CONSUMER DURABLE INDUSTRY IN INDIA

March, 2012
 1. OVERVIEW OF INDIA’S CONSUMER DURABLES MARKET
India’s Consumer Market

India’s consumer market is riding the crest of the country’s economic boom. Driven by a young
population with access to disposable incomes and easy finance options, the consumer market has
been throwing up staggering figures. The market share of MNCs in consumer durables sector is 65
per cent. MNC's major target is the growing middle class of India. MNCs offer superior technology
to the consumers whereas the Indian companies compete on the basis of firm grasp of the local
market, their well acknowledged brands, and hold over wide distribution network.

India officially classifies its population in five groups, based on annual household income (based on
year 1995-96 indices). These groups are: Lower Income; three subgroups of Middle Income; and
Higher Income. Household income in the top 20 boom cities in India is projected to grow at 10 per
cent annually over the next eight years, which is likely to increase consumer spending on durables.
With the emergence of concepts such as quick and easy loan, zero equated monthly installment
(EMI) charges, loan through credit card, loan over phone, it has become easy for Indian consumers
to afford more expensive consumer goods.

Key Industry Dynamics

Industry Size: Rs. 350 billion

Key Categories: White Goods, Brown goods and Consumer electronics.
Competitive landscape: Dominated by Korean majors like LG and Samsung in most of the
segments
Margin Profile: Low margin, dependant on volumes
Growth opportunities: Lower penetration coupled with increasing disposable income

Ownership of consumer durables (% of household)

Refrigrators 46%
8%
Pressure cooker 80%
38%
Bicycle 53%
69%
Wrist watch 88%
76%
Urban
Ceiling fan 89%
48% Rural
Mixer/Grinder 56%
19%
Colour TV 54%
17%
Motorcycle 34%
19%
Car 12%
3%

0% 20% 40% 60% 80% 100%

Consumer Classes

Even discounting the purchase power parity factor, income classifications do not serve as an
effective indicator of ownership and consumption trends in the economy. Accordingly, the National
Council for Applied Economic Research (NCAER), India’s premier economic research institution,
has released an alternative classification system based on consumption indicators, which is more
relevant for ascertaining consumption patterns of various classes of goods.

There are five classes of consumer households, ranging from the destitute to the highly affluent,
which differ considerably in their consumption behavior and ownership patterns across various
categories of goods. These classes exist in urban as well as rural households both, and consumption
trends may differ significantly between similar income households in urban and rural areas.

The rapid economic growth is increasing and enhancing employment and business opportunities
and in turn increasing disposable incomes. Middle class, defined as households with disposable
incomes from Rs 200,000 to 1,000,000 a year comprises about 50 million people, roughly 5% of the
population at present. By 2025 the size of middle class will increase to about 583 million people, or
41% of the population. Extreme rural poverty has declined from 94% in 1985 to 61% in 2005 and is
projected to drop to 26% by 2025.

Affluent class, defined as earning above Rs 1,000,000 a year will increase from 0.2% of the
population at present to 2% of the population by 2025. Affluent class’s share of national private
consumption will increase from 7% at present to 20% in 2025.

Overview of India’s Consumer Durables Market

The Indian Consumer Durables segment can be segmented into three groups:

White goods Brown goods Consumer electronics

· Air conditioners · Microwave Ovens · TVs
· Refrigerators · Cooking Range · Audio and video
· Washing Machines · Chimneys systems
· Sewing Machines · Mixers · Electronic accessories
· Watches and clocks · Grinders · PCs
· Cleaning equipment · Electronic fans · Mobile phones
· Other domestic appliances · Irons · Digital cameras
· DVDs
· Camcorders

Most of the segments in this sector are characterized by intense competition, emergence of new
companies (especially MNCs) and introduction of state-of-the-art models, price discounts and
exchange schemes. MNCs continue to dominate the Indian consumer durable segment, which is
apparent from the fact that these companies command more than 65 per cent market share in the
color television (CTV) segment.
In consonance with the global trend, over the years, demand for consumer durables has increased
with rising income levels, double-income families, changing lifestyles, availability of credit, increasing
consumer awareness and introduction of new models. Products like air conditioners are no longer
perceived as luxury products.

