Let us start with a basic economics lesson. In your high school, you must have read about related goods. Basically, there are two types of related goods – substitutes and complements. The demand, supply, price and other economic metrics of one good affects the behaviour of other related good. So, for example, if cars become more expensive or their sales go down, then the demand for car tyres will automatically go down.
Now, let us give you a real life scenario. You already know how the Chinese property market is in the middle of an absolute carnage. Real estate companies are going through a big debt crisis, property projects are getting stalled, and people are simply not buying new houses. This has already led to a slump in the gas sector and now the consumer electronics sector is bound to follow. After all, consumer electronics and houses are related industries – if people don’t buy new houses, they would hardly need household appliances or consumer electronics.
Chinese gas sector slump:
The cascade effect in the Chinese economy is already visible. Disappointed earnings in the Chinese real estate sector have already driven China Gas Holdings Ltd.’s stock to a 15-year low. On Tuesday, the shares of China’s leading gas distributor recorded a serious slump of 20%, which wiped out $2.5 billion in market value, in a single say.
The reason for China’s gas sector downfall is simple – a dip in fresh house purchases has led to lesser residential crisis, which has translated into a major loss of earnings for China Gas Holdings Ltd. The company announced that net income for the six months through September fell 19% year on year, even as the residential connections dropped by over a third. In fact, shares of other Chinese gas distributors like China Resources Gas Group Ltd. and ENN Energy Holdings Ltd. too registered comparatively moderate declines.
The Chinese consumer electronics sector to follow:
We already know that the cascade effect in the Chinese economy has set in and the overall economy is on a downward trajectory. So, you might wonder what might happen next? Well, a little bit of extrapolation would suggest that the consumer electronics sector could be the next to follow.
The Chinese consumer electronics industry is pretty huge with some big brands like BOE, Changhong, DJI, Haier, Hisense, Huawei, Konka, Meizu, Panda Electronics, Skyworth, SVA, TCL, Xiaomi, Oppo and ZTE dominating the industry. In 2020 alone, the market volume of the Chinese electrical household appliances sector had amounted to about 1.5 billion Yuan.
The growth in Chinese consumer electronics spending is powered by growing household spending by Chinese consumers. In 1990, an average Chinese citizen spent around 110 Yuan on household appliances and consumer electronics. Yet, by 2020, the per capita household appliances and consumer electronics expenditure jumped to 1,640 yuan.
Over the past 30 years, market growth of Chinese household appliances was driven by a massive growth in the real estate market. Rapid urbanisation in China and countless housing projects led to proliferation of houses by Chinese citizens. Therefore, people spent a lot of money towards buying household appliances and other consumer electronics for their brand new houses.
Therefore, housing sector and household appliances grew exponentially, as related industries. This is what also led to the emergence of some really big players like TCL Technology, a Chinese state-owned enterprise that manufactures television sets, mobile phones, air conditioners, washing machines, refrigerators, and other household appliances.
Similarly, Wuxi Little Swan Co Ltd emerged as a big player producing washing machines, air conditioners, refrigerators, dishwashers, dryers, and water heaters. Other enterprises like Midea Group and Hisense too, have made it big in the consumer electronics sector.
The energy crisis in China to further plummet consumer electronics sector:
While the real estate crisis in China is already creating demand-side problems in the consumer electronics market, there are supply-side problems too. Factory gate inflation in China hit a record high of 13.5% year-on-year, in October. Supply chain disruptions and higher input costs are thus leading to production of more expensive and less affordable goods in China, which is set to further push down demand in the consumer electronics sector.
On the other hand, China’s manufacturing purchasing managers’ index, or PMI, remained below 50 points in September and October, which is an indicator of overall contraction in industrial activity. In November, the PMI did rebound to 50.1 points, but expansion in industrial activity remains sluggish. The gas sector crisis is China is now likely to lead to a new phase of contraction in Chinese industrial activity over the next few months.
China’s gas sector has already crashed and now with the cascade effect setting in, we can expect that Chinese consumer electronics industry too will nosedive in less than a week.