"Price increase game": Home appliance companies squeezed by both ends
China News Weekly reporter/Chen Weishan
"Diphenylmethane Diisocyanate".
Although he has been immersed in the home appliance industry for many years, Li Fang is still unfamiliar with this name. After several inquiries, he accurately told reporters the name of the chemical product commonly known as "black material" in the industry.
"Black material" is an important raw material for the manufacture of refrigerator insulation. As a manager of a household appliance company with an annual output of 4 million refrigerators and freezers, Li Fang has been anxious about the price increase of "black material" since last year.
In this fancy price increase game started by the upstream, Chinese manufacturing companies are reluctantly digesting more pressure from rising costs.
China is not a commodity supplier. While manufacturing companies in the "world's factory" convert raw materials into terminal consumer goods, they are also silently under the pressure of rising raw material prices.
Ye Jianhua, big data director of Shanghai Nonferrous Metals.com, told China News Weekly that from the situation of the companies he visited, the purchasing power of many manufacturing companies has fallen sharply. In addition, the upstream payment form is mostly "cash on spot", but there are often billing periods in the downstream. , Which exacerbated the pressure on the company's capital chain.
The pressure of rising prices of bulk commodities not only directly affects the capital side of enterprises, but also squeezes profit margins, causing some manufacturing companies to fall into the embarrassing situation that the more orders they receive, the more companies lose money.
This is also the point that this round of commodity price hikes has puzzled many people. In the context of high inflation expectations, why has the CPI remained relatively stable, and ordinary domestic consumers are not deeply touched?
The answer to this question may still need to be sought from manufacturing companies.
Ningbo is one of the three major domestic appliance production bases. There are about 3,000 complete machine companies. They are good at small appliances and two-season products. Most of them are small and medium-sized private enterprises. The appliance industry is close enough to the lives of ordinary people. This makes Ningbo The home appliance industry has become an excellent sample for observing this problem.
The mismatch of supply and demand behind the fierce price increase of raw materials
"In July 2020, the price of'black material' was maintained at 14,000 yuan/ton. At the end of the year, it had exceeded 20,000 yuan per ton. After entering 2021, it once reached a peak of about 25,000 yuan/ton. The price per ton is still between 18,500 yuan and 19,000 yuan.” Li Xiangsuo "China News Weekly" recalled that in 2016, "black material" had a more outrageous price, reaching 38,000 yuan / ton.
"The price increase of'black material' has a more obvious impact on the cost of large refrigerators. Taking a conventional double-door refrigerator as an example, the price of'black material' per ton increases by 1,000 yuan, and the final cost will be pushed up by 30 yuan." Li Fang told reporters that based on the current price of "black material", the average cost of each refrigerator will increase by 70 to 80 yuan. "The price increase of "black material" alone is enough to kill the refrigerator industry."
But among the raw materials used in a refrigerator, the price increase is more than "black material."
"Plastics, compressors, and packaging materials such as cartons and foams are all rising in price. The main raw material of compressors is steel, so the price has risen by 8% to 10%, but because the unit price of compressors is lower, The compressor used in a small refrigerator is mostly 80 or 90 yuan, so the impact on the cost of the refrigerator is not great.” According to Li Fang’s calculations, from July 2020 to May this year, the cost of refrigerators and freezers increased by approximately 25%.
On average, raw materials account for 70% to 80% of the cost of home appliances. Wang Weiding, secretary-general of Ningbo Home Appliance Industry Association, told China News Weekly that the refrigerator industry is indeed affected by upstream price increases because it uses more types of raw materials. .
Of course, other types of home appliances are also affected to different degrees due to differences in the types of raw materials used.
Zhang Tao, the person in charge of a home appliance company that specializes in two-season products, told China News Weekly that the company’s main products are electric fans and heaters. 30%. However, the amount of copper used in electric fans is limited, and it is mainly used in motors and wires. Various types of plastics account for about 85% of the amount of materials used, while ABS plastics have risen from 12.3 to 189 per ton." According to his calculations, the price increase of various raw materials of electric fans is close to 50%, pushing up the cost of the whole machine by 30%.
