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China's home appliance industry faces multifaceted challenges in its overseas expansion, with leading companies actively responding by undertaking high-quality globalization initiatives.

Currently, China's home appliances have grown into an advantageous industry with global competitiveness.

Abstract of high-quality globalization of China's home appliance industry: 1) After joining the WTO in 2001, China's home appliance industry saw a continuous increase in exports, becoming a global production base for home appliances.

2) Major home appliance companies were among the earliest industries in China to promote globalization.

Before gaining full industrial chain competitiveness, the effects of globalization were average.

After 2016, China's home appliance industry began to show global competitiveness, with representative events such as Haier's acquisition of GEA in 2016, the launch of Roborock on Amazon in the United States; the merger and acquisition of SharkNinja in 2017; and in 2018, the production of large-sized panels in mainland China exceeded that of South Korea.

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3) The United States imposed additional tariffs on Chinese export products, promoting Chinese companies to accelerate globalization.

Currently, major domestic home appliance companies have formed a global layout; the main production capacity of small home appliances is still in China, but more and more companies have built production capacity in Southeast Asia.

The United States is an important global consumer appliance market, with a self-sufficiency rate of about 30%: 1) The United States is the largest single overseas consumer market for home appliances.

According to Euromonitor data, in 2023, the U.S. market's retail sales accounted for 21% of the global consumer appliance market, with the subcategories of power tools/garden tools accounting for as much as 41%/59%.

2) The U.S. market is the most important overseas market for Chinese home appliance companies, with major home appliances and sweeping machines ranking in the first echelon in the U.S. market.

3) In 2023, the shipment value of U.S. home appliance manufacturers was $28.3 billion (data from the U.S. National Bureau of Statistics), and we estimate that the local production capacity in the United States can meet about 30% of the local market demand.

Among them, the production capacity of washing machines, dishwashers, and large kitchen appliances is the most retained.

Whirlpool, GEA, and Electrolux's major home appliances sold in the United States are mainly produced in the United States, and even supply Europe and South America.

To protect the production capacity of major home appliances, the United States has repeatedly imposed tariffs on South Korean companies' washing machines from 2011 to 2017, causing Samsung and LG to transfer their washing machine production capacity globally, from South Korea to Mexico, then to China, then to Southeast Asia, and finally building some washing machine production capacity in the United States.

The proportion of the amount of home appliances imported from mainland China to the United States has decreased from 48% in 2018 to 31% in 2023: 1) In recent years, the proportion of home appliances imported from Mexico, Vietnam, and Thailand in the United States has increased significantly.

2) Due to U.S. consumers bearing import tariffs.

From 2019 to 2023, the United States frequently exempted import tariffs on various home appliance products.

3) Since 2018, China's home appliance industry exports have not been significantly negatively affected by U.S. tariff policies.

On the one hand, the rapid growth of markets outside the United States, especially in recent years, emerging market countries have begun to popularize major home appliances; on the other hand, the growth of home-based demand during the pandemic in the United States, and the large-scale inventory reduction after demand overdraw, this significant fluctuation has a greater impact on the industry.

4) In summary, the overseas business of home appliance leaders, companies mainly engaged in brand business are more affected by the significant fluctuation of demand, the significant increase in sea freight; OEM companies are more affected by the significant fluctuation of demand and exchange rate fluctuations.

Risk market demand downturn risk; exchange rate fluctuation risk; U.S. tariff policy risk.

China's home appliance production is of great importance, and the brand goes overseas with a broad market production end: China is a global home appliance production base.

Since joining the WTO in 2001, the export value of home appliances has maintained a growth trend: 1) According to data from the China Household Electrical Appliances Association and the General Administration of Customs, from 2002 to 2023, China's home appliance export value increased from $8.75 billion to $87.8 billion, with a CAGR of 12%.

2) Some period fluctuations are not enough to change the trend of China's home appliance export growth, and the larger fluctuations include the decline in home appliance exports in 2009 caused by the global financial crisis; the high increase in home-based demand caused by consumer subsidies in Europe and America during the pandemic in 2021, and the fluctuation caused by the large-scale inventory reduction afterwards, during this period, the export growth from the second half of 2020 to 2021 was obviously high, and the export decline caused by the large-scale inventory reduction in Europe and America from 2022 to the first half of 2023 was more obvious.

