China Appliances Target Philips Market as Incomes Double: Retail

China’s demand for cheap home appliances is waning as the government phases out subsidies. In response, domestic companies are entering Royal Philips Electronics NV (PHIA)’s market with high-end devices, including a red washing machine that sterilizes shoes and can cost eight months of a family’s disposable income.

Export of the fancy appliances, including three-door refrigerators, may follow if the products are successful and will mean increased Chinese competition in the expensive end of the appliance world.

Sales for white goods may drop by as much as 10 percent this year, Capital Securities Corp. analyst James Hu estimates. The slowdown is boosting competition in China’s $77 billion appliance market as local brands that traditionally made cheaper products use premium lines to bolster profits.

Manufacturers are marketing swankier offerings, including Qingdao Haier Co. (600690)’s 13,999 yuan ($2,219) red washing machine, to attract China’s increasingly affluent consumers. That may help them draw local shoppers, and eventually global ones, from overseas competitors such as Philips and Siemens AG (SIE).

“Some domestic brands have shown strong ability to develop new, better products,” said Chen Jun, a Beijing-based analyst at Boxin Capital. “It’s a perfect time to upgrade, as they’ve made a lot of money from the favorable policies and aren’t worried too much about cash.”

A government program that gave shoppers as much as 400 yuan to subsidize purchases of new home appliances helped drive sales the past two years. The incentives, part of government moves to boost domestic consumption, ended Dec. 31.

That has made premier products more important for Chinese appliance makers, which traditionally focused on cheaper offerings as foreign competitors sold more expensive items.

Chinese consumers have more to spend on discretionary items. Per-capita disposable income for households in towns and cities almost doubled to 19,109 yuan in 2010 from 2005.

Monthly disposable income of urban households in China (CNGDPYOY) averaged about 1,818 yuan last year, according to data from the National Bureau of Statistics.

“Many Chinese consumers who have higher purchasing power used to prefer foreign brands because they think they’ve got reliable quality,” said Chen. “Things have changed recently. Some domestic brands have shown strong ability to develop new products.”

Qingdao Haier’s China sales more than doubled in the two years through 2010 to 54 billion yuan. China sales at air- conditioner maker Gree Electric Appliances Inc. (000651) during the same period grew 57 percent to 47 billion yuan.

China’s appliance industry is expected to grow to 862.3 billion yuan in 2016 from 485.8 billion yuan in 2011, according to estimates by London-based researcher Euromonitor International.

The business environment for the appliance industry “isn’t very promising” this year, Zhang Tieyan, a spokeswoman for Haier Group, said in a response by e-mail. The closely held appliance maker, the biggest shareholder of Qingdao Haier, will focus on innovation and push for market share through premium products such as frost-free, three-door refrigerators, she said.

Qingdao Haier’s 13,999 yuan “Casarte Duplex Front-loaded Washer” has a traditional washing machine and a sterilization section below, where shoes can be disinfected. At the Shanghai store, the red machine with a touch screen was four times costlier than a more basic, white Siemens machine.

The line offers “high technology for an elegant lifestyle,” Zhang said.

“Business is quieter for low-end products, as most people who want to buy have done so,” said Gu Mingfei, a Haier sales representative at a Shanghai store. “For the high end, a few hundred yuan of subsidy doesn’t matter to buyers. They would pay more attention to its quality, design.”

The bigger ambitions of Chinese brands will mean more competition for foreign brands such as Philips locally and eventually overseas.

China’s GD Midea Holding Co. (000527) has a 19 percent market share in China’s consumer appliance industry and Haier Group has 8.1 percent, according to Euromonitor. Philips is third with 6 percent share.

Chinese companies export mainly low-end products, said Wang Nianchun, a Shenzhen-based analyst at Guosen Securities Co Ltd.. “It will be a gradual process for them to upgrade their offerings to foreign consumers,” she said. “It’s a direction they will have to take.”

‘Competitive Position’

Philips didn’t comment, saying it is in a “quiet period” before reporting earnings.

Nicole Neuer, a spokeswoman for BSH Bosch und Siemens Hausgeräte GmbH in Munich, said China, where it mostly sells higher-end products, is one of its biggest markets globally. The company is a joint venture between Siemens and Robert Bosch GmbH that sells home appliances globally.

“We expect single-digit percentage revenue growth in China this year and expect to gain further market share in the country,” Neuer said. “Our competitive position is excellent.”

Even as higher-end lines offer a potential boost, local companies still face weakening economic growth. The higher margins from more expensive products “isn’t enough to offset declining sales,” said Chen. China’s economic growth is poised to weaken to 8.5 percent this year from about 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey.

Air-conditioner sales are expected to grow 5 percent this year after surging about 18 percent in 2011, estimates Zhu Zheng, a Shanghai-based analyst at Ping An Securities. Refrigerator sales may be little changed after growing 14 percent last year and washing machine sales growth may slow to 4 percent from 9 percent, he said.

Qingdao Haier shares lost 37 percent last year, compared with a 22 percent drop for the benchmark Shanghai Composite Index. Gree Electric lost 4.6 percent in Shanghai trading last year.

Local brands may have an edge. “Foreign brands will find it hard to compete with domestic brands, especially in central and western areas, because they don’t enjoy advantages on costs or distribution network,” said Wang.

The government is studying policies to encourage spending on energy-saving products, online shopping and tourism, Commerce Minister Chen Deming said Jan 5.

China could introduce new policies that favor only certain appliance categories, such as energy-saving products, later this year, said Hu. Some appliance sales in rural areas continue to be subsidized.

Global and local appliance makers still have room to grow in China. There were about 42 air conditioners and 58 refrigerators in every 100 households last year, according to Ray Li, a Shanghai-based analyst at Euromonitor International.

To contact Bloomberg News staff for this story: Michael Wei in Shanghai at mwei13@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Stephanie Wong at swong139@bloomberg.net