Consumer durables industry may see some festivity cheersFriday,October 04,2013Indian consumer durables industry is one of the fastest growing sectors in India, primarily driven by growing Indian economy. Indian consumer market is extremely competitive and fragmented and mainly dominated by the global players (MNCs), representing around 65 percent share due to their superior product as well as manufacturing technological. Consumer durables products are divided into the three categories such as white goods, brown goods and consumer electronics. At present, industry size stands at around $8 billion. Although, industry has limited control on the prices due to high competitive pressure, industry players have been able to maintain their margins at a decent level on the back of superior operating margins and healthy demand scenario in the country. However, Indian consumer durables industry is still operating at low penetration level despite showing strong growth over the past decade. The government has allowed 100 percent foreign direct investments (FDI) in electronics hardware-manufacturing sector under the automatic route.Industry PerformanceThe sector mainly relies on the state of the country’s economy and tends to grow faster when the economy is expanding. Strong domestic economy’s growth over the past few years has driven the industry to a double digit growth. Indian consumer durables marker size increased by a CAGR of 12 percent to around $8 billion in FY13 from 3.8 billion in FY06 on the back of growing economy, which led to rise in the level of people disposal income. Further, factors such as growing urbanization in the country, favorable demographics with 64% of the population in working age category, rising young population with access to disposable income and easy availability of financing schemes are some of the key drivers influencing growth of this sector. Some eminent industry side advantages like constant product upgradation with advance technology, cost-effectiveness and efficient manpower and improved distribution network of players all have provided the much needed platform to boost the industry’s growth. Further, low penetration level in most of the consumer durables products, like AC, washing machines and microwave oven offer huge market opportunities for industry players. It is expected that Indian consumer durables market size will grow at around 10-12 percent CAGR and would reach in size to around $12.5 billion by FY15 mainly on the back of growing disposal income of the people coupled with low penetration level.At present, consumer durables industry growth, being highly sensitive to people disposal income, is under pressure owing to the prevailing economic slowdown. Indian economy growth slowed down to four year low of 4.4 percent in April-June quarter of FY14. Further, sector growth is also impacted by the factors like spiraling inflation, high interest rates, declining employment opportunities and drop in agriculture and industrial output that have been subsequently leading to deferment in purchase decisions. Industry demand is also suffered due to rising products prices as a hike in input prices and the rupee depreciation have been forcing the manufacturer to increase consumer durables products prices. Therefore, prices of consumer durables are likely to remain high in near term on account of rupee depreciation. However, domestic industry is still attracting big investment owing to the massive untapped potential in both rural and urban areas and the country's steadily growing disposal income. There are very few houses in the country having full range of appliances therefore, global players are of the view that even with five to six percent growth in economy, Indian consumer durables market presents a remarkable opportunity to enter and invest.

Growing Demand of Consumer Durables ProductsIndia is still an urban centric market with around two-thirds of the total domestic demand of the consumer appliances triggered by the top 40 cities of the country. Though, over 60 percent of the country population resides in rural India, it represents only 35 percent of the total domestic sale. However, the ratio of demand is likely to change in the near future on the back of growing demand from the rural markets. Over the past few years, rural consumer durables markets grew by an average annual rate of 30 percent. Improved rural infrastructure, agricultural reforms, increasing availability of power, rising product awareness through advertising and customized products for rural consumers are some of the leading factors credited for increasing rural market demand. Meanwhile, the growth in consumer durables rural market is mainly contributed by first time buyers of products unlike replacement demand in urban markets. Therefore, rural consumer durables market is expected to post much faster growth than the urban market in future on the back of strong growth drivers. In the rural market, demand of the durables products like refrigerators as well as consumer electronics goods has been rising, while the demand for non-essential consumer durables products including laptops, ACs, LED and beauty and wellness products among others have been rising in urban market.The biggest attraction for the Consumer Goods industry players is the growing Indian middle class, as the market is characterized with low penetration level. At this time, middle class, having income around Rs 200,000 to 1,000,000 comprises around 5 percent of the population and is likely to increase to 41 percent of the country’s population by 2025. Apart from steady income gains, easy availability of consumer finance and increasing government spending on infrastructure especially rural electrification programme have also become the favouring factors that are enhancing demands of consumer durables products in India. On the other hand, in order to leverage growth opportunities, companies are spending more on innovation and expanding operations. Currently, industry players are also collaborating with banks and other financing companies to market assertively for their costly consumer durables products such as personal computers, televisions/LCDs, refrigerators and air conditioners etc. Consumer durables products like ACs are no longer perceived as luxury products.

