Consumer Electronics Market in China
Executive Summary
Stable Gnp Growth Enables Development of Consumer Electronics Sector
The Chinese
consumer electronics products market has entered into full development. It has
been ranked the second-biggest market in the world. Although the global economy
had gone into recession, the domestic economy is still going strong, with more
than 9% growth in GNP. China’s substantial high-income population has created a
growing demand for consumer electronics products. Innovation and technology
have been the main factors underpinning the sector’s growth. 2008 saw rapid
growth in sales of digital TVs, cameras and mobile phones, which are mostly due
to replacement purchases, while sales of other consumer electronics products
saw stable growth.
Unit Prices Going Down
Although raw
materials costs soared in 2008, the unit prices of consumer electronics
products went down, especially for TVs and mobile phones. Manufacturers
expanded their production to overcome this, as market competition forced
players to lower their prices to gain market share. Another important factor is
that many low-end products, including unbranded mobile phones and laptops,
increased their market share relative to those of premium brands, which led to
reductions in overall unit prices relative to 2007. Lower unit prices
contributed to the big push in sales of consumer electronics products, since
the domestic market is dominated by price.
Booming TVs Market
Digital TV saw
the fastest growth in 2008, as many consumers chose to update their old
analogue TV sets just before the start of the Beijing Olympic Games. Another
factor was that many couples chose to marry before the Olympics, which also
boosted the sales of TVs among those forming new households. Most players
launched new products and invested heavily in advertising before the Olympics,
in tier 1 and tier 2 cities. Price promotion encouraged consumers to buy
flat-panel TVs, and large-screen sets sold better than smaller ones.
Market Penetration Increasing
The consumer
electronics market has seen big sales in the major cities, where penetration
rates are relatively high, while penetration levels also increased in villages
and smaller cities, where people were willing to spend more money. In order to
stimulate consumption in these areas, manufacturers and distributors had
reduced their price to middle-market levels, which offered consumers an optimal
opportunity to purchase new products.
Healthy Growth But at Slower Pace
The Beijing
Olympic Games boosted the consumer electronics market in 2008, but expectations
may have been exaggerated since the predicted spurt to growth in sales of most
consumer electronics products did not materialise. During the forecast period,
the market will continue to grow in sectors that demonstrate stable demand, but
the rate of growth and manufacturers’ profits will both decline. The growth in
sales of most consumer electronics products such as desktops, mp3 players and
mobile phones will decline for lack of consumers’ purchasing power.
Key Trends and Developments
Innovation Brings More Value To Consumer Electronics
In 2008 many
families replaced their existing consumer electronics products. The
televisions, mobile phones, computers and mp3 players sectors were the most
strongly affected, and many manufacturers sought to take advantage of this by
launching innovative products in these sectors. These include televisions with
Internet access, PDAs that enable users to make phone calls and mp3 players
updated to mp4 which can play videos. Both domestic players and the
multinationals that focus on product research and development will seek to
improve their market profiles and branding. HiSense saw rapid growth in its
market share for digital TVs as consumers found it the most innovative brand in
the flat-screen TVs subsector, while Shinco led the market in DVD players.
Outlook
Innovation will
underpin the growth in sales of domestic consumer electronics products.
Innovation provides the main power to push the industry forward. It is expected
to remain a powerful force as both domestic and multinational players face
pressure from the soaring costs of raw materials that had previously squeezed
their profits, and only innovation can bring increased value sales. Top
multinationals such as Sony, Samsung and Canon are expected to lead this
process of innovation by launching of new products over the long term, while
consumers will stick with value-added products.
Current impact
Innovation has
influenced the allocation of market shares over the review period. The small
players that cannot deliver innovative products will find it hard to survive in
the market, since innovations create higher profit margins for suppliers that
emphasise R&D. Domestic manufacturers’ R&D capabilities, especially in
chip design and solutions, are weak. Over 90% of chips used to manufacture electronics
are imported, and domestic producers have collaborated to maintain their
competitiveness with the multinationals.
