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Author's profile photo Ravish Kumar Ojha

Emerging Trends in Emerging Economies: Manufacturing Perspective Consumer Durables

Well, if you are looking for ‘The Next…’ or ‘Emerging’ trends after pandemic recedes then watch out for this space.

Also read: Emerging Trends in Emerging Economies: Manufacturing Perspective Automobile Sector 2-Wheelers

Emerging economies like India have gained pace rapidly after the scare of the pandemic has subsided due to various factors owing to:

  1. The rapid pace of Vaccination
  2. Herd Immunity (Clusters)
  3. Restrictions on Travel
  4. Better Crowd management

Beyond the pickup in the overall scene of economic indicators like IIP (Index of Industrial Production), Electricity consumption, and demand for fuel; there are several second-order effects emerging.

Work from home, supplemented by restrictions on domestic services offered by support staff has pushed the need for ‘Home Automation’. Products responsible for Home Automation fall into the category of ‘Consumer Durables’. They are better known in the industry as White goods (AC, Washing Machines, Cleaning equipment, Refrigerators, etc.) or Brown goods (TV, PC, Digicam, etc.).

Product Categorization

Consumer%20Durables%20Categorization

Consumer Durables Categorization

One segment that has picked up momentum and is gaining attention from the industry due to the low base effect is white goods. Several emerging economies including India had low penetration of white goods due to the availability of vast affordable labor. Covid-19 made a dent in the pool of labor market and raised up wages esp. in Tier-1 and Tier-2 cities. Spillover effects of this trend are visible in the white goods segment that experienced waiting periods for home cleaning equipment at the leading dealer touchpoints.

From the past 18 months, the sales growth trend of white goods has gained enough momentum to catch the attention of OEMs (Original Equipment Manufacturer). Several OEMs have committed to installing additional capacity to manufacture goods locally to offset the growing demand and raised prices to factor in rising inflation due to high commodity prices like steel, commercial fuel, and labor shortages.

Product penetration across world economies:

Currently, penetration of few white goods like that of Air Conditioners [HVACs] stands at ~6% in India and that points to enormous room for growth. Sales for this segment had oscillated between 15-20% before the pandemic knocked doors.

Room%20AC%20Penetration

Room AC Penetration

 

Data Source: India Brand Equity Foundation (IBEF)

 

Growth of per capita income:

Within emerging economies, India’s Per capita income had grown by ~10% on an average over the period ranging from 2012-2020. Barring 2020 (which represents the black swan event), the growth in per capita income points to significant potential for the population to spend on discretionary products.

Per Capita Net National Income

Data Source: Central Statistics Office (CSO)

The combination of rising disposable income and demand for discretionary products points to rising consumption for consumer durables. Rightly so, OEMs have started committing to install additional capacities to cater to the demand.

 

Volume growth:

AC%20Sales%20Volume

AC Sales Volume

Data Source: Industry, livemint

Consumer durables comprise a large part of discretionary spending. Rising disposable income provides room for spending on this category of products. Within consumer durables, Air Conditioners represent a segment of products that is largely under-penetrated, and rightly so the OEMs have found this gap to be addressed with priority. The supply of locally manufactured AC units will play a significant role in bringing down cost structure. Local manufacturing help strengthen the ecosystem for sales, services, and spares as well.

 

Discretionary spending gaining momentum:

Discretionary%20Spending

Discretionary Spending

Source: D&B Forecast, Eicher Motors, HDFC Bank

Overall, this points to the sweet spot for leading brands to seize the opportunity.

New investments gaining momentum:

Leading brands engaged in manufacturing Consumer Durables products have noticed the emerging trend in this space. The world’s top 10 leading brands engaged in the manufacturing of HVAC (Heating Ventilation and Air Conditioning), VRF (Variable Refrigerant Flow) systems are already present in India and this emerging trend has further encouraged them to commit additional investments. E.g. Daikin recently made the announcement to set up 3rd manufacturing site with investments to the tune of 1000 Crores.

To encourage domestic manufacturing and assembly of Consumer Durables and Electronics, GOI (Government of India) has announced PLI (Production Linked Incentive) scheme. This scheme is targeted at the component manufacturers of Air Conditioners and LED lights in order to push the domestic manufacturing industry.

Export markets opportunities:

The above-highlighted trend is going to change the dynamics of Air Conditioner Manufacturers in Indian geography, given the significant domestic potential. The investments announced by the OEMs are targeted at the domestic demand potential as well as the export markets like West Asia, South America, Sri Lanka, and Africa. The product configurations offered to the domestic market in India are well-suited to the above-mentioned export markets given the similar climatic conditions.

Takeaways:

Industry experts engaged with Consumer Durables and Manufacturing industries are well-advised to take note of this emerging trend. This space also has a lot of opportunities for the Software Solution providers to the Manufacturing Industries. Given the nature of the manufacturing industry, a big trend is also emerging in the terms of Supply Chain, Logistics. Solutions providers can expect second-order effects to benefit the organizations engaged in providing Supply Chain solutions to the OEMs.

Another second-order effect in offing is the Services and Spares of these products (AC Units). Upon installation of the product, annual maintenance/repair/spares/servicing provide value ad market to the organization tied with the OEMs.

Hence, this trend is poised to build an ecosystem that goes well beyond the manufacturing sites, benefiting

  1. Customers with better product pricing (domestic manufacturing)
  2. Industry (second-order effects, component manufacturing)
  3. Employment (Manufacturing, Sales, Services, Spares)

 

References:

  1. A cool opportunity for India to be an AC manufacturing hub
  2. Japanese AC major Daikin to set up third manufacturing facility in Andhra Pradesh
  3. Blue Star to invest in new manufacturing facilities; targets to grow by 25% in FY22
  4. Tata Group’s Voltas plans to set up new manufacturing unit in South India
  5. 52 companies apply with ₹6,000-cr investment proposals for PLI scheme for AC, LED lights

 

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      Author's profile photo Kanakaraj V A
      Kanakaraj V A

      Nice article!!