Growth of Consumer Electronics Production in India

The biggest attraction for MNCs is the growing Indian middle class. This market is characterized
with low penetration levels. MNCs hold an edge over their Indian counterparts in terms of superior
technology combined with a steady flow of capital, while domestic companies compete on the basis
of their well-acknowledged brands, an extensive distribution network and an insight in local market
conditions.

One of the critical factors those influences durable demand is the government spending on
infrastructure, especially the rural electrification programme. Given the government's inclination to
cut back spending, rural electrification programmes have always lagged behind schedule. This has
not favored durable companies till now. Any incremental spending in infrastructure and
electrification programmes could spur growth of the industry.

The digital revolution is shaking up the consumer durables industry. With the advent of MP3 music
files, personal video recorders, game machines, digital cameras, appliances with embedded devices,
and a host of other media and services, it is no longer clear who controls which part of home
entertainment. This has set off a battle for dominance, and the shakeup is spanning the entire
technology spectrum.

Microsoft Corp. is spending billions on entertainment initiatives such as its Xbox video game
console. Compaq and HP sell MP3 music players that plug into home-stereo systems. Apple
Computer is positioning its new iMac as a digital-entertainment device. Sony is building Vaio
computers that focus on integrating multimedia applications.

Philips sells stereos that hook into a high-speed Internet connection to play music from the Web.
More startups are trying to carve out profitable niches in digital music, video, and home networking.
The industry is witnessing a number of strategic alliances, to develop a range of capabilities -
electronic hardware, software and entertainment content.

As more consumers grow comfortable with technology, companies need to build simpler devices
that offer more entertainment and convenience. These new machines need to work together readily,
and should be as easy to set up and use as a telephone or a television. Consumerization of
technology could be a major phenomenon over the next 5 to 10 years. This could hasten industry
consolidation, as healthy companies gain market share by buying out weaker ones at attractive
prices.
Apart from steady income gains, consumer financing has become a major driver in the consumer
durables industry. In the case of more expensive consumer goods, such as refrigerators, washing
machines, color televisions and personal computers, retailers are joining forces with banks and
finance companies to market their goods more aggressively. Among department stores, other factors
that will support rising sales include a strong emphasis on retail technology, loyalty schemes, private
labels and the subletting of floor space in larger stores to smaller retailers selling a variety of
products and services, such as music and coffee.

Consumer electronics- key products-

• CTVs are the largest contributors to this segment;

market size estimated at 18 million units in 2010.
Colour TVs
During this period, 21-inch CTVs dominated the
market with a 65 per cent share

•LCDs are perceived as high-end products

Liquid crystal displays •Indian LCD market in 2010 was about 3.2 million units
(LCDs) •The price decline due to relatively low import duty on
LCD panels and the introduction of small entry-size
models have triggered growth in LCD sales

•The Indian DVD market was estimated at 6.2 million

units in 2009
Digital video discs (DVDs)
•The organised market accounts for 80 per cent of the
total DVD market

• The set-top box (STB) market is growing rapidly, due

to the expansion of DTH and introduction of the
conditional access system (CAS) in metros
Direct-to-home (DTH)
• During 2010-2012, the subscriber base is expected to
grow from 23 million to 42 million, making India the
largest DTH market in the world

• The Indian refrigerator market was estimated at 6.5

million units in 2010, the largest in this segment
Refrigerators
• •Reduction in prices and high demand for frost-free
segment are driving growth

Growth Scenario

India, with its huge middle-class population and rapid economic growth, is one of the largest
spenders in consumer electronics in Asia. Double-income families, rising income levels, availability
of credit, changing lifestyle, introduction of new models, and increasing consumer awareness led to
the surging demand of consumer electronics in India. The digital technology revolution has enabled
the industry to earn profit from the growing interaction of digital applications, such as LCD TVs,
mobile phones, etc. Thus, our research foresees that the Indian consumer electronics market will
grow at a CAGR of around 18% during 2011-2014. The Indian consumer electronics market today
stands at over Rs.400 billion.

