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Household electric appliance manufacturing, the key players and their vigour to balance costs and returns

The household electric appliance is one of the most important consumer-centric household industry. The rise in the per capita and personal disposable income has led to an increase in the consumption of household appliances and this is forecasted to reach around USD 345 billion by 2020. The revenue generation in the industry from developed economies has, however, seen a dip in the past years owing to the recession. In addition, the major demand drivers in these markets were replacement sales rather than new sales. The industry has begun focusing more on the emerging economies, where the lifestyle and rising disposable income have boosted the demand for household products.

The industry is highly concentrated with approximately 90% of the revenue generation attributed to large players like Whirlpool, Electrolux, Haier, Samsung and LG. They have built a brand loyalty over a long period with huge investments. Thus, it becomes difficult for new entrants to outlast as they are required to invest heavily in R&D, distribution networks and brand building. The leading players have also expanded their market share by acquiring other entities, as represented in the table below. The consolidation trend is expected to continue as these companies want to expand into new geographies and segments. The graph below shows the revenue of leading household appliance companies worldwide in 2015. Whirlpool outperformed with the revenue of USD 20.89 billion, while Panasonic was the second-largest household appliance company with sales that amounted USD 17.05 billion.

*Deal terminated due to antitrust rejection

The cost structure of household appliance manufacturers is primarily dominated by raw material costs. The changes in the market price of steel have a direct influence on the production costs. In 2015, when the steel prices fell, the production costs also decreased for the companies. The below chart portrays the percentage and material cost accounts for a significant portion (almost 55%) of the total costs. Moreover, R&D is another important cost component that determines the product’s ability to capture newer market amidst global competition. Enhancements in design, features and after sales services largely impact customer decision. Fluctuations in exchange rates also have a paramount bearing on the costs.

In 2015, Whirlpool performed better with an EBITDA margin of 8.92%, in comparison with Electrolux and Haier, their EBITDA margins were 5.86% and 5% respectively. Whirlpool with the highest R&D expenditure, posted the highest EBITDA margin, which implies that it has been effectively spending on research to bring down other operating costs in tandem with the continuous improvisation of products. It has also been successful in decreasing its direct cost by c. 12% YoY because of its continuous cost and capacity reduction initiatives. Electrolux has been moving its manufacturing from North America and Western Europe to Asia, Latin America and Mexico in order take the cost advantage. Whirlpool’s selling expenses were similar to that of Electrolux’s at around 10% of revenues. In fact, their depreciation charges were also similar at 3.2%. However, the margins for Electrolux were low due to high restructuring and impairment costs. Electrolux had the urge to expand and achieve cost synergies (through mergers), in accordance with industry trends, which led to the restructuring of its operations. The firm incurred huge expenses (USD 245 million) with the acquisition of the home appliance division of GE, which fell apart due to monopoly concerns. 

Haier’s return on equity stood at 33%, relatively higher than that of Whirlpool’s and Electrolux’s. The major driver on its ROE was high asset turnover ratio, it posted an adequate revenue with a smaller asset base. Intangible assets of Haier accounted for only 1.75% of its total asset base while that of Whirlpool was equivalent to 30%. Its depreciation and amortisation expenses were thus almost negligible at 0.6% of revenues. Haier’s low dependence on debt, indicated by its equity multiplier led to limited interest payments. As a matter of fact, its bank interest income and government subsidies boosted its net margin by 0.23%. Whereas, for whirlpool, interest payments pulled down its net margin by 2.2%. Thus, what worked best for Haier was a judicious use of its asset base to drive revenues.

Therefore, overall, with the rising standard of living and steady urbanisation, the household industry is well balanced to grow at a CAGR of c. 6% by 2020. The ever-improving technology has made appliances more user-friendly and growing affluence of middle-class consumers has prompted a high demand. Companies such as Haier with a smaller market share are challenging the net margins of Whirlpool and Electrolux with its soaring asset turnover. In addition, Haier’s acquisition of GE’s home appliances will pose a direct threat to Whirlpool in the US market. Haier held only 1.1% of the US market and the acquisition appears to be a right move as GE held approximately 14% of the US market share. Haier’s game plan thus seems to be enlarging its market share in the upcoming years through inorganic growth, sustaining it with high cash and cash equivalent reserves (almost double of the Whirlpool). At the same time, it also has a scope to increase its leverage and continue with its expansion spree. New players like Micromax, who have just forayed into the home appliance market will stick to their low-price strategy since their smartphones are already an established name in India, it could be a company to keep an eye on.

 

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