According to statistics from Ningbo Home Appliance Industry Association, this round of raw material price increases began in October 2020 and reached its peak from March to May this year. Taking several raw materials commonly used in the home appliance industry as an example, copper has risen close to 65%, aluminum and aluminum. ABS plastics rose by more than 50%.
In May, it was the period when many heads of home appliance companies in Ningbo remembered that raw material prices touched the peak of this round of increases.
Wang Lin, the head of a small and medium-sized enterprise whose main products are washing machines and dryers, told China News Weekly that starting from March this year, raw material suppliers will raise prices almost every week. “The most exaggerated one was in May. One day there were five or six suppliers with price increase letters to the company to request price increases."
In Zhang Tao's view, after the Spring Festival this year, some summer home appliance manufacturers concentrated their purchases, which undoubtedly pushed up raw material prices.
"The peak sales season for electric fans is April, May, and June. However, because the price of raw materials has risen since last year, companies have been cautious in purchasing. However, as the peak season has arrived, companies have rushed to buy raw materials, pushing up prices in disguise."
Obviously, the price increase of raw materials that the home appliance industry is distressed is not determined by the imbalance of short-term supply and demand, behind it is the general rise in commodity prices since last year.
The CRB index compiled by combining the prices of 19 commodities reached 228.45 on July 2, an increase of more than 28% during the year. In the same period last year, the index was only 149.31.
Take, for example, copper, which has a large increase in most people's memory, which reached an all-time high in the second week of May, which was close to 4.9 US dollars per pound.
Why did commodity prices rise?
Ye Jianhua, director of big data at Shanghai Nonferrous.com, believes that there are two factors behind it. First, the major economies led by the United States released liquidity last year, which naturally led to rising market inflation expectations and rising commodity prices.
Secondly, the mismatch between supply and demand directly supports price increases. "The recovery of less developed countries from the epidemic is slower than that of developed countries, and the former is precisely the main supplier of some commodities, while the latter represents the demand side, and demand recovers quickly. This can be seen from the significant increase in China’s export orders last year, but the release of supply has been relatively slow, resulting in a mismatch between supply and demand."
According to data released by the China Household Electrical Appliances Research Institute and the National Household Electrical Appliances Industry Information Center, the export scale of the household electrical appliance industry in 2020 will be 458.2 billion yuan (excluding color TVs), a year-on-year increase of 24.2%.
Last year, Ningbo home appliance companies briefly experienced the happiness brought about by the surge in foreign trade orders. Wang Weiding told reporters that more than 90% of home appliance export companies in Ningbo "orders surged, even doubled over the same period."
The popularity of orders, especially foreign trade orders, continued until this year. Li Fang said that in July, the company’s foreign trade orders had already been received in the fourth quarter of this year.
He Yong’s company’s electric iron production capacity accounts for half of the world’s capacity. As the company’s deputy general manager, He Yong told China News Weekly that foreign trade orders have been scheduled to the end of this year. Last year’s exports increased by about 10%. This year’s situation is basically the same as last year.
"Because of the shortage of shipping containers, many products are still placed in the factory without delivery after production, but customers will still place orders. Since there will be no payment if they are not shipped, the company's capital chain was under pressure for a while, and it was communicating with customers Later, they even agreed to make a payment before shipment.” This shows the strong demand.
But as Zhang Tao said, on the surface, it seems that the export volume is large, but in fact, several companies are happy and sad.
"The price of raw materials has risen, and the factors such as the increase in exchange rate and shipping costs are superimposed. Many orders may not be better than doing, and they may lose more if they do."
Difficult cost pressures
"After receiving foreign trade orders, we will arrange production capacity, which means that we will not purchase raw materials immediately to enter the production process. Therefore, some foreign trade orders received at the end of last year and the beginning of this year happened to catch up with another year when the raw materials were purchased and production began. The price of raw materials will rise, and such orders will definitely lose money.” Zhang Tao introduced.
Home appliance companies do not hoard too much raw materials. The general purchase cycle is half a month, especially for some larger companies.
Li Fang introduced that the company’s daily output of refrigerators and freezers is 20,000 units. In order to avoid pressure on the company’s capital chain, raw materials such as compressors and black and white materials will only be stocked for half a month. The daily packaging materials are even Same-day delivery, "delivery at 5 o'clock every morning, directly to the workshop for use".
