We'll take it: Now let's talk discounts!

From the smiles on the faces of pretty women who invariably star in advertisements for refrigerators, washing machines and microwave ovens, it would seem that all is well in the Rs 5,000-crore white goods industry. Scratch a little, though, and the happy veneer will scrape off to reveal a painful, tearful reality. Overcapacity rules, slashing prices to the bone is the norm and without adequate sales volumes to compensate, bottom lines across the board are a deep shade of red. Pushed to the wall, the tenure of senior managers in the 'durable' industry is now counted in months, not years. So much so that Swedish white goods giant, Electrolux AB is reported to have given up on India and is said to be looking for a buyer for its three factories in the country as it readies itself for what looks like an ignominious exit.

"The competition today is not to be the market leader or brand leader, but a loss leader," says T.K. Banerjee, Managing Director of Chinese white goods major Haier India, the latest price warrior in an already bloodied market. He is right, for just about no one, not even the otherwise invincible chaebols, LG India and Samsung Electronics India, are making money selling white goods in India (see The White Goods Sob Story In Short). And if anyone claims that they are (making profits), they are either a high-end niche player such as Hitachi, which sells just air-conditioners, or they are simply lying. "There is no question of margins today; if you can make enough to cover your costs, you're lucky", admits Shyam Motwani, Vice President (Marketing), Godrej Appliances.

Not that you hear consumers complaining, for they have never had it so good. A five-kg automatic washing machine is now available for Rs 6,000 as against Rs 8,000 just two years ago. A 1.5-tonne room air-conditioner is in the market at prices nudging Rs 15,000 as against Rs 25,000 three-four years ago. Then, absolute prices coming down is a truism in just about all consumer goods, from cars, two-wheelers, electronics, even expendables. And it's no excuse for making losses, when industry profits across sectors are booming, with the consolidated profit of India Inc. crossing Rs 1,00,000-crore in FY 2005. So why is the durable industry in India an exception?

A DIFFERENT, HAPPY STORY IN CONSUMER ELECTRONICS

Anintimidating choice of flat TVs: But he will still take one home Price erosion is a problem in consumer electronics as well, even at the high-end. For instance, the average price of a flat-screen colour television fell almost 12 per cent last year, according to retail sales data from research agency ORG-GFK. Yet, in value terms, the market grew by 108 per cent to Rs 3,106-crore (3 million units). "In televisions, strong volume growth more than made up for the price erosion", explains T.K. Banerjee, Managing Director, Haier India. In the hierarchy of consumer durable purchases, a television is still uppermost for the Indian consumer. "And as more TV manufacturers get more components made in India, prices will progressively get lower, boosting volumes," says Girish Rao, Vice President (Sales), LG India. Apart from economies of scale, everything else is also working out for the consumer electronics category. "There is a lot of content and programming on cable & satellite television today to keep the category relevant," says Ravinder Zutshi, Deputy Managing Director, Samsung Electronics India. With direct-to-home television services set to boom with the entry of Tata-Star and Sun TV, besides the two existing players, Doordarshan and Zee, and the impending second round of private fm radio licensing with easier financial norms, the market for hardware, DTH ready CTVs and fm-ready music systems, will also boom. Another plus for CTVs is the relatively shorter replacement cycle compared to, say, a refrigerator or a washing machine, for technology changes such as curved to flat-screen are too apparent for the consumer to ignore. "Consumers usually replace televisions within five years. And what's best is that a TV holds residual resale value, unlike, say, a washing machine or a refrigerator, where there are few takers for an old one," adds LG's Rao. With multiple-television homes accounting for just 10 per cent of all 80-million TV homes, no one is expecting growth to slow down anytime soon.

How It All Began

"Prices are tight, but that is nothing new in this industry", says Girish Rao, Vice President (Sales), LG India. "The problem, particularly in the last year has been the increasing cost of components, plastics, metals... price of just about everything are going through the roof." And it has been a double whammy of sorts. There is way too much supply chasing too little demand.

Just how bad things are can be gauged from the fact that India boasts an installed capacity of over five million refrigerators, against a demand of just 3.3 million (2004-05). Couple this kind of demand-supply imbalance with an anaemic under 6 per cent growth in sales of refrigerators, and the result is one measure of the frustration in the industry. "No one can raise prices here. We are stuck between low volumes and low prices," says Ravinder Zutshi, Deputy Managing Director, Samsung India. Explains Nanu Gupta of Vijay Sales, Western India's largest electronics retailer, "Supply is outstripping demand two-to-one; the market cannot grow fast enough to match the supply-demand imbalance."

This is true even for washing machines, where the market has almost stagnated, moving from 1.1-million units six years ago to just 1.4-million units in 2004-5, a compounded growth of barely 4 per cent. Air-conditioners present the only silver lining, growing six fold in six years, from 0.2 million units to 1.2 million. "Refrigerators and washing machines not only have a long replacement cycle, in upcountry markets where the power supply is erratic, consumers don't feel the need for such products; they don't see the point in having a fridge when there is no electricity for four-to-six hours a day. And people in India stay away from washing machines because they think the bai (maid) is there to do the washing," says LG's Rao.

