A large continuous increase in production material costs illustrate that China's home appliance makers will likely see more difficult times next year.

Statistics show the prices of raw materials including steel, plastics and copper continued to rise over the past two years, and will continue to increase in the coming year.

For companies in the sector, the purchasing price of steel rose by 70 percent this October compared with the same month in 2003.

The price of plastics rose 73.9 percent during the same period, while copper prices increased by 1,600 yuan (US$193) per ton since the beginning of this year.

The increase of material prices, as well as the rise of other production costs like transportation fees and labour costs, put strong pressure on the home appliance manufacturing industry.

The sector has been forced to absorb the rising costs by cutting profits over the past two years.

Meanwhile, in a bid to seize bigger shares in the oversupplied market, home appliance makers have to compete by lowering their products prices.

With continuous rising production costs and shrinking profits caused by price wars, some home appliance makers plan to increase prices in 2005.

Siemens China told the media last week that it will raise the prices of most of their products in the Chinese market including refrigerators, washing machines and small electric appliances by 3 to 5 percent beginning January 1.

It is the first home appliance maker to decide to increase product prices under the pressure of rising production costs.

Other foreign brands have intentions to follow Siemens' move.

Leading domestic home appliance makers like Hisense and Changhong refused to reveal their price strategy.

"Most manufacturers will not be rash enough to increase their prices, which would probably result in a loss of market share," said Luo Qingqi from Pully Consultants Co Ltd, a consultancy specializing in electric home appliances.

China's market become accustomed to drops in electrical appliance costs.

A 21-inch TV set retails around 800 yuan (US$96.60), a third of the price in 1996, the middle-range 29-inch flat-screen TV set is priced at about 1,800 yuan (US$217), while the prices of high-end digital high-definition TV sets continues to fall.

"The risk is definitely here," said Wu Jianke, general manager for the home appliance sales department of Siemens' China operations.

"But for Siemens, another possibly more damaging risk is that the rising cost and the falling price will lead to poorer product quality, and in the long term, customers will not believe in established brands," Wu said.

According to Wu, China's home appliance industry has currently entered into a malicious development circle with continuous price wars.

He said the 3 to 5 percent price rise is not too much for individual customers, but it is important for companies which would use this money to maintain its service networks, and increase investment in research and development.

Despite rising production costs, more problems lie ahead for home appliance manufacturers, including a yuan revaluation, the government's export rebate cut and an expectation of rising interest rates.

"Under this enormous pressure, home appliance makers will face harder times next year," Luo said.

Manufacturers will probably raise prices to tackle the problem. But it is hard to predict, as the market truly decides the price, Luo said.

(China Daily December 28, 2004)