Air-conditioning is a Lindy business
Air conditioning has been a vital invention since Willis Haviland Carrier developed the first modern system on July 17, 1902. It has provided essential comfort in hot and humid weather, and its significance has endured for over a century. According to the Lindy Effect, air conditioning is likely to persist for at least another hundred years. Moreover, due to the effects of climate change, the demand for air conditioning is expected to increase rather than decrease. While it is important to minimize electricity consumption and mitigate climate change, advancements in efficiency can help address these concerns. Additionally, it is a reality that wealthier consumers who can afford air conditioning will continue to utilize this technology for their personal benefits. In today's world, air conditioning has become a necessity rather than a luxury in most buildings and homes.
Midea, a prominent Chinese home appliance company, primarily derives 44% of its revenue from air conditioning, catering not only to residential but also commercial spaces. Another 36% of its revenue comes from various other home appliances such as ovens, refrigerators, kettles, and cookers. Additionally, Midea owns Kuka, a German industrial robot company, which contributes 9% of its revenue in FY2022.
Competitive Advantages
In China, the market for durable white goods is highly consolidated, with the top three companies controlling over 60% of the market. Based on information from ChinaIOL, Midea holds the largest share of the domestic market for commercial air conditioners in 2022. Additionally, according to data provided by AVC, Midea secures the top position in market shares for residential air conditioners, countertop pan-microwave ovens, countertop ovens, electric radiators, induction cookers, and electric kettles in 2022.
Once again in FY2022, Midea has solidified its position as the leading air-conditioning supplier from China, surpassing Gree and Haier. This achievement highlights the brand's remarkable recognition, which holds significant value for any business catering to consumers. Furthermore, air-conditioning for residential or commercial uses requires extensive installation and doesn’t get replaced for years. Customers want to have the peace of mind to do it once and do it right, and hence they are likely to choose a brand that they trust rather than going with the cheapest.
Alongside its reputation for dependability, Midea boasts a skilled and extensive workforce capable of offering maintenance, service, and aftermarket parts to prevent costly and disruptive system failures in mission-critical commercial air-conditioning. Midea has managed to clinch numerous international commercial air conditioner projects. These notable ventures include prestigious locations such as Dalma Mall, the largest shopping mall in Abu Dhabi, the 2018 FIFA World Cup Russia venues, Singapore Changi Airport, Zetas Thermal Power Station, one of Turkey's major thermal power stations, and Top Glove, the world's largest rubber gloves manufacturer based in Malaysia.
To maintain its leadership position, Midea has dedicated significant attention to research and development endeavors. In 2022, the company allocated approximately 3.7% of its revenue towards research and development investments. Additionally, Midea has strategically pursued the acquisition of intellectual property. A notable instance occurred in 2016 when the firm acquired an 80.1% stake in Toshiba Lifestyle Products & Services Corporation (TLSC), the home appliance division of Toshiba Corporation in Japan. This transaction granted Midea access to a substantial portfolio of 5,000 intellectual property assets and a worldwide license to utilize the Toshiba brand for 40 years.
Lastly, Midea has established an extensive distribution network that contributes to its success. In first and second-tier markets, the company has cultivated strong relationships with prominent home appliance retail chains. In third and fourth-tier markets, Midea utilizes a combination of flagship stores, franchised shops, and diverse channels to reach customers. Moreover, in towns and villages, the firm extends its reach by providing convenient products and services through a network of retail stores, effectively covering markets across all tiers.
With the assistance of its subsidiary, Annto Logistics Technology, Midea boasts impressive delivery capabilities. The company can efficiently deliver products to 30,739 towns and villages within 24 hours and to 37,260 towns and villages within 48 hours, encompassing over 94% of the country's towns and villages. This extensive distribution network enables Midea to effectively serve customers across various regions, contributing to its widespread presence and market penetration.