Saturday, 2024 April 13

Chinese home appliance makers find new horizons in the household photovoltaic market

Major home appliance sales are sluggish, prompting companies in the industry to seek new directions.

One of the hottest spaces that companies are pivoting toward is none other than photovoltaics (PVs). Household names such as Midea, Haier, and TCL have all entered the field, with Skyworth Group leading the charge. According to financial reports, in the first half of 2023, Skyworth Photovoltaic’s business revenue reached RMB 12.13 billion (USD 1.7 billion), accounting for 37.6% of the group’s total revenue.

Growth in the PV business can be rapid. When Skyworth ventured into the PV business in 2020, it registered only RMB 1 billion (USD 140 million) in revenue that year. However, revenue jumped to RMB 4.1 billion (USD 569.5 million) in 2021, before nearly tripling to RMB 11.9 billion (USD 1.6 billion) in 2022. By the first half of 2023, revenue from Skyworth’s PV business was almost on par with its home appliance business, which stood at RMB 14.1 billion (USD 1.9 billion).

As the core business of home appliances hits its peak, PV has become the main driver of growth for Skyworth. On one hand, benefiting from policy support, PV has emerged as a thriving industry over the past few years, witnessing rapid growth. On the other hand, the core competitiveness of household PV lies in reaching rural consumers directly, aligning well with the distribution channels of companies.

However, this trend also brings risks. The capacity of key provincial power grids is reaching its limit, hindering the connection of household PV systems to the grid and thereby affecting income generation. Moreover, market competition is intensifying, with the rural distribution channels and financial models that Skyworth Photovoltaic relies on becoming increasingly prevalent in the household PV industry, failing to create long-term barriers.

After three years of profitability, both Skyworth and the entire household PV market are finding it increasingly challenging to maintain profitability.

Policy shifts and financial leasing propel PV business growth

In September 2020, the Chinese government proposed its “dual carbon” goals, igniting a surge in PV enthusiasm.

Upstream PV component manufacturers increased production and doubled down on promotions, driving down prices from nearly RMB 2 (USD 0.28) per watt to a current low of RMB 0.8 (USD 0.11) per watt. This dip in price enabled PV projects to turn profitable on their own, reducing reliance on government subsidies. Downstream PV installation companies found greater room to maneuver, leading to the emergence of niche PV application scenarios.

Household PV is one of the popular scenarios. Manufacturers install PV panels on the roofs of self-built rural homes and sell electricity to the grid for profit. What’s unique is that both the installation and usage of household PV are offered directly to consumers. A PV engineering contractor once told 36Kr that PV installation doesn’t require highly technical skills. Rather, it’s primarily about procuring PV components and having workers install them.

With minimal barriers and a D2C approach, competitive advantage in the household PV industry typically stems from superior distribution capabilities—control the channels to reach China’s 230 million rural households, and you can capture the customer base for household PV.

Home appliance companies happen to possess distribution capabilities in the domestic rural market. According to a report by the China Center for Information Industry Development (CCID), in 2022, the retail sales of home appliance products in China’s rural markets reached RMB 285 billion (USD 40 billion), accounting for 34.1% of the domestic home appliance market. Consequently, rural distributors of appliance companies played an unexpectedly important role, transitioning from promoting air conditioners and washing machines to selling PV equipment.

The home appliance business itself also plays a synergistic role. One of Skyworth Photovoltaic’s major selling points is “free home appliances,” bundling PV installation with complimentary home appliances worth thousands of RMB. In June 2023, Ma Long, general manager at Skyworth, said that the company had given away 700,000 appliance units of various types, totaling RMB 1.38 billion (USD 193.9 million) in retail value.

There are mainly three business models for household PV:

  • Renting rooftops, whereby customers lease out roofs of properties they own or manage for a fee.
  • PV loans, which involves customers borrowing one or more PV units. Most customers need to borrow from financial institutions to manage the costs, with relatively high financial risks involved.
  • Financial leasing, which entails an entity installing and operating PV power stations while a financial institution provides funds to purchase the stations.

Skyworth Photovoltaic mainly promotes the financial leasing model, overseeing the installation, operation, and maintenance of household PV power stations while a cooperating financial leasing institution—Huaxia Financial Leasing—provides funds to purchase the stations. Users pay rent to Huaxia based on income from selling the electricity generated. As an additional guarantee, Skyworth Photovoltaic provides users with a minimum income guarantee, ensuring that their earnings won’t be lower than the rent even if the PV power station doesn’t generate sufficient electricity to sell.

Financial leasing has led to Skyworth Photovoltaic’s distinctive business model that combines both B2B and B2C aspects. While its primary role is to install household PV power stations, its revenue mainly comes from financial leasing institutions. As long as there is financial support from such institutions, Skyworth Photovoltaic, with the extremely low threshold of “zero-cost installation of power stations,” can quickly expand its market.

