SC 87 S Aian niht - dbs.com

DBS Group Research • January 2020DBS Asian Insights87SECTOR BRIEFING

China Home Appliance Sector

A Smart Leap

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DBS Asian Insights SECTOR BRIEFING 8702

China Home Appliance SectorA Smart Leap

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Wen Nan Tan EditorMartin Tacchi Art Director

Vincent YANG [email protected]

Mavis HUI [email protected]

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Executive Summary

Industry Overview: China’s Home Appliance SectorA Structural Change

Growth Driver #1: Replacement Demand

Growth Driver #2: Structural Shift Towards Smart AppliancesTransformative Potential

Knowing Your Consumers

The Future of Smart Homes

Growth Driver #3: Shift In Consumer Preference Towards Premium Products

Growth Driver #4: Manufacturers’ Global ExpansionOverseas Sales Carrying More Weight

Impact from US-China Trade War

Overseas Production

Growth Driver #5: Smart ManufacturingIndustry IoT

Robotics

Overall sales of China’s major white goods (ACs, washing machines, refrigerators) is expected to expand by 8.3% CAGR during 2019-23F (vs. 7.8% during 2015 and 2018), mainly supported by the robust replacement demand, rising smart appliance sales and ongoing premiumisation progress. From our analysis, we believe that smart home appliances will see a 20.4% CAGR in terms of sales volume during 2019-23F. Segmentally, we estimate that sales volume of smart ACs/washing machines/refrigerators to witness 22%/19%/15% CAGR during 2019-23F, respectively.

Seeking a better quality of life, we expect the structural trend of Chinese consumers’ evolving preference towards premium home appliance products should boost overall average selling prices (ASP) of ACs, washing machines and refrigerators. Coupled with a 10% total sales volume CAGR, we foresee premium appliance sales value to achieve a 12.5% CAGR. We also believe market leaders should continue to benefit from such a trend, leveraging on their established brand names at various price points.

Through a flashback to Japan during 1960-80s, we have found many similarities between Japanese’s home appliance sector at that time and China at the current stage. If history is a guide, we believe overseas expansion should continue to be a key growth driver for Chinese appliance manufacturers, evidenced by the growth stories of Sharp and Sony. Given the gradually saturating domestic demand, foreign markets are becoming increasingly crucial for Chinese home appliance makers, and we believe M&As have proven a good expansion strategy for leading Chinese home appliance players.

Latest challenges could include Sino-US trade tension, despite the impacted revenue of leading players could only take up a fraction (low single digit of total sales). It has also triggered home appliance manufacturers establish their production bases overseas, including Vietnam, India and Thailand, which are discussed in this report. Compared to Midea (c.10% production capacity abroad), Haier currently has more diverse production capacity globally, which has been proven as more resilient facing trade uncertainties.

As IoT technology advances, it will not only benefit the consumer-focused smart home platform but also enhance home appliance makers’ production efficiency via industrial IoT platform. For instance, unmanned quality inspection, automated equipment failure detection. At the current stage, Chinese companies have relatively lower penetration rate in Industry IoT platforms. However, Haier and Midea have demonstrated their ability in leading the new trend. in this report, we have also discussed the main differences between their current industrial IoT platforms.

Executive SummarySmart appliances

expected to take off in China

Globalisation: Another way up

Limited trade war impact on market

leaders

Industrial IoT ecosystem and smart

manufacturing


Automation on the rise


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The robotics industry is set to prosper in China, given rising wages and labour shortage. We expect China to outpace Asia’s 14% installation number CAGR during 2019-22F (source: IFR), given its higher potential compared to other advanced Asian economies (140 robots per 10k employees vs. 831 and 327 in Singapore and Japan as of 2018) and more diverse demand from other manufacturing sectors other than automotive, such as medical devices.

Structural changes towards smart appliances and

premium products

PRC white goods market size


A Structural Change

We expect the Chinese white goods sector to expand by 8.3% CAGR during 2019 and 2023F in sales value terms. Going forward, as penetration rates continue to rise and overall new demand could wane, especially for the key segments of washing machines, refrigerators, ACs, we believe the following growth drivers would shape the future years: 1. Replacement Demand2. Structural Shift Towards Smart Appliances3. Shift in Consumer Preference Towards Premium Products4. Manufacturers’ Global Expansion5. Smart Manufacturing

Segment wise, we expect air conditioners, washing machines and refrigerators to see 9.8%, 4.8% and 5.9% CAGR during 2019-23F in terms of sales value, respectively. We would like to highlight structural shift towards smart appliances and premium products in the China home appliance sector.1. We believe smart ACs, washing machines and refrigerators could see 21.5%, 18.7% and

14.7% volume CAGR during 2019-23F, as penetration rates of smart appliance continue to rise (from 34% in 2019 to 62% in 2023F).

2. Riding on Chinese customers’ preference for high-end products, premium ACs, washing machines and refrigerators could see 13.5%, 6.5% and 7.8% CAGR in sales volume terms, respectively.

Industry Overview: China’s Home Appliance Sector

White goods: air conditioners (AC), washing machines, and refrigeratorsSource: ChinaIOL, AVC, CMM, DBS HK

3. Our estimates also assume a 60:40 weighting in terms of the replacement (60%) and new demand (40%) breakdown within both smart and premium products. For instance, 60% sales volume of smart appliances is contributed by replacement demand.

4. As AC’s penetration still see decent headroom in China, we expect its overall new demand should continue to see positive growth during 2019-23F.

PRC white goods market size

Industry sales value growth forecast (19-23F):

Replacement demand

52% of total sales volume by 2023F (41% in 2018)

19-23F sales volume CAGR: +12%

Replacement demand


19-23F sales volume CAGR: +0.9%

Replacement demand


19-23F sales volume CAGR: -1.6%

Smart appliance

72% of total sales volume by 2023F (35% in 2018);


Smart appliance


19-23F sales volume CAGR:+18.7%

Smart appliance


19-23F sales volume CAGR+14.7%

Premiumisation



Premiumisation



Premiumisation



New Demand

48% of total sales volume by 2023F(60% in 2018)


supported by new home demand and penetration rate increase

New Demand


19-23F sales volume CAGR: -2.6%

New Demand


19-23F sales volume CAGR:-2.6%

Globalisation: Chinese brands' oversea expansion via organic gorwth or M&A

(15-18)(19-23F) (15-18)(19-23F) (15-18)(19-23F)Air conditioner:

ASP CAGR

Vol CAGR

+9.8%

+2.5%

+7.1%

+13.7%

+3.2%

+10.2%

Washing machine:

ASP CAGR

Vol CAGR

+4.8%

+5.5%

-0.7%

+3.1%

+5.2%

-2.1%

Refrigerator:

