China’s government introduced ‘The Implementation Scheme of Energy-efficiency Leader System’ on December 31, 2014. Seven ministries and commissions including National Development and Reform Commission (NDRC), Ministry of Finance (MoF), and Ministry of Industry and Information Technology (MIIT), will lead and manage this ‘leader’ system. The government wants to increase the level of energy-efficiency amongst high energy-consuming products and equipment, high energy-consuming industries and public institutions. It also hopes to establish a long-term mechanism to promote energy-saving and emission-reduction based on this scheme. This scheme will raise current standards of energy-efficiency through incentive programs and industry benchmarks.
The energy-consuming products in this scheme include inverterised range of air conditioners, refrigerators, front- loading washing machines, and also flat panel TVs. This scheme reminded many of the subsidy programs which were implemented by China government between 2008 and 2011 within the domestic white-goods market. The government had been providing domestic consumers with allowances under 14% of total retail prices in home appliance market since the fourth quarter of 2008. These programs created a strong expansion of white-goods market between 2009 and 2011. Then, this market entered an adjustment period in 2012 as allowance programs concluded at the beginning of 2012. Post this, the government implemented new energy-saving subsidy program in domestic market in June 2012, which did not boost demand to similar levels as it provided fewer subsidies to medium and high-end products. This resulted in China domestic white-goods market registering a flat or negative unit growth in 2012.
Figure: China domestic white-goods unit shipments by appliance type, 2008-2013
According to the current scheme, the energy-efficiency level of ‘leader’ products must be higher than the earlier level of energy-efficiency of China Energy Label. These ‘leader’ products also have the highest level of energy-efficiency within the same product types. This means that the ‘leaders’ must have strong design capability to create the best performance products. This scheme further recommends the energy-saving renovation projects that were supported by central finance, to use these ‘leader’ products. The government also encourages qualified enterprises to use ‘leader’ label and China Energy Label for branding, promotional and commercial purposes. With this incentive scheme, the government wants to encourage leaders to develop, produce, and promote the highest level of energy-efficient products, but does not announce to provide subsidy to leaders. One possible scenario is that the government will introduce the highest energy-efficiency products of leaders on the state-owned media, such as official websites, professional periodicals, and television specials, in order to support makers’ sales promotions. The government may also give leaders tiny awards instead of subsidy per unit. The government wants to guide the development of energy-saving products, not to directly interference markets.
Figure: Energy-efficiency ‘Leader’ label
(Resource: Website of MIIT)
Figure: China Energy Label with energy-efficiency ‘leader’
(Resource: Website of MIIT)
As we understand, this scheme would not boost the domestic white-goods market if the China government does not provide any kind of allowances or subsidies. Domestic white-goods market is characterized by lower or negative growth ratio in terms of unit shipments. With high penetration rates of white-goods attained in urban areas, this market is dependent on product replacements. Consumers buy new generation of technology products to replace older appliances providing basic functions. As a result, high-end white-goods market shows rapid growth potential. New couples purchasing for new families, new homes is another market driver for high-end products. Younger consumers like to acquire new products, with new functional benefits as they establish new lifestyles and habits. Compared with their parents’ generation, they pay more money on home appliances in order to relish a more comfortable life. Thus, the high-end segments will continue to grow more rapidly than total white-goods market. As appliance makers are finding it difficult to expand their unit share within the mature markets, the focus is thus driven towards investing more resources to produce and market high-end products, pushing up average selling prices (ASPs), sales revenue and therefore profit margins. This scheme would thus improve development of high-end white-goods products such as inverterised range of room air-conditioners, front-loading washing machines and large capacity refrigerators.
Figure: China domestic white-goods unit shipment forecast by appliance type, 2015-2019
China domestic white-goods market structure appears stable. The leading appliance makers had adapted to the market environment without any allowance or subsidy programs. Some of them did not expect the government to implement new subsidy program because they could sustain healthy growth in sales revenue and profits by themselves. They have an indifferent approach towards this scheme. On the other hand, some small-sized appliance makers have and will be squeezed out of market due to net losses during the past three years. So, the top makers will continue to dominate the China domestic white-goods market in the next five years as they gain to establish integrated advantages of being a famous brand, with stronger in-house design capabilities, better sales channels offering wide range of products catering to wider consumer segments. Based on IHS estimates reported within its ‘Home Appliances Intelligence Service’ top two appliance makers contributed to more than 50% unit share across three major home appliance types in 2014, comprising of room air-conditioners, washing machines and refrigerators.
Figure: China domestic white-goods market share by volumes, 2014
This scheme will further encourage leading appliance makers to invest more resource towards development of higher energy-efficiency products. Whereas, small sized appliance makers would face difficulty in developing high-end, energy-efficient products due to weaker design capabilities and limited material resource. The leading makers have been - implementing vertical integration strategy to control key components market, such as motors and compressors, to cut down material costs. Thus would further boost the market perception and increase the brand reputation of these leading appliance companies as they market high-end, high performance energy-efficient appliances. To summarise, this scheme would further increase the market dominance of the leading domestic white-goods makers within the high-end segment. And this would mean that these leading domestic white-goods makers will continue to adopt this vertical integration strategy, as have being implementing for more than 10 years.