China Consumer

Lenovo’s pastoral idyll

Rural appliances scheme boosted domestic demand. Why end it?

Lenovo’s pastoral idyll

Using his head

All good things eventually come to an end, and China’s home appliance subsidy programme – aimed at rural consumers – is no different.

Back in December 2007, Beijing unveiled the Home Appliances to the Countryside scheme, which offered a 13% discount to rural residents on the listed price of refrigerators, televisions, washing machines, computers, air conditioners, mobile phones, water heaters, microwave ovens and traditional ovens.

The idea was to get China’s 737 million rural consumers spending – and shop they did. Between 2007 and August of this year, rural residents spent a total of Rmb405 billion ($63 billion) on 180 million household appliance units under the programme. Refrigerator, television and air conditioner sales accounted for 48.3% of home appliances sold, says the Ministry of Commerce.

Thanks to the increase in domestic consumption, appliance makers like Haier and Hisense found new customers for their products. The scheme also helped lesser-known brands break into an untapped market, says International Finance News.

Alas, the subsidy scheme is due to be withdrawn by the end of this year in Shandong, Henan and Sichuan province. The programme officially comes to an end nationwide by early 2013.

Analysts say the move is part of the government’s ongoing battle against inflation. “The subsidies were first released to boost the economy amidst the global financial crisis. The idea was to promote domestic consumption to offset the slump in exports. But China’s biggest headache now is not growth but how to rein in inflation, so it’s no surprise that they are now pulling back on the subsidies,” says Lu Renbo, deputy-secretary at China Electronic Chamber of Commerce.

Industry observers now warn that the rural market will likely see a decline in sales and that excess capacity may lead to price wars among manufacturers. Large appliance makers are likely to survive. But smaller operators may find it tougher. Chengdu Evening News reckons that many small producers have derived more than half of their sales via the subsidy programme.

“This is going to have an adverse impact on small- and medium-sized appliance producers. Not only do they have to battle with rising costs, without the support of the government, they now find themselves in much tougher competition. Some might be eliminated as a result,” Wen Jianping, an analyst at Orville Consulting told CBN.

Others caution that pulling back on the subsidies is a mistake at a time when the economy is showing signs of slowing. But there are also signs that Chinese outside the major cities have more cash to spend. Rural income growth reached its highest rate in 2010, surpassing the growth of urban disposable income, says the Financial Times. Last year, per capita net income rose 10.9% to Rmb5,919 ($898) in the countryside, mostly as a result of government policies favouring agricultural production.

Other reasons for growth in rural consumption include an increase in public expenditure on infrastructure projects, making it easier for companies to distribute their products. New housing construction in rural areas has also surged, which means that the number of homes with running water and power – needed to run all those appliances – has also gone up.

No wonder, then, that Lenovo is unfazed by the end of the subsidy programme. China’s largest PC maker recently announced that it is opening more than 1,000 stores, many of them in areas traditionally considered as rural counties.

Though difficult to reach commercially, the countryside is “probably still the world’s most promising market” in terms of the number of people “who’ve never owned a PC before, who would like to own a PC and who have that capability,” David Wolf, CEO of Wolf Group Asia, a Beijing-based marketing strategy firm, told the Wall Street Journal.

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