ASP CAGR

Vol CAGR

+5.9%

+8.1%

-2.1%

-1.4%

+2.9%

-4.1%


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Source: ChinaIOL, AVC, CMM, DBS HK

AC sales volume CAGR sensitivity analysis (2019-23F)

Refrigerator sales volume CAGR sensitivity analysis (2019-23F)

Washing machine sales volume CAGR sensitivity analysis (2019-23F)

White goods industry sales volume CAGR sensitivity analysis (2019-23F)

AC sales value CAGR sensitivity analysis (2019-23F)

Refrigerator sales value CAGR sensitivity analysis (2019-23F)

Washing machine sales value CAGR sensitivity analysis (2019-23F)

White goods industry sales value CAGR sensitivity analysis (2019-23F)

Smart AC vol CAGR 6% 11% 16% 21% 26% 31% 36%

5% 5.6% 7.9% 10.4% 13.0% 15.8% 18.7% 21.7%

0% 3.0% 5.4% 8.1% 10.9% 13.8% 16.8% 20.0%

-5% 0.5% 3.1% 5.9% 8.9% 12.0% 15.1% 18.4%

-10% -1.8% 1.0% 4.0% 7.1% 10.3% 13.6% 17.0%

-15% -3.9% -0.9% 2.3% 5.5% 8.9% 12.3% 15.8%

-20% -5.7% -2.6% 0.7% 4.1% 7.6% 11.2% 14.8%

-25% -7.4% -4.0% -0.6% 3.0% 6.5% 10.2% 13.9%

Smart refrigerator vol CAGR 0% 5% 10% 15% 20% 25% 30%

10% 9.0% 9.4% 10.0% 10.6% 11.3% 12.0% 12.8%

5% 4.4% 5.0% 5.6% 6.3% 7.0% 7.9% 8.8%

0% 0.0% 0.6% 1.3% 2.0% 2.9% 3.9% 4.9%

-5% -4.4% -3.7% -2.9% -2.1% -1.1% 0.0% 1.1%

-10% -8.7% -7.9% -7.0% -6.0% -4.9% -3.7% -2.4%

-15% -12.9% -12.0% -11.0% -9.8% -8.6% -7.2% -5.8%

-20% -16.9% -15.9% -14.7% -13.4% -12.0% -10.5% -8.9%

Smart WM vol CAGR 4% 9% 14% 19% 24% 29% 34%

-3% -0.6% 1.4% 3.6% 5.9% 8.4% 11.0% 13.7%

-8% -3.5% -1.3% 1.0% 3.5% 6.1% 8.9% 11.7%

-13% -6.3% -3.9% -1.4% 1.3% 4.1% 7.0% 10.0%

-18% -8.8% -6.2% -3.5% -0.7% 2.3% 5.3% 8.5%

-23% -11.1% -8.3% -5.4% -2.4% 0.7% 3.9% 7.1%

-28% -13.1% -10.2% -7.1% -3.9% -0.7% 2.6% 6.0%

-33% -14.8% -11.7% -8.5% -5.2% -1.9% 1.6% 5.1%

Smart white goods industry vol CAGR 5% 10% 15% 20% 25% 30% 35%

5% 5.3% 7.1% 9.0% 11.1% 13.3% 15.7% 18.1%

0% 2.1% 4.0% 6.1% 8.4% 10.8% 13.3% 15.9%

-5% -0.9% 1.2% 3.4% 5.8% 8.4% 11.1% 13.9%

-10% -3.8% -1.5% 1.0% 3.5% 6.3% 9.1% 12.0%

-15% -6.4% -3.9% -1.3% 1.5% 4.3% 7.3% 10.4%

-20% -8.8% -6.1% -3.3% -0.4% 2.6% 5.8% 9.0%

-25% -10.9% -8.1% -5.1% -2.0% 1.2% 4.4% 7.7%

Smart AC vol CAGR 6% 11% 16% 21% 26% 31% 36%

5% 8.3% 10.6% 13.1% 15.8% 18.6% 21.5% 24.6%

0% 5.6% 8.1% 10.8% 13.6% 16.6% 19.6% 22.8%

-5% 3.0% 5.7% 8.6% 11.6% 14.7% 17.9% 21.3%

-10% 0.7% 3.6% 6.6% 9.8% 13.0% 16.4% 19.9%

-15% -1.4% 1.7% 4.9% 8.2% 11.6% 15.1% 18.6%

-20% -3.3% 0.0% 3.3% 6.8% 10.3% 13.9% 17.6%

-25% -4.9% -1.5% 2.0% 5.6% 9.2% 12.9% 16.7%

Smart refrigerator vol CAGR 0% 5% 10% 15% 20% 25% 30%

10% 17.5% 18.0% 18.6% 19.2% 19.9% 20.7% 21.6%

5% 12.7% 13.3% 13.9% 14.7% 15.5% 16.4% 17.3%

0% 8.0% 8.7% 9.4% 10.2% 11.1% 12.1% 13.2%

-5% 3.4% 4.1% 5.0% 5.9% 6.9% 8.0% 9.3%

-10% -1.1% -0.3% 0.7% 1.7% 2.9% 4.1% 5.5%

-15% -5.4% -4.5% -3.4% -2.2% -1.0% 0.5% 2.0%

-20% -9.6% -8.5% -7.3% -6.0% -4.5% -3.0% -1.3%

Smart WM vol CAGR 4% 9% 14% 19% 24% 29% 34%

-3% 4.9% 7.0% 9.2% 11.6% 14.2% 16.9% 19.7%

-8% 1.8% 4.1% 6.5% 9.1% 11.8% 14.7% 17.6%

-13% -1.0% 1.4% 4.0% 6.8% 9.7% 12.7% 15.8%

-18% -3.6% -1.0% 1.8% 4.8% 7.8% 11.0% 14.2%

-23% -6.0% -3.1% -0.1% 3.0% 6.2% 9.5% 12.9%

-28% -8.0% -5.0% -1.9% 1.4% 4.8% 8.2% 11.7%

-33% -9.8% -6.6% -3.3% 0.1% 3.6% 7.1% 10.7%

Smart white goods industry vol CAGR 5% 10% 15% 20% 25% 30% 35%

5% 10.1% 11.9% 13.9% 16.1% 18.4% 20.9% 23.5%

0% 6.7% 8.7% 10.9% 13.3% 15.7% 18.4% 21.1%

-5% 3.5% 5.7% 8.1% 10.6% 13.3% 16.1% 19.0%

-10% 0.5% 2.9% 5.5% 8.3% 11.0% 14.0% 17.1%

-15% -2.2% 0.4% 3.1% 6.0% 9.0% 12.2% 15.4%

-20% -4.7% -1.9% 1.0% 4.1% 7.3% 10.5% 13.9%

-25% -6.9% -3.9% -0.8% 2.4% 5.7% 9.1% 12.6%

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* Assume % of premium product does not change, ASP does not changeSource: DBS HK

Our base case assumes a 20% CAGR of smart appliance sales volume and -10% CAGR of traditional appliance sales volume during 2019-23F. However, if technology revolution and consumer preference changes come quicker than our expectation in the foreseeable future, it should drive faster white goods industry growth. According to our sensitivity analysis, a 30% CAGR of smart appliance sales volume and -15% CAGR of traditional appliance sales volume should yield industry volume and value CAGR of 7.3% and 12.2%, respectively, during 2019-23F, assume ASP and product mix does not impacted.

