Forewarning a decline in discretionary consumer spending, the production of major household appliances is taking a hit. As per the latest official numbers, local manufacturing of appliances like refrigerators, TV sets and electric fans is down on a year-on-year basis in the nine-month period ended March 31, 2019, whereas the production of deep freezers has flat-lined. Growth came only for air-conditioners; apparently local production is increasingly substituting for imported ACs, so overall supply of ACs could be flat.
If one is to annualize the production seen thus far in 9MFY19, all those five electronics items are set to record lower production levels in FY19, closing yet another fiscal in the red. Should it actually happen, it will set appliance manufacturers several years back. For instance, the production of refrigerator and TV sets will slide back to the level last seen in 2013; deep freezers, ACs and electric fans will revert to production numbers reported in 2016.
The ongoing economic slowdown, which is expected to get worse, will advise consumers to use discretion while buying convenience products. With declining disposable incomes, the middle class is expected to become more price-conscious. Other factors that can potentially weigh on consumer propensity to purchase durables include a major hike in power tariffs, listless construction activities, and a squeeze in farming incomes.
The troubles for appliance makers started brewing in FY18, and now in FY19 there will be further drawdown in production growth over a smaller base. (This is not to be confused with the overall ‘electronics’ industry reported in LSM numbers. The ‘electronics’ industry actually grew by 24 percent in 9MFY19 – the highest growth among LSM industries amid a 3 percent LSM contraction. However, that growth is attributable to production of electric machines, not appliances).
Already, the profitability of listed appliance makers – Pak Elektron Limited (PSX: PAEL) and Waves-Singer Pakistan Limited (PSX: WAVES) – is taking a hit. In Jan-Mar 2019, PAEL scored a meager top line gain of 2 percent but watched its net profits drop 22 percent year-on-year. For WAVES, the fruits of merger may take time to ripen, as net profit of the combined entity fell by 26 percent in 1QCY19.
In the current economic environment, local appliance makers are braving much more than the threat to their top line from declining consumer spending. It’s a triple-whammy for them: the PKR slide is making imports of appliance components costlier, raising the cost of production; the rising inflation is stoking higher operating expenditures; and financing costs are getting higher as the policy rate has gone up to 12.25 percent.
Is there a silver lining? Maybe! On the hierarchy of households’ appliance-related needs, refrigerators and deep freezers occupy the primary ladders of importance. In fact, over 50 percent of sales (in rupees, not volume) of appliance makers like PEL and Waves-Singer come from these two appliances. However, government surveys indicate that a majority of households in Pakistan, mostly those residing in rural areas, do not own these now-indispensable products.
Perhaps a heightened product focus on the bottom of the pyramid, helped by a major up tick in remittances, can help appliance makers’ ride out the economic storm. As passing on rising costs to consumers may not be currently advisable, it looks like manufacturers may need to play the volume game, at least until the per capita incomes are back on the growth highway.
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