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Stainless steel remains a material of choice, on the inside and outside of major appliances. (Photo courtesy Viking)

Appliance Outlook 2019

An Unexpected Lull

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The North American appliance market defied the broader economy in 2018. 

Last year, conditions were ripe for a banner year for the appliance sector. The economy was quite good, with GDP growth above 3 percent. Unemployment continued to trend downward, and personal income finally began to climb upward. The housing market showed modest growth. And the Tax Cuts and Jobs Act of 2017 put a few more dollars in the purses of the average homeowner. 

With all of those tailwinds supporting it, the appliance market fell flat. Literally. 

According to the Association of Home Appliance Manufacturers, total appliance shipments in 2018 were nearly identical to the prior year, coming in at 79.18 million units in both calendar years. The largest appliance sectors, the AHAM 6, totaled 47.39 million units last year, 0.6 percent lower than 2017. 

The inability of the domestic appliance industry to ride the positive economic wave was perplexing to observers. “If you come across any explanations why shipments were down last year, let me know,” says Evan Barrington, a long-time industry analyst as the vice president of economic analysis and forecasting for the Stevenson Company, Louisville, Ky.  “The reason I ask that question is if you look at the drivers of consumer demand in general, most of them were very strong.”

Yet, only one major product group, ranges and ovens, showed any gains in 2018. Those products were up 3.1 percent, while the other five groups experienced modest declines.

Now, Barrington acknowledges, AHAM’s figures represent shipments, not consumer sales. Some drawdown of inventory could have been at work, particularly in a changing distribution market. But that shouldn’t have been enough to turn those positive macroeconomic conditions into such a lackluster year. 

Of course, there was one other change facing the industry in 2018, one that it’s not really accustomed to. Prices for most products increased last year, a natural byproduct of the increase in raw material costs. 

The heavy tariff environment was the chief driver of the price hikes. It started with the Section 232 levies that pushed up the price of steel and aluminum. Later, the 201 tariffs levied against China resulted in further input good cost increases, as domestic suppliers source many of component parts from Asia. 

“Pricing was a part of what happened, but was it all?” Barrington asks. “I’m not aware of any historical period where we saw a decline in appliance shipments given the economy we had.”

For the industry, the conditions of 2018 are expected to be repeated this year. Barrington expects shipment levels to range from down 1-2 percent to, at best, flat. 

His outlook is in line with the forecast of other industry observes. David MacGregor, CEO and Senior Analyst for Longbow Research, Independence, Ohio. “For the North American appliance business, demand is mixed,” he says. 

MacGregor breaks down the drivers into three categories – replacement needs, new construction-related sales and discretionary purchases. He expects demand tied to new home construction, which represents about 25 percent, to be relatively flat. And discretionary demand, occupying about 15-20 percent, will be up. He credits continuing innovations within the sector for the expected growth in voluntary purchases. 

However, replacement purchases make up almost 60 percent of the market, and Longbow forecasts that market to be down about 3-4 percent in 2019. The answer to that is tied to the last recession.

The average lifespan of a major appliance is about 10 years. And given where the market was 10 years ago, there aren’t as many appliances hitting the end of their life cycles over the course of 2018 and 19. 

Leading manufacturers also see a muted growth picture in 2019. “We anticipate continued economic and trade uncertainty to temper overall demand resulting in moderate but positive industry growth of 1 percent globally. The North American outlook is 0-1 percent growth in demand in 2019,” said Jim Peters, CFO for Benton Harbor, Mich.-based Whirlpool, during his company’s recent quarterly conference call. 

The outlook was similar, if a little less optimistic, from Sweden’s Electrolux. “In North America, based on current industry dynamics with higher prices in the market, we estimate U.S. industry shipments will be flat to slightly negative for the full year 2019,” said President and CEO Jonas Samuelson during his company’s call with analysts and investors. 

Most industry observers believe the rising price environment for input costs that characterized 2018 has not yet reached its peak, and companies will have no choice but to respond with higher prices. “Price increases are our main tool to mitigate cost inflation,” Samuelson said. “We expect price increases in the first quarter, and to have a positive contribution for the full year, mainly in North America and Latin America. 

Whirlpool executives said higher prices on steel and plastics are one part of the higher cost environment. “The other big part that hasn’t changed is the tariff landscape. The company has already absorbed the increases from the Section 232 tariffs and the first round of 301 tariffs. “And we have fully factored in a likely 25 percent increase in March,” said Marc Bitzer CEO of Whirlpool, the world’s largest appliance maker. 

The tariffs have hit all manufacturers, MacGregor says. “I think people are still struggling to make sense of it all,” he says. “Clearly, 232 had an inflationary effect on metal prices.” Additionally, subsequent 301 tariffs on Chinese products also boosted costs, as many domestic manufacturers source products such as electric motors and wire harnesses from Asia.  