As most Chinese households already own a washing machine and at least one refrigerator (more than 90 per 100 households in both categories, similar to advanced economies), new demand is close to saturation.

Compared to Japan’s 176% AC household penetration rate in 2017 (source: Euromonitor) - an advanced economy in East Asia with similar climate - we believe China’s AC industry still has substantial upside, especially in rural areas (urban: 129%, rural: 53% in 2017).

Sensitivity analysis of white goods sales

growth

Penetration rate of refrigerators and washing machines across countries (2007)

AC household penetration rate in China projected to rise

AC sales value CAGR sensitivity analysis (2019-23F)

Refrigerator sales value CAGR sensitivity analysis (2019-23F)

Washing machine sales value CAGR sensitivity analysis (2019-23F)

White goods industry sales value CAGR sensitivity analysis (2019-23F)


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In contrast to purchase patterns for refrigerators and washing machines, our analysis shows that AC shipments are also closely related to China property sales. AC sales have been statistically proven to have a 9-month lag to property sales. In other words, a new home sold now would likely impact AC shipment nine months later, given that most properties are pre-sold in China. Based on our in-house assumption of slightly decline property sales area in China in the medium term, sales volume of ACs due to newly built homes is likely to see damping trend, which we estimate would account for close to one fifth of total AC industry sales volume during 2019-2023F.

Urban penetration rate for ACs, washing machines, and refrigerators

Correlation between AC sales and property

sales


Rural penetration rate for ACs, washing machines, and refrigerators

Sources: National Bureau of Statistics, Euromonitor

Correlation between domestic shipment of air conditioners and property sales

Sales forecast of Haier and Midea

Consolidation opportunities for

market leaders

We opine that market leaders such as Midea and Haier would benefit from the industry’s upcoming structural changes and shift in consumption preferences. Based on our estimates, Midea and Haier are likely to achieve low-teens sales CAGR in China during 2019-2023 to outperform the industry, led by their first-mover advantage in (1) smart appliances, (2) smart manufacturing, (3) premiumisation, and (4) globalisation. We will look closer into the abovementioned key drivers in the following sections.


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Source: NBS, ChinaIoL, DBS HK

Source: DBS HK

Replacement demand to support sales growth

Replacement demand as a % of total demand (PRC, 2023F)

Domestic AC sales volume forecast (PRC)

Source: DBS HK

Source: ChinaIOL, CMM, NBS, DBS HK

We expect replacement demand should continue to support the resilient growth for China’s home appliances, as we expect replacement demand to account for 53% of total sales volume in 2023F vs 46% in 2018. Specifically, as the aged appliances that were bought during the time of the government-subsidised programmes (2009-2013) progressively retired, we estimate that overall replacement demand would account for 52%, 57% and 52% of total sales volume for ACs, washing machines and refrigerators, respectively, by 2023F.


Growth Driver #1: Replacement Demand

Domestic washing machine sales volume forecast (PRC)

Domestic refrigerator sales volume forecast (PRC)

Sources: ChinaIOL, CMM, NBS, DBS HK


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Smart appliances are increasingly a focal point for most home appliance makers as IoT technology continues to evolve. Although there is no universal definition as yet in terms of classification, we believe smart home appliances generally share the following features:

1. Smart home appliances are designed to deliver comprehensive, integrated and active services

2. These services are designed around various functions and scenarios, e.g. dining, cooking, etc. to save the users’ time and costs

3. Smart home appliances are typically embedded with IoT technology to enable communication between various home appliances and can be remotely controlled in multiple modes e.g. via mobile phone app or voice control.

While sales of traditional household appliances are beginning to hit a ceiling as they become less attractive to Chinese customers, manufacturers are pushed to come up with smart devices to satisfy consumers’ increasingly sophisticated demands. Given less and less barriers to access smart appliances, and manufacturers’ enthusiasm to stimulate home appliance demand upgrade, we believe we could be on the verge of seeing a breakthrough of smart home appliances in China within the next few years. In our view, smart appliances will become an important growth driver for the Chinese home appliance industry in the medium-to-long term. In the white goods segment, we forecast the sales volume of smart appliances to reach 20% CAGR during 2019-2023F, outpacing overall industry CAGR of 3.7% during the same period.

Ready for the smart appliance hype

Smart appliances are getting more popular


Growth Driver #2: Structural Shift Towards Smart Appliances

Life cycle of smart home appliances

PRC smart white goods sales volume growth

As we understand it, apart from satisfying Chinese consumers’ increasing needs, smart appliances also provide manufacturers with an excellent opportunity to establish ongoing relationships with customers, compared to the traditional one-off buy-and-sell connection. In the era of smart homes, the digitisation of home appliances would potentially introduce “Everything-as-a-Service”, and transform appliance manufacturers’ role from product providers to prominent ongoing services providers to add more value. Additionally, appliance makers are also exploring new revenue streams via smart appliances. For instance, a partnership with local food traders could fulfil the smart refrigerator’s food replenishment function. Favourable policies (e.g. government subsidies) could also support the sales growth of energy-saving smart appliances. All in, we expect the penetration of smart white goods in China had reached 27% by the end of FY18 and could potentially expand to c.62% by the end of FY23F, in terms of sales volume.

Source: IHS Markit (May 2018), DBS HK

Source: ChinaIOL, CMM, NBS, DBS HK

Value-added services matter


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The progression and role of white goods in a smart home may vary. Specifically, we estimate that smart ACs will most likely reach a peak in terms of volume penetration at 72% by 2023F and account for 73% of total smart white goods in sales volume terms, as IoT technology-enabled AC is able to efficiently address the inconvenience of having multiple remote controls.

Domestic sales volume forecast of smart air conditioners, washing machines, and refrigerator (PRC, 2015-23F)

Source: IHS Markit, DBS HK

Air conditioners could lead the way in smart

home penetration


PRC smart white goods sales volume breakdown (2018 vs. 2023F)

Penetration of smart white goods (in terms of sales volume, PRC)

Source: IHS Markit, DBS HK (only including air-conditioners, refrigerator and washing machine)

Source: IHS Markit, DBS HK

Why is the IoT platform attractive for appliance

makers?

