China Herald: Rising labor costs and lower sales growth drive outbound expansion

James Roy

Haier´s purchase of GE´s appliances and Midea´s efforts to get a bigger stake at Germany´s robotic company Kuka both reflect the challenges the giant Chinese firms face at home, says business analyst James Roy to Barron´s. Rising labor costs and slowing growth of domestic sales makes both look abroad.

Barron´s:

James Roy, an analyst at consultant China Market Research Group, says the deals represent two very different ways in tackling the challenges both face. For Midea, “labor costs are continuing to rise and the pool of available workers shrinking over time,” Roy tells Barron’s Asia. A number of Chinese provinces have lavished annual increases in minimum wages, while an ageing workforce and preference for services jobs are also draining the talent pool. A quick hunt through Midea’s annual financial reports indicates wages as a percentage of sales costs have risen exponentially over the last few years.

That’s been eating in to Midea’s bottom line. The company’s traditionally focused on the low-to-middle end of the Chinese market for appliances like refrigerators and washing machines, which typically have lower margins. ...

The rationale behind Haier’s purchase of GE’s appliances business looks simpler to decode. The company’s battling similar headwinds to Midea, namely sluggish domestic sales due to the Chinese economy’s slowdown. In fiscal 2015 its total revenues slumped by about 5%. A recent fightback in China’s property market hasn’t brought much reprieve either, given the rebound’s been mostly confined to top tier cities like Shanghai and Shenzhen. Haier bills itself as the world’s biggest white goods maker, with global market share of 10%, but the vast majority of this comes from China. Estimates put Haier’s U.S. sales at a tiny 1% of its overall revenue. GE “gives them access to a higher end segment than they’ve previously been able to get to through their own self-branded products,” explains China Market Research’s Roy....

Still, there’s more both Midea and Haier could do to clean up their act. China Market Research’s Roy reckons both have been slow to catch up with new trends in home appliances, or have made missteps here in the past. Case in point: Both Haier and Midea have been slow to the punch when it comes to new offerings like air purifiers – products with obvious captive markets given the poor air quality in Chinese cities. Additionally, dryer machines, for example, just haven’t caught on given locals’ propensity for hanging clothes out of windows to dry. Roy thinks by bringing more international expertise into the fold, the pair is more likely to avoid being taken to the cleaners in future. “There’s a growing comfort among large Chinese companies to acquire other companies and learn from their best practice,” he believes. “There’s a realization that they need to learn more international know-how.”

More at Barron´s

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Are you looking for more experts on China´s outbound investments? Do check out this list.