Note: The General Administration of Customs has been counting the total export value of home appliances since 2019, and before 2019, it used the data from the China Household Electrical Appliances Association.

Since 2019, it has used the data from the General Administration of Customs; considering the change of data sources, the YoY in 2019 still uses the data from the China Household Electrical Appliances Association.

Data source: China Household Electrical Appliances Association, General Administration of Customs, Research Department of CICC The proportion of China's home appliance production capacity in the world has not decreased.

Although the home appliances exported to the United States have obviously decreased, the demand growth in emerging market countries outside the United States has compensated for the decline in export demand to the United States.

According to data from the Industrial Online, in 2023, the export volume of China's air conditioners, refrigerators, and washing machines increased by 8%, 28%, and 37% year-on-year, reaching 70.84 million, 43.81 million, and 38.4 million units, respectively, all hitting historical highs, among which the export volume of refrigerators has exceeded the demand peak during the pandemic in 2020-2021.

Data from the Industrial Online shows that China's home air conditioner production accounts for more than 80% of the global output.

In the global refrigerator and freezer production in 2023, China accounts for 58%, while other Asian regions and Europe account for 19% and 11%, respectively.

In the global washing machine production in 2021, China accounts for 44%.

Thailand is currently the second-largest white appliance producer in the world.

In 2023, Thailand's air conditioner, refrigerator and freezer, and washing machine production capacity reached 20.8 million, 11 million, and 12.2 million units, respectively.

The proportion of domestic color TV exports to North America has decreased, while the proportion exported to Europe and Latin America has increased.

According to data from the Industrial Online and the General Administration of Customs, in 2023, China's color TV export volume increased by 7% year-on-year to 98.95 million units, close to the high point of 99.49 million units in 2020.

The demand for the increase in the share of Chinese brands in Europe has compensated for the significant decline in exports to the United States.

Looking at the regions, in 2023, the proportion of China's color TV export value to North America decreased by 15 percentage points compared to 2019, while the export value to Europe/Latin America increased by 8 percentage points/9 percentage points compared to 2019.

Looking at the absolute value of export amounts by region, the export to North America showed a downward trend from 2019 to 2023, while the export to Europe and Latin America showed an upward trend.

We believe that the decline in China's color TV exports to North America mainly comes from the impact of tariffs.

Currently, the sales of domestic color TVs in the United States are mainly supplied by overseas production bases (such as Mexico, Southeast Asia, etc.

), Hisense and TCL both have overseas production capacity layouts that radiate to the U.S. market, so the domestic color TV export supply has decreased; and the increase in export value and proportion to Europe mainly comes from the continuous increase in the market share of Chinese color TV brands in Europe, driving the growth of exports to Europe.

Although China is already the global center of home appliance production, in terms of overseas markets, the overall share of Chinese companies (including foreign brands acquired by mergers and acquisitions) is not high.

In the major home appliance market, Haier currently has a higher share in the overseas major home appliance market, and other Chinese brands still have a gap with Whirlpool, Samsung, LG, Electrolux, etc.

In the European and American markets, the main competitors are European and American brands, and in Southeast Asia, South Asia, and the Middle East and Africa regions, the main competitors are Japanese and Korean brands that have been deeply cultivated for many years.

Research shows that since the United States imposed additional tariffs on Chinese imported goods in 2018, in most sectors, U.S. tariffs have been almost completely passed on to U.S. companies and consumers, and have accelerated the reshaping of the global industrial chain.

We believe that China's home appliance industry chain occupies a leading position in the world, and it is difficult to find a substitute in the short term, and the ability of Chinese home appliance leaders to pass on costs to the downstream is strong, so the long-term impact of U.S. tariffs on Chinese home appliance companies is limited.

From the perspective of corporate performance, market demand is still the main factor affecting the profitability of home appliance companies, not tariffs.

We have analyzed three models of Chinese companies' overseas business: 1) Local production and local sales: Taking Haier Smart Home as an example, about 60% of its overseas revenue comes from the U.S. market, and about 60% of the sales in the U.S. market are produced locally in the United States.