With over half the market for most white goods, refrigerators, washing machines, ovens, even air conditioners, carved up between the two aggressive chaebols, it isn't surprising that most competitors blame them for the sorry state of the industry. "Their strategy of gaining market share at any cost has hurt the rest of the industry," says Haier's Banerjee. Rivals also claim that at least one of the two chaebols, if not both, is not just losing money on white goods in India, but that its predatory pricing is skewing an already distorted business model for the industry. "Our home appliances division was profitable last year and it will be so this year too," defends Samsung's Zutshi.

Electrolux (India) MD Rajeev Karwal seen here) has reportedly given up on India, and may exit the country

LG India's Rao is also quick to retaliate, saying the company can afford to sell cheaper, and still not make lossses, because it sells more, something other companies are only beginning to understand now. With fixed costs constant, the theory goes, the Koreans follow the philosophy of amortising costs over much larger volumes, bringing down per unit cost substantially. "It is not just a question of amortisation; we have to sell according to our capacity, because having a certain installed capacity means certain fixed costs, which do not disappear if you sell less," adds Samsung's Zutshi. Cause or effect, the result remains the same.

The Blame Game

"The reason why most other companies are showing losses is because of their policy of giving dealers huge credit," adds LG's Rao. In fact, dealer credit, another theory goes, is to blame for the woes of the industry. Most consumer durables companies sell through stand-alone dealers on credit, with the dealer paying the company only when the product gets sold, which could be anything betwen 30 days and 90 days later: This meant that companies were in effect carrying inventories (and paying for it) right up to the retail store level.

In an attempt to correct this inefficient system, and switch over to a pay-as-you-go system for dealers, companies such as Whirlpool of India (WoI) and Electrolux Kelvinator India (EKI) had to implement massive write-offs on dealer debts over the past two years, pushing them into the red. And the trade-off for the dealer from the credit system to cash-and-carry again created its own problems for the industry. "We jacked up dealer margins to move them over from credit," says Rao. With dealer margins up, and no room for increasing prices, the already wafer-thin 2-4 per cent spreads just disappeared overnight for most appliance marketers.

Even Korean chaebols like LG India (MD K.R. Kim seen here) are not making any money in white goods

It was easier for diversified players such as LG, Samsung and Videocon, who were present across consumer electronics and appliances, to still conduct business as usual because they could cross-subsidise their losses in appliances with surpluses from their booming consumer electronics business, colour television, DVDs, music systems and the like. "Five years ago, the size of the television market was similar to that of refrigerators. Today it is three times the size," explains Banerjee. A booming cable & satellite market, at 61-million households currently, kept CTV demand propped up; thus, despite a 12 per cent erosion in prices in CTVs, the margins were a healthy 8-9 per cent last year. Compare that with the under-4 per cent margins that even a market leader such as LG claims it is making on appliances.

A Long Dark Tunnel

Videocon (CMD V.N. Dhoot seen here) has cross-subsidised losses in appliances with gains in electronics

The cracks are already apparent in the pure-play durable model across companies such as WoI, EKL or Godrej Appliances. EKL is already, reportedly, exiting India. WoI has been unable to hold its head over water and even Godrej Appliances, at one time synonymous with refrigerators in India, is a distant number three in refrigerators, and according to market sources, an unprofitable one at that. The market has already claimed two CEOs of appliance-only marketers, with Raj Jain of WoI shunted out to China last year and the impending exit of Rajeev Karwal from EKL. For, it isn't just a matter of cross-subsidising alone that benefits companies with a presence in both durables and electronics; a diversified portfolio comes with multiple advantages, such as assembly-line flexibility, to increased media, marketing and retail muscle. And in a fiercely competitive market, with parity in terms of price and brand power, such synergy can make all the difference on who survives, and who is pushed out of the ring, much like EKL.

"This is an extremely difficult phase that we are going through. The only way that this problem will get addressed is if the market grows," adds Godrej's Motwani. What will it take to make the market grow, to get the crucial volumes that would ensure profitability? Well, replacement cycles for durables, currently at 5-7 years, will have to get shorter and economic growth has to filter down to smaller cities for volumes to pick up in the hinterland.

Ravinder Zutshi, Deputy MD, Samsung India, feels that no player can increase prices

That apart, infrastructure issues (read: increased availability of power and water), something quite out of control of marketers, will allow consumers across urban and rural India to buy more refrigerators and washing machines. "There is no point buying a refrigerator when you don't have electricity for half the day," says LG's Rao. Well, we don't have proof as yet of any of this happening anytime soon. Replacement cycles aren't getting any shorter, and power and water shortages have affected even the metros.

However, as the market matures and consumers become more discerning, price will hopefully not be the determining factor. For even in the US, despite the influx of cheap brands, Whirlpool remains the leader in appliances and General Electric in refrigerators. That's the only hope the industry has, and when you don't have anything left but hope, you realise that's enough.