Chinese white goods makers like Haier Electronics Group Co Ltd <1169.HK> are muscling in on their distributors and expanding into logistics and e-commerce in a bid to win the fierce battle for margins in the world's biggest home appliance market.
This strategy shift is expected to hurt retailers such as market leader Suning Commerce Group Co Ltd <002024.SZ> and GOME Electrical Appliances Holding Ltd <0493.HK> as slowing economic growth and increasingly thrifty, web-savvy consumers intensify the already cut-throat competition in the $89 billion sector.
"It has become the norm for manufacturers to roll over to e-commerce and logistics distribution, hoping to enrich customers' online shopping experience, while holding up profit margins without having them eroded by a middle-man," said Linus Yip, chief strategist at First Shanghai Securities. "Apart from securing market share, it is more about surviving in the highly competitive market," he added.
Chinese appliance manufacturers, already facing higher labor and operating costs, are currently vying with their distributors and online marketplaces for the same customers, who are, by and large, unwilling to pay a premium for local products.
Distributors often undercut manufacturers by offering discounts or financing for purchases, which in turn reduces the profit margins of everyone involved in the sector: second-ranked distributor GOME, backed by private equity firm Bain Capital, posted a loss for 2012.
GOME said after the stock market close on Tuesday that it swung to the black in the first half, with a profit of 322 million yuan ($52 million).
Now manufacturers like Haier, GD Midea Holding Co Ltd <000527.SZ>, and Hisense Kelon Electrical Holdings Co Ltd <000921.SZ> are fighting back.
ONLINE AND INSIDE THE MAINLAND
The benefits of taking control of distribution and e-commerce are clear: manufacturers can expand into China's vast interior where most of the sales growth is expected to come from without having to open physical outlets or share their already meager profits with retailers.
Home appliances are big business in China with the value of the domestic market forecast to grow by about one-fifth in the next two years to $105 billion, according to data from consultancy Euromonitor. This growth potential was a factor that attracted Whirlpool Corp , the world's largest maker of home appliances, to agree to buy a majority stake in China's Hefei Rongshida Sanyo Electric Co Ltd <600983.SS> for $552 million.
E-commerce is also booming with customers expected to almost double the value of home appliances they purchase online in the next two years to 257.54 billion yuan ($42.06 billion).
GD Midea, Hisense and air-conditioning maker Gree Electric Appliances Inc <000651.SZ> have already told investors they want to expand into distribution and e-commerce but so far, Haier appears to be the most advanced.
The company signed a deal for an undisclosed amount with Singaporean firm Global Logistics Properties in September to expand its distribution and logistics network, particularly in less developed cities and has said it has enough cash to finance this business.
On Tuesday Qingdao Haier Co Ltd <600690.SS>, sister company of Hong Kong-listed Haier Electronics, said it plans to beef up its e-commerce business and logistics operations to enhance its last-mile services, after announcing a 15 percent rise in first-half net profit.
The few foreign firms that tried to carve out a stake of the Chinese market have also shifted their attention to the web. U.S.-based Home Depot Inc , the world's largest home improvement chain, said late last year it would close all seven of its big stores to focus on online sales and specialty shops.
Even though the competition is tough, Haier's investment is likely to pay off because by targeting less developed cities, they are venturing into largely virgin territory, analysts say.
"They have the first comer advantage and that will give them a chance of succeeding, because at the end of the day, while somebody needs to build their network, they can just use Haier network," said Nicholas Studholme-Wilson, retail sector analyst at Sun Hung Kai Financial.
"Suning doesn't have the distribution in tier 3 and tier 4 cities and it will take time to build up the warehouse business and logistic business."
Suning, in the mean time, is seeking new revenue streams by venturing into banking and online financial services.
(Additional reporting by Twinnie Siu and Rachel Lee; Editing by Anne Marie Roantree and Miral Fahmy)