Moreover, another important factor that has contributed significantly to the expanding consumer
goods market is the phenomenal growth in the Indian media. Even consumers in the remotest areas
are equally aware of the latest products launched in the market due to the increasing penetration of
television channels and cinemas. In addition, aggressive marketing efforts of the domestic majors are
also helping the industry. Even Internet explosion is contributing significantly towards its successful
achievement.

Air conditioners (including industrial and office conditioners) constituted 38 per cent of the
consumer appliances market, followed by refrigerators at 14 per cent, electric fans at 7.5 per cent,
washing appliances at 7 per cent and sewing machines at 5 per cent.

The consumer durables market recorded revenues of USD6.3 billion in FY10. During FY 03-10,
the industry expanded at a CAGR of 11.7 per cent.
Value growth of durables is expected to be higher than historical levels as price declines for most of
the products are not expected to be very significant. Though price declines will continue, it will cease
to be the primary demand driver. Instead the continuing strength of income demographics will
support volume growth.
Market Size
(in million units)
Consumer Durables Market Size (2010) Market Size (2011E) Growth (%)
Flat Panel TV 2.8 4.5 61
Refrigerator 9.0 12.0 33
Washing Machines 5.0 6.0 20
Air Conditioners 3.4 4.4 29
Microwave 1.0 1.5 44
 2. COMPETITION OVERVIEW

Videocon, India’s third largest consumer durables manufacturer, plans USD333 million capex for
setting up a LCD manufacturing plant in Chennai by the end of 2011

→Market leader LG has earmarked around USD292 million for enhancing production capacity and
strengthening its LG brand shop network by 2012
→Japan’s Panasonic plans to invest USD208 million by 2014 in setting up manufacturing units and
an advanced R&D centre
→Samsung, India’s second largest consumer durables maker, plans to invest USD94 million to
expand capacity by 2015
→LCDs are expected to be one of the fastest growing segments, growing at a phenomenal CAGR
of 87.6 per cent during 2009-12

Samsung India
Samsung India commenced its operations in India in December 1995, today enjoys a sales turnover
of over US$ 1 billion in just a decade of operations in the country. Samsung design centres are
located in London, Los Angeles, San Francisco, Tokyo, Shanghai and Romen. Samsung India has its
headquartered in New Delhi and has a network of 19 Branch Offices located all over the country.
The Samsung manufacturing complex housing manufacturing facilities for Colour Televisions,
Colour Monitors, Refrigerators and Washing Machines is located at Noida, near Delhi. Samsung
‘Made in India’ products like Colour Televisions, Colour Monitors and Refrigerators are being
exported to Middle East, CIS and SAARC countries from its Noida manufacturing complex.
Samsung India currently employs over 1600 employees, with around 18% of its employees working
in Research & Development.

Market share of major players in refrigerator market

Refrigerators‐ Market sales
3%
16%
20% Videocon
Godrej
18%
Whirlpool
23% LG
20% Samsung
Others
Whirlpool of India

Whirlpool was established in 1911 as first commercial manufacturer of motorized washers to the
current market position of being world's number one manufacturer and marketer of major home
appliances. The parent company is headquartered at Benton Harbor, Michigan, USA with a global
presence in over 170 countries and manufacturing operation in 13 countries with 11 major brand
names such as Whirlpool, KitchenAid, Roper, Estate, Bauknecht, Laden and Ignis. Today,
Whirlpool is the most recognized brand in home appliances in India and holds a market share of
over 25%. The company owns three state-of-the-art manufacturing facilities at Faridabad,
Pondicherry and Pune.

In the year ending in March '06, the annual turnover of the company for its Indian enterprise was
Rs.13.75 billion. According to IMRB surveys Whirlpool enjoys the status of the single largest
refrigerator and second largest washing machine brand in India.

