CONFIDENTIAL
Industry Situation Analysis:
Refrigerator
aaaaaa ELECTRONICS CHINA
(aaaaaa China)
This report is solely for the use of client personnel. No part of it may be
circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from McKinsey & Company.
This material was used by McKinsey & Company during an oral
presentation; it is not a complete record of the discussion.
aaaaaa010807BJ-refrigerator
KEY MESSAGES
• Refrigerator market is expected to grow at % annually from RMB 21 billion in
2000 to RMB 26 billion in 2005. Although growing at a rate as high as %,
side-by-side refrigerator market is expected to remain very limited in the next 5
years
• In general, industry profitability for refrigerator is moderate. However, side-by-
side refrigerators enjoy double digit return on sales
• Except side-by-side refrigerator, refrigerator market is led by local players.
However, there are opportunities for MNCs to successfully build up their position
by focusing on mid-to-high-end segments
• The refrigerator industry is relatively “low-tech” and has low entry barriers. Entry
into WTO is not expected to have direct huge impact on the competitive
environment
• With market shares around 3 to 4%, aaaaaa is moderately positioned in
refrigerator market.
1
aaaaaa010807BJ-refrigerator
MARKET ASSESSMENT
Market
assessment
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
2
aaaaaa010807BJ-refrigerator
MARKET ASSESSMENT
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
• Evaluation criteria, weight and rating
• Assessment of market attractiveness
Market
assessment
• Product/service definition
• Relevant regulatory environment and trends
• Relevant technological environment and trends
• Market size and growth rate
• Key buying factors
• Distribution channel structure
• Market share by competitor
• Industry profitability or economics
3
aaaaaa010807BJ-refrigerator
MARKET DEFINITION
• Product/service definition
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
Market
assessment
4
aaaaaa010807BJ-refrigerator
PRODUCT SCOPE – WHITE GOODS
Product group Product category
Air conditioner
Washing machine
White goods
Microwave
• Packaged A/C
• Central A/C*
• Side-by-side
Refrigerator
Product subcategories
*Used by residentials and small businesses
5
aaaaaa010807BJ-refrigerator
MARKET DEFINITION
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
Market
assessment
• Relevant regulatory environment and trends
• Relevant technological environment and trends
6
aaaaaa010807BJ-refrigerator
LOW-END REFRIGERATOR MARKET IS LIKELY TO BE DOMINATED BY
LOCAL COMPETITORS. MNCS COULD SUCCEED IN THE MID-TO-HIGH-
END NICHE MARKETS
Regulatory
Trends/issues Implications
• Market has been fairly open and will
remain so
• Most leading MNC players are already in
China and have localized their production
and sourcing
Technological
• In general, technologies for refrigerators
are not very complicated, esp. for low-
end products
• Technology trend is to focus on
digitization, artificial intelligence and
environmental friendliness
• Entry to WTO is not expected to
have huge direct impact on current
competitive environment
• The market is likely to be dominated
by local players who are mostly not
as strong in technology as MNC
players but stronger in channel and
sales capabilities, especially in the
low-end segments
• MNC players are likely to succeed
by being niche players and focusing
on mid-to-high-end segments
• Competition in product innovation is
likely to focus on customization and
localization
7
aaaaaa010807BJ-refrigerator
MARKET DEFINITION
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
Market
assessment
• Market size and growth rate
• Key buying factors
• Distribution channel structure
8
aaaaaa010807BJ-refrigerator
ALTHOUGH aaaaaaOND LARGEST MARKET AMONG WHITE GOODS,
REFRIGERATOR MARKET GROWTH WILL BE MODEST
Source: GFK, SINO-MR, Light Industry Information Center, aaaaaa, field interviews, McKinsey analysis
2000
Side-by-side
Non-side-by
-side
refrigerators
2001 2002 2003 2004 2005
CAGR
(00-05)
Percent
21,130
22,060
23,050
24,070
25,140
26,260
Key
drivers Rationale or assumptions
• Replace-
ment
• Since the penetration
rate in China is high
(~80%), particularly in
major cities (>100%),
majority of the
demand for non-side-
by-side refrigerators
will come from
replacement purchase
• Income
growth
• Increase in
average
disposable income
drives demand for
mid-to-large
capacity and mid-
to-high end
refrigerators
• Average
price
• Drops at 4% .
