Introduction
As a multi-billion dollar sector, the Chinese home appliances industry seeks to provide quality electrical and mechanical devices that can be utilized in a household. In the next few years, the global home appliances sector is projected to grow significantly, as population growth in various regions continues to push the demand for household devices upwards. Similarly, the Chinese home appliances sector is anticipated to grow amid the realization of low sales in the last few years.
In the Chinese market, players, including Gree, Midea, and Haier, continue strategizing on their competitive advantages to foster their unrelenting expansion in the market as the biggest three competitors. The growth of e-commerce sales in China has also boosted the industry following an increased number of customers who make online purchases of items such as refrigerators, washing machines, and air conditioners. In this light, understanding China’s home appliances market requires an assessment of its competitiveness and investment highlights. A SWOT analysis can also help to gauge the status of the sector.
A Brief Overview of the Home Appliances Sector
The future of the Chinese home appliances sector is undoubtedly bright, owing to the witnessed fast growth of online sales (Zhang and Gu 6; Shen et al. 18). Thus, industry players expect to make considerable sales of devices such as washers, refrigerators, air conditioners, and an array of kitchen appliances (Zhang and Gu 9). According to Yan et al., the market anticipates a significant infiltration of online shoppers in China, leading to an increased sale of items, including ACs, washers, and fridges to 38%, 48%, and 53% respectively by 2020 (9). In 2017, the sales volume of the mentioned items stood at 29%, 45%, and 41% correspondingly (Yan et al. 9). As such, positive prospects in the market will see industry players make huge sales on an array of appliances.
Competitors, including Gree, Midea, and Haier expect a low digit revenue gain in 2018 compared to the revenue reported in 2017. This situation follows the anticipated decline of the market value from 14% in 2017 to 6% in 2018 (Yan et al. 14). In this light, amid the continued growth of the market regarding the sales volume for washers, ACs, and refrigerators, it is projected that players will record a low double-digit revenue increase. In this respect, regardless of the opportunities presented by the industry boom, competitors need to be wary of an array of waves in the Chinese market.
Market Overview: Leading Players
The Chinese home appliances segment is considerably competitive to the extent that players continue executing strategic approaches to boost their edges. Rivals such as Gree, Midea, and Haier need to regard the rising demand for premium products as the main contributor to the currently experienced market growth. In this respect, premiumization is one of the major strategies that Gree, Midea, and Haier have adopted to foster their competitive edges in the Chinese market. For instance, Gree and Haier have efficient and effective positioning in premium products, including ACs, fridges, washers, and heaters compared to the case of Midea (Yan et al. 11). Therefore, the effectiveness of marketing strategies adopted by various rivals determines the sector’s competitiveness to a considerable extent.
The online channel is also one of the notable mechanisms that have influenced profitability and growth among major competitors in the Chinese home appliances market. The platform is accountable for the impressive growth of the online sales for ACs, washers, refrigerators, and heaters by 23%, 34%, 24%, and 18% correspondingly (Yan et al. 24). Regarding volume, the market reported an upsurge of 29%, 44%, 35%, and 29% in this order (Yan et al. 24). For this reason, industry players identify the online channel as an important driver of sales and profits. Similarly, Gree, Haier, and Midea expect an enhanced online penetration by volume for various products, especially ACs.
The basis of competition in the Chinese home appliances sector is influenced by an array of factors. The notable triggers of competition include price, product range and quality, advertising and promotion, store location, and external antagonism. In this respect, the competitive landscape is comprised of various elements that account for the continued growth of the sector in China.
The Competitive Landscape and Volume/ASP/Revenue/Margin Trend
The witnessed boom in online purchases has played a considerable role in promoting the sales volume of various competitors in the Chinese home appliances market. For this reason, the adoption of online stores by rivals has resulted in an increased sales threshold for air conditioners whose retail volume increased from 19% in 2016 to 29% in 2017 (Yan et al. 34). Consequently, the market share of Haier, Midea, and Gree grew from 60% to 64% for both offline and online platforms (Yan et al. 3).
Fridges and washers also continue witnessing a higher level of online penetration, resulting in heightened online sales for competitors. Therefore, the online channel is one of the significant triggers of higher sales volume among players in the industry. Estimates reveal that the growth of e-commerce among other factors will contribute to an increased sales volume, especially for products, including air conditioners and heaters (Cui and Pan 203). Thus, the online channel is one of the avenues that have boosted the sales volume and profitability of the main home appliances brands in China.
The home appliances price increment experienced in 2017 has a substantial implication on the industry’s ASP. It is projected that the industry’s ASP will grow considerably in 2018, especially for devices such as ACs, fridges, washers, and heaters by 4%, 5%, 8%, and 4%, respectively (Yan et al. 30). The realization of the growth will imply a better performance of the industry regarding ASP where Gree, Haier, and Midea continue with their premiumization of products to meet the growing demand for quality merchandise in the Chinese market.