LG India

LG Electronics was established on October 1, 1958 (As a private Company) and in 1959, LGE
started manufacturing radios, operating 77 subsidiaries around the world with over 72,000
employees worldwide it is one of the major giants in the consumer durable domain worldwide. The
company has as many as 27 R & D centers and 5 design centers. It's global leading products include
residential air conditioners, DVD players, CDMA handsets, home theatre systems and optical
storage systems.

Market share of Mobile phones market

Mobile Phones‐Market sales

14%

LG
15%
Samsung
others
71%
In FY10, LG and Samsung comprised of about one-third of the consumer durables and mobile
phone markets combined

→Between the two, Samsung leads the mobile handset and premium flat panel TV market
→LG has a stronger presence in other consumer durables, including refrigerators, washing
machines, microwave ovens, air-conditioners and televisions.

Market share of Flat panel TV market

Flat panel TV‐ Market sales

13% 14%
Videocon
21% Sony
22%
Panasonic
LG
9%
21% Samsung
Others

Sony India
Sony Corporation, Japan, established its India operations in November 1994. In India, Sony has its
distribution network comprising of over 7000 channel partners, 215 Sony World and Sony Exclusive
outlets and 21 direct branch locations. The company also has presence across the country with 21
company owned and 172 authorized service centers.

Sharp India Ltd

Sharp India ltd was incorporated in 1985 as Kalyani Telecommunications and Electronics Pvt Ltd,
the company was converted into a public limited company in the same year. The name was changed
to Kalyani Sharp India in 1986. The company was entered into a joint venture with Sharp
Corporation, Japan - a leading manufacturer of consumer electronic products to manufacture
VCRs/VCPs/VTDMs. The company manufactures consumer electronic goods such as TVs, VCRs,
VCPs and audio products. The products were sold under the Optonica brand name. Sharp has a
production base in 26 countries with 33 plants, and its products are used in 133 countries. The
company was accredited with the ISO-9001 certification in the month of February, 2001.

Hitachi India
Hitachi India Ltd (HIL) was established in June 1998 and engaged in marketing and sells a wide
range of products ranging from Power and Industrial Systems, Industrial Components &
Equipment, Air Conditioning & Refrigeration Equipment to International Procurement of software,
materials and components. Some of HIL’s product range includes Semiconductors and Display
Components. It also supports the sale of Plasma TVs, LCD TVs, LCD Projectors, Smart Boards
and DVD Camcorders.
 3. POLICY AND INITIATIVES
Foreign investment up to 100 per cent is possible in the Indian consumer electronics industry to set
up units exclusively for exports. It is now possible to import duty-free all components and raw
materials, manufacture products and export it.
EHTP (Electronic Hardware Technology Park) is an initiative to provide benefits to companies that
are replacing certain imports with local manufacturing. EHTP benefits include export credits, no
duties on imported components or capital equipment, business tax incentives, and an expedited
import-export process.
The government, in an attempt to encourage manufacture of electronics in India has changed the
tariff structure significantly.
Customs duty on Information Technology Agreement (ITA-1) items (217 items) has been abolished
from March 2005. All goods required in the manufacture of ITA-1 items are exempt from customs
duty.
Customs duty on specified raw materials / inputs used for manufacture of electronic components or
optical fibres / cables has been removed. Customs duty on specified capital goods used for
manufacture of electronic goods has been abolished. Excise duty on computers has been removed.
Microprocessors, hard disc drives, floppy disc drives and CD ROM drives continue to be exempt
from excise duty.

3.1 Intellectual Property Rights

Protection of Intellectual property rights (IPR) is a prime requisite for development of R&D and
innovation in the consumer electronics sector. The Government of India has developed a robust IP
act to facilitate innovation, growth and development. Several amendments to the Copyright Act,
creation of a new Trademark Act, a new Designs Act and amendments to the Patents Act show
India’s continued effort to protect IPR.

