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Economy

China's electronics makers lose steam as market matures

Earnings dip as efforts to diversify are slow to bear fruit

Hisense LCD televisions on display at an appliance store in Guangzhou. (Photo by Takashi Kawakami)
Hisense LCD televisions on display at an appliance store in Guangzhou. (Photo by Takashi Kawakami)

GUANGZHOU -- Chinese manufacturers of consumer electronics are in a losing battle against a maturing domestic market, despite forward-looking efforts to shore up earnings by expanding to other sectors.

This comes as a shock to companies that have ridden China's economic boom to riches. But the newfound prosperity among consumers has brought nearly universal household ownership of appliances over the past decade. The challenge for manufacturers now is getting customers to come back when buying replacements.

At a sales floor in Guangzhou, 55-inch flat-screen TVs made by TCL are being offered at a 30% discount of 8,000 yuan ($1,170). "If we don't cut prices, customers won't come," said a salesperson.

A similar observation was given by a sales clerk in charge of Haier appliances: "There are fewer customers compared to last year."

Business is slow due to the overall shrinkage of China's consumer electronic market. During the July-September quarter, sales fell 5.6% from a year ago, industry figures show. This is a troubling departure from the 11.9% annual increase for all of last year, and the 9.7% gain for the first half of this year.

Television sales slumped 18.3%, while refrigerators and washing machines dipped 2.2%. Much of the downturn is due to a cooling of real estate sales, as well as the effects of price wars, according to a trade group.

At the same time, domestic appliance manufacturers struggled during the July-September quarter. Sales campaigns and other price-competitive offerings have undermined earnings, especially those generated by TVs.

At Hisense, China's biggest TV manufacturer, the net quarterly profit at business unit Qingdao Hisense Electronics plummeted 90% from a year earlier. Industry peer Konka Group suffered a 10% profit decline, while TCL and Sichuan Changhong Electric underperformed in year-by-year sales.

Midea, the country's largest producer of consumer electronics, eked out a mere 1% gain in June-September sales. For a company used to turning in double-digit sales growth on an annual basis, this amounts to a sharp deceleration. Sales of washing machines took a hit in particular.

One company that managed to weather the storm is Gree Electric Appliances, China's market leader in air conditioners. Thanks to the strength of its brand, group sales jumped 38% during the three months through September.

Still, China's saturation rate for air conditioners stood at 93.5% last year, data from Euromonitor shows. That compares to 52% in 2007. Refrigerator penetration skyrocketed to 94.1% from 60.8% within the same span. The growth is attributed to poorer households in the interior getting access to consumer electronics.

During Singles Day on Nov. 11, China's answer to Cyber Monday, sales of consumer electronics rose only 11% from last year, despite sales jumping 24% overall. The days when discounting drew customers have passed for household appliances.

It is not that the industry failed to anticipate the market maturation. Starting around 2015, companies diversified their operations through buyouts and tie-ups. The goal was to bring in more technologies and brands that would contribute to profit, but those efforts are slow to bear fruit.

Midea, for example, purchased German industrial robotics company Kuka in 2017 in a bid to capitalize on China's brisk demand for factory robots. But Till Reuter, Kuka's CEO, made the abrupt announcement last week that he will leave the company this month.

Midea and Kuka formed a Chinese joint venture in March with the aim of leveling up production of robots. Although the official reason for Reuter's departure has not been disclosed, many ascribe it to irreconcilable differences in operational strategy.

Like other corporate groups, Gree has diversified to maintain earnings, but that strategy appears to have gone off track. In 2016, Gree began its smartphone business in earnest, then partnered with electric vehicle maker Zhuhai Yinlong New Energy.

But Gree failed to boost name recognition among smartphone consumers. The tie-up with Yinlong is still at the stage where investments are prioritized, and the venture has yet to contribute to earnings.

This August, Gree established a company dedicated to developing semiconductors. But its new businesses run the gamut from smartphones to electric vehicles, seemingly in attempt to chase after whatever is hot in the electronics industry. No consistent strategy is to be seen.

TCL, too, has positioned smartphones as a core of its diversified approach. Alcatel, the French brand it acquired, performed strongly around 2015, leading TCL to buy rights to the Blackberry brand in 2016.

But TCL's telecommunications equipment segment, which includes smartphones, has undershot year-earlier delivery numbers every quarter since April-June 2016. TCL has not narrowed the brand power and technological gap that exists with Apple, China's Huawei Technologies and other big players.

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