Because the price of raw materials has risen too fast this year, the habitual operation mode of home appliance companies has led to losses in some orders.
He Yong’s company’s foreign trade orders are mostly OEMs, that is, foundry orders. He Yong told China News Weekly that after overseas customers place orders, the company will produce and deliver in batches. As the price of raw materials rises, some will not be shipped. Or the products produced request price increases.
"The price increase can basically cover the cost increase. Although there are some products without price increase, the part of the raw material price increase will be paid by the customer."
But not other home appliance companies can get enough price increases like He Yong.
According to statistics from Ningbo Home Appliance Industry Association, the average price of home appliances has generally risen. Since the beginning of this year, the average price of refrigerators and freezers has risen by 13%, and the average price of washing machines has also risen by more than 10%.
But can the increase in product prices cover the increase in costs?
Li Fang introduced that since 2021, the company’s refrigerators have adjusted their prices three times, one in March, April, and May. If the price adjustment of last year is taken into account, the average selling price of the product has risen by 10%.
"I can only increase it by two or three percentage points each time. I also want to increase it by 8 points or 10 points at a time, but I can't do it. I have to work slowly with customers."
Obviously, a 10% increase in sales prices cannot cover the 25% increase in the cost of refrigerators, which means that companies have to absorb 15% of the cost increase pressure.
"For refrigerators, companies that have done well in the past three years have at most only a profit margin of 2% to 3%. The average company can only just protect its capital, so it is impossible to absorb the pressure of 15 points of cost increase." Li told reporters bluntly. Unless a company only focuses on the high-end product market, it has dozens of profit margins. Any company that does conventional products will not lose money in the first half of this year.
The loss of some orders may be more serious. Li Fang’s company used to increase the price of raw materials by 25%. This is the guaranteed price and the break-even point. However, as the price of raw materials rises, the average price increase ratio has been increased. Decrease to 10%, "For example, the cost of raw materials for a refrigerator is 1,000 yuan, and now the price sold downstream is only 1,100 yuan. Many products are even sold at a price increase of 6 or 8 points on the cost of raw materials. Let's talk about it."
"Yesterday, I was still communicating with the financial department. Several products are already unsustainable at their current prices." Li Fang picked up a product price list from his desk and explained to reporters that there was a refrigerator with a side-by-side refrigerator. The cost of materials has reached 1,223 yuan, but the current price is only 1,299 yuan. It only adds 6% to the cost of raw materials. How can it be possible to cover labor and manufacturing costs?
"We originally hoped that the price of this product would rise to 1380 yuan, but the customer felt that the price was too high and did not discuss it."
When asking customers for price increases, some home appliance companies have very limited voice, and they rarely increase prices on the basis of existing pricing, unless they face great pressure to increase costs.
"If the price of raw materials only fluctuates slightly, we will not adjust the price, because the price adjustment is very cumbersome and the amount of work is large. Therefore, the company’s financial department has a heavy workload this year. Each time the price is adjusted, the financial department has to do a lot of calculation work. If the price is adjusted frequently , The financial department cannot afford it." Li Fang said frankly that in fact, the company does not want to adjust prices unless it is a last resort.
Zhang Tao also said that for summer electrical products such as electric fans, the peak sales season of each year is three to four months in summer. Generally, they will "open" after the Spring Festival. The price of raw materials sets the price of the product. "Thereafter, unless the price of raw materials fluctuates greatly, the price will not be adjusted."
When Zhang Tao's company set a price for electric fans in March this year, the price was increased by 10% compared to previous years. Although the price of raw materials has continued to rise since then, there has been no price adjustment, but a unified price increase of 10 yuan for products using chips.
"If the price of a chip only rises by 20%, 30%, or even 50%, we will not increase the price, but this year the price of the chip has doubled or even tripled. Previously, the price of a chip less than two yuan would increase. To six or seven yuan, you can only choose to increase the price." But in his words, the increase in product prices can only slightly ease the pressure caused by rising costs, and will not lose too much.
The price increase of home appliance companies is limited, and it is more subject to the acceptance of downstream customers, especially when facing domestic distributors.