The country has already made several changes in its IP acts over the years.. Several amendments to
the Copyright Act, creation of a new Trademark Act, a new Designs Act and amendments to the
Patents Act show India’s desire to change and adapt. New acts have also been enacted to cover
semiconductors and layout designs which will be of considerable importance to the electronic
industry.
In the current WTO regime, India is a party to the “Trade Related Aspects of the Intellectual
Properties (TRIPs) Agreement” and has accordingly, amended most of its IPR Acts and Rules to
conform to the said Agreement. The Indian Copyright Act 1957 was amended in 1999; the patent
Act 1970 was amended in 1999 & 2003 and
Trademarks and Merchandise Marks Act 1959 was overtaken by a new Trademark Act 1999. The
Industrial Design Act 1911 was effectively replaced by The Design Act 2000, and the Layout Design
of Semiconductor integrated Circuit Act 2000 was enacted.

The agreement on TRIPs takes care of the intellectual property rights by enforcing the patent rights,
copy rights and related rights, and the protection of industrial designs, trade marks, geographical
indications, layout designs of integrated circuits and undisclosed information. Accordingly, the
member nations are asked to modify their existing laws. Once these laws come into force,
unauthorised use of the patented innovations, trade marks, etc. becomes difficult. Enforcement of
the TRIPs agreement makes the production of any product possible either through internal
innovation or through formal transfer of technologies.
The consumer electronics and durables sector is expected to continue to benefit from supportive
policies and become globally competitive.

3.2 Regulations

3.2.1 Free Trade Agreement

WTO regime which came in force in 2005, results in zero customs duty on imports of all telecom
equipment. 217 IT/electronic items were covered under the Information Technology Agreement
(ITA) of the WTO for complete customs tariff elimination by 2005.
Out of these 217 items, several items were already at NIL customs duty. In fact, IT/electronics was
the first sector in India to face complete customs tariff elimination. The ITA-1 would result in
intensifying competition as more imported products will be easily available at lower prices.

3.2.2 Foreign Investment Policy: FDI

Foreign investment up to 100 per cent is allowed in Indian electronics industry set up exclusively for
exports. The units set up under these programmes are bonded factories eligible to import, free of
duty, their entire requirements of capital goods, raw materials and components, spares and
consumables, office equipment etc. Deemed export benefits are available to suppliers of these goods
from the Domestic Tariff Area (DTA).
A part of the production from such units is permitted to be sold in the DTA depending upon the
level of the value addition achieved. The FDI approval for electrical equipment (including computer
software and electronics) from April 2000 to January 2010 was US$ 21.24 billion, which was 2.01
per cent of the total Foreign Direct Investment (FDI) approved. During the same period the FDI
inflow for electrical equipment (including computer software and electronics) was US$ 96.30 billion.

3.2.3 Procedure for approval

Once the investment in equity has been approved, the import of capital goods, components and raw
materials or the engagement of foreign technicians for short duration does not require any additional
approvals.

Approval of Ministry of Home Affairs is not needed for hiring foreign nationals holding valid
employment visa.

Approval for setting up units in Export Processing Zones (EPZs) is given by the Board of
Approvals in the Ministry of Commerce. Approval for setting up export-oriented units (EOUs)
outside the zones is given by the Ministry of Industry.

Approvals for setting up Electronic Hardware Technology Park (EHTP) and Software Technology
Park (STP) units are cleared by the Inter Ministerial Standing Committee (IMSC) set-up under the
Chairmanship of the Secretary, Department of Information Technology.

Proposals involving foreign direct investment not covered under the automatic route are considered
by the Foreign Investment Promotion Board (FIPB).
3.2.4 FDI/ Foreign Technology Collaboration Agreement

The government facilitates FDI and investment from Non- Resident Indians (NRIs) including
Overseas Corporate Bodies (OCBs), predominantly owned by them, to complement and
supplement domestic investment. Foreign technology induction is encouraged through FDI and
foreign technology collaboration agreements. FDI and foreign technology collaborations are
approved through automatic route by the Reserve Bank of India.
 4 OPPORTUNITIES AND CHALLENGES
4.1 Challenges

Heavy taxation in the country is one of the challenges for the players. At its present structure the
total tax incidence in India even now stands at around 25-30 per cent, whereas the corresponding
tariffs in other Asian countries are between 7 and 17 per cent.

