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Despite slowing sales, consumer electronics business still attracting investments

Despite slowing sales, consumer electronics business still attracting investments

The consumer electronics market may have slowed down, but continues to attract sizeable investment. This is because of the massive untapped potential in both rural and urban areas and the country's steadily growing young working population.

Gaurav Shinde has been on a shopping spree. The 25-year-old from Mumbai, who began working with Google in Hyderabad a year ago, has just splashed out on the latest flat screen LED TV, a tablet and a smartphone for his father.

Next on his shopping list? An iPhone and a host of appliances such as a washing machine, refrigerator and microwave for his bachelor pad. "I was always interested in tech gadgets and I used to take my computer apart and fix it just for fun in college. Now that I've started earning I'm getting into buying these products," says Shinde, a search quality associate at Google.

Shinde is one of thousands of urban buyers driving the consumer electronics industry even though the economy has been in the throes of a slowdown for many months. The consumer electronics business is still attracting big investment because of the massive untapped potential in both rural and urban areas and the country's steadily growing young working population. "Very few houses have a full range of appliances. So, even with five to six per cent gross domestic product growth, companies are looking to India as a place to enter and invest. Compared to the rest of the world, we are still doing really well," says Shantanu Das Gupta, Vice President of Corporate Affairs and Strategy, Whirlpool India. According to Gupta, only 14 per cent of households in urban areas have refrigerators and 15 per cent have washing machines.

Similarly, a report, Emerging Trends in Consumer Electronics and Durables Industry, by the Associated Chambers of Commerce and Industry (ASSOCHAM) in May 2012 notes that only two per cent of households in small towns have refrigerators and only 0.5 per cent own washing machines.

"Around two-thirds of consumption of consumer appliances happens in the top 40 cities by per capita income. So this is an urban centric market still," says Gupta. Most of his company's 40,000 independent outlets are in areas with a population of 500,000-plus. These towns or urban areas account for around 70 per cent of the company's home appliances consumption, while the rest is rural sales. Gupta says he expects this ratio to change only marginally in the future because of the continuing potential in urban areas.

Though the Rs 34,000-crore consumer electronics industry has taken a hit because of the economic slowdown, it is still growing at an impressive 15 per cent a year compared with a global growth figure of just 10 per cent. The ASSOCHAM report adds that India's consumer electronics and durables sector is likely to reach Rs 52,000 crore by 2015. The huge potential has driven a host of new foreign consumer electronics firms to invest in the country in the past two years. The sector has seen around 11 completed mergers and acquisitions (M&As) since 2010, according to market tracking website DealCurry. com's database. Apart from foreign investment, domestic firms are also pumping big money into the consumer electronics business.

Only 14 per cent of households in urban areas have refrigerators and 15 per cent have washing machines

Many are pinning their hopes on the digital sector with more consumers buying laptops and TVs

Chinese air-conditioning manufacturer Midea Holdings sealed a deal with American air-conditioning and refrigeration systems firm Carrier's Indian unit in January to bring its entire range of home and consumer appliances to the market. The 40:60 Carrier-Midea joint venture (JV) plans to invest Rs 500 crore in the next five to six years to produce and distribute Midea's range of home appliances in India. The JV firm has already set up a manufacturing plant in Gurgaon.

Midea is not alone. France's Groupe SEB, a home appliances maker and owner of the Tefal brand, acquired a 55 per cent stake in Indian electrical appliance maker Maharaja Whiteline in 2011. Fisher & Paykel Appliances, a high-end kitchen appliances brand from New Zealand, tied up with Shivam Industrial Corp, a Gurgaon-based retail and distribution operator, to market its products in India. Dutch company Royal Philips Electronics, a familiar brand in India for decades, acquired Maya Appliances in early 2011. Chennai-based Kreon Financial Services bought Aran Kitchen World India, a company operating in the modular kitchen segment, in December 2011.

Apart from M&As and new joint ventures, companies are also spending on innovation and expanding operations. In 2011, Hitachi allocated $400 million to set up a research and development (R&D) centre in Bangalore. Panasonic too has set up its first ever India R&D plant in Gurgaon. US home appliances firm Whirlpool plans to invest Rs 750 crore on innovations and setting up of a new line of products in India.

It is not just the potential in home appliances that is fuelling the optimism. Many are also pinning their hopes on the digital sector with consumers expected to buy more laptops, mobile phones and televisions. "People are spending more on LCDs, LEDs, laptops and mobiles," says Nilesh Gupta, Managing Director of Vijay Sales, an electronic retail chain in Mumbai. He says the replacement cycle for mobiles has come down to eight to 10 months from 15 months two years ago.

No doubt there are also signs of the slowdown - but for it, sales and investments may well have soared higher. The average washing machine replacement cycle, for instance, has risen to more than five years from four, two years ago.

Consumer electronics sales have also taken a hit. The ASSOCHAM survey, which queried 200 middle income group employees from select cities, found that 49 per cent had decreased spending on home appliances and 44 per cent had cut spending on home and personal electronics.

"The overall slowdown in the economy has impacted the consumer buying sentiment," says Mahesh Krishnan, Vice President of home appliances at Korean firm Samsung's Indian unit. "However, the premium/technology-oriented segments have continued to sustain their growth."

Other industry officials say business has suffered because they have been forced to increase prices following rising input costs and a weakening rupee. "Industry is facing two main challenges: a hike in input prices and the rupee depreciation, due to which manufacturers have raised prices constantly," says Yasho V. Verma, Chief Operating Officer of LG India.

Carrier-Midea, for example, has had to increase product prices because up to 60 per cent of its products require imported components. Similarly, Whirlpool has increased prices 10 per cent month-on-month since November 2011 while LG has increased prices by 15 per cent over the same period. Such increases have affected demand. "The situation two years ago was much better; a growth rate of around 20 per cent plus," says Vijay Sales's Gupta.

Despite slowing sales, the consumer electronics business will not run out of steam any time soon.