Knowing Your Consumers

We believe the IoT platform and smart homes offer home appliance makers a lot of inspiration the product types and features that consumers may want. The following will be key:

1. Deepens customer understandingTraditionally, as manufacturers were highly dependent on channel distributors and retail chain stores, they had limited direct contact with end-users. But the IoT platform offers consumer appliance manufacturers a chance to revamp their business model and provide more popular products, as they could gain a deeper understanding of customer demands via such platform.


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2. Generate additional salesSmart products create more value because manufacturers can generate recurring sales beyond the one-time selling price, e.g. smart refrigerator’s auto-replenishment function could bring manufacturers additional ongoing revenue streams

3. Boost customer loyaltySmart appliances provide many ways to retain customers, e.g. delivering ongoing updates to satisfy more scenarios.

According a consumer survey regarding smart homes by ICA, CSHIA and Sina in 2019, when asked about what they want in a smart home, the priority of most consumers was whether it is useful (31%), followed by installation services (26%), branding (25%) and price (9%). In terms of the method of controlling the appliances, we understand users prefer smart pad control (27%), followed by voice control (24%) and mobile app control (20%).

Property developers are also actively engaging in developing smart homes and are now increasingly collaborating with home appliance makers. According to the same survey, most of the surveyed property developers (87%) are developing or planning to roll out new property projects with smart home features. Results of the survey also imply that these smart home property projects could be well-received by buyers of mid-to-high-end homes (43%) and large flats/villas (33%). We also understand that these new smart home projects are most likely based in Eastern China and Southern China, where consumers have significantly higher spending power.

What consumers want in a smart home Control gadgets that users prefer in a smart home

Sources: ICA, CSHIA, Sina (2019)

What do consumers look at?


Smart home buyers by property type

Location of smart home properties under development or planning

Per square meter expenditure by real estate developers to equip homes

Control gadgets that users prefer in a smart home

Source: ICA, CSHIA, Sina (2019)


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The Future of Smart Homes

We have identified key trends that are shaping smart homes in China

IoT Ecosystems We are starting to see different market participants strategically shifting their focus to develop and expand their IoT ecosystems, rather than relying on sales of individual traditional smart appliances. One of the drawbacks of traditional smart appliances is that customers are required to use multiple mobile apps to control different appliances under various brands. As the smart appliance industry evolves, consumers are increasingly looking at a more convenient option to control multiple devices (one-for-all).

According to Viomi and IDC, IoT enabled ecosystems will be the norm in China and is estimated to reach 90% of total households by 2022F. Given the strategic importance of the IoT ecosystem in the future, more participants are now joining the race to compete for the future role of “chamberlain”.

There are four major types of market players in the IoT ecosystem: (1) Traditional home appliance makers, including Haier and Midea, (2) Internet companies, such as Baidu, JD, and AliCloud; (3) Mobile phone manufacturers, such as Xiaomi, Huawei, and (4) Traditional retailers/distributors, such as Suning and GOME.

We have tried to analyse the competitive edge of these companies through a few angles.

1. Current platform scaleAs penetration of smart speakers is rapidly ramping up in China, internet companies have acquired a broader user base than other players. For instance, AliCloud had more than 200m connected devices as of June 2019 thanks to its smart speaker Tmall Genie. Baidu has also built up its DuerOS voice assistant installed base to 275m as of 1Q19. Smartphone makers Xiaomi and Huawei have also achieved a decent user base. As of 30 Sept 2019, Xiaomi had c.213m connected devices (excl. mobile phones & PCs), and c.3.5m users with 5 or more Xiaomi IoT devices. Huawei also has a broad router installation base of 260m, which could potentially be transferred to become IoT platform users.

2. AffordabilityCurrently, all these IoT ecosystems do not charge users anything. However, to be compatible with some home appliance makers’ smart platforms, consumers would need to buy a set of products under the same brand. This also applies to smartphone maker Xiaomi: to maximise its ecosystem experience, more products under Xiaomi brand or its associated brands are needed. While for another mobile smartphone maker Huawei, the current IoT ecosystem is centric around its Wi-Fi router, and the company has just launched its smart television which is seen as an important interaction gateway within a household.

Major players in IoT enabled ecosystems


3. Ease of useThis refers to ease of operating the system. Haier stands out in this perspective, as consumers can use mobile app or voice control to operate the appliances. Apart from that, its devices are designed to deliver seamless services rather than singular product functionality.

4. Flexibility of switching The flexibility to switch to another IoT system if necessary. Internet companies and retailers generally provide open ecosystems, via their smart speakers or mobile apps, which makes it easier to switch to another IoT platform vendor. On the other hand, Xiaomi, which has a closed ecosystem, makes it difficult to switch as their products are not compatible on other platforms.

5. Platform extendibility (across brands)This refers to the number of partners for possible extensions to the IoT platform. The open system generally has an advantage in product extension. However, for home appliance manufacturers such as Haier and Midea, it would be more challenging to have the appliances of their competitors onboard.

6. Product qualityHome appliance leaders have advantages in product quality over other IoT platform competitors, especially in the large appliance segment, which requires more advanced techniques. Xiaomi is well-known for its value-for-money strategy, but we understand that it still takes time to beef up its production of high-quality large appliances.

According to our preliminary analysis, we believe Huawei might outperform among other IoT ecosystems. We believe the flexibility Huawei gives to both consumers and home appliance manufacturers, including the easy setup procedure, the open platform to include all home appliance brands, as well as the large user base of Huawei & Honor smartphones, has made its platform more attractive compared to others. Besides, a low level of threats to home appliance manufacturers also bodes well for Huawei’s ecosystem expansion. Having said that, home appliance makers are set to deliver the best user experience compared to other IoT ecosystems given their better understanding in both users and hardware.


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DBS assessment: Factors to determine IoT platform competitiveness

Source: DBS Bank

Source: DBS HK

Competitive advantages of different platforms

Industry Domestic leaders

Competitive advantages

Home appliances

Haier, Midea

(1) Home appliance companies have proper brand recognition, leading market positions, established sales networks, scale advantages, and supply chain management expertise.

(2) They can provide smart home solutions within their existing comprehensive brand matrix.

(3) The distributor networks maintained by home appliance companies could rapidly distribute new products across the country

Internet Baidu, JD, AliCloud

(1) Internet companies can provide open ecosystems to integrate a large number of hardware companies, especially by leveraging on the popularity of smart speakers in China. Large platforms maintained by internet companies could attract many users to the IoT system and intensify industry competition.

(2) E-commerce companies have strong online sales channels, and home appliance companies rely on Tmall and JD.com for their online sales, which could give e-commerce companies an extra advantage.

Smartphone Xiaomi, Huawei

(1) Xiaomi has the early mover advantage in the IoT platform segment, and it has formed strong customer stickiness. Many smaller-sized appliance companies receive funding from Xiaomi to join its sizeable closed business ecosystem.

