Emerging markets are the next frontier for consumer appliances
The worldwide household appliances market is projected to reach $760 billions by 2025. In particular, growth in emerging markets is accelerating due to rapid urbanization and rise of the middle income group. This is in contrast to the moderating growth in global consumer appliances sales as growth in developed and mature markets stagnate.
The current low product penetration rate in emerging markets relative to developed economies indicates the enormous future growth potential in the emerging economies. This is especially since the demand for consumer appliances is predicated on the availability of basic amenities and infrastructure such as electric. For instance, only with availability of clean water will washing machines be sought after. Likewise, without stable and uninterrupted electricity supply, a refrigerator or an air-conditioner is nothing but a white elephant. As these basic infrastructure continues to improve in these emerging economies, demand for electrical appliances will grow in tandem.
Emerging markets has massive potential to drive future demand
The rapid urbanization, along with a rising middle class in emerging market are driving demand in these countries.
As illustrated from the graph below, the global revenue of smart appliances are increasing. By 2020, Asia Pacific countries, North America and Western Europe are projected to have more than 30% of connected appliance in the regional markets.
Although smart appliances may first appear in developed markets, emerging markets' first-time users are also likely to take up the consumption volume due to the huge potential demands and their increasing purchasing power. Therefore, Asia Pacific markets such as China and Indonesia are likely to have a mixed demand for both traditional and connected appliances.
While product replacements and upgrades are the key drivers for smart appliances sales in developed markets, they take a backseat in emerging markets, replaced by changing demographics in the driver's seat.
Production plants are relocating to emerging markets with lower cost
As a result, many traditional appliances companies are relocating their production plants to emerging markets. Among the top 15 countries with the largest production, China, Thailand, Poland, Indonesia, Turkey and Pakistan are projected to take up more productions.
Countries with lower labour and electricity costs are likely to see more relocations as home appliance industry is moderately labour intensive. Depending on the specific products, consumer appliance ranks between 20 - 30th in a list of 46 industries in terms of labour intensity.
Additionally, energy cost is a key cost component for consumer appliances production. As such, areas with uninterrupted power supply and low electricity prices are major factors of consideration during site selection. By evaluating various markets from the labour and electricity cost perspective, Indonesia and Vietnam stood out from the rest.
Therefore, this relocation trend is likely to continue due to the increased attractiveness of the emerging markets, particularly in Southeast Asia.
Within the past half decade, we've witnessed companies adopt their strategies due to the evolving demand and supply of the industry. However, there are some common strategies employed by bigger players and key industry trends to note.
Emergence of connected and smart appliances will drive demand for sensors, processors, touch-screens, chips etc.
Many companies are likely to integrate further into the value chain to increase their competitiveness. With the emergence of Internet of Things (IOT), the home appliances companies are likely to seek for horizontal or vertical integration, partnership and alliance, or possibly outsourcing relations with smart components producers.
With that, major players are looking to acquire 'smart' capabilities to boost their growth. For example, in September 2018, Foxconn, the Taiwan-based iPhone supplier, acquired Belkin which is an iPhone accessory maker that also owns Linksys and Wemo.
In addition, in order to lower the transaction costs and mediate risks from outsourcing, major appliance companies that have mastered the key technology are likely to further integrate into the value chain.
Technology convergence will lead to convergence of competition.
As the 'smart' market becomes more popular, consumers' data also becomes an important component generated from the consumption of these appliances. This consumption data provides valuable consumer insights for manufacturers, yet at the same time, consumers require data security and privacy.
More companies are increasingly tapping into areas like IT, automation and even healthcare either through M&A or partnerships. In April 2018, American Water Works Company, Inc. (NYSE: AWK), the large publicly traded U.S. water and wastewater utility company, announced its acquisition of Pivotal Home Solutions, which offers coverage for a wide variety of home appliances, heating and cooling systems, and lines in and around homes. This acquisition indicates that utility and infrastructure companies may be equally interested in tapping into the appliance industry.
New Production Hubs
Southeast Asian countries are seeing more tractions from manufacturers that are shifting over from China due to rising costs.
In recent years, China’s home appliance market has reached a plateau and are seeking further breakthrough. Faced with a rise in labour and raw material cost, China was forced to raise the prices of consumer appliances.
Consequently, Southeast Asian countries (Indonesia and Vietnam in particular) are winning manufacturers over from China due to multiple reasons. With lower labour cost in these countries, cost of production is greatly reduced. In addition, these countries have rising domestic consumption which drives the demand for consumer appliances. Finally, the infrastructure and business environment are improving which paves the way for future investments.
Within the past few years, many major manufacturing companies have relocated. In 2019, TCL, the top 3 global TV brand and leading consumer electronics company have located its new manufacturing base in Bing Duong, Vietnam. Besides that, the South Korean giant, Samsung, also officially closed down all their smartphone manufacturing plants in China and shifted its production to India and Vietnam in the same year.
Besides, we see trends of companies transferring production line to emerging economies that are more price sensitive and have lower buyers sophistication.
This will accelerate the trend of industrial upgrading in China and the migration of the home appliances industry to Southeast Asia.
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