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Air conditioners face cold sales this summer

By Wang Lan (China Daily)
Updated: 2008-07-16 09:04

Domestic air conditioner producers are taking a further hit this summer by rising material costs, bloated inventory and declining sales both at home and abroad, according to industry analysts.

Shi Hong, an analyst on home electrical appliances at Industrial Securities in Shanghai, told China Daily that profits of most air conditioner manufacturers are expected to drop again this summer largely because of dwindling sales as potential buyers are balking at the idea of buying them because of rising energy costs.

The sluggish property market has also contributed to the decline in sales because fewer new homes need to be fitted, Shi and other analysts said.

Air conditioners on sale at a shopping center in Beijing in this file photo.

Exports of air conditioners, accounting for more than half of the industry's total sales, has also been dragged down by the persistent appreciation of the renminbi against the US dollar and other major currencies. These problems have been aggravated by surging material costs.

"The surging prices of basic materials in producing air conditioners, such as steel and petrochemical products, have hit manufacturers," Shi said.

Analysts said the continuous renminbi appreciation has stripped national air conditioner makers of their competitiveness against Japanese and South Korean brands in many overseas markets.

Latest industry figures show sales of Chinese air conditioning products in May totaled 7.92 million units, down 10.9 percent from the same month in the previous year. Of these, 3.13 million units were sold in the domestic market, down 32 percent from the previous year.

Although exported air conditioning products from China increased 13 percent in May to 4.79 million units, the growth rate dropped 7 percentage points compared with last May's 20 percent.

Meanwhile, the inventory of air conditioners rose 4 percent to 10.75 million units by the end of May.

Although June's sales figure is yet to be published, analysts predict it won't significantly increase from May.

"I don't expect any pleasant surprises in terms of higher sales in June," said Shi.

Industry analysts said as long as manufacturing costs keep rising and sales fail to rebound, air conditioner makers will continue to suffer shrinking profits in the next two months, after which the annual peak sales season ends.

Apart from material costs, according to industry experts and analysts, air conditioner makers should also control the expenses related with sales and company operation, which usually account for 70 percent of the gross profit margin.

For example, Gree and Midea, the nation's two largest air conditioner makers in terms of sales, posted a gross profit margin of 18 percent and 18.6 percent respectively in 2007. But after weeding out their expenses on product sales and company operation, they posted a net profit margin of 3.39 percent and 3 percent respectively.

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