Market Insight

Room air-conditioners will lead growth in China smart connected home appliance market

October 26, 2015

Horse Liu Horse Liu Principal Analyst, Connected Home
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China smart home appliance market outlook

China’s home appliance market is characterized by maturity with lower or negative growth ratio in unit shipment. Domestic bulks of the markets will grow marginally in terms of unit shipments, with a compound annual growth rate (CAGR) of around 3.5% in the coming five years. Replacement is one major market driver within mature markets. Better brand reputations and higher customer loyalty will retain sales growth for appliance makers. Naturally, major appliance makers are increasing focus towards high-end or diversified segments. The smart appliance is one of the important diversified segments for appliance makers because they can provide personalized services based on standard products. Appliance makers can find new opportunities to increase sales revenue and to improve profit margins in smart home appliance market segment.

Domestic smart home appliance market is still at the nascent stage. The developers are defining the products and roadmaps. They design smart appliances through adding Wi-Fi modules to connect existing products to internet. IHS expects this introduction stage to last for five years, until 2020. The penetration ratio of bulk smart appliance segments will be less than 20%. Only one or two smart appliance types will reach higher penetrations with more than 50% by 2020. One possible scenario is that the unit shipments will be more optimistic based on several assumptions, such as low-price strategy, the connection becoming one standard feature, and availability of killer applications. China’s domestic smart home appliance market would enter growth stage in 2018. These emerging market segments will be changeful in the next five years.

 

 

 

 

 

 

 

 

 

 

As an emerging segment, the domestic smart home appliance market will enjoy a higher unit growth ratio due to small unit base in the next five years. IHS forecasts that domestic smart room air-conditioner market will grow to 40.1 million units in 2020, from 3.8 million units in 2015. On the other hand, major product segments, such as smart washing machines and smart refrigerators, will be niche markets. Besides white-goods, IHS also analyzes small appliance market, such as smart rice cookers, microwave ovens and smart water heaters in its report titled ‘Smart Connected Home Appliance Market Report - China - 2015’. These products are all necessities with higher penetration in China.

All appliance makers are very open and flexible to the development of smart home appliance market, mainly because they are exploring new effective business models. Appliance makers can redefine a smart appliance to create new opportunities and new market rule. Thus, they have opportunities to change or strengthen their roles in this emerging segment. The leading appliance makers position smart products as high-end products in order to improve profit margins and brand reputation. The second-tier appliance makers implement low-price strategy in order to quickly build their market share. Appliance makers are also actively exploring new business models and looking for new vertical and horizontal partners. Midea Group (Midea) is one of the leading players  in the domestic smart home appliance market segment.

Besides appliance makers, semiconductor manufacturers and internet-connectivity module manufacturers are also actively developing the smart home appliance market. The leading appliance makers design and manufacture Wi-Fi modules in their own factories. Some medium sized makers purchase Wi-Fi modules in order to speed up time-to-market. Participants within supply-chain want to accelerate development of smart home appliance market segment. The pushing power is strong, but the pulling force is still weak. Some consumers still use smart products as general appliances instead of connecting them to the internet because single connective appliance only provide users with single feature instead of an home automation system. Customers’ needs are decisive factors for development of smart home appliance market. Appliance makers need to transform themselves as to become service providers offering qualified services based on understanding customers’ needs and changing lifestyle. They also need to establish clear and long-term developmental strategies in terms of product positioning, pricing, and marketing.

Makers’ improvements

IHS predicts that China’s domestic room air-conditioner and refrigerator markets will suffer yearly unit decline in 2015. Naturally, bulks of appliance makers will suffer lower or negative sales growth rates in the domestic market during 2015. On the other hand, they have to present investors positive financial statements, so they are actively implementing strategy of cost reduction in order to improve profit performance. Some appliance makers reduce staff to curtail labor cost. For example, the head counts in Gree Electronic Appliances Inc. (Gree) declined to 71,419 by the end of 2014 from 80,189 at December 31, 2012, according to its annual reports. Increasing labor cost is also a challenge for appliance makers. The salaries of common laborers have been increased approximately 2 times in China during past ten years. Several leading makers have more than 100,000 employees. They are upgrading automotive production lines in order to reduce quantity of assembly workers. For example, Haier Group is working toward Robotic manufacturing. The automation production lines also can improve efficiency and quality of products. The appliance makers also controlled total production capacity in order to reduce risks of oversupply. They closed production lines for low-end products and sold some excess facilities including factory buildings and equipment. On the other hand, they are increasing the production capacity for high-end products.

Appliance makers are also optimizing internal organization structures in order to improve efficiency and response speed. Conventionally, China’s appliance makers are hierarchical organizational structures for mass production. One headquarter controlled several or tens sub-companies or factories. The decisions were necessarily slow and could not meet the demands of changeful markets. They are trying to change to flat organizational structures and empowering sub-companies and branch offices with more decision-making powers. Some leaders also established self-managed teams in order to respond quickly to the needs of the special customers and to provide with relative products and services based on corporate platforms. They hope these teams can examine market needs quickly and explore new business models. These teams can define, design, and produce new products independently. The prediction is that these independent teams cannot soil reputations of companies and brands. The flat organizational structure also can save labor costs. The leading appliance makers are trying to adapt to individual needs and rapid changes.

Price wars are eroding profits of appliance makers. The leading appliance makers are endeavoring to improve in-house design capabilities of diversified and high-end products in order to retain sales growth and to earn higher profits. Compared with international brand owners, China’s appliance makers are weaker in design capabilities. Stronger in-house design capabilities will create opportunities for more profits and improve brand reputations. It is one important production base for famous international companies. The leading appliance makers strengthened the strategy of platform in order to create more models based on one platform and to expand product sectors quickly. Currently, broader product sector is one of the necessaries of leaders. In response, the core semiconductor chip suppliers are trying to enhance partner relationships with leading appliance makers. They established union labs or joint ventures to develop new market segments together. They also provide business partners with customization services in order to create new diversified chips as well as to optimize designs of end-products. The business partner relationship can resist risks and maintain growth in uncertain and changeful markets.

The leading appliance makers are actively developing export markets because they understand that domestic markets are slowing down. Conventionally, they implement ODM business models with meager profit margin in export markets. They are trying to promote their own brands in some countries in order to create more profits and to improve brand reputations. It is a long-term strategy to build a brand in a new market. Appliance makers also acquire appliance companies in order to enter new markets quickly. They established new design team and facilities in foreign countries in order to respond quickly to the local needs. In summary, they are improving brands’ reputations, sales channels, design capability, and production capacity in export markets.

Geography
China
Organization
GREE Haier Midea Group
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