Domestic
manufacturers are now aware of this trend and have invested in R&D, so
their innovative new products will help them to increase their market shares.
Consumers were the main beneficiaries of this process of innovation, through
the development of new technologies and products that meet their more
personalised needs. Innovation provides the catalyst for growth in the domestic
market, which is why digital products have displaced analogue models. Digital
displays, high-definition TVs (HDTVs) and home entertainment centres, portable
media players, mobile phones and digital cameras benefited the most from this
trend. These movements are quite positive for the development of the market,
since players can identify them as top manufacturers from the numbers of new
products they launch each year.
Future impact
Innovation drove
the market’s performance in 2008, and it will increase manufacturers’ profits
and also benefit consumers during the forecast period. The market will be
dog-eat-dog in 2013, since thousands of domestic players are likely to enter
the consumer electronics industry. If the potential for innovation is fully
realised and players stick with it, the market will display healthy growth, but
otherwise it will embark on a price war. The televisions, computers, portable
media players and mobile phones sectors will be heavily impacted by this
process of innovation. Their future growth will depend mostly on the extent of
innovation achieved and the development of new products. No doubt innovation
had a positive effect on the development of the market: consumers are clearly
fond of new products since they were willing to spend more money on higher-value
goods. In the future, manufacturers will keep an eye on new technologies with a
view to improving their sales. The continued development of digital televisions
and the Broadband communications network will certainly lead to the creation of
a huge market for consumer electronics. In line with potential consumption
trends, innovations are expected in large-screen, high-definition LCD TVs, in
digital cameras with large and high-speed storage capacity, and in home audio
and cinema products that contain advanced technology. Innovation will benefit
manufacturers, consumers and retailers alike; manufacturers and retailers will
achieve better sales and consumers will experience the latest technologies, and
these trends are likely to be positive for the development of the market.
Online Sales Grow Relative To Traditional Distribution Channels
Although online
sales accounted for 1.9% of the total market in consumer electronics products
in 2008, they showed strong growth with high efficiency and low running costs.
Furthermore, a growing number of consumer electronics websites are now adding
customer reviews, which help consumers in their decision-making. With the
establishment of a third-party payment service and the credit rating system,
online shopping has attracted an increasing number of consumers. Many
established durable goods retailers such as Gome and Suning also now have
online stores, catering to the domestic market, and young people are in the
habit of buying on line. The profits of suppliers of consumer electronics
products are being squeezed by the rising costs of materials and increasing
price competition, so they are keen to save on distribution costs by selling
their products on line.
Current impact
Consumers are
becoming more comfortable with using the Internet, and this has led to rising
online retail sales. This is a real growth engine for the retail industry
overall, and sales of portable consumer electronics products like mp3 players,
mobile phones and laptops are most affected by this trend, since consumers can
easily buy smaller products from online stores such as Taobao. These are also
doing more cross-promotions – which might for example involve getting a coupon
on line to use in a store. Consumers also order on line if they don’t find the
right product in a traditional store, since the online stores can offer a very
wide range of goods.
Players that
took advantage of this development and targeted young consumers have led the
sales of other players. Since young people’s spending is driving China’s retail
growth (accounting for 20% of sales in 2008, through traditional distribution
channels like department stores and supermarkets), some exciting products will
be launched on line, months or even years ahead of their distribution through more
traditional channels. Some products that do not sell well through traditional
distribution channels can become bestsellers through online stores: domestic
consumer habits are strange, since people will follow the crowd when they find
that certain products are ranked as top sellers but would hesitate to spend
money on them though traditional channels.
