Chinese white goods makers eye global brands for market share and premium cache

[HONG KONG] When Chinese white goods giant Haier Group bought a 20 per cent stake in Fisher & Paykel Appliances in 2009, the heavily-indebted New Zealand company was at the mercy of its banks, hit by a depressed housing market and an ill-timed factory relocation overseas.

Its full acquisition three years later not only helped keep Fisher & Paykel afloat, but also put privately-owned Haier in control of one-fifth of Australia's markets for fridges, washing machines and dishwashers, up from less than 5 per cent in 2010. Rivals such as Electrolux AB and LG Electronics Inc lost market share in various kinds of products during the period, according to data from Euromonitor.

Haier's advance in Australia, largely fueled by its own deep pockets, may be an indication of how it could stir up the US market after its deal to buy General Electric Co's appliance business for US$5.4 billion in January.

Under Haier control, Fisher & Paykel has been able to do large product launches and its research and development budget has increased, Carnegie Investment Bank said in a recent note. Carnegie said it expected Haier will use the same strategy in the US market. The group's global R&D spending jumped to 3.05 billion yuan (S$641 million) in 2015, a rise of 53 per cent since 2012.

Qingdao Haier Co Ltd, the publicly traded core subsidiary of the Chinese group, has spent 9.7 billion yuan since 2011 in acquiring home appliance assets, according to its annual report.

Haier is not alone. Major Chinese white goods makers such as Hisense Electric Co Ltd and Midea Group Co Ltd , have been on an overseas spending spree this year, as they seek to snap up foreign brands to tap faster-growing markets as growth slows at home.

"Access to other markets helps them find new sources of growth as the domestic market slows," said James Roy, associate principal of Shanghai-based China Market Research Group. "It's also an opportunity to gain additional know-how to succeed in China, where competition is becoming fairly intense."

For rivals such as Whirlpool Corp, Electrolux, LG and Samsung Electronics - some of the biggest names it will come up against in the United States - one aspect of Haier's rise in Australia will give some cause for comfort.

Despite integration of their sales, logistics and customer care operations, the deal has yet to lead to larger market share gains for Haier's own brand, highlighting challenges the group faces as it seeks to build market share in the mid-tier segment of the market.

"The high-end market is the weak spot for Chinese home appliance makers," said Juliette Liu, analyst at Yuanta Research in Taipei.

A search on Australian home appliance retailer The Good Guys has Fisher & Paykel on the top line of its listed brands, while Haier's own brand is nowhere to be seen. Haier did not respond to a request for comment about its strategy in Australia.

"There have not been any questions about that brand," said Mitch Konno, assistant store manager at a Sydney outlet of privately-owned whitegoods chain Bing Lee, which carries Fisher & Paykel products but not Haier.

"Fisher & Paykel is the more well known brand and I don't think consumers know they're the same company," added Mr Konno.

A Sydney outlet of The Good Guys was displaying just one Haier clothes washer among the 50 different machines it was trying to sell during a recent visit by a Reuters reporter. Floor staff for the company said they were not permitted to comment.

China's top domestic players, including Haier, Hisense, Midea, Gree Electric Appliances Inc and Joyoung Co Ltd opened their wallets to fund this overseas push.

Since the start of 2014, they spent over US$31 billion on deals, a nearly six-fold increase from the US$5.4 billion recorded between 2010 and 2013, according to Thomson Reuters data. Latest deals include Midea's US$473 million purchase of Toshiba's white goods business, and Hisense's acquisition of Sharp Corp's TV factory in Mexico.

On Wednesday, Midea said it had offered to buy German industrial robots maker Kuka AG in a deal that values Kuka at around 4.5 billion euros.

More deals are likely to follow, as some global players exit the market amid growing competition from the low-cost Chinese manufacturers, who are also under pressure from the government in Beijing to improve product quality and standards.

"We will aggressively look for and capture M&A opportunities that may arise globally, in a bid to further enhance our global competitiveness," said Jiang Peng, a spokesman for Midea.

And their solid profit generation ability will help Chinese firms lead further consolidation. Midea logged an operating profit margin of 13.8 per cent in 2015, and Haier posted a margin of 7.2 per cent, higher than Electrolux's 2.2 per cent and Whirlpool's 6.2 per cent, according to CLSA and company reports.

REUTERS