"The price of foreign trade orders is often'a single negotiation.' If the price of some orders is too low, the company can give up taking orders. However, sales agreements signed with domestic distributors often have a taste of strategic cooperation. After an agreement is signed, the other party Regularly purchase goods from the company according to the sales rhythm. If you want to adjust the price in this process, the dealer will often continue to delay.” Li Fang explained that after raising the price to the dealer, the other party will often show you various industry analysis, meaning Can we wait for the price increase, but the company cannot sell out during this process. "We will send a price increase notice to the dealer and the customer requires confirmation within 3 days, but if the other party does not confirm it, we will still supply the goods based on the multi-year cooperative relationship. ."
"You can't adjust the price casually. If you don't talk about it, it will collapse." This has become the consensus of many interviewed household appliance companies, especially the heads of small and medium-sized enterprises. Wang Lin told China News Weekly that the smallest model produced by their company Take the mini washing machine as an example. The domestic ex-factory price rose from 104 yuan to 111 yuan, but in the end it only increased the price by 3% to the dealer.
As of May of this year, Li Fang's company has suffered a loss of 30 to 40 million yuan, and he still has no hope of reversal in the second half of the year.
In the industrial chain from raw materials to terminal commodities, home appliance companies are in an awkward position. Their bargaining power is the weakest, so they are more exposed to the pressure brought by this round of commodity rises. This seems to explain why domestic CPI has always been relatively stable.
Weak bargaining power
"China's PPI and CPI data fully reflect the difference in price transmission between supply ports and demand ports after this round of commodity price increases." Ye Jianhua told China News Weekly.
In 2020, China's PPI still maintained a negative growth year-on-year, but by the first 5 months of this year, the year-on-year growth rate of the PPI index surged from 0.3% to 9%.
However, in contrast, although the CPI index is also growing year-on-year, the growth rate was 1.3% in May, which does not seem to be coordinated compared to the PPI index. This is also the "scissors gap" between the PPI and CPI trends that have been discussed a lot by the outside world.
"Smelting companies in the upstream of the copper industry chain are actually very limited by the rise in copper prices, because they earn more processing fees, that is, processing mineral copper and miscellaneous copper into cathode copper, which is similar to processing with imported materials." A senior person from a domestic smelting company told China News Weekly.
"In the bulk commodity industry chain, the bargaining power of the upstream supply side is stronger than that of the downstream processing and deep processing links, making it difficult for the downstream links to transmit the pressure of rising costs to end consumers through prices." Ye Jianhua explained that the price of all bulk commodities The industrial chain structure is a pyramid structure. Only a small number of upstream companies have control of resources. However, because China is a strong manufacturing country, the downstream processing and deep-processing links are in a state of excess capacity. The structure of supply and demand in the industry chain also determines the limited bargaining power downstream.
"The most typical performance is that upstream raw material companies will trade with downstream manufacturing companies in the form of'cash spot', which in itself is a manifestation of upstream bargaining power."
Specific to the home appliance industry, we can also see the impact of production capacity on the bargaining power of companies in the subdivisions.
In this wave of rising raw material prices, the price of copper has risen significantly, and the air-conditioning industry has been most affected by it. However, many people in the air-conditioning industry said in an interview with China News Weekly that the price adjustment process of air-conditioning has been significantly greater. For smooth.
A person in charge of an air-conditioning company said that since March this year, the company’s air-conditioning products have also undergone three rounds of price adjustments, and almost every time they talk to dealers, they don’t need to talk about it. The increase will be discussed for half a month. However, as soon as air-conditioning companies issue a notice, downstream distributors will immediately agree to see the general price increase in the industry. Some air-conditioning companies do not even adjust the price once a month, but half the price. It is adjusted once a month." He believes that this is because there are fewer air-conditioning companies, and less than 10 companies basically dominate the market. "Everyone shouted one, two, three and raised the price."
The price increase in the air-conditioning industry has started last year. At the end of November 2020, Oaks issued a notice stating that from January 1, 2021, the price of the hang-up unit will be increased by 100-200 yuan/set, and the price of the cabinet will be increased by 200-300 yuan/ The sets vary.
In December, Hisense adjusted the prices of air-conditioning products.
Entering 2021, Oaks and Midea will continue to adjust the prices of air-conditioning products. The aforementioned person in charge told reporters that some brands are also raising prices in disguised ways through the promotion of new energy efficiency standards. "In addition, we can also see that the saliva that has often been provoked in the past can be seen. Wars and price wars have disappeared this year."