Currently, regarding industry average, Gree has an ASP of 1.1x for ACs. Concerning fridges, the ASP for Haier and Midea reveals an industry average of 1.2x and 0.8x respectively (Yan et al. 17). In the case of washers, Haier and Midea have an industry average ASP of 1.1x and 0.7x respectively (Yan et al. 17). Moreover, Haier also reports a greater industry average ASP compared to rivals such as Midea and Gree. Therefore, mechanisms such as the premiumization of products in the market combined with effective and efficient positioning account for the impressive performance among competitors.
Amid the increase in volume sales, the upsurge of revenue growth is expected to slow down in 2018. Estimates indicate that the value of industry growth will decrease to 6% in 2018 from 14% recorded in 2017 (Backaler 68). In this concern, it is expected that major players in the industry will realize low double-digit revenue growth in 2018 compared to the mark reached in 2017 (Yan et al. 9). As such Haier, Midea, and Gree need to adopt competitive strategies that will see them realize greater revenue growth in the short and long term. In this respect, the profit margin trend is expected to decrease slightly in the few years among the main competitors, owing to the slow growth anticipated in 2018.
Investment Highlights
The market presents an array of investment opportunities for industry players, including Gree, Midea, and Haier. Gree is anticipated to sustain its continued growth fostered by the premiumization of its merchandise. Notably, the projected rise in the sale of premium air conditioners will enhance the growth and sustainability of the home appliances industry player in China. Additionally, Gree’s strong earnings and its generation of FCF will bolster the company’s dividend growth. Projections reveal that Gree’s dividend will realize a yield of 5.9% in the 2018 financial year (Yan et al. 28). Based on the BCF, Gree is expected to increase the TP from RMB 48 to roughly RMB 55 (Yan et al. 43). In this respect, investing in Gree is expected to yield desirable returns.
Midea boasts of management that is responsible for the company’s strong growth. Nonetheless, the company is expected to experience limited gains from its market share. The gain in market share, thanks to premiumization and the online channel, has not been substantial. Midea is also expected to maintain “Hold” while increasing the TP from RMB 47 to roughly RMB 60 (Yan et al. 1). The growth momentum turnaround since 2016 is identified as a factor that will enhance the re-rating of Haier while possibly triggering its net margin improvements in the future. Additionally, Haier’s strong product portfolio and its rapid online growth will enhance the company’s chances of gaining from premiumization. Moreover, owing to the DCF status, Haier will increase the TP to RMB 23 from RMB 19, a situation that will make it realize a PE of 20.1x and an ex-cash PE of 17.3x in the 2018 financial year (Yan et al. 38).
SWOT Analysis
The Chinese home appliances market is characterized by various strengths, weaknesses, opportunities, and threats. As such, a SWOT analysis will facilitate an understanding of the industry’s situation. As uncovered, the premiumization of products by competitors such as Gree and Midea has made them realize considerable shares of the market, thus bolstering the strength of the industry. The strong management of companies such as Midea also boosts the sector since players continue to realize stable growth (Shen et al. 37). The online penetration of various products is also a strong point that fosters the stability of China’s home appliances industry.
Nonetheless, the limited upsurge in market share gains from the online platform and premium products denotes the weakness of the industry. The growth of the housing industry in China offers the home appliances industry an opportunity to expand. According to Schulz, the increased adoption of the online channel by consumers also presents the industry with opportunities for further growth (43). The main threat to the industry is the slow revenue growth of players, a situation that is expected to occur in the next few years.
Conclusion
The Chinese home appliances sector is on the verge of further expansion, owing to consumer upgrades and speedy online sales growth. These factors imply that major brands such as Gree, Haier, and Midea will realize a considerable market share. However, investors need to consider maintaining their loyalty to Gree and Haier while holding on to Midea. The premiumization of products and strong management approaches to foster the competitiveness of players in the industry present more growth opportunities.
Works Cited
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Cui, Miao, and Shan Pan. “Developing Focal Capabilities for E-commerce Adoption: A Resource Orchestration Perspective.” Information & Management, vol. 52, no. 2, 2015, pp. 200-209.
Schulz, Yvan. “Towards a New Waste Regime? Critical Reflections on China’s Shifting Market for High-Tech Discards.” China Perspectives, no. 3, 2015, pp. 43-50.
Shen, Yali et al. “Current Status of Internet Commerce and Taxation Problem in China.” International Tax Journal, vol. 40, no. 2, 2014, pp. 17-47.
Yan, Lina et al. China White Goods: 2018 Outline: Premiumization is Good News for the Big Brands. HSBC Global Research, 2018.
Zhang, Zhe, and Chenyan Gu. “Effects of Consumer Social Interaction on Trust in Online Group-buying Contexts: An Empirical Study in China.” Journal of Electronic Commerce Research, vol. 16, no. 1, 2015, pp. 1-21.