74 96
126
166
217
285
Refrigerator market size and growth
RMB millions, percent
Units sold
(non-side-by-side)
millions
Average selling
price
(non-side-by-side)
1,8401,9101,9902,0702,1602,250
9
aaaaaa010807BJ-refrigerator
THE MARKET IS VERY SATIATED
Replacement is likely
to be the key driver
for future demand
Source:China Statistics Yearbook
Penetration rate in China
Tier 1
Tier 2
Tier 3
Whole China
103%
101%
87%
80%
10
aaaaaa010807BJ-refrigerator
MID-TO-LARGE CAPACITY REFRIGERATORS HAVE BEEN CONSUMER's
FAVORITE CHOICE
Source:SINO-MR, GfK
< 100L
100% =
1998 1999 2000
Historical market size by capacity in major cities
Percent, million units
100-150L
150-180L
180-200L
200-225L
225-250L
250-300L
> 300L
CAGR
(00-05)
Percent
11
aaaaaa010807BJ-refrigerator
SIDE-BY-SIDE REFRIGERATOR MARKET WILL BE OF VERY LIMITED SIZE,
DESPITE ITS HIGH GROWTH RATE
RMB millions, percent
2000 2001 2002 2003 2004 2005
CAGR
(00-05)
Percent
Key drivers
Rationale or
assumptions
• Living space • Only households with
kitchens over 30m2* are
assumed to possibly
consider side-by side
refrigerators
• Household
income
• Only households with
average annual income
over RMB500,000 are
assumed to possibly
consider side-by-side
refrigerators
• Lifestyle • Most wealthy people
have maids who do
grocery shopping
everyday and they are
not in high demand for
super large refrigerators
• Price • Drops at 2% .
*Construction area
Source:Zhongxi Trading Co., aaaaaa, Lufthansa Department Store, Sci-tech Department Store, YYSC, team analysis
3,500 4,680 6,260 8,380 11,210 15,000 sold
Side-by-side refrigerator
market size and growth
Average
selling price
• Key customer
groups
– Chinese
educated
overseas
– Expatriates
– Wealthy local
people
• Key markets
– Beijing
– Shanghai
– Guangzhou
– Shenzhen
– Shenyang
12
aaaaaa010807BJ-refrigerator
PRICE IS THE DOMINANT FACTOR FOR CONSUMER’S NON-SIDE-BY-SIDE
REFRIGERATOR CHOICE WHILE BRAND AWARENESS IS MORE
IMPORTANT FOR SIDE-BY-SIDE REFRIGERATOR
Factors to consider when making non-side-by-side
refrigerator purchasing decisions
Percent of respondents
Source:IMI, SCSS2000, interview
47
28
26
23
19
17
14
14
10
7
4
Brand image
Price
Capacity
Energy-saving
Exterior design
Low noise
No frost
After-sales service
Non-CFCs
Freezer capacity
Other
KBFs for side by side refrigerator
Soft commercials, such as
putting a side-by-side
refrigerator in the club of high-
end residential area is very
effective in increasing the
awareness
Many potential
customers are not fully
aware of the existence of
side-by-side refrigerators
in China market
When making
purchase decisions,
the key factors that
customers consider
are brand, design and
Yong Guy
Manager
ZXHY Trading Co.
13
aaaaaa010807BJ-refrigerator
DIRECT COOLING IS STILL THE PREFERRED CHOICE ACROSS THE
MARKET
Percent
Source:SINO-MR; GfK, field interview
North West
East China
Although indirect-cooling
refrigerator is frost-free, it
tends to dry up the food.
As a result, it is particularly
unpopular in less humid
areas such as Northern
China
North East
North China
South West
Central West
Market share of direct cooling refrigerators in major cities, 2000
14
aaaaaa010807BJ-refrigerator
CHANNEL STRUCTURE FOR REFRIGERATORS IS FLAT, ESPECIALLY
FOR LOCAL PLAYERS
Source:Interview
Manufacturers
First tier
distributors
Retailers
Local manufacturers = 70-80%
MNC manufacturers = 30-50%
Department
stores
Hypermarkets
Specialty
stores
Others
Local manufacturers = 20-30%
MNC manufacturers = 50-70%
15
aaaaaa010807BJ-refrigerator
AMONG ALL RETAIL CHANNELS, HYPER MARKETS AND SPECIALTY
STORES ARE EXPECTED TO GROW FAST IN THE NEAR FUTURE
Sales distribution by channel --- white goods
Percent
Hyper markets
Specialty stores*
Department stores
Others
5
1998 2000 2003E
*Includes electronic chains such as Guomei and Dazhong
Source:Saaaaaa
16
aaaaaa010807BJ-refrigerator
DISTRIBUTION STRUCTURE FOR SIDE-BY-SIDE REFRIGERATORS
DIFFER BY TIER CITIES
Tier 1
cities
Manufacturers
1st tier
distributors
Retailers
2nd tier
distributors
20%
70%
End users10%
Manufacturers
1st tier
distributors
Retailers
100%Tier 2
cities
Source:Field interview 17
aaaaaa010807BJ-refrigerator
KELON's CHANNEL STRUCTURE FOR REFRIGERATORS
Source:Annual report, field interviews
Rongsheng
Kelon is currently
exploring other channel
strategies:
• Set up sales and
distribution companies
with distributors
• Cooperate with large
retailers such as
Carrefour and Guomei
in product planning Kelon Retailers
1st tier
distributors
95%
5%
Kelon Retailers
1st tier
distributors
40%
60%
Kelon
18
aaaaaa010807BJ-refrigerator
HAIER HAS A DISTINCTIVE DISTRIBUTION APPROACH WHICH IS
HEAVILY FOCUSING ON DIRECT RETAIL SALES FOR BASE AND
HUB CITIES
..