“What they’re doing is raising prices to the extent they can, and focusing on manufacturing productivity as a way to offset it. Most of the companies haven’t fully covered the cost increase. As a consequence, you may see further pricing increases later this year,” MacGregor says. 

That’s not surprising, as the market is entering mostly uncharted territory. “In the appliance industry, we don’t have a lot of experience with price increases. Every once in a while they spike, but then they come back down,” Barrington says. He notes the combination of productivity gains, and the ever-present push for market-share gains by participants in the ultra-competitive industry typically undercut any attempts to raise prices for consumers. 

Given the confusion, it’s no surprise the industry would like to see some resolution to the trade disputes. AHAM doesn’t often get involved in trade issues as part of its mission, in part because of the global nature of its membership base, but it found itself addressing the subject in 2018. 

“Tariffs on products or components, on steel and aluminum, have a cumulative effect, causing our members all kind of additional work. Do their supply chains need to change? Can they invest in new products if tariffs are going to go up?” asks Joe McGuire, president and CEO of the D.C.-based trade group.

His activities since the first wave of tariffs were introduced included testifying before the USTR, and advising member companies on how to apply for exclusions. AHAM is pushing for a new trade deal with China to prevent the imposition of 25 percent tariffs this month, while also advocating for the approval of the USMCA. 

“We don’t want NAFTA to lapse or be terminated. We were not leading the pack to support it, but we feel it’s pretty fair. It’s baked in and has created good flow between the U.S. and Mexico and Canada,” McGuire says.

While overall consumer demand may be down to flat this year, it won’t necessarily be reflected in the consumption of carbon, stainless and other metal products. That’s due to a significant push by foreign appliance makers to relocate production for the U.S. market here. 

Later this year, South Korea’s LG Appliances will open a new 829,000-square-foot facility in Clarksville, Tenn., to produce washing machines. The following year, fellow producer Samsung will complete a $380 million facility in Newberry County, S.C. And just recently, Electrolux announced it would expand its operations in Springfield, Tenn., and Anderson, S.C., though it will also cease production in Memphis. 

MacGregor says these investments are going to result in a significant change in the mix of domestically produced appliances compared with imports.  In 2017, about 36 percent of the 10,000 washing machines purchased in the U.S. each year were produced overseas. By the end of this year, the mix is expected to decline to about 16 percent, resulting in an increase of 1.5 million units annually, just in washers 

MacGregor says the movement to produce white goods here is “probably foreign manufacturers responding to the growing threat of tariffs and friction within the channels.”

Some U.S. companies have already seen the benefits of such a push. Craig Mathieson, president of Jemison Metals, sells material to a manufacturer headquartered overseas that has been growing domestically. Their business with Jemison has been up considerably, and the imposition of tariffs led them to source even more material from U.S. suppliers. “They were selling an enameling steel which goes inside an oven. That product had been coming over from Europe, and we moved quickly to source it domestically,” Mathieson says. 

One factor being watched closely by the appliance sector is how the financial difficulties faced by Sears play out on the consumer. For years, the retailer has been a leading source of appliance sales, including its Kenmore brand and other nameplates. However, the company filed for Chapter 11 protection in 2018, and consumers are increasingly moving to other sources. 

In his remarks to investors, Electrolux’s Samuelson acknowledged some concern over the retailer’s problems. “Sears, our main private label customer in North America, filed for Chapter 11, and there are still uncertainties how this will impact our volumes.”

MacGregor says the market for Sears products is being split, with large home stores such as Home Depot and Lowe’s claiming the low end of the market, while the high-end consumers are moving toward independent brands, “where there’s a higher level of service associated. Sears is bifurcating between those two groups.”

While the manufacturers can’t do much to goose replacement demand or new home construction, they do have the ability to spur discretionary consumption through product innovation. And makers of both low- and high-end products have been particularly active recently in introducing new technologies and features. 

An expansion of colors, including painted steels, and more engaging interfaces and controls, have been part of the development on the aesthetic side. On the technology front, innovations have also been introduced to improve functionality. Refrigerators designed to improve food preservation in a waste-reduction effort and variable pressures in dishwashers to improve cleaning performance are just a few recent developments.

Most notably, of course, is the ongoing push to connect appliances. It’s a move that will undoubtedly continue in the years to come. 

However, the move is not without its drawbacks for the industry. AHAM has been active in addressing several concerns that have emerged as a result of the growing use of smart technology in major appliances. The association has been working to address manufacturers’ concerns over intellectual property and the effect on warranties that would result from several Midwestern states’ attempts to introduce Right to Repair laws. Additionally, McGuire says, the association has been involved in efforts to address cyber security, particularly as states are beginning to move ahead of the federal government on that front. 

“It’s a new area for us to be involved with, but anybody who is going to be participating in the Internet of Things needs to pay attention to this. We don’t want to let technology companies have all of this. Manufacturing companies need to be involved as well,” he said. 

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