Outlook
During the
forecast period online sales are expected to grow faster than those through
traditional channels, and online sales of consumer electronics products are
expected to lead the non-store-based retail sector. Strong e-retail growth is
set to continue for many years to come. If this trend dies out, TV or mobile
phone shopping will develop quickly to replace it. More people will be encouraged
to shop on line because of the high cost of petrol, and the online channel is
still growing strongly as the consumer electronics market expands. Online sales
continue to grow at a faster rate than ever.
Broadband has been approved in China, and there is enormous potential
for improvement. China has 123 million Internet users, 26% of whom have
experience of shopping on line. If the consumer base continues to expand, it
will have a very positive effect on online sales, as both domestic players and
multinationals promote the habit.
Future impact
Online sales
drove sales in 2008 and will have a positive impact in future. Online
purchasing saves many of the costs of physical distribution, enabling online
consumers to buy at lower prices. Mobile phones sold on line will normally cost
at least 20% less than the same phones bought from traditional stores, and
portable consumer electronics products will generally be affected more by
online sales than in-home products, since the latter are more difficult to transport.
Many smaller vendors are also prospering in this market. Chinese consumers are
curious about buying on line, even if they have not yet made such a purchase.
If they encounter no problems, they will certainly continue to make purchases
on line. China is an up-and-coming e-commerce market because of its large
population and growing Internet use. This growing market highlights the high
level of consumer demand met by online stores that offer a wide range of
complementary products that are not available in the traditional stores. Top
players are successful in selling on line because their customers trust their
products and trust them, while online selling will cause difficulties for small
players who do not have good return policies, since consumers will find it
inconvenient to resolve disputes or complaints about their online purchases.
Online sales will bring benefits to manufacturers, consumers and retailers.
Competition Heating Up in the Market
In the domestic
market, the premium market share is held by multinational players such as
Canon, Nokia and Sony, and only few domestic players such as Lenovo can retain
stable market shares against multinationals in the computer segment. At the
bottom of the market lies a vast, low-end segment served by local companies
offering low-quality, undifferentiated products. China’s middle market is
growing faster than the premium and low-end segments combined and accounts for
nearly half of all revenues in some product categories. Chinese challengers in
the low-end segment tend to improve the quality of their goods over time. Their
goal is to undercut the established players by providing new offerings that
ratchet up quality but cost consumers much less.
Multinationals
gained a competitive edge in prices, as they can now enjoy lower labour costs
domestically. Consumers have long tired of the poor quality and image of
China’s domestic brands.
Current impact
Almost all
sectors of consumer electronics products have been affected by competition and
marketing campaigns throughout the review period. Taking the mobile phones
sector as an example, more brands entered the Chinese market, but the market
shares of powerful brands continued to expand; with 90% of the market belongs
to just eight top brands. In the laptops market, the ten bestselling models are
made by only a handful of manufacturers, including Lenovo, Dell,
Hewlett-Packard and Sony. The well-known brands’ domination of the market is
intensifying. Multinationals were the main beneficiaries since they dominate the
markets for most consumer electronics products, although domestic players also
improved their performance by achieving record sales in 2008. In the latest
bout of competition in the LCD TV market, the sales of Japanese brands fell,
while those of Korean brands improved. An increase in the volume sales of
large, domestic-brand LCD TVs also boosted the market’s overall sales revenue.
While
multinationals focused mainly on high-end sectors, domestic players, which are
mainly located in the low-end segment and rely on price as a major competitive
tool, felt the mounting pressure from a slower growth rate. Domestic
manufacturers surely felt the chill of a slow-down in the market’s growth and
inadequate customer demand.
Outlook
Market
competition will continue to develop, expanding from manufacturing to penetrate
the retail sector which will include both domestic and foreign retailers.
Retailers are expected to look towards smaller cities to make further inroads
and expand their markets, and price is not expected to be the main factor in
attracting consumers. As consumers demand higher levels of service from
retailers, multinationals will continue to reduce their costs and maintain
price competitiveness in the market. Domestic manufacturers, after some
consolidation and reorientation, are becoming just as aggressive as the
multinationals based in Japan, South Korea or Europe. Multinationals are
gradually realising that changing the landscape of the domestic market will not
be easy, but foreign brands still threaten domestic manufacturers’ market
share, and further price wars are to be expected.
