OPINION

Appliance Chain Effect

Costs inflation and withdrawal of policy incentives are casting an ominous shadow over China's home appliance market, raising worries over the survival of small firms.

In June 2009, the Chinese Government initiated a nationwide program to stimulate domestic demand and withstand the ripple effect of the financial crisis. Under the program, consumers selling their old appliances to designated recycling companies are eligible for a 10-percent discount on the purchase of new appliances.

The powerful incentives effectively released the potential of China's rural consumer market, and laid a solid floor for growth despite the slowing economy. More broadly, they played a key role in invigorating the appliance market.

The favorable policies brought numerous potential buyers onto the table, and paved the way for the entire industry to move up the value chain and sharpen its competitiveness. Related businesses, such as raw material and parts suppliers, also burst with vitality.

While Western markets suffered setbacks, China's appliance industry held up well, providing a stabilizing force for the world's receding electronics sector.

The biggest beneficiaries were the large manufacturers that took advantage of the favorable policies to expand their market shares and strengthen their resilience to economic downturns.

The leading companies experienced a sales boom in small cities and rural areas. As a result, they gained an opportunity to strengthen marketing networks and aftersale services in those regions. Many of them established a number of franchised stores and maintenance stations in those newly explored markets.

They were more able to innovate with their business model, such as improving products to meet customer demands and forge closer tie-ups with component suppliers. Those improvements enabled them to save production costs and reduce vulnerability to market fluctuations.

But the trade-in program was stopped at the end of 2011. Meanwhile, the scheme to subsidize rural buyers of home appliances is also expected to come to an end this year.

Those small companies are expected to receive a heavy blow from the phase-out of the favorable policies and even face the risk of a prolonged downturn. The far-reaching implication may be felt in the following two ways.

First, many small brands will be marginalized or even forced out of market due to withering demands. Their networks, which dramatically expanded during the boom times, will become a heavy burden. Meanwhile, some foreign brands may also face shrinking market shares.

Second, vicious price wars may reoccur in domestic markets. Due to severe overcapacity and piling inventory, many firms would have to significantly lower prices to make ends meet.

The European debt crisis has showed no signs of abating, adding fuel to concerns over the prospects of the global appliance sector.

In order to find way out of the gloom, Chinese appliance companies are supposed to take effective measures to boost profitability. They must shift their business model to focus on creation of new demands.

In addition, it is necessary to enhance technological progress and product innovation. Only innovative services and products can bring more added value. n

This is an edited excerpt of an article in Manager, a monthly magazine published in Shenzhen, Guangdong Province

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