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Consumer durables industry may see some festivity

cheersFriday,October 04,2013
Indian 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 Performance
The sector mainly relies on the state of the countrys economy and tends to grow faster when the
economy is expanding. Strong domestic economys 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 industrys 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 Products
India 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 countrys 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 Segments
Consumer 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 Segment
The 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 Indias 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 digital
applications
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 worlds 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 governments 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 Concerns
Ongoing 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, sectors 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 Industry
In 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.
Outlook
The 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.

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