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ALI FARHOOMAND
ZHIGANG TAO

CHINA’S HOME APPLIANCES INDUSTRY 2004

The home appliance sector is one of the most market-oriented and sophisticated industries in China. Over the last 10 years, [Exhibit 1], China’s home appliances industry has seen rapid development, and become the largest in the world. The size of the domestic market, including white goods1 and brown goods,2 is estimated at US$24 billion.3 In terms of output, China ranks first in the production of air-conditioners, microwave ovens, refrigerators and washing machines; it also tops the world in manufacturing compressors for both refrigerators and air-conditioners.4 The output of electric fans and other small electrical appliances either has reached or is close to US$12.1 million, also commanding the top position in the world. Fuelled by the continued growth of the domestic market, and the overseas expansion drive of Chinese enterprises, it is estimated that China’s home appliances industry will continue to expand in the subsequent 5 years.

With most sectors in this industry being haunted by signs of overcapacity, China’s home appliances enterprises are focusing more efforts on exploring the overseas markets. In 2004, export destinations comprised an even spread over Europe, Asia and America, with each region accounting for about 30% of total exports [Exhibit 2]. According to official statistics, export value of the industry has scaled above US$10 billion, reaching a record US$12.6 billion [Exhibit 3]. However, Chinese domestic home appliances enterprises are facing increasing obstacles and challenges in their export markets, such as anti-dumping charges and royalties claims, which hamper their overseas l expansion drive. Future development of these companies depends heavily on whether they can find solutions to end this stalemate.

Concurrent with the internationalisation effort of domestic home appliances enterprises, is the localisation of multinational companies in China. Some of them have begun to adopt competitive pricing strategy, a move they used to disdain. Labour costs in China remain relatively low, mainly due to the abundance of manpower in its vast underdeveloped inland areas. More home appliances multinationals are seeking to relocate their facilities to China. Some have also started setting up sourcing centres in China in an attempt to enhance competitiveness by taking advantage of low-cost components made in the country. Also, liberalisation of the industry subsequent to China’s WTO accession enables a level playing field for both, multinational and domestic companies.

The Market

As the largest home appliances market in the world, Chinese consumers buy about 11m refrigerators, 12.5m washing machines, 20m home air-conditioners, 30m television (TV) sets and 10m microwave ovens(2003).5 [See Exhibit 3 for a summary of statistics on China’s home appliances industry]

China’s home appliances market is two-tiered, comprising the urban and rural areas. Among China’s 1.3 billion population, 0.8 billion live in rural areas. Income disparity between the urban and rural population is huge [Exhibit 4]. The differences in income levels and living conditions mean that consumers’ demand for home appliances in these two market segments vary markedly in terms of price, technology and functions.

Urban consumers, who bought appliances in the late 1990s, are now upgrading to new products. Also, better living conditions have led to increased spending on high-end home appliances. Urban households now have more sophisticated demands for new products. According to a surveyconducted on 160,000 households across 50 cities in China in the first half of 2004, consumers’ top concerns were technology and quality (85.1%), while concern for price dropped to 77.1%, which was still the over-riding factor in their purchase of home appliances in 2000 (83.4%).6

In rural areas, owing to income constraints, electricity consumption and poor living conditions, consumers are more concerned about price and durability. The Chinese government has been improving the living conditions in rural areas, which helps to boost home appliance purchase. According to the National Statistics Bureau, rural per capita cash income in the first quarter of 2004 was US$101, an increase of US$12 over last year, representing a 12.2% rise.7 Also, electricity tariffs in rural areas used to be much higher than that in urban areas. The government has been implementing reforms in electricity supply, in an effort to lower electricity costs in rural areas. As a result, the rural population is now inclined to purchase more home appliances.

Consumption of home appliances between rural and urban markets is at a ratio of 20 to 80. According to statistics published by China’s “State Survey for the Home Appliances Industry”, consumption of home appliances among the rural population has been growing at a rate of 15% to 20% in recent years, while that for the urban population remained stable at 5%.8 [Exhibit 5] As growth in the urban market slows down and reaches saturation, the new growth cycle, mostly driven by the rural market, is likely to continue until 2008.
1 A term used to describe large appliances such as refrigerators, washers, and dryers. The terminology was derived from the standard white color of these appliances that existed until recent years.
2 Computers, televisions, radios and other home electronics. Named during the days when many televisions and radios had wood or fake wood cabinets.
3 US$1=RMB 8.27 on November 11th 2004; “Guangdong’s Home Appliance Market”, Nanfang Daily, March 12th 2004 [www document] http://www.nanfangdaily.com.cn/southnews/tszk/nfdsb/jdzk/200403120641.asp (accessed November 22nd 2004).
4, 5 MII Market Analysis and Forecast Report, CCID Datasource Co., Ltd, June 23, 2004.
6 “Home Appliance Products Entering High Quality Consumption Period” [www document] http://qsy.eastday.com/eastday/2004qsy/node7346/userobject1ai127557.html (accessed September 18th , 2004).
7 National Bureau of Statistics of China, statistics for which year, name of report?
8 National Home Appliance Research Bureau, statistics for which year, name of report?
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