Future impact
Competition
drove the market in 2008 and will continue to intensify in 2009 and throughout
the forecast period to 2013. The situation facing small and medium-sized
players worsened and the top companies may threaten their market shares. With
fierce competition and no other significant market drivers, domestic players
will need to make significant changes. Only domestic players such as Lenovo,
which has a deeply entrenched distribution network, are likely to continue to
display growth in sales. Both domestic and multinational players who wish to
succeed in the future will need to maintain good control of their supply
chains, and such efficiencies may enable them to win the game and survive a
period of falling profits and price wars. Consumers will benefit from the
competition, since they can buy products at lower prices.
Unit Prices Going Down for Each Sector
Unit prices fell
in most consumer electronics sectors in 2008, which was the dynamic driver of
the market’s growth. Major retailers like Gome and Suning announced that they
would not pass on price hikes to consumers in the short term. HDTV has been in
the spotlight, seeing rapid growth in sales, and the unit price dropped sharply
from RMB 12,918 to RMB 12,150. The volume sales of analogue TVs declined by
7.0% while their value sales fell by 17.6%. The output of mobile phones,
another key sector of the consumer electronics products market, also increased
dramatically and exceeded the level of market demand in 2008, which forced a
reduction in their price. There was pressure on prices in almost every sector
since consumers gradually realised the need to take account of the price when
making their purchasing decisions.
Current impact
The market in
consumer electronics products has become more dominated by price as people have
become accustomed to falling prices in this sector, and this has impacted the
performance across different sectors. The fall in prices was bad news for the
market players, but good news for consumers. Price is still a major stimulus
fuelling consumption on the Chinese market: the prices of mobile phones, colour
TVs and laptops are all going down, thereby giving an impetus to market growth.
In 2008, the average price of a mobile phone was RMB 1,365 – down by 2.5% –
while the sector’s volume sales increased by 20.0%. The colour TV market saw
especially eye-catching price cuts, as the price of 38-inch LCD models dropped
by 51%. Volume sales of traditional CRT colour TVs, which still account for the
largest number of TV sales, began to decline gradually in 2007, but their
prices are in drastic decline. Low-end mobile phones and laptops are proving to
be the most successful segments in their respective categories, both
contributing more than 40% to overall market sales, while smaller and
lower-priced LCD TV s experienced big increases in market share that led to a
fall in the average unit price for the televisions sector as a whole. Consumers
became more willing to buy as the unit price fell, and the smaller players
endured a tough year in 2008. The latter had to absorb the rise in material
costs to hold on to their sales shares, while all manufacturers had to control
their production costs, failing which it would have been hard for them to
develop.
Outlook
Unit prices will
fall in both the short and the long term, this trend will remain strong during
2009–2013. If the price remains stable or increases it will lead to negative
growth in sales, and China’s notoriously price-sensitive consumers will wait to
see if the price drops again. With low labour costs, multinationals can offer
lower prices, and a fast-growing domestic market will spur China’s consumer
electronics manufacturing industry to more than double in size. The market is
not dominated by premium products; on the contrary low-end and mid-range
products will account for the bulk of the market in future as the unit price
declines. The entry of the bigger players in these market segments has forced
the smaller ones to squeeze their margins and reduce prices further. Average
unit prices are likely to decline, however, as manufacturers pass on the
reduction in material costs to consumers.
Future impact
Sales benefited
from lower prices in 2008, and a continued decline in prices will enable more
consumers to buy products in 2009 and through to 2013. On this basis we can
expect the market to expand, as sales of many expensive consumer products like
projectors, digital cameras and digital camcorders will grow, if their prices
are going down and most middle-class consumers can afford them. In order to
improve their sales, manufacturers need to put their efforts into new product
development, instead of being driven into a price war. In order to pave the way
for newly launched products, manufacturers will normally give discounts on
earlier models or the previous year’s products. The continually falling prices
of consumer electronics products is combining with consumers’ increasing
disposable income to give them reasons to spend more on electronics products.
