Home appliances are one of the most competitive industries in China, benefiting from the country’s rapid urbanization and rising household disposable income coupled with the government’s subsidy scheme.  With a market size of 914 billion yuan (US$131 billion) by revenue in 2019, the sector saw a compound annual growth rate of 3.7% over 2014-2019.

The market has seen a proliferation of small and medium-scale players, primarily because of the low capex and investment requirements. Most companies in the sector also have low financial leverage due to strong cash flow generation.

However, key industry players will seek additional growth through mergers & acquisitions, thereby increasing external funding needs and leverage, Fitch Ratings said in a special report. Major targets include underperforming domestic and international peers for scale expansion and those in sub-sectors for horizontal integration.

Companies making and selling brown goods (light electronic durables such as TVs, radios, and computers) have the highest financial leverage due to their high external funding needs, and are likely to see more M&As amid stalling sector growth. On the other hand, kitchen and lifestyle appliance companies’ balance sheets are largely unleveraged as sector consolidation is yet to start.

Recent deals have generally been financed through a combination of internal cash and bank loans, the ratings agency says, adding that the amount of bond issues has been low.

China’s home appliance market can be segregated into four segments: white goods (air-conditioners, washing machines and refrigerators), which had a market share of 45% in 2019; brown goods (TVs), 16%; kitchen appliances (range hoods, stove, ovens, etc.), 15%; and lifestyle or small appliances (rice cookers, air purifiers, microwaves, etc), 24%.  Air-conditioners and TVs are the two largest product categories with sales of 191 billion yuan and 128 billion yuan, respectively, in 2019.

Performance has been varied, Fitch says. Traditional home appliances, such as TVs and refrigerators, are approaching saturation. TV sales, in particular, dropped by 10.6% in 2019 as consumers increased their usage of mobile phones, tablets and PCs.  Kitchen and lifestyle appliances, despite their small market sizes, have experienced faster growth due to lower household penetration.

According to the report, property sales are an important cyclical factor in the demand for new home appliances. China’s new home sales growth is expected to trend down gradually over the next three to five years. Kitchen appliance sales are highly correlated with new home sales and typically lag the latter by one to two quarters on average. Sales of washing machines and refrigerators are less sensitive to property market volatility, and rely more on replacement demand with a typical cycle spanning seven to 10 years.

Covid-19 impact

Since the start of the year, the industry has been significantly affected by the coronavirus pandemic. The impact has been felt the most in the first quarter, particularly in the case of large home appliances, as lockdowns halted installation services.  

But sales recovered in the second quarter as most regions emerged from lockdown measures.  Air-conditioners and refrigerators saw sales grow 13.1% and 9.0% respectively in June from a year ago, compared with -41.5% and -35.6% in February, while the decline in sales of washing machines slowed to -6.2% from -48.6%.  Fitch expects a rise in replacement demand as consumers spend more time at home, accelerated by price discounts and government subsidies.

Covid-19 is also pushing up sales through e-commerce channels as consumers limit offline shopping to avoid infection, says the report. Online sales of home appliances were up 7.2% in the first half from a year ago, compared with a -29.3% growth for offline sales.

Lifestyle appliances have the highest share of online sales as these products are often small-ticket items and easy to transport through express delivery. Large home appliances rely more on a traditional sell-through model despite increasing e-commerce exposure.

E-commerce sales of Chinese home appliances accounted for 38.7% of overall sales in 2019, while sales through offline channels were largely saturated, Fitch says, adding that e-commerce also has better access to consumers in lower-tier cities.

According to Fitch, Midea Group has made the best efforts in expanding its e-tailing business, which accounted for 43% of its overall sales in the first quarter, up 10 percentage points from a year ago.

The rise of the Internet of Things (IoT) and online brands may pose some threats to conventional home appliance companies, especially TV makers. Smart home appliances from leading loT brand Xiaomi are competitive on pricing and are internet-connected through mobile apps, which have greatly improved user experience and stickiness. The rise of online shopping should help IoT brands to increase their penetration, but most IoT brands bear the risk of inadequate product control as they outsource production, says Fitch.

Also, the lean margin strategy of online brands may leave limited room for investment in R&D without external capital support.