Policy momentum coupled with business model innovation has fueled Skyworth Photovoltaic’s rapid growth. According to Skyworth’s financial report, in the first half of 2023, Skyworth Photovoltaic added 130,000 household PV stations, with a total of 339,000 household PV stations built, ranking among the top companies in the household PV industry.

However, the household PV industry faces increasing challenges such as grid constraints and competition from peers.

Low barriers to entry and grid constraints

Grid constraints are one of the challenges facing the household PV industry.

The revenue of household PV stations comes from selling electricity to the grid. However, the grid’s carrying capacity is limited, making it difficult to fully absorb the rapid growth of household PV stations. According to data from China’s National Energy Administration, in the first three quarters of 2023, the total capacity of newly installed PVs in China reached 32.977 gigawatts, 1.3 times the figure in 2022. However, the grid’s carrying capacity cannot keep up with this level of progression.

The grid capacity in some key provinces for household PV is approaching saturation. By the end of 2023, energy bureaus in multiple provinces issued warnings about the difficulties of accommodating distributed PV connectors. Guangdong and Shandong, for example, had 37 and 53 counties, respectively, where space restrictions for distributed PV connectors have been implemented. Provinces with large installations of household PV, such as Henan, Liaoning, and Heilongjiang, also faced difficulties in accommodating connectors.

Increasing grid capacity primarily involves deploying energy storage systems. However, deploying energy storage systems increases the installation costs of household PV projects, significantly reducing their profitability. According to 36Kr, for a conventional household PV power station with a capacity of 20 kilowatts, equipping it with an energy storage battery that charges 5% per hour will increase the installation cost by about 10%, affecting profitability.

It’s also worth noting that the typical profit margin of the household PV industry is not high. In the first half of 2023, the gross profit margin of Chint Anneng and Jolywood, two leading companies in the household PV industry, was 16.7% and 17.5%, respectively, significantly lower than the gross profit margin of companies leading in the appliance industry. For instance, Midea and Haier’s margins were 25.2% and 30.4%, respectively, for the same period.

Skyworth Group has not disclosed the profit data of its PV business. According to Yicai, the net profit margin of Skyworth Photovoltaic is about 3–5%. Lin Jin, chairman of Skyworth’s board of directors, said that the most important thing for the PV business at present is to seize scale—he does not want the profit margin to be too high, as it may lead to losing part of the market.

Since entering the household PV business, Skyworth’s net and gross profit margins have decreased. According to financial reports, the net profit attributable to Skyworth decreased from RMB 1.44 billion in 2020 to RMB 827 million in 2022. Skyworth’s gross profit margin decreased from 17.9% in 2020 to 13% in the first half of 2023.

In its 2022 annual report, Skyworth explained the decline, stating that the gross profit margin of its new energy business is lower than that of other business segments, “while its sales have grown significantly year-on-year, the group’s overall gross profit margin has also declined slightly.”

Intensified competition is another major challenge. The “secret” of Skyworth Photovoltaic’s rapid growth—distribution channels in rural areas and financial leasing—are unlikely to constitute long-term barriers.

Notably, competitors in the PV industry are already beginning to adopt similar business models. In the second half of 2020, Chint Anneng began to sell household PV stations to state-owned energy enterprises and financial leasing institutions. By the first half of 2023, the sales revenue of Chint Anneng’s household PV stations accounted for 84.7% of its total revenue, mainly based on the financial leasing model.

Home appliance peers are also using rural distribution channels to compete for market share in the household PV market. Haier, relying on its logistics subsidiary RRS, has launched Nahui New Energy, its PV business entity. According to Beijixing, as of the end of 2023, Nahui’s coverage spans 23 provinces nationwide, reaching more than 1,000 counties.

TCL Group has also established TCL Photovoltaic Technology, its PV business entity, launching a campaign offering free home appliances when customers opt for PV installations. In 2023, TCL Photovoltaic Technology’s household business scale exceeded 5 gigawatts.

In the face of monopolistic competition, expanding upstream in the industrial chain to establish supply chain and technological advantages is a natural solution. According to 36Kr, on January 8, Skyworth signed a contract for the second phase of its new energy project in Suzhou, planning to produce hybrid inverters, energy storage battery modules, and other products.

In addition to delving deeper into the PV industry chain, Skyworth has also expanded its energy storage business. By operating and maintaining 339,000 existing household PV stations, Skyworth Group has little to worry about the sales of inverters and energy storage products.

However, in a fully competitive market, it may be difficult for Skyworth to replicate the rapid growth it has experienced in the household PV market over the past three years.

​​​​This article was written by Xi Xiangyu in chinese and was originally published by 36Kr.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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