The operating profit margin of Haier's overseas business did not decline significantly after the United States imposed tariffs in 2018, and with the improvement of Haier's competitiveness in the United States, its overseas business operating profit margin has been increasing from 2019 to 2021.

2) China produces and the United States sells (OEM): Taking enterprises that mainly export to the U.S. market as an example, most of their exports adopt the FOB model, that is, the downstream customers declare customs, and the tariffs are borne by the customers, so the company's performance is less affected by the additional tariffs, and is more affected by market demand and exchange rate fluctuations.

We have seen that the net profit margin of such companies has not decreased but increased after 2018, mainly driven by the prosperity of overseas demand, and the decline in 2021 is mainly due to the rise in raw material prices, high sea freight, and the appreciation of the RMB exchange rate, and after 2022, it is also affected by the inventory reduction cycle, but none of them are due to additional tariffs.

3) China purchases and the United States sells (brand going overseas): Taking Vesync and SharkNinja as examples, in this model, the company purchases from Chinese suppliers and then sells to the United States in its own brand mode, and the tariff costs must be borne by the company itself, so domestic brands going overseas are affected by certain tariff policies in the U.S. market sales.

However, looking back at the past few years of operation, the profitability of the above companies is mainly affected by external factors such as the U.S. demand cycle and sea freight, and the impact of tariffs on profit margins is relatively limited.

According to Vesync's disclosure, the tariff cost accounts for about 1%~3% of the company's revenue, and the proportion of sea freight costs is relatively higher.

During the phase of tariff increase in 2021, the gross margin/operating profit margin of Vesync and SharkNinja both declined year-on-year, and in the phase of tariff exemption in 2022, affected by the weakening of U.S. demand for small home appliances, and the maintenance of high sea freight and raw material costs, Vesync's revenue growth slowed down, and the profit margin declined significantly year-on-year, and SharkNinja's profit margin also declined slightly year-on-year.The globalization of China's home appliance industry and the factors driving industrial transformation: The pursuit of the lowest comprehensive costs and local market support have led to multiple shifts in the home appliance industry.

Under the international environment of free trade, the global capacity layout of enterprises is mainly based on the following considerations: 1) The lowest comprehensive cost: a) Labor cost factor: Before the transformation to automated production, the home appliance industry was relatively labor-intensive.

Differences in labor costs have promoted the transfer of the home appliance industry chain.

b) Industrial chain support factor: The production of home appliance companies involves a large number of raw materials and components.

The support of the industrial chain is quite important for cost control, material supply, and cooperation between upstream and downstream enterprises.

China has a complete range of industries, creating favorable upstream support resources for the development of the home appliance industry.

Currently, when Chinese companies are laying out their global capacity, a large number of core components and components need to be imported from China.

c) Transportation cost factor: Household appliances such as refrigerators, washing machines, and color TVs are relatively large in volume and have high transportation costs.

The transportation radius has a significant impact on the expansion of overseas markets.

This leads to the global capacity layout of household appliances considering the impact of transportation radius more.

North America generally chooses Latin America as the production base, and Western Europe generally chooses Eastern Europe and Turkey as the production base.

d) Tariff barrier factor: Differences in tariffs and industrial policies between countries and regions have a significant impact on the global transfer of the home appliance industry chain.

Currently, the United States still imposes tariffs of about 7.5% to 25% on Chinese exports of air conditioners, refrigerators, washing machines, color TVs, ovens, water heaters, vacuum cleaners, and other home appliance categories, while Southeast Asia exports to the United States without tariff barriers.

This has led to some small home appliance capacity targeting the United States to move to Southeast Asia.

2) Localization support: The success of a brand is not only about cost control, but also equally important in product innovation, design, marketing, and other aspects.

During the brand expansion stage, companies sometimes do not follow the principle of the lowest comprehensive cost to better respond to local needs.

There are regional differences in consumer demand pain points, and localized production and research and development can respond to local needs in a timely manner and make timely adjustments.

The globalization of brands is a long and arduous task.

It took 30 years (1990-2020) for the home appliance industry to achieve the goal of becoming a manufacturing powerhouse.

The globalization of brands is a more challenging goal, and it is a long and arduous journey.

Chinese home appliance companies have been exploring overseas markets since the 2010s and have expanded by building their own production bases and mergers and acquisitions.