Industry SegmentsConsumer durables industry is majorly divided into three segments, white goods, brown goods and consumer electronics. All the three segments of the Indian consumer durables industry are characterized by the high competition, prices discounts and exchange schemes and emergence of new companies. Further, all segments are dominated by the global players (MNCs), representing around 65 percent share in the domestic consumer durables market. MNCs mainly targets middle class people and offer superior technology products as compared to the Indian companies. Whereas, domestic players are competing on the basis of their well acknowledged brands, firm grasp of Indian consumer durables market and a strong hold over wide distribution network. Samsung and LG, two South Korean conglomerates, are the dominant players across all categories. Bajaj electronics, Voltage, Videocon industries and Godrej are some leading domestic players currently operating in the industry.

Consumer Electronics SegmentThe consumer electronics segment consists of products like televisions, personal computers, electronics accessories and personal computers among others. Present market size of consumer electronics segment is around Rs 34000 crore. Global players, LG and Samsung account for around 70 percent share of the total domestic consumer electronics market as these global players has already adjusted to India’s high-volume, low-margin market by increasing

advertising, dropping prices and creating interest-free payment plans. Further these global players still maintain a strong hold on the urban middle class segment growing at about 12 to 15 percent annual rate. On the other hand, strong growth potential in both rural and urban areas due to low penetration level and the country's steadily growing young working population have 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. Besides rising foreign investments, domestic firms are also pumping huge money into the consumer electronics business. Over the past few years, Indian consumer electronics market is growing at an impressive 15 percent annual rate. Demand for consumer electronics in India is mainly driven by a young demographic population along with rising disposable incomes, easy availability of finance options, and increasing eminence of consumer electronics' retail stores, online retail industry and growing middle class in the country. Further, digitalization has brought revolution in the sector and high digital technology driven products has enabled the industry to earn profit from the growing interaction of digitalapplications such as TVs, LCD and mobile phones. As per the Associated Chambers of Commerce and Industry of India (Assocham), Indian consumer electronics market size is likely to reach Rs 52,000 crore by 2015.Key Products:Colour Televisions, LCDs and LEDs: Colure televisions are the largest contributor of the segment with the current estimated market size of over 14.0 million units in volume terms. Among all consumer electronics products, 21-inch colour TVs continues to dominate the market with around 65 percent share. With the introduction of high definition television, the demand for the product is likely to enhance from affluent consumers.Meanwhile, flat panel TVs including LCDs and LEDs are considered as the high end products. However, the flat TVs sales in India grew at a higher rate of around 35 percent over the past few years and now reached at around 5.5 million units in FY13. Further, decline in product prices due to reduced low import duty on LCDs and LEDs panels, higher penetration levels, and the introduction of small entry-size models are key factors credited for high growth of the segment. Meanwhile, the world’s fastest-growing market for consumer electronics has few homegrown makers of flat-panel TVs and thus the domestic market in India is mainly dominated by the global giants, Samsung representing around 26 percent share followed by Sony and LG having 24 and 20 percent share respectively in the domestic electronics products market. At present, LED TVs account for around 80 percent of the total flat panel television market as it run with greater energy efficiency and can provide a clearer, better picture than the general LCD TVs. The flat panel TVs market is expected to surge at 7.5 million units by the end of current fiscal.Mobile Phones: Indian mobile phone industry posted a healthy growth at around 12-14 percent over the past few years on the back of growing disposal income of the people. Present market size of Indian mobile market stands at around Rs 10,000 crore. Domestic mobile phone market is dominated by the Samsung, which recently overtook Nokia holding the throne for more than a decade. Samsung now controls around 31.5 percent share in the domestic mobile market as compared to 27.2 percent controlled by Nokia. India is also emerging as a global base for mobile handsets as low mobile penetration and favorable government policies are attracting international players to set up manufacturing facilities in India. Meanwhile, domestic players

