China Consumer

Losing their cool

Air-conditioning trio in price war

A man inspects china-made air-conditioners on display at a home appliance exhibition in Beijing May ..

Hot competition

In the past Dong Mingzhu has warned that price wars aren’t always a good thing for shoppers. One example was an interview with Forbes in 2009, in which the chief executive and chairman of air-conditioner manufacturer Gree said: “The first casualty of a price war is the consumer because manufacturers can’t lose money and will use substandard materials to meet lower prices. Products all break down after a while. If the company disappears, who will fix the product?”

But Dong seems to have changed her mind lately. During the National Day holiday week in early October, China’s largest air-conditioner maker by sales cut prices steeply on various models to “give back to consumers”, according to statement accompanying the promotional campaign.

A senior executive at the firm admits that the move is unprecedented. “Such large-scale discounting is something Gree has never done in the last 20 years,” he told the Securities Times.

So why do it now? Liu Buchen, an industry observer, told the 21CN Business Herald that the price cuts are the “last resort” as Gree struggles to reach its annual sales target of Rmb140 billion ($22.8 billion) this year, compared to Rmb120 billion in revenues in 2013.

In the first half of the year, Gree reported sales of Rmb58 billion andnet profit of Rmb5.7 billion. But it needs to pick up the pace if it is to meet its full-year commercial goals.

“To reach the target of Rmb140 billion, it means the sales need to go up 17% from a year ago. But in the first half of the year, sales only went up a little over 9%. So that puts a lot of pressure on Gree in the second half of the year and slashing prices are the most effective way to drive sales,” says Liu.

Competition is stiff too. Last year Dong declared rather triumphantly that Gree led Midea, its closest rival in China, by Rmb40 billion in sales. But in the first six months of 2014, the gap between the two shrank to Rmb9 billion.

“Since the first half of this year, Midea has been grabbing more share in the air-conditioner market, which puts a lot of stress on Gree. As a result, Gree hopes that the disruptive pricing could counter Midea’s growing momentum in the market,” the Securities Times reports.

Competitors like Midea and Haier have also shown that they are ready to respond to Gree’s discounting with aggressive price cuts of their own. Within days, each supplier was offering steep discounts on various models. Some popular products were selling at prices 40% cheaper than normal.

Although the worst of the commercial hostilities have now been put on hold (the “promotion” finished after the week-long holiday), many analysts believe that it won’t be the last pricing battle this year. The industry is already plagued by oversupply and the slowdown in home purchases has put a damper on sales. Average temperatures this summer were lower than the last few years too. “This year’s summer was cooler than usual. As a result, the country has over 28 million air-conditioning units in inventory, worth over Rmb50 billion, a historical high,” a sales director at Galanz, another domestic air-conditioner maker, told 21CN.

Data from the National Bureau of Statistics reveals that between January and August this year, China produced 111.3 million air-conditioners, up 12.5%​​ compared with a year ago. In the first seven months of the year, consumers purchased only 39 million units, according to separate data, which is an increase of 9.4% compared to a year earlier.

But at least the tough business conditions could turn out to have a silver lining for the environment. Industry analysts are predicting that many of the smaller air-conditioner makers could be forced out of business as their bigger rivals wrestle for market share. In China, there are nearly 200 manufacturers of lower-cost, generic air-conditioners. And more often than not, their machines fail to meet energy-efficiency standards.

“Gree’s aggressive price cuts might help weed out manufacturers that make machines that don’t meet environmental standards,” a Gree spokesman added hopefully. “As the business becomes less profitable, maybe they [the lowest-cost producers] will just go away.”

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.