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Consumer Durables: Survival of the fittest - Views on News from Equitymaster
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  • Jan 25, 2001

    Consumer Durables: Survival of the fittest

    The Budget 2000 was a disappointment for the Indian consumer durable industry. Though the industry has been longing for reduction in import duty on colour picture tube (CPT), which currently is at 35% (15%-25% on other sub-components of television), it was maintained at the same level. This was a big setback for the Indian consumer durable industry. Moreover, the rise in glass prices, globally, led to higher CPT (colour picture tube) prices. For instance, colour picture prices under the 21’ inch category has gone up from US$ 51 in FY00 to more than US$ 60 during the year.

    Production declines…
    (`000) Apr-Oct 2000 Apr-Oct 2001 Change (%)
    Washing machine 439 430 -2.1%
    Air conidtioners 24 23 100.0%
    Refrigerators 1,239 1,136 -8.3%
    Television 1,607 1,207 -24.9%
    Wrist watches 5,613 4,522 -19.4%
    Source: CMIE      

    Higher customs duty coupled with rupee depreciation increased the cost of manufacturing and thus pressurised margins for the consumer durable companies. Since vast majorities of the Indian population are price sensitive (elasticity of demand is still high in case of durables), these companies were unable to raise prices, in order to keep the demand stimulated. Even then, CTV sales dropped by 35% and the manufacturers were forced to cut production by 15%-20%. Overall sales volumes of the industry slowed down as drought conditions in three states curtailed demand for consumer durables. Added to this, both the non-banking finance companies and banks resorted to an increase in interest rates for consumer durable financing, which also subdued sales.

    However, refrigerator sales showed reasonable increase in volumes during the first half of the current year, which could be due to the change in consumer hierarchy (having bought television, consumers are buying refrigerators). Air conditioner, industrial as well as room air conditioners, sales also notched higher growth rates (12% in 1HFY01) in the current year thanks to the information technology boom and the increasing number of infotech parks. Both Carrier Aircon and Voltas reported a sharp growth in sales in the first quarter of the current year. Sales for Voltas grew by more than 22% in 1QFY01.

    The impact of slowdown in consumer durables is apparent from the quarterly results declared by companies like BPL and MIRC Electronics. These companies have reported either a drop or a very marginal rise in sales during the first half of the current year. BPL, the market leader in the television segment, reported a 6% decline in sales for the second quarter of the current year. Operating margins for MIRC Electronics in 2QFY01 has come down sharply from 9.9% in 2QFY00 to 6.3% in 2QFY01.

    Due to slow down in overall slow down in sales, consumer durable companies have cut in their adspend to prevent their margins from a nose-dive (except for the Korean companies, of course). Total adspend have come down by close to 10% for the current year.

    Despite all these concerning factors, Korean multinationals have had a memorable year. They have cornered a significant proportion of market share from Indian companies, expanded their distribution outlets and have gained high brand image among the large Indian middle class population. One interesting fact to note is that the share of Indian consumer durable companies has been on the decline over the last three years. The share of multinationals in the Indian market share pie has increased from 52% in FY98 to 65% in FY00.

    Given the competitiveness prevailing in the industry and the pressure on consumer durable companies to improve their operational efficiency, what is the way forward?

    The advent of convergence and advancement in television technology has resulted in consumers becoming more sophisticated. Consumers have a wide variety of models, be it in television, refrigerators and washing machines, to choose from at an affordable cost. We are already seeing companies launching web enabled television sets. Though the response to these are not encouraging, in the long term, with the advent of direct to home television (DTH), demand for web enabled televisions is expected to shown sharp growth. Samsung has already sold more than 20,000 units of its cable modem. We believe that television will no longer be perceived as just an entertainment product but as an entertainment-cum-educational product.

    Already Chinese companies are posing a great threat to the Indian companies by offering better products at cheaper prices. Post WTO, Indian companies will have to contend with imports, as customs duty would be lowered. Having said that, offering cheap, cheaper and cheapest product cannot be a sustainable strategy in the longer run. Therefore, survival depends on the ability to deliver technologically advanced products at the right price and this depends on improving their operational efficiencies.



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