(2) Huawei is late to the game but is catching up. As it strategically develops various gateways, e.g. mobile phones, Wi-Fi routers, TVs etc., for its open IoT platform, it has potential to ramp up its user base and attract more appliance brands.

Retailers/ distributors

Sunning, GOME

(1) Retailers are consolidating their online/offline platforms and moving closer to customers during last mile delivery and appliance installation. It is easier for them to exert influence on customers in terms of the choice of IoT platforms.

(2) Retailers can rapidly deploy new products across the country.


Voice Recognition and Control Chinese consumers prefer having the voice control feature, according to Deloitte’s study of smartphones. This also partly explains the success of quick adoption of smart speakers in China. As at April 2019, the urban areas in China lead in terms of smart speaker ownership (22%), at a level similar to the US. In terms of smart speaker shipments, China has become the largest smart speaker market, taking up more than 50% of the global share, according to Canalys’ smart speaker analysis.

Chinese consumer’s preference for voice recognition

Smart speaker shipments by country

Source: Deloitte

Source: Canalys


23

Many households are finding that it is useful to have smart speakers nearby. In the US for example, more than 40% of smart speaker owners now have multiple devices compared to 34% in 2018. Households with two to three speakers in China are rising as well. Of the 19m new smart speaker owners, 31% have purchased multiple devices. We believe China is also catching up in terms of per-household consumption.

Urban China is leading in smart speaker adoption; yet overall China lagging behind the US

Smart speakers per household (US)

Source: Deloitte (June 2018), Canalys forecast* (Apr 2019)

Source: Voicebot Smart Speaker Consumer Adoption Report

Expect ownership of smart speakers per

household to rise


As traditional appliances gradually upgrade to smart appliances, it is crucial for the consumer to find a more natural way to communicate with all the devices. One of the solutions is to have an input device, which most industry experts believe could be a smartphone or smart speaker, mainly thanks to mobility and smooth interaction, according to iResearch’s survey in 2018. Global players like Google (Nest Lab) and Amazon have demonstrated their potential in driving the success of the connected home via introducing smart speakers to satisfy consumers’ varying needs. In China, Baidu, Xiaomi and AliCloud, have also launched their flagship smart speakers to catch consumers’ attention.

We believe voice control technology can help manufacturers to reach out to a larger group of customers, particularly the elderly, who may not be that proficient in using smartphones. To improve the accuracy of artificial intelligence, many manufacturers are also hiring experts from academia and forming a partnership with speech recognition companies, such as Haier’s partnership with iFlytek, to produce voice-controlled products. We expect to see this trend becoming more prevalent as a hands-free alternative to control via smartphones.

Cloud Adoption As sales of smart appliances continue to grow, and data volume grows exponentially, we expect to see cloud adoption accelerating among home appliance players. The datapoints that home appliances collect from homes and send back to cloud could be stored and analysed for greater consumer insight and behaviour to capture future business opportunities.

Cloud also lays a strong foundation for potential IoT ecosystem extension, as the cloud connection has easily enabled the interoperability between users and appliances. For instance, Huawei and Midea have established a cloud-to-cloud relationship, which allows Huawei users

Smart speaker players global market share (in terms of shipment, 2Q19)

Source: Canalys

Smart speakers to become an important

gateway to IoT platform

More thoughts on voice control


25

to control some of Midea’s products, mostly ACs. Going forward, we believe the cloud-to-cloud connection would become more popular among home appliance makers, which is an easy way for them to establish interoperability while deciding which models can be connected by external business partners.

5G In theory, there are two things experts are expecting 5G to achieve in a smart home:

1. Consolidation of multiple confusing wireless standards to enable more straightforward installation

Currently, smart home appliances are connected via different standards e.g. WiFi, Zigbee, Bluetooth, and the difficulties of installation have led to many consumer complaints while a 5G-enabled device could automatically configure itself to a reliable, pervasive network with minimal user involvement.

2. More reliable connection and lag-free experience

As 5G works on much higher frequencies, it can technically achieve response times as short as 1-2 milliseconds, while wireless connection to the internet in homes is usually 10 to 100 times slower. That faster response time will allow your smart home devices trigger notifications and device-to-device automation routines in a more seamless fashion, helping to achieve a smoother connected home experience.

Cloud-to-cloud connection

Source: Company

What 5G means for a smart home?


Nevertheless, it will be a while before 5G takes over the smart home, as infrastructure must be in place before device makers are able to produce 5G-enabled products. Apart from that, as signal transmission within 5G network consumes a higher amount of energy, appliances running on consumer-installed replaceable batteries will not be able to stay connected for a good amount of time.

Consumers usually have high expectations when they think about what smart appliances should offer: they believe the smart home should be delivered and managed seamlessly; they want products and services to work together behind the scenes and satisfy their sophisticated needs. There remain various barriers before we can turn what has been a tech-led evolution into a consumer-led revolution:

1. The technology is not meeting the high expectations of consumers. While there have certainly been breakthroughs in sensor controls and smart speaker-enabled remote connectivity, there remains a lack of groundbreaking innovation in the market. For example, a smart fridge that tracks its content and alerts users upon foods expiry sounds appealing, but this technology remains distant considering consumers’ real demand and appliance’s high price point

2. There is no existing coherent system to connect the plethora of smart products and services available, and brands are currently only able to deliver the best experience when the consumer has a full set of the same brand of products at home. We believe this would potentially promote bundled sales under the same brand but hinder smart appliances interconnectivity going forward.

3. Home appliance makers seem to produce appliances with the same smart functions, making it difficult for customers to tell the difference. Apart from that, there is also an increased risk of user data leakage.

Barriers remain


27

As China’s middle class continues to expand with growing disposable income, we believe the premiumisation trend is likely to sustain in the longer term. Within the white goods segment, we believe premiumisation would become an important driver and we estimate sales of premium white goods to reach 12.5% CAGR during 2019-23F in China.

Riding on rising disposable income and Chinese consumers’ increasing demand for a better quality of life, the ASPs of air-conditioners, washing machines, and refrigerators have risen by 3.2%/5.2%/2.9% CAGR during 2015-18 and we expect to ASPs to rise by a further 2.5%/5.5%/8.1% CAGR during 2019-23F. As penetration of Chinese home appliances is reaching saturation, especially for refrigerators and washing machines, we opine that premiumisation serves as an increasingly important growth driver going forward.

Growth Driver #3: Shift in Consumer Preference Towards Premium Products

Premium product sales as a % of total sales in China

Rremium products retail price:AC > RMB4300, Washing machine > RMB3500, refrigerator > RMB 3800

Source: CMM, DBS HK


Consumers’ preferences have been evolving over the years with a gradual shift to better quality products, as evidenced by the rising proportionate sales of mid-to-high-end appliances, as evidenced by the offline channels. In the refrigerator segment, for instance, we can see that mid-to-high-end sales accounted for 43.8% of its offline sales in 2014, compared to 72.7% in 2018.