Companies such as Midea and Haier, on the one hand, are influenced by the transportation radius of household appliances and build factories globally.

On the other hand, they expand overseas by acquiring and integrating foreign home appliance brands.

Currently, home appliance companies have completed large-scale production base construction in Europe, America, Southeast Asia, South Asia, East Asia, Africa, and other regions, with obvious regional radiation effects.

However, in terms of the effect of brand globalization, it was only after 2020 that Chinese home appliance companies showed a certain competitiveness in brand globalization, and the initial effect of brand globalization was not significant.

Taking Haier Smart Home as an example: Global brand strategy, acquisition and self-built parallel.

By the end of 2021, Haier has 122 manufacturing centers and 30 industrial parks worldwide, serving 1 billion user families.

As one of the earliest home appliance brands to go abroad, Haier has many years of factory operation experience in Pakistan, India, Nigeria, and other places, and has further expanded its global capacity layout through the acquisition of GEA, FPA, Candy, and Sanyo white appliance business.

Haier's global layout has a history of 20 years, and has improved its global production and brand layout through large-scale acquisitions.

1) Haier has insisted on its own brand going abroad since the 2000s, and has successively built factories in the United States, Thailand, Nigeria, Jordan, Pakistan, and other places for the production and sales of white appliances.

In 2006, Haier took the lead in proposing the "global brand strategy".

At that time, the timing was not mature, and the effect was average.

Especially in developed countries, the progress of the Haier brand was slow.

2) In the 2010s, Haier Group began to acquire and integrate foreign home appliance brands in developed countries worldwide, taking this opportunity to go abroad.

It has successively acquired the white appliance business of Japan's Sanyo, Australia's Fisher & Paykel, the United States' GE home appliance business, Europe's Candy, and obtained some of its factories around the world, further deepening globalization.

3) Since 2015, Haier Group has determined Haier Smart Home as the global home appliance platform, and all overseas home appliance businesses have been injected into Haier Smart Home in succession.

From 2015 to 2020, Haier Smart Home's merger and acquisition expenditure exceeded 55 billion yuan.

The global optimization of the leading capacity of color TV OEM: The global OEM capacity is mainly concentrated in China.

In addition to the brand's own capacity, the top ten global color TV OEM factories are mainly concentrated in mainland China and Taiwan, China.

According to the data of Luotu Technology, in 2023, the shipment of the top ten global color TV OEM factories (excluding four brand-owned factories) accounted for about 73% of the global overall OEM ratio.

At present, China has achieved a leading position and manufacturing advantages in the color TV industry chain and has become an important global base for color TV production.

Color TV brand: The leading enterprise's capacity is well-planned globally.

The color TV category is relatively large in volume and has high transportation costs, so brands such as Hisense, TCL, Samsung, and LG all have a global capacity layout.

1) TCL Electronics began to go abroad to build capacity in the 1990s, mainly through acquisition and self-built forms.

In the 2010s, it continued to expand overseas capacity construction.

At present, it has built color TV factories in Mexico, Poland, Vietnam, India, Brazil, Egypt, and other places, and has also built display and module capacity in the Indian factory.

2) Hisense's color TV business went abroad from South Africa and then gradually expanded to various regions around the world.

At present, it has built color TV factories in Mexico, Indonesia, South Africa, Slovenia, the Czech Republic, and other places.

3) Korean color TV leaders Samsung and LG have capacity layouts in South America, Southeast Asia, Europe, and other places.

For the American market, the leading color TV brand companies have capacity layouts in Mexico and Southeast Asia.

Samsung, LG, Hisense, and TCL all have color TV factories in Mexico to radiate the demand of the United States.

In addition, some of the capacity of TCL and Samsung in Vietnam is also used to serve the American market.

Since the Sino-American trade conflict in 2018, the importance of global capacity layout has become more prominent.

Taking the import of American color TVs as an example, according to the data of USITC, the proportion of American color TVs imported from China in 2018 decreased from 35% in 2018 to 10% in 2023, while the proportion of imports from Mexico increased from 62% in 2018 to 78% in 2023.

We believe that leading companies with a global capacity layout have stronger risk resistance capabilities.