About 65 per cent of Indian population that lives in its villages still remains relevant for some
consumer durables companies. This India, at least a large proportion of its constituents, still buys
black and white TVs and doesn't know what flat screens are. Also, foraying into these rural markets
has a considerable cost component attached to it.

Companies not only have to set up the basic infrastructure in terms of office space, manpower, but
also spend on transportation for moving inventory. Even LG and Samsung, which are touted as
having the largest distribution network in the country, have a direct presence only in 15,000 to
18,000 of the around 40,000 retail outlets (for consumer durables) in the country.

Poor infrastructure is another reason that seems to have held back the industry. Regular power
supply is imperative for any consumer electronics product. But that remains a major hiccup in India.

Along with these few major challenges are:

o Intense competition among players - leading to higher ad spends and lesser pricing power,
thereby lowering margins
o Increase in raw material prices – major raw materials (metals) are exhibiting increasing trend
posing margin pressures; however, shift in product mix to partially offset increase in input
costs over the medium term
o Changes in technology - making product lifecycles short
o Rural distribution - availability of products to masses is difficult as 68 per cent of India’s
population still lives in rural areas.
o Entry of cheap products - as private labels in organized retail

4.2 Opportunities

The rising rate of growth of GDP, rising purchasing power of people with higher propensity to
consume with preference for sophisticated brands would provide constant impetus to growth of
white goods industry segment.

Penetration of consumer durables would be deeper in rural India if banks and financial institutions
come out with liberal incentive schemes for the white goods industry segment, growth in disposable
income, improving lifestyles, power availability, low running cost, and rise in temperatures.

While the consumer durables market is facing a slowdown due to saturation in the urban market,
rural consumers should be provided with easily payable consumer finance schemes and basic
services, after sales services to suit the infrastructure and the existing amenities like electricity,
voltage etc.

Currently, rural consumers purchase their durables from the nearest towns, leading to increased
expenses due to transportation. Purchase necessarily done only during the harvest, festive and
wedding seasons — April to June and October to November in North India and October to
February in the South, believed to be months `good for buying’, should be converted to routine
regular feature from the seasonal character.

Rural India that accounts for nearly 70% of the total number of households, has a 2% penetration in
case of refrigerators and 0.5% for washing machines, offers plenty of scope and opportunities for
the white goods industry. The urban consumer durable market for products including TV is growing
annually by 7 to 10 % whereas the rural market is zooming ahead at around 25 % annually.
According to survey made by industry, the rural market is growing faster than the urban India now.
The urban market is a replacement and up gradation market now.

The increasing popularity of easily available consumer loans and the expansion of hire purchase
schemes will give a moral boost to the price-sensitive consumers. The attractive schemes of financial
institutions and commercial banks are increasingly becoming suitable for the consumer. Consumer
goods companies are themselves coming out with attractive financing schemes to consumers
through their extensive dealer network. This has a direct bearing on future demand.

The other factor for surging demand for consumer goods is the phenomenal growth of media in
India. The flurry of television channels and the rising penetration of cinemas will continue to spread
awareness of products in the remotest of markets.

The vigorous marketing efforts being made by the domestic majors will help the industry. The
Internet now used by the market functionaries that will lead to intelligence sales of the products. It
will help to sustain the demand boom witnessed recently in this sector. The ability of imports to
compete is set to rise. However, the effective duty protection is still quite high at about 35-40 per
cent. So, a flood of imports is unlikely and would be rather need based.

Reduction in import duties may significantly lower prices of products such as microwave ovens,
whose market size is quite small in India. Otherwise, local manufacturing will continue to stay
competitive. At the same time, there will be some positive benefits in the form of reduction in input
costs. Washing machines and refrigerators will also benefit from lower input costs.