Premium product sales growth

ASPs of home appliances higher due to trading up trend

Source: JD.com, CMM, DBS HK

Source: CMM, DBS HK

Consumer preference shifting to better quality products


29

We understand that online sales average price points are lower compared to offline sales amid a slightly different product mix and positioning. However, within the online channel, the consumption upgrade trend is taking place as evidenced by increasing contribution from products with price tag above RMB3000. In 2018, almost half of the online sales were made up of purchases of large ticket items (product priced over RMB3k). According to Red-Top’s survey (2018), 28% of the consumers nowadays prefer to purchase higher end appliances online, vs. 5.7% ten years ago in 2008.

Mid-to-high-end products’ proportionate sales in offline channels

Online sales contribution from products priced above RMB3000

Source: AVC

Source: China Center for Information Industry Development (Home appliance online sales analysis (2018), Feb 2019,)

Same pattern for online sales


Over the last few years, we have been seeing clear product upgrade trends in the AC/washing machine/refrigerator segments in terms of functionality and design. The better product mix has thus driven ASP growth. We have identified the following trends for white goods, as shown in the following charts:

1. For refrigerators, we see consumers’ preference moving towards larger-sized refrigerators i.e. multi-door and side-by-side-door refrigerators. On average, the retail price of high-end refrigerators is 2.6x that of low-end refrigerators.

2. For washing machines, we see a shift to front load washing machines. An integrated dryer function is also an emerging trend. On average, the retail price of a front load washing machine is 2.4x that of a top load washing machine.

3. For air conditioners, consumers tend to prefer inverter ACs more than fixed frequency ACs. On average, the retail price of a variable frequency AC is 1.6x that of a constant frequency AC.

ACs - offline retail sales volume

Source: AVC

Ongoing product mix improvement


31

Riding on the change in consumer’ preference and domestic players’ branding upgrade, we have seen Chinese companies gaining more market share, notably Haier’s Carsarte brand, which is a leading brand in the premium home appliance segment. As of Sept 2019, Casarte accounted for 40.6%, 76.8% and 41.2% of sales of premium refrigerators (RMB10k+), premium washing machines (RMB10k+) and premium home air-conditioners (RMB16k+).

Washing machines - offline retail sales volume

Refrigerators - offline retail sales volume

Source: AVC

Source: AVC

Chinese companies benefitting from

consumption upgrade


Offline premium brands sales value breakdown

Casarte market share in China’s high-end home appliance sales (9M19, PRC)

Source: AVC

Source: Company

Brand power emerging

No.1 high-end market share No. average price Refrigerator (RMB10k+) 41% 2.6x of industry average

Drum washer (RMB10k+) 77% 2.2x of industry average

Home air-conditioner (RMB16k+)

41% 2.4xof industry average

To satisfy the various demands of Chinese customers, we understand that domestic brands are also evolving to come up with a comprehensive brand matrix, especially for market leaders like Haier and Midea. For example, Haier currently has “Casarte” covering the high-end segment, while “Leader” brand focuses on the mass market. Midea is catching up and developed the “COLMO” brand which has AI features and delivers a premium experience while its “BUGU” and “Hualing” brands focus more on the value-for-money segments.


33

Domestic players’ comprehensive brand matrix

Source: Company

Tier

2-3

bra

nds

Tier

2-3

bra

nds

We believe market leaders’ comprehensive brand matrix covering a wide range of prices and consumer preferences have reshaped the industry’s landscape. Going forward, we expect the industry to consolidate further, as leaders continue to gain market share leveraging on their strengthened brand awareness, improved product mix and quality, and widened distribution coverage. We believe this would also in turn beef up market leaders’ pricing power to lift their blended ASP. Apart from this, we anticipate market leaders’ early move in smart appliances should also enhance their high-tech brand image, and hence their pricing improvement too. Overall, riding on the premiumisation trend, we expect GP margins of Haier and Midea will continue to expand going forward.

Market leaders to enjoy benefits of premiumisation


Gross profit margin forecast

Source: DBS HK


35

We believe overseas markets are becoming increasingly important to Chinese home appliance leaders, as echoed by the rapid growth of Japanese home appliance makers during 1960s-80s, a period we believe is very similar to China’s current stage. In view of lingering uncertainties of Sino-US trade negotiation, in this section, we have also attempted to assess the impacts of such on Chinese home appliance makers. We understand that a significant number of manufacturers are gradually placing more focus on overseas production facilities to lower the disruption impact arising from the trade conflict.

Overseas Sales Carrying More Weight

As volume growth of some major appliances have plateaued, overseas markets are becoming increasingly critical for Chinese white goods manufacturers. In 1H19, overseas revenue accounted for almost half of QD Haier and Midea’s sales, and we also expect overseas contribution to increase in 2019 given short-term weakness in domestic demand.

Case Study: Parallels between China and Japan We have chosen to look at the Japanese home appliance market in the 1980s for our globalisation case study, given its multiple similarities to the Chinese market at the current stage: (i) similar GDP per capita according to World Bank data, (ii) similar penetration rates of major appliances such as washing machines and refrigerators. Due to the different technology level, ACs were more expensive in the 80s in Japan hence the lower penetration rate compared to China’s current stage; (iii) other similar macro factors, e.g. GPD growth, demographic structure, and international trade environment.

Source: Japan Statistics Bureau, CEIC, Wind

Macro comparison between Japan (1960s – 80s) and China (current stage)

Growth Driver #4: Manufacturers’ Global Expansion

Japan (1960s-80s) China at current stage GDP c.5% growth; GDP per capita of US$9,465

in 1980, with 10.4% CAGR during 1980 and 1990

6-7% growth; GDP per capita of US$9,770 as of 2018, with 10.9% CAGR during 2008 and 2018

Population growth 0.55% CAGR (1980-1990) 0.53% (2007-2017)Demographic structure

70% (age 15-64, 1989), 12% (age above 65, 1989), single household (1960): 16%

72% (age 15-64, 2017), 11% (age above 65, 2017), single household (2017): 16%

International trade Trade war with the US since 1968, Implementation of Trade Act of 1974, agreement to cut Japan's colour TV shipment to the US

Sino-US trade war began in 2018, and no deal reached as of Dec 2019


Source: World Bank

Source: Japan Statistics Bureau

Similar GDP per Capita (Japan in 80s vs. China now)

Similar penetration rate for some home appliances

Over the course of 10 years during 1976 and 1985, sales growth of major Japanese home appliance manufacturers was boosted by rapid revenue growth outside of Japan. Looking at the financials of major market players, overseas sales proportion had increased by 10-20ppts during these ten years, demonstrating the importance of overseas market expansion for Japanese appliance makers at that time. Specifically, Sharp had registered the fastest revenue and net profit growth among peers.