Source: Field interview; McKinsey analysis
Specialty
shores
First tier city aaaaaaond tier city Third tier city
Haier shop-in
-shops
Retailers in
first tier cities
• Retailers in some
large aaaaaaond
tier cities
• Specialty store
• Haier shop in
shops
• Retailers in
aaaaaaond tier
cities
• Specialty store
• Haier shop in
shops
• Retailers in third tier cities
• Specialty stores
Haier A/C sales Co.
Haier sales branches
in small aaaaaaond
tier cities
Wholesales in some
third tier cities
Haier sales center
in first tier cities
Haier sales center
in some large
aaaaaaond tier
cities
Haier sales centers
in first and
aaaaaaond tier
cities
Haier sales branches
in big third tier cities
East region North region West regionSouth region
19
aaaaaa010807BJ-refrigerator
MARKET DEFINITION
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
Market
assessment
• Market share by competitor
• Industry profitability or economics
20
aaaaaa010807BJ-refrigerator
WHILE THE MARKET IS GETTING MORE DOMINATED BY TOP PLAYERS
COMBINED, MNC PLAYERS ARE GRADUALLY TAKING MORE SHARES
*Rongsheng and Kelon combined
Source:SINO-MR, GfK, LIIC
100%=
1998
Others
1999 2000
aaaaaa
Electrolux
Meiling
Kelon*
Haier
Siemens
• Haier and Kelon are the
leading players.
However, their market
shares are decreasing
• Although latecomers to
the market, Electrolux
and Siemens are quickly
building up their
positions by focusing on
mid-to high-end and high
-end markets
• Compared to other MNC
players, aaaaaa's growth
in the market is rather
slow
Millions units, percent
Refrigerator market share of major players in major cities
CAGR
(98-00)
Percent aaaaaa
Haier/Kelon/Meiling
Siemens/Electrolux
21
aaaaaa010807BJ-refrigerator
EAST, SOUTH AND SOUTHWEST CHINA SEEM TO BE THE WINNING
TERRITORY FOR MNC PLAYERS
* Kelon and Rongsheng combined
Source:SINO-MR, GfK, LIIC
100%=
North
China
Others
aaaaaa
Electrolux
Meiling
Kelon*
Haier
Siemens
• Electrolux and Siemens
are doing particularly
well in Southwest
• Apart from Southwest,
MNC players are doing
better in east China and
South China, relatively
more affluent areas
• aaaaaa is relatively
strong in East China and
South China
North
East
East
China
Central
South
South
West
North
West
Market share in major cities by geography, 2000
Million units, percent
aaaaaa
Haier/Kelon/Meiling
Siemens/Electrolux
22
aaaaaa010807BJ-refrigerator
LOCAL LEADING PLAYERS ARE DOMINATING IN ALMOST ALL PRICE
SEGMENTS, MNC PLAYERS TEND TO BE STRONG IN MID-TO-HIGH END
MARKETS
*Another Kelon's brand
Source:SINO-MR, GfK, LIIC
100%=
< 1,500
Others
aaaaaa
Electrolux
Meiling
Kelon
Haier
Siemens
• Siemens is focusing on
very high-end market
while Electrolux is
focusing on mid-to-high
end market
• aaaaaa demonstrated
strength in low-price
market
• Kelon uses multi-brand
strategy to target both low
-to-mid end market and
mid-to-high end market
1,500 -
2,500
2,000 -
2,500
2,500 -
3,000
3,000 -
4,000
> 4,000
0
0
Rongsheng*
0
Market share in major cities by price band, 2000
Million units, percent Electrolux
Kelon/Rongsheng
Siemens
aaaaaa
23
aaaaaa010807BJ-refrigerator
LOCAL PLAYERS ARE DOMINANT IN MOST PRODUCT SEGMENTS, MNC
PLAYERS HAVE STRENGTH IN MID-TO-LARGE CAPACITY MARKETS
*Another Kelon's brand
Source:SINO-MR, GfK, LIIC
100%=
< 100L
Others
aaaaaa
Electrolux
Meiling
Kelon*
Haier
Siemens
• Haier is leading in most
markets
• Electrolux and Siemens
have strong position in
mid-to-large capacity
markets
• aaaaaa is very strong in
small capacity
(< 100L) market and is
relatively strong in mid
capacity market
100 -
150L
150 -
180L
180 -
200L
200 -
225L
225 -
250L
250 -
300L
> 300L
Rongsheng*
0
0
0
0
0
Market share in major cities by product type, 2000
aaaaaa
Haier/Rongsheng/Kelon
Siemens/Electrolux
24
aaaaaa010807BJ-refrigerator
GE IS THE LEADING PLAYER IN SIDE-BY-SIDE REFRIGERATOR MARKET
100%=
Others*
aaaaaa
1,000 3,500
• The market is
dominated by MNC
players
• aaaaaa has
significant share in
the market. However,
GE clearly dominates
• New players such as
Haier are entering the
market
• The high-end side-by
-side refrigerator
market is likely to
remain MNC’s
territory while “local
players” will focus on
lower-end segments
Units, Percent
Unit market share
60
*Includes Haier, LG, Whirlpool, etc.
