CONSUMER: Midea Goes Appliance Shopping with Toshiba

Bottom line: Midea could buy another global brand following its purchase of Toshiba’s home appliance business, while hometown rival Gree will also feel pressure to make a small to mid-sized overseas acquisition in the next 1-2 years.

Midea in MOU for Toshiba’s appliance unit

Following several days of rumors, struggling Japanese tech giant Toshiba (Tokyo: 6502) has confirmed it will sell a controlling stake in its home appliance business to Midea (Shenzhen: 000333), extending a fledgling movement by Chinese buyers abroad. The move could pressure other Chinese rivals, most notably Gree (Shenzhen: 000651), to follow in the footsteps of Midea and Haier (HKEx: 1169), which is also in the process of buying General Electric’s (NYSE: GE) appliance business.

From a bigger perspective, this particular trend looks a bit like what happened several decades ago in the older industry for TV sets. That trend saw Asian buyers purchase big western brands in the fading TV industry, with storied names like Zenith and RCA ultimately get gobbled up. Fast forward to the present, when most of those older brands no longer exist or are insignificant, which could hint at what may lie ahead for these new purchases by the Chinese companies.

From a more near-term perspective, these purchases look relatively savvy and reflect the difficulty that Chinese brands have faced in their limited campaigns to move abroad. Haier has been the most aggressive on that front, but has relatively little to show for its efforts despite years of trying to enter the US. The biggest problem for the Chinese companies is their lack of experience at building brands, and many are now hoping to solve that problem by purchasing well-establish western names like GE and now Toshiba.

Toshiba has been under pressure to sell some of its non-core units following an earlier $1.3 billion accounting scandal. Last year it sold 2 of its China-based appliance factories to local TV maker Skyworth (HKEx: 751). Now Midea says it has signed a memorandum of understanding to buy a majority stake of Toshiba’s home appliance business. (company announcement; English article; Chinese article)

Midea’s announcement notes that the 2 sides have worked together for 20 years, though no financial details were given. Japanese media said the deal could be worth billions of yen, which probably translates to a relatively modest amount worth less than $100 million. That’s not too difficult to believe, since Toshiba’s appliance business is losing money. What’s more, I suspect that Midea will probably pay for some or most of this deal with its own stock rather than cash, much the way PC giant Lenovo (HKEx: 992) has done for many of its big global purchases.

Japanese Sell-Off

This purchase is the latest in a growing list of sales by Japanese electronics makers of their money-losing businesses. Lenovo was one of the earliest to enter the field with its formation of a joint venture that saw it take over the PC business of NEC (Tokyo: 6701) in 2011. More recently, leading Chinese electronics retailer Suning (Shenzhen: 002024) purchased Japanese peer Laox, and has used the chain to target the millions of Chinese tourists who travel to Japan each year.

The Midea-Toshiba deal also comes just weeks after Haier announced its own blockbuster agreement to buy GE’s home appliance unit for $5.4 billion, and as Taiwan’s Hon Hai (Taipei: 2317) closes in on a deal to buy Japanese electronics giant Sharp (Tokyo: 6753). The common thread to all of these deals is that western firms are looking to dump their older, more mature electronics businesses, and that Chinese companies are stepping in as eager buyers.

All that brings us back to what’s next for these acquisitions, and what future deals we might see. I do suspect that Haier is probably finished buying overseas assets for now, as it will take quite a while to digest GE’s appliance unit. Toshiba’s appliance unit should be significantly smaller, and it’s possible we could see Midea make another global purchase in the next couple of years. Meantime, Gree, China’s other major appliance maker, will undoubtedly be feeling some pressure to make its own overseas acquisition, and I expect we could see it make a small- to mid-sized purchase in the next year.

As to how these Chinese companies will fare with their new foreign purchases, the results will probably be mixed. Haier has the most overseas experience and thus could do relatively well with its GE purchase. Midea is less experienced, and could have more trouble in the tougher Japanese market. At the end of the day I do suspect that most of these foreign appliance brands will eventually die out over the longer term. In their place we’ll probably see the rise of a newer generation of companies focused on Internet-connected appliances that have more functions and greater flexibility than the current generation.

 

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