have also started operation in 2009-2010 and companies like Micromax and Karbonn have acquired around 4 and 3 percent share of the domestic market. The recent growth in the domestic mobile phone market is also credited to the introduction of smart phones and dual-SIM phone category. However, at present the segment is under pressure, as slowing economy with high inflation has taken a toll on the discretionary people spending, impacting mobile phone demand.Indian Personal Computers Market: Indian personal computers (PCs) market size stood at around 11 million units in 2012. During the past few years, domestic PCs market is growing at higher rate (around 5 percent) on the back of growing shift in end-user demand towards portable PCs. Though, the growth in the desktop computers is supported by the demand from government-led projects particularly related to the educations schemes. Indian personal computer market is dominated by the Hewlett-Packard (HP) consisting around 23 percent share in India's overall PCs sales in quantity terms followed by Acer and Dell representing around 14 percent share in the total domestic market. While, Lenovo with a market share of around 13 percent stood at fourth position. Despite continual economic slowdown which has impacted PCs growth in Asia pacific region including China, Indian PCs market is showing positive growth on the back of rising demand from government’s special projects. However, organic demand for PCs in India outside such government special projects has weakened, which will remain a cause of concern for PCs vendors.

Issues and ConcernsOngoing economic slowdown: The prevailing economic slowdown in the country has taken toll on the industry, pulling down the consumer durables products demand. High interest rates, rising inflation, and declining employment opportunities has forced consumers to defer their buying decision. Further, rising raw material prices owing to the high input costs and rupee depreciation have been putting pressure on the industry margins. Thus, ongoing economic slowdown has become a major concern for the sector.Need of large investment in technology and rising competition: With the continuous change in the psychographic and demographic profile of the customer, consumer durables products are required to undergo persistent changes to meet the varying demand of consumers. Thus, sector would continue to rely heavily on advancement in technology. Another factor that is going to affect industry is competition. Growing competition among players has forced them to spend

more on advertisement and also lessen their pricing power, thereby lowering industry margins.Heavy taxation and poor infrastructure: Heavy taxation in the country has become a challenge for the industrial players, affecting their profit margins. At present, tax incidence in India stands at around 25-30 percent, whereas corresponding tariffs in the other developed countries are between 7 to 17 percent.  Further, sector’s growth is also impacted by the inadequate infrastructure of the country as regular power supply is imperative for any consumer electronics products. Moreover, inadequate infrastructure and road connectivity in rural areas has also poses challenge for the industry growth.Government Initiatives to support Consumer Durables IndustryIn order to enhance growth of the industry, the Government of India (GOI) has set up an Electronic Hardware Technological Park (EHTP), which provides benefits like exports credit, business tax incentives, no duties on capital equipment or imported components and an expedited import-export process. Further the move is also providing incentives to the companies that are replacing certain imports with manufacturing. The GoI has removed custom duty on inputs/specified raw material used for manufacture of electronic components. It has also abolished custom duty on specified capital goods used for manufacturing electronics goods.To increase industry demand in the festival session and to provide relief to the consumers, especially the middle class, public sector banks will provide cheaper loans for consumer goods purchases. As the lower interest rates depends on the lending capacity of banks, the government has agreed to provide additional capital support to PSU banks from the budgeted Rs 14,000 crore to help them lower interest rates for financing of consumer durables products.Further, to boost the domestic manufacturing of consumer durables goods, the GoI is currently offering 25 percent subsidy on capital costs for manufactures to set up technology plants in the country. Furthermore, the GoI has developed a robust Intellectual property right (IRP) to facilitate innovation, growth and development, which is a prime requisite for the development of R&D and innovation in the consumer durables sector. The GoI has allowed 100 percent FDI in electronics hardware manufacturing sector under the automatic route.OutlookThe consumer durables industry is highly correlated to the economic scenario as its growth depends upon the consumers’ disposal income. Over the past few years, strong Indian economic growth has propelled the sector to double-digit growth. Further, factors like increasing disposable income, easy availability of credit and rising rural demand have significantly added to the industry growth. With the focused growth and appropriate planning for sector, Indian consumer durables industry has emerged as one of the most attractive sectors in the world and is attracting big investment from global players.However, in the present scenario the Indian consumer durables industry is under pressure owing to the prevailing economic slowdown. Ongoing high interest rates phase and rising inflation, forcing consumers to defer their purchasing decisions. Further, increase in raw material prices and intense competition among players, has also become key concerns for the industry. Meanwhile, the coming festive season is a crucial time for consumer durables industry as it contributes almost 25-30 percent to the year's turnover. Therefore, in the near term, industry may see some improvement. The, medium term outlook too looks bright for Indian consumer durables industry on the back of strong growth drivers with massive untapped potential in both rural and urban areas and steadily growing domestic economy.