37

Impact from US-China Trade War

The US had imported US$5.7bn worth of white goods from China in 2018, with more than a half from Chinese OEM players, according to China customs. As of the end of Oct-19, all refrigerators, most ACs (window and car ACs) and adll clothes drying machines exported to the US are subject to an additional 25% tariff.

25% tariff on almost all white goods

Sharp and Sony: Sales CAGR (1962-1985)

Sharp and Sony: Sales Breakdown

Sources: Bloomberg Finance L.P, Company


Based on US trade data, among the three white goods categories - ACs, refrigerators, washing machines - China-made ACs accounted for 35% of total AC imports into the US in 2018 in value terms, representing the highest dependence among white goods. For refrigerators, those manufactured in China formed 23% of total imports into the US.

Taking these into perspective, China is the second largest exporter of ACs and refrigerators to the US, both coming in second to Mexico. As for washing machines, back in 2017, the US slapped anti-dumping tariffs targeting Korean branded (LG & Samsung) washing machines, hence China-made washing machines under the Korean brands suffered a sharp decline in terms of US imports.

US’ high dependence on China’s appliances

Chinese white goods imported by the US

US AC imports from China (US$3.2bn in 2018)

Source: Trade data online


39

US refrigerator imports from China (US$2.4bn in 2018)

Imported home appliances from China as a % of total US imports of home appliances

US washing machine imports from China (US$188mn in 2018)

Sources: Trade data online


We understand that the trade conflict would have a sizeable impact on small-to-medium-sized manufacturers, which had dedicated their OEM business for the US market, as the US remains the largest single market (c.24% of China’s exports, source: Chinese Customs) for exports of Chinese appliances overall (white goods, TVs, kitchen appliances, cameras, etc.). Taking the example of JS Global, assuming that the additional US tariff of 25% has been imposed since 1 Jan 1, 2018, tariff expenses would have accounted for 13% of its sales revenue of vacuum cleaners and air fryers.

However, as for leading Chinese white goods manufacturers, we believe the direct impact of the tariff is limited, especially for companies that already have production capacity in the US, which we have summarised in the following table. Besides, as some of the duties will inevitably be passed onto the US consumers (as evidenced by the price increase of washing machines in the US), we believe this would alleviate part, if not all, of the tariff impact.

Additional US tariff impact on JS Global’s sales of vacuum cleaners and air fryers

Average selling prices of washing machines in US (based on prices in Dec) (change% yoy)

Source: JS Global Prospectus

Source: Bureau of Labor Statistics

Limited impact on market leaders


41

Overseas Production

As Chinese households’ penetration of different types of appliances is reaching saturation, home appliance market leaders in China, e.g. Haier and Midea, have been looking to expand their production bases and markets overseas for some time already. In view of the growth opportunities in overseas markets, especially emerging markets, Chinese appliances makers have been actively expediting their efforts via JVs, M&As and greenfield investments. According to our understanding, overseas appliance production capacity currently accounts for c.5% of Midea’s total capacity, while Haier, with 69 plants abroad out of 123 in total, has been more successful in localising operations in foreign markets.

Additionally, potentials of further tariff hikes have been another significant trigger for overseas capacity build-up. Chinese home appliance makers are accelerating their pace to diversify supply chains elsewhere, despite the latest pause in the US tariff hike (from 25% to 30% starting in Oct 2019), which was previously scheduled to hit US$250bn worth of Chinese goods including air-conditioners, refrigerators and clothes dryers. The temporary tariff truce also includes the 15% tariff on some types of small appliances by Dec 2019 (within the remaining US$300bn worth of imported Chinese goods). Apart from the Sino-US trade war, India had also increased import tariffs on various consumer electronics and appliances since 2017, prompting Chinese appliance manufacturers to establish production bases in India too.

Growing need to localise

Trade uncertainty as another trigger

Midea’s global production bases

Brazil (2)

Argentina (1)

China (17)

Japan(2)

Vietnam (1)

Thailand(1)

India(2)Egypt(1)

Italy(1)

Belarus(1)

Microwave oven, water heater

Commercial air- conditioner

Residential & commercial air conditioner

Residential & commercial air conditioner

Residential air conditioner Residentialair conditioner

Refrigerator, washing machine, rice cooker, microwave oven

Residential air conditioner,refrigerator, washing machine, rice cooker, fan

Rice cooker, fan, Induction cooker

All categories: Residential & commercial air conditioner,Refrigerator, washing machine, rice cooker, microwave oven, dish washer, vacuum cleaner,oven etc.

Source: Company


Due to rising labour costs in China, home appliance makers are planning to reallocate more capacity abroad. Traditionally, Chinese products have been considered as low-end in overseas markets. But now, Chinese manufacturers are keen to explore more growth potential in the emerging markets via their acquired foreign brands, of which local consumers regard as mid-to-high-end products. They also aim to reduce their dependence on OEM and increase the sales mix from their own brand products.

Where will home appliance companies move? We highlight Vietnam, India and Thailand as countries that Chinese home appliance manufacturers are attracted to set up production base driven by local demand, better tariff policies and competitive labour costs. Chinese manufacturers normally enter these markets via JV, M&A and/or greenfield investments.

VietnamChina’s top three appliances manufacturers - Midea, Gree and Haier - have been in Vietnam for some time. Gree established its third overseas air conditioner plant in Ho Chi Minh City (following Brazil and Pakistan) in 2008 with 100k-unit annual production capacity, but it was closed in 2013 due to disputes with local shareholders.

Midea set up a small appliances production plant and a refrigerator appliance plant in Vietnam during 2007-08 with a capacity of 5-8m units for small appliances, 1m units for air-conditioners, and 500k units for refrigerators.

Haier established its footprint in Vietnam by acquiring Japanese company Sanyo, and also added a manufacturing plant with a 500k-unit washing machine capacity (for mid-to-high-end products) in 2018. According to Haier, its Vietnamese production is mainly used to support local demand, as well as exports to Japan, the Middle East, and Indonesia.

Given the better trade policies, cheaper labour cost and growing local demand, we have seen other appliance makers expanding capacity into Vietnam, e.g. Kingclean Electric. To fill the gap in the local supply chain, essential upstream players, such as Sanhua Intelligent Controls, have also begun to establish plants there and are producing electrical components in Vietnam.

