Chinese Lassitude
Just weeks ago, the sentiment in the CE space was positive, with headlines about a better 2H or 3Q and an optimistic view of the massive 6/18 shopping holiday in China, the 2nd largest behind Single’s Day (11/11). However little has been said about the holiday, which ended last week, even though sales were up 10.3% y/y at JD.com (JD), the originator of the shopping holiday, as since 2018, the JD.com 6/18 holiday sales gains on a y/y basis have consistently been between 25% and 35%, which puts this year’s results well below typical. Recent easing of travel restrictions in Beijing have already triggered a new outbreak with restrictions expected to be reinstated, while the country is facing Nucleic Acid COVID testing within 48 hours for all entering public spaces, offices and schools, so there is much to be said about the effect of those and other COVID restrictions on in-store purchases.
That said, ~24.5% of total retail sales in China in 2021 were made on-line, down only a bit from the 24.9% in 2020, so on an overall basis COVID this year seems to have had roughly the same effect on brick and mortar sales as in 2021. This leaves the effects of inflation as the major cause of the weakness, yet INF data suggests that China’s inflation rate will be 2.08%, only slightly above the 5 year average of 1.96%. Of course, there is the possibility that the Chinese government is not reporting accurate inflation data to the IMF, but at least the data for this year has been fairly consistent, rising from 0.9% in January and February, to 1.5% in March, and 2.1% in both April and May.
While the data suggests that macro issues in China have been relatively minor, especially when compared to the annual rate in the US in May of 8.6%, so we have trouble understanding the weakness from a consumer perspective, but the malaise seems to be a general depressive state that has settled over many of China’s largest cities, a result of the on-again-off-again lockdowns that have kept the population in lockdown on and off for months, but we also see that the aggressive discounting normally done in the weeks before the official holiday being less than during last year. We expect this is a function of both the increasing cost of raw materials and components that have not been fully passed on to consumers by CE manufacturers, leaving little room for aggressive pricing, and the fact that a portion of the demand seen in 2021 included demand not sated in 2020.
In some CE products it is easy to see, such as notebooks, where government sponsored purchases drove outsized demand that ended as early COVID restrictions ended globally, while TV set sales where consumers stuck at home wanted to upgrade relatively early in the COVID pandemic cycle, saw only a modest change from the norm. But while here in the US and in Europe, where we faced the most severe restrictions earlier in the COVID pandemic, the Chinese population, at least in its big cities, is facing the prospects of the how the restrictive policies of the Chinese government, good or bad, will make normal life almost impossible, and that seems to have paled thoughts of spending especially without massive discounting to attract on-line flow and created a weariness toward spending on consumer electronics that seems to have taken hold on the Mainland.
We expect this will continue until China’s COVID-19 policies become more amenable to the population and the economy, which we would expect (in a tacit way) at the end of Q3 or in early 4Q, at which point much of the excess CE inventory will have been worked down and the holiday season is upon us. That said, we expect Chinese consumers will still need to see some incentives by way of loss-leaders or discounts, which will be a bit tricky for brands still carrying high-cost product, and much will depend on how long CE companies continue to hold back orders, a problem for those companies whose CE brands are considered leaders in China and want to continue to show profitable results. But growth is the key for the Chinese government and while the mandates associated with COVID are one way to protect the Chinese economy from the scourge of a massive COVID outbreak across the country, the Chinese government must still find a way to break the lassitude that we believe has gripped the Chinese population.
That said, ~24.5% of total retail sales in China in 2021 were made on-line, down only a bit from the 24.9% in 2020, so on an overall basis COVID this year seems to have had roughly the same effect on brick and mortar sales as in 2021. This leaves the effects of inflation as the major cause of the weakness, yet INF data suggests that China’s inflation rate will be 2.08%, only slightly above the 5 year average of 1.96%. Of course, there is the possibility that the Chinese government is not reporting accurate inflation data to the IMF, but at least the data for this year has been fairly consistent, rising from 0.9% in January and February, to 1.5% in March, and 2.1% in both April and May.
While the data suggests that macro issues in China have been relatively minor, especially when compared to the annual rate in the US in May of 8.6%, so we have trouble understanding the weakness from a consumer perspective, but the malaise seems to be a general depressive state that has settled over many of China’s largest cities, a result of the on-again-off-again lockdowns that have kept the population in lockdown on and off for months, but we also see that the aggressive discounting normally done in the weeks before the official holiday being less than during last year. We expect this is a function of both the increasing cost of raw materials and components that have not been fully passed on to consumers by CE manufacturers, leaving little room for aggressive pricing, and the fact that a portion of the demand seen in 2021 included demand not sated in 2020.
In some CE products it is easy to see, such as notebooks, where government sponsored purchases drove outsized demand that ended as early COVID restrictions ended globally, while TV set sales where consumers stuck at home wanted to upgrade relatively early in the COVID pandemic cycle, saw only a modest change from the norm. But while here in the US and in Europe, where we faced the most severe restrictions earlier in the COVID pandemic, the Chinese population, at least in its big cities, is facing the prospects of the how the restrictive policies of the Chinese government, good or bad, will make normal life almost impossible, and that seems to have paled thoughts of spending especially without massive discounting to attract on-line flow and created a weariness toward spending on consumer electronics that seems to have taken hold on the Mainland.
We expect this will continue until China’s COVID-19 policies become more amenable to the population and the economy, which we would expect (in a tacit way) at the end of Q3 or in early 4Q, at which point much of the excess CE inventory will have been worked down and the holiday season is upon us. That said, we expect Chinese consumers will still need to see some incentives by way of loss-leaders or discounts, which will be a bit tricky for brands still carrying high-cost product, and much will depend on how long CE companies continue to hold back orders, a problem for those companies whose CE brands are considered leaders in China and want to continue to show profitable results. But growth is the key for the Chinese government and while the mandates associated with COVID are one way to protect the Chinese economy from the scourge of a massive COVID outbreak across the country, the Chinese government must still find a way to break the lassitude that we believe has gripped the Chinese population.
JD.com 6/18 Holiday Orders - Source: SCMR LLC, Company Data
China - Inflation - Average Consumer Prices - Source: IMF
Long-Term Notebook Panel Shipments - Source: SCMR LLC, IHS, Company Data
Long-Term TV Panel Shipments - Source: SCMR LLC, IHS, Company Data
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