These factors indicate a positive future for the consumer electronics industry
in China.
Growth Benefits in Rural Areas
Growth in sales
of consumer electronics products was fastest in cities, where the competition
is fiercer, while most rural families were still buying their first colour TV,
hi-fi system or VCR/VCD/DVD players. Yet most of these categories are fast
approaching the stage of upgrade purchases, and demand for replacement products
is therefore increasing. The government issued regulations to increase the
farmers’ disposable incomes, and these factors will translate into solid demand
for consumer electronics products, together with the effects of China’s
urbanisation as small cities developed into big cities. The cities experiencing
the greatest market competition are those along the east coast, but the
municipalities and provincial capitals in inland regions, where 56% of the
population lived, are not to be ignored. Rural regions are emerging markets for
the main players, leading players in both manufacturing and retail sectors are
shifting their focus to the smaller cities and rural areas.
Current impact
Sales of
televisions, home cinema and audio products, mobile phones and computers have
all been affected by urbanisation, while the market continues to be dominated
by the conversion from analogue to digital. Camcorders have not been affected
very much since they are still struggling to gain sales in tier 1 cities.
Players had put an additional emphasis on rural marketing with a greater focus
on sales at the district level. Manufacturers are also both increasing their
penetration of and expanding their product ranges for rural markets, all of
which should help boost rural sales. The tilt towards the smaller towns and
rural areas is becoming more pronounced. Players in the mobile phones industry
are eyeing rural districts as their new area of opportunity. To increase their
market shares there, both Nokia and Motorola had low-end models priced less
than RMB 500, which are easily purchased by rural consumers.
Outlook
With the rapid
development of China’s economy and the increase in the country’s purchasing
power, consumer markets in rural areas being revitalised in an all-round way.
In the longer term, urbanisation will improve the standard of living in rural
areas, will which enable people to buy more durable goods. The most competitive
markets are to be found in the cities along the east coast, but the potential
for growth in municipalities and provincial capitals in inland regions is
higher as the penetration levels are currently low. The increasing urbanisation
will also promote sales of TVs in villages, towns and in the outskirts of
cities. The pattern of urban consumption is now being upgraded and transformed.
The new round of reform to the housing system will create new market demands
and upgrade existing demands. Policies of constructing new housing in the
countryside will gradually turn potential demand into effective demand.
Future impact
Since the
competition in big cities is fierce, players in the consumer electronics market
will seek opportunities in other, smaller cities, while urbanisation will drive
the sales of consumer electronics products in 2009 and through to 2013. The
market in rural areas will become bigger, and there will be more room for expansion
since consumer electronics products will become more popular there. The mass
rural market will be attractive not only to manufacturers who will need to
establish their sales networks, but also to retailers who may benefit from a
brighter future by looking for new opportunities in China’s lower-tier cities
and rural areas. During the forecast period, 32.8% of Chinese rural families
are expected to buy colour TVs, and sales of both the in-home and portable
consumer electronics sectors will be positively affected by urbanisation. The
effects on the in-car consumer electronics sector will remain infinitesimal
since cars will not be popular in rural areas in the short term. As tier1
cities become saturated, the rural market is becoming more important, since it
is relatively low end, and manufacturers need to design and launch low-priced
rather than premium products. The Chinese government aims to boost the demand
for electronic products in rural areas. In Sichuan, for example, the local
government will compensate people who buy home appliances or consumer
electronics products with a value of more than RMB 1,500 within one day, to the
tune of RMB 200. This provides a positive signal that consumers are being
encouraged to buy these goods, and this will benefit manufacturers, consumers
and retailers.
