Haier

White goods makers have plenty to worry about, besides demand

It is a double whammy for Indian consumer electronics makers. The prospects for 2020-21 (Apr-Mar) were already bleak as COVID-19 destroyed demand in the crucial summer months, which account for three-fourths of annual sales for these companies. To add to that, heightened border tensions between India and China are making them sweat even more.

Companies may face disruptions in supply of essential components from China, a key supplier of electronic parts, as India seems to be reworking the equation between the two countries on the trade front.

China is the world’s largest manufacturer of rotary compressors for air conditioners. Of the world’s total installed capacity for rotary compressors, China’s share stands at 86%.

“The dependency on China for finished goods has considerably reduced over the last two-three years. However, for components like motors, compressors and electronic parts, it continues to be high,” said Kamal Nandi, business head and executive vice president at Godrej Appliances Ltd.

Currently, the air conditioner industry in India outsources more than 60% of the components and a significant part of this comes from China.

Encouraging local manufacturing and raising duties on Chinese imports appears to be on the government’s mind, but such a move could be detrimental for the sector at this juncture.

Companies are already struggling with diminished pricing power due to demand destruction and working capital constraints, given the disruption to the supply of key inputs.

The basic customs duty on compressors for air conditioners and refrigerators was raised to 13% in the Union Budget for 2020-21 (Apr-Mar) from 10%.

A higher import duty on China products would mean companies may be forced to look at alternate destinations like Thailand, Vietnam and South Korea for sourcing, and this can see their cost maths go topsy-turvy, analysts said.

MAKE IN INDIA

Prime Minister Narendra Modi’s clarion calls of self-reliance and ‘Make in India’ are seen as steps in the right direction from a long-term perspective, but these are unlikely to fructify overnight, experts said.

“It will take a long time to set up a local supply chain… Industry players are working with the government to finalise a phased manufacturing programme, similar to that of mobile phones,” Blue Star Ltd Managing Director B. Thiagarajan said.

Blue Star has been creating alternate vendor bases under its enterprise risk management programme, but a few components such as compressors will have to be imported predominantly from China, Thiagarajan said.

An official at domestic contract manufacturer Amber Enterprises Ltd also said the company was witnessing a shift in consumer preference to buy locally-made room air conditioners due to the increase in customs duty in the segment.

The relatively expensive components produced domestically could result in retail prices going up, unless brands are willing to take a hit on their margins.

OTHER HEADWINDS

After a massive hit to demand in April and May due to the lockdown restrictions amid the virus outbreak, companies had indicated that they saw some recovery in June. However, channel checks show that the recovery was not broad-based.

In fact, sales of air conditioners slumped 45-47% on year in June and those of refrigerators dropped 25-26% on year, indicating the potential hit to discretionary spending due to COVID-19.

Furthermore, an increased competition from application-based service providers like ‘PickMyLaundry’ and ‘Aap Ka Dhobi’, besides growing ease for renting appliances are also hurting sales as customers look to cut back on spending, market sources said.

In such a difficult demand situation, if companies are forced to look at domestic or other international markets for sourcing components, they would either have to raise prices or absorb a cut in margins, an official at a local contract manufacturer said.

When the pandemic has already gripped the sector, the government’s plan to shut China’s doors could possibly leave companies in a state of instability.-Cogencis

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