CHINA’S air conditioner manufacturers ended their listless 2002 fiscal year in July, only to find themselves mired in an off season.

　Soaring stocks and cool temperatures are to blame for the trauma to the industry, according to industry analysts.

　Soaring stocks

　As of the end of July, stock had soared to as high as 10 million units from 2.3 million at the end of last year, official figures have shown.

　Stocks have built up partly as a result of stagnant sales in June and July due to flooding in the western and southern regions, says Jiang Feng, vice-director of the China Household Electrical Appliance Association. Cool temperatures and rainfall in northern China have also dampened demand, he added.

　To make things even worse, according to the whether forecasts by the China Central Television, there is little possibility that hot whether will return in early autumn as it did last year.

　“Stocks are almost enough for next year’s sales,” an unidentified industry insider said to the Chongqing Morning Post.

　Air conditioner industry’s woes have also been caused, in part, by large production expansion by many domestic manufacturers such as Galanz and Rowa, which over-estimated the growth of the domestic and export markets.

　Although exports rose 38 percent to 5.5 million units in the first half of this year, most of those were made by foreign-funded firms. Exports by domestic firms rose only 10 percent year on year, according to official figures.

　Price cuts

　Domestic air conditioner manufacturers, desperate to free up their capital, have had to turn to price cuts to boost sales.

　In Beijing and Nanjing, an average of 500 yuan is wiped off the price tag of every unit.

　Nanjing-based Panda has even lowered the prices of some its products by 50 percent.

　Ferociously contested by some 400 brands, China’s air conditioner sector has been a fertile ground for such toll-taking price wars. Earlier this month, Shanghai-listed Qingdao Haier reported a 45 percent slump in profits to 219.18 million yuan (US$26.47 million) and a 3.7 percent drop in sales on the back of fierce competition for slack domestic sales which forced it to turn to the lower profit-margin export market.

　Guangdong-based Midea, another major domestic brand, also posted a decline of 39.57 percent in net profit.

　It’s estimated that on average, a price cut of 20 to 30 percent has been instituted so far this year.

　Production exceeds demand

　Song Muxiang, vice-president of the Guangdong-based Panasonic Air Conditioner Company, said that 24.5 million air conditioner units will be made this year, while the demand nationwide is expected to reach just 17 million units at most.Pressured by the fierce competition, manufacturers have to spend more on advertising which further drains their profits.

　According to research by Beijing-based Market Research Center of Chinese Enterprises (MRCCE) in the first half of this year, advertisments in newspapers and magazines by air conditioner manufacturers nationwide posted a 44.22 percent increase over the same period last year, reaching 224.53 million yuan. Haier alone dished out over 20 million yuan.

　Although a stock of 5 million units was left over from last year, manufacturers’ confidence was boosted by the hot temperature in April.

　During the Labor Day holidays, sales exceeded expectations. As a result, manufacturers stepped up production on their assembly lines.Unexpectedly, rain took over the whole country in mid-May. June turned out worse, as northwest and southern China were unable to escape from floods, and north and east China basked in cool air never before experienced at the height of summer.

　Though many manufacturers slammed on the brakes, it was too late. A stock of 5 million units had built up in the warehouses of the manufacturers, not to mention that of the sellers.

　The industry’s curse goes beyond the weather. “In some sense, this is a rational return to the normal after the persistent market fever of the past several years,” said Xu Xiuxian, deputy general manager of Jiangsu Five Star Home Appliance Company.

　Induced by the vast consumer demand and a net profit that stood at well over 30 percent, firms across the country joined the fray in a market whose overall production was only several million units a year in the late 1990s.

　By the end of last year, the overall producing capacity jumped to 32.7 million units a year, twice the country’s demand.

　Industry-wide restructuring is expected to continue well into 2005, according to a recent survey jointly conducted by the Development Research Center of the State Council, the Ministry of Information Industry and China Home Appliance Association.

　The survey found that currently 43.9 percent of urban families have air conditioners and that for the years up to 2005, overall demand will linger at 13 million units a year, without considering group procurement and export.Due to the mounting glut, price wars will dominate the landscape in the coming years. The living space of the small players will be gradually eroded as their big brothers, building a reputation for price and quality, edge ahead on the strength of scale economy, shows the survey. It concludes that the price war won’t come to an end until 2006. By then, the bulk of the market share is expected to go into the hands of the top three manufacturers. The three largest producers now control less than 40 percent of the market.This conclusion is shared by Xu Xiuxian, who believes that the top brands will pull off price cuts to recover lost territories next year. As a result, some bench-warming players with annual sales volume of 500,000 units will be sent off the court.The overall picture of the industry, nonetheless, remains far from bleak. According to Xu, urban households will need more than one air conditioner per apartment. More importantly, there is the vast rural market to be tapped. The penetration rate in rural areas currently sits at merely 1.5 percent.Even within the industry, one segment has been identified as a future driving force for companies of technical prowess — central air conditioning systems. A senior manager with South Korea’s LG told the Nanfang Daily that central systems account for 10 percent of LG’s sales in South Korea but contribute 90 percent of its profit. Demand for central air conditioning systems is expected to reach 20 billion yuan by 2005, and 35 billion yuan by 2010, according to China Home Appliance Association. Due to its relatively higher demand for technology, there are so far only 50 brands in this segment, with foreign brands controlling 90 percent of the market.However, their Chinese counterparts are picking up the message. Qingdao-based Hisense is aiming for a sale of 400 million yuan in this category this year, while Midea is targeting at 600 million yuan this year and 2 billion in 2005. Guangdong-based Gree is pouring into the construction of a production base to churn out 5 billion yuan worth of central conditioning systems annually. One thing to pray for, amid this hustle and bustle, is that the disorderly competition experienced by the home-use air conditioner segment won’t recur.