China's home appliance industry has dropped a gear and is facing a major impact from austere domestic and international economic conditions in the coming two to three years.

This warning earlier in November was made by the China Economic Monitoring and Analysis Center under National Bureau of Statistics of China.

Lackluster stock markets have bitten into consumer incomes while the slack property market has dented the need for home appliances.

Domestic sales growth softened to 18.6 percent in August from 27.1 percent in January while exports are being crippled by the slower economic growth in China's major destinations, which are struggling on the verge of economic recession, including the United Kingdom, Germany, France and Japan.

"We expect a more rigorous situation next year," said Ye Zhicai, deputy director-general of China Economic Monitoring and Analysis Center.

Although the appliance industry's overall situation is grim for 2009, the rural market will be a rare bright spot.

Government policy

In the mid October, China's Ministry of Finance together with the Ministry of Commerce rolled out guidelines to precede the "Home Appliances to the Countryside" policy, short-listing more areas and more products.

The move came after the government emphasized it would boost domestic consumption at the 17th National Congress of the CPC to counter falling overseas demand. Stimulating consumption especially in the rural areas was high on the agenda.

The "Home Appliances to the Countryside" policy was first put forward at the end of last year to upgrade rural consumption and promote coordinated development in domestic consumption and exports.

The central and provincial governments give subsidies of 13 percent of the sales value to home appliances makers based on export rebates to lower the price for the consumer. It is a sign of the government's focus shift from exports to domestic demand.

"China's household electrical appliances exports are facing declining demand in this global recession. We acted in response to the country's call to promote domestic consumption. In the view of the home appliances industry, the urban market is relatively mature and saturated while rural areas offer great market potential," Zheng Zhuwei, an official from the Ministry of Commerce said.

Statistics from the China Household Electrical Appliances Association show that for the first trial of the policy in three provinces, total sales reached 4 billion yuan (US$581 million), involving 167 million people, 30 percent more than that of provinces not involved in the trials. The second trial which is now under way will cover 392 million people, or 53.19 percent of the nation's rural residents. And it could generate a market worth more than 40 billion yuan.

Ye said growing incomes in rural areas will increase the demand for home appliances. According to the National Bureau of Statistics, in the first three quarters, individual incomes in rural areas increased 19.6 percent on a yearly base, faster than the GDP growth.

Major domestic manufacturers unanimously welcomed the opportunities. Qindao Aucma Company Ltd, Hisense Company Ltd, TCL Corp, Amoi Electronics Co and Midea Group Co have all been short-listed in the project according to the announcement on November 20.

Joint ventures such as Motorola (China) Electronics Ltd and Nokia (China) Investment Co also won bids to tap the rural market in this trial to get an equal ranking with their domestic competitors in this tough market. It is the first time joint ventures are a part of the policy.

Suning Appliance Co has collaborated with dozens of joint ventures including Samsung Electronics Co, Sony (China) Ltd, Siemens (China) Ltd to cover more areas and products in an attempt to exploit the huge market. Suning will offer the same subsidies as the government.

"We are positive about the huge rural market, which plays an increasingly important role for us. We are targeting third and fourth tier cities in our future development plan. Rural areas can be the new momentum for the domestic growth and we expect an industry reshuffling," said Jin Ming, vice president of Suning Appliance Co.