However, such price adjustment steps are difficult to achieve in more competitive industries such as refrigerators and washing machines.
"Customers see that there are indeed companies in the industry that do not raise prices, but only let a few companies rise first, but this industry is not united, and it lacks an industry leader or a very authoritative industry association to take the lead." Li Fang said with emotion. There are as many as 20 or 30 brands in this segment of refrigerators, and the production capacity is far greater than the demand. There are always several companies that will jump out and bargain, "Everyone is watching you and you are watching me."
Under this circumstance, companies dare not raise prices rashly because they are worried about the impact on sales.
Li Fang said that although the price increase is far from covering the pressure of rising costs, it has also restrained sales.
"Distributors will also compare prices when they get the goods. If they continue to rise, they will wait and see and reduce purchases."
In addition to the remaining fierce competition for overcapacity, the increase in the proportion of e-commerce channel sales has also suppressed the extent of the increase in product prices by home appliance companies.
From last year's data, the proportion of various home appliance e-commerce sales has increased to varying degrees. According to statistics from Aowei Cloud Network, online retail sales of refrigerators and washing machines accounted for more than 60% last year.
Li Fang introduced that when the company's domestic sales market grew by 20% last year, online sales surged by more than 70%, but price protection in e-commerce channels was difficult to achieve.
Zhang Tao is somewhat fortunate not to participate in this year's e-commerce price war. "In the top ten electric fan products displayed on e-commerce platforms in previous years, the company's products will occupy two or three seats, but the company has only one product in the top 30 this year. This year We did not engage in price wars on e-commerce platforms. With the rising cost of raw materials and the market decline due to weather factors, this means that we will not lose a lot this year, otherwise we will have to spend at least tens of millions of yuan."
Driven by the big data logic of the e-commerce platform, the price and sales volume will become the key to the product's position on the page, and low enough prices are often the key.
A person in charge of an enterprise told China News Weekly that on the e-commerce platform, more can only be the pressure of manufacturers to subsidize the cost increase, because "riding a tiger is difficult."
For example, a sales target of 500,000 units was set at the beginning of the year, and a set of molds can produce up to 150,000 units. Therefore, the company must prepare at least 3 sets of molds alone.
Even for small household appliances, the cost of a set of molds is several million yuan. With such a large investment in the early stage, even if the product sells one and loses one, it must be impulsive, which in turn inhibits the price increase.
This also reflects the embarrassing situation of some home appliance companies in Ningbo. The orders are clearly losing money, but they have to continue to do it. In addition to diluting the fixed cost expenditures in the early period, another important reason is to feed the workers.
Zhang Tao told China News Weekly, “Now it’s difficult to recruit workers. If companies don’t provide workers with minimum wages, workers may quit at any time, and it will be difficult for companies to recruit workers anymore. Therefore, companies now post money to make some orders mainly to feed workers. Otherwise, companies will have to provide more funds to subsidize workers' wages, or they will lose more.” This has almost become the status quo of many small and medium-sized home appliance companies in Ningbo.
Wang Lin even bluntly said that even if there is no room for price increases in the e-commerce channel, we must use the e-commerce channel to make more shipments, mainly to feed the workers.
This has caused the company’s production line to still look prosperous. Li Fang told reporters, “If the factory’s capacity is left unused, even if the order loses too much, it will have to bite the bullet, but if the capacity utilization rate reaches 70 to 80%, the company may Only then will some orders with excessive losses be cut."
Because of rising raw materials and sluggish market demand, Zhang Tao cut the production capacity of electric fans by one-third this summer. The vacated capacity did not dare to be idle, but started to produce heaters.
At the end of June, he was paying attention to the price trend of heater raw materials, and faintly worried that the heater production capacity would be surplus in winter.
In addition, it seems that all he can do is to wait for the price of raw materials to fall. "The prices of copper and iron sheet have fallen by about 15% compared to the peak, but the price of aluminum does not seem to have fallen."
(Li Fang, Zhang Tao, Wang Lin, and He Yong are all pseudonyms)
China News Weekly, Issue 25, 2021
Statement: The publication of the "China News Weekly" manuscript is authorized in writing