, the company’s offline home appliance stores were forced to close, and online business was also blocked.
How do companies save themselves?
What are the countermeasures for home appliance companies?
At present, the overall growth rate of home appliance retail in first- and second-tier cities has slowed down, but the annual sales volume of home appliances and 3C in the county market has reached 900 billion yuan, accounting for nearly 40% of the country. Therefore, Guangdong Province is leading the strategy of “home appliances going to the countryside.”
However, people in the industry have different views on this “going to the countryside” action.
Some people believe that the last similar action during the global financial crisis was triggered by the US subprime mortgage crisis in 2008. At that time, China was in a “vigorous period of outbreak” of domestic appliance demand and achieved good results. However, China’s rural home appliance market is now saturated. In some developed areas in the Yangtze River Delta and Pearl River Delta, the rural penetration rate is comparable to that of large cities. From this perspective, the effect of going to the countryside this time is not beneficial.
Another group of people believe that, unlike the previous “countryside” effort, today’s rural products will focus more on consumption upgrades promoting health and smart home appliances. Home appliances in the countryside in 2008 have now been there 13 years, so upgrades may spur demand.
Others say the effort depends on the strength of the policy. In 2009, the government subsidized 13% of the price of products going to the countryside. If the government does not allocate funds this year, experts believe the stimulation effort will lag.
This article originally appeared in EETimes sister publication ESMChina.