Rising labour costs in China as a push factor

Source: Indian Customs

India raised import tariff on home appliances

Tariff (%) Before 27 Sept 2017 After 27 Sep-17

Air conditioners 10 20

Refrigerators 10 20

Washing machines (less than 10kg) 10 20

Compressors for refrigerators & ACs 7.5 10


43

India Over the past two years, Chinese appliance players have been building plants in India, given the strong growth potential in India and increased import tariff. Midea invested 8bn Indian rupees (c.US$123m) in 2017 to establish a production base manufacturing refrigerators, washing machines, and water heaters. Prior to that, Midea also had a JV with Carrier in India. In 2018, Haier announced that it is investing US$286m to set up a second base in India, this time in an industrial zone in Noida in North India (first plant was in Pune, operational since 2017) to produce major appliances. We believe all these recently added capacities have been designed to satisfy the fast-growing local demand.

Thailand Midea currently has a production plant in Thailand via its acquisition of Toshiba, mainly manufacturing washing machines. Similarly, Haier owns its Thailand plant through the acquisition of Sanyo since 2007. The production site currently has an annual production capacity for 1.2m refrigerators, 150k washing machines, and 200k air-conditioners. As Haier’s largest production base in ASEAN with full functions of manufacturing, development and distribution, the Thailand plant is designed to meet demand from ASEAN, Australia, Japan, Middle East, and Africa.

Setting up capacity in the overseas markets is not a simple process, and we understand that so far, the profitability of appliance companies in the abovementioned emerging countries is generally lower than China. Chinese appliance makers are mainly concerned about:

1. Higher freight costs and longer lead times due to poor transportation infrastructure, including roads, railway and ports

2. A lack of supply chain integration, for instance, some critical components like electronic control modules may still need to be imported from China

3. Sophisticated and unfamiliar political and cultural environment, for instance, some Chinese companies experienced anti-China protests in Vietnam in 2014, while India’s multi-cultural population also creates difficulties for Chinese appliance manufacturers

4. Potential forex fluctuation in emerging countries could also be other challenges

Challenges remain


In contrast with Chinese consumers’ enthusiasm for a digital life, including smart home exploration, digitalisation progress of Chinese enterprises is still lagging compared to developed economies. According to a study made by Boston Consulting Group (BCG), as of Mar 2017, there were only 25% of digitised Chinese factories, compared to 46% in Germany, and 54% in the US. Specifically, the Chinese manufacturing industry is still trying to catch up in various aspects such as industry connections, data analytics and decision-making, and the level of automation. We believe home appliance market leaders are among the first batch to enjoy first mover advantages to ride the wave of smart manufacturing, thanks to their early forays into Industry IoT and robotics.

Smart manufacturing on the horizon

Growth Driver #5: Smart Manufacturing

China’s digital factories still lag developed economies

Source: BCG “Chinese Internet Economy White Paper 2.0” (2018)


45

Industry IoT

Within the home appliance manufacturing industry, Haier’s COSMOPlat and Midea’s MeiCloud stand out among the Top50 sizeable industry IoT platforms in China. While the two giants have long been known as successful consumer appliance brands in China, we highlight that they have also made significant moves to lead the upcoming industry 4.0 era. According to our understanding, there exist fundamental differences between Haier and Midea’s Industrial IoT platforms, in terms of their design to address various challenges as well as consumer pain points.

Industrial IoT development (China vs. US)

Penetration of smart sensors

Cloud adoption rate amongst enterprises

Patents on smart analytics and decision

making

Penetration of industrial robots

c5% 2016

c30% 2018

933 2017-8

68 units / 10k workers

2016

Smart connectivity

Data integration

Smart decision making

Human robot collaboration

c12% 2016

c80% 2018

5203 2017-8

189 units / 10k workers

2016

Source: BCG “Chinese Internet Economy White Paper 2.0” (2018)

Haier and Midea: their industry IoT platforms

have significant impact


MeiCloud is designed to streamline upstream and downstream operations, with the aim of zero inventory and C2M (“Customer-to-Manufacturer”) production. We understand MeiCloud is capable of connecting various procedures e.g. R&D, procurement, production, logistics and end-user usage, in a real-time manner. The platform also utilises cutting-edge deep learning technique for product quality inspection, smart manufacturing and distributions, and detecting equipment failure. In our view, we believe MeiCloud is similar to IoT platforms in the US and Europe, given MeiCloud’s heavy focus on data analysis and technology development.

Unlike the US and EU’s Industrial IoT platforms, Haier’s COSMOPlat focuses more on enabling small and medium enterprise (SME) growth via resource matching. Despite limited data analysis models covering only a few industries now, Haier shares its resources via its COSMOPlat platform, especially for home appliance and peripheral sectors. For instance, there are more than 30,000 suppliers on Haier’s platform using its joint-procurement services. Haier also shares the capacity of its logistics arm which specialises in bulky items, e.g. supplying furniture, fitness equipment to SMEs.

Robotics

Given the ageing population and rising labour costs, China’s robotics industry has great potential to catch up with developed economies. Despite a rapid pick-up of robotics density in China (from 15 robots per 10k employees in 2010 to 140 robots per 10k employees in 2018), we still see huge gap compared to other developed Asian economies, e.g. 831 and 327 robots per 10k workers in Singapore and Japan, respectively. Going forward, according to International Federation of Robotics (IFR), the overall installation numbers are expected to recover in 2020F and grow at 14% CAGR during 2019-22F in Asia. We also expect China to outpace Asian growth despite a slowdown in automotive industry in the near-term, thanks to the following reasons:

1. Demand from other manufacturing sectors should outgrow automotive industry. Over 100 different manufacturing industries in China use robots and most of them have only just begun to automate. There are over 500 robots per 10k employees in China’s automotive manufacturing sector, which is relatively saturated, compared to less than 50 robots per 10k employees in other manufacturing sectors.

2. Rising wages and labour shortage eventually make robots economically feasible.

3. As China gradually moves up the manufacturing value chain away from commoditised components towards semi- or fully finished products, we believe there will be strong domestic demand, especially in some promising new sectors such as electric vehicles and medical devices.

Recognising this great potential, Midea have acquired KUKA (KU2.DE) back in 2016 to expand its strategic footprint in robotics.

Midea’s MeiCloud: Focusing on data

and technology development

Haier’s COSMOPlat: Industrial IoT with

Chinese characteristics

Robotics: A bright future in China


47

Robotics density in selective countries/regions (2018)

Estimated worldwide annual supply of industrial robots in 15 main markets at 2018 Year-End

Industry robotics density (China vs. world average)


We understand that the auto industry remains the largest buyer of robots, accounting for more than 30% of robot usage in China, followed by the fast-growing 3C& Electronics manufacturing industry. Given the auto industry’s sluggish sales outlook and 3C&Electronics gaining traction in China, we could see the 3C & Electronics industry becoming the most critical customer group for robotics makers in China in the medium term. Based on our on-site visits in the past, major home appliance makers are also using robotics in certain procedure such as coat painting.

Robotics installation forecast in Asia

Robotics sales breakdown by downstream industry

Sources: International Federation of Robotics (2019)

Source: GGII, DBS HK

A peek at downstream buyers


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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


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