Source:Zhongxi Trading Co., aaaaaa
GE
1999 2000
Growth
percent
250
N/A
319
211
25
aaaaaa010807BJ-refrigerator
KEY MNC PLAYERS ENJOY PRICE PREMIUMS IN SIDE-BY-SIDE
REFRIGERATORS
• GE entered the market first and has the strongest
brand image. It’s price is the highest
• aaaaaa’s price is 10-20% lower than GE’s
• Other players’ prices are on average 10% lower
than aaaaaa’s
Source:Field interview; GfK
26
aaaaaa010807BJ-refrigerator
KELON AND MEILING’S FINANCIALS SHOW THAT MANUFACTURER'S
PROFIT SUFFERED OVER THE PAST FEW YEARS AND ARE EXPECTED TO
REMAIN LOW
Source:Morgan Stanley Dean Witter report, annual reports
Meiling
1997
2001E
2000E
1999
1998
Kelon
EBIT margin
Percent
27
aaaaaa010807BJ-refrigerator
MARKET ASSESSMENT
Market
assessment
Supply (competitor)
analysis
Demand (customer)
analysis
Overall environment
analysis
Market definition
• Evaluation criteria, weight and rating
• Assessment of market attractiveness
28
aaaaaa010807BJ-refrigerator
Evaluation
criteria
Weight
Percent
Attractive-
ness ratingMarket
assessment
MARKET ASSESSMENT --- NON-SIDE-BY-SIDE REFERIGERATOR
Overall
environment
analysis
• China environment
attractiveness
Demand
(customer)
analysis
• China (related)
market size
• China (related)
market growth rate
Supplier
(competitor
analysis)
• Industry profitability
in related markets
20
20
20
20 6%
RMB
7
10
1
Evaluation
basis
• Profitability trend 20 Moderate
decline
4
4%
4
29
aaaaaa010807BJ-refrigerator
Evaluation
criteria
Weight
Percent
Attractive-
ness ratingMarket
assessment
MARKET ASSESSMENT --- SIDE-BY-SIDE REFERIGERATOR
Overall
environment
analysis
• China environment
attractiveness
Demand
(customer)
analysis
• China (related)
market size
• China (related)
market growth rate
Supplier
(competitor
analysis)
• Industry profitability
in related markets
20
20
20
20 7%
74 MRMB
7
1
7
Evaluation
basis
• Profitability trend 20 Sustain 7
31%
4
30
aaaaaa010807BJ-refrigerator
APPENDIX
31
aaaaaa010807BJ-refrigerator
DEFINITION OF GEOGRAPHIES
Chengdu
Beijing
Wuhan
Shenyang
Dalian
Guangzhou
TianjinShijiazhuang
Taiyuan
Ji’nan
Nanjing
Shanghai
Ningbo
Hefei
Nanchang
Fuzhou
Xiamen
Kunming
Changsha
Xi’an
Lanzhou
Haerbin
ChangchunWulumuqi
Haikou
Northeast
North
Northwest
East
Central South
SouthwestHuhehote
Qingdao
Hangzhou
Zheng
-zhou
Shenzhen
Nanning
Guiyang
Chongqing
Xining
Yinchuan
32
DEFINITION OF TIER CITIES
Tier 1
Tier 2
Tier 3
Beijing, Shanghai, Guangzhou
Shenyang, Wuhan, Hangzhou, Tianjin, Chengdu,
Chongqing, Shenzhen
Other provincial capitals
33
aaaaaa010807BJ-refrigerator
