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| Electronics Industry in China May Benefit from Higher Iron Ore Price |
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International iron ore price will at least go up another 65% this year. The resultant raw materials price increase has given Chinese home electronics manufacturers an opportunity to announce retail price hikes. As a result, home electronic brands have all spoken out of their intention to lift prices.
Loud but inactivity
In retail stores of Wuhan City, bellwether Haier-branded products are still sold at similar prices to their pre-Chinese New Year level, so are other Chinese brands. Some foreign brands, such as Siemens, do lift their prices by 3-8%. "Electronics brands are highly substitutable, which renders limited consumer loyalty. The price-increasing signals sent out by manufacturers are more for testing competitors and consumers, but none wants to be the first adopter," said Dr Li Yanyan, a marketing expert from Renmin University of China. "Only a handful of categories and models will see price increases. And the price-hike activity itself also contains elements of promotion, sensationalization and other strategic considerations."
Some electronic brands are now using this opportunity to push their products in downstream distribution channels. For example, Haier announced in mid-February that it would lift prices of fridges and washing machines by 7%. But at the same time, it also announced that distributors which take delivery of sufficient quantity before a deadline could receive volume discounts, thus transferring some of the risks and cost pressure to distributors. |
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Some manufacturers quietly lifted their prices in low seasons, so that they can launch "discount campaigns" in high seasons. It is understood that many air-conditioning companies had already lifted their prices in February 2008, in order to leave enough margins for price cuts when it comes to the high season of March and April.
Push for higher prices by foreign brands
Premium brands, mostly foreign brands, are not only the leaders of price hikes, but also the biggest beneficiaries. In a rising-price environment, it is the foreign brands which command premium-positioning and high brand loyalty that stand out, instead of those Chinese brands that account for the majority of market shares. Consumers of premium products are less sensitive to prices, and they are willing to pay for the "quality confidence" of foreign brands.
Although many foreign electronic brands use China as their global production base, their market shares in China are actually not that high. The timely price increases by foreign brands are not only in line with the general up-marketing consumption trend in China, but also entrenched their premium market positioning by lifting profit margins and brand images. For example, Swedish Electrolux has been building up its premium image in China by leading price-hikes in recent years. And Korean LG has also lifted the prices of low and middle-end products, in order to entice consumers to purchase its premium-end products which have better performance/price ratio.
Industry consolidation via higher prices
Price-increasing activities by manufacturers are also for industry consolidation reasons. The increasing brand concentration in China's electronics industry has given large brands more bargaining power when facing large retail chains, hence the possibility to lift up the prices. The chronic price wars and rising cost pressure in China's electronics industry have led to the exiting of small players and mergers and acquisitions between large players, resulting in a more and more concentrated industry.
38 washing machine brands had disappeared in 2007, accounting for 41% of total brand numbers. And the Chinese air-conditioning market also became more concentrated in 2007, with key players such as Gree, Midea and Haier getting more market shares.
Retail price increases have improved the profitability of the Chinese electronics industry and pushed for optimisation of product mix, helping the industry enter a benign development path. After several rounds of price increases, electronics price growth has now exceeded their cost growth, leading to obvious improvement in industry profitability. In November 2007, listed electronics producers such as Gree and Midea had all upgraded their annual profit forecast.
Improvement in profitability also promoted higher investments in technological R&D, resulting in higher-valued-added products. In previous years, "conceptual marketing" was popular among Chinese electronics companies, but now they have added more tangible technological elements to their products. And the proportion of premium products in the market has also increased.
More price increases ahead
Statistics revealed that steel materials account for 20-30% of electronic companies' variable cost base in China. Without passing onto downstream channels, a 20% increase in steel price may cut 2 percentage points off a company's net profit margin, which is a significant number for the Chinese electronic industry given their low profit margins. As international iron ore prices will increase at least 65% in 2008, there is a good possibility that price for electronics in China will go up significantly.
From a development perspective, price increase or price decrease alone doesn't really matter, what worries the industry is the endless price wars. While large players have successfully achieved higher industry concentration through previous price wars, they should now leverage the current rising-price environment to collectively reach an appropriate profit margin, in order to keep away from any vicious price wars.
Leading electronics brands should also pay attention to the tune of the market, particularly consumer feedback and competitor reactions. Some second tier brands may even opt for price wars to steal market shares from their larger rivals.
Chinese electronics companies should use this price-increasing opportunity to upmarket their brands and continue their production transfer to the lower-cost mid-western provinces. They should also accelerate development of alternative materials such as new plastics, in order to reduce production costs and cope with competition from their foreign rivals.
Produced by China Business Intelligence; Source: www.chinairn.com
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