On December of 1947, a team of engineers at Bell Laboratories in Murray Hill, New Jersey, developed the first functional transistor and spawned the birth of the modern electronics industry as we know it. Today the global consumer electronics industry is valued at over $630 billion and plays at essential role in how we live, play, and work. Over the past couple of years the sector has experienced a resurgence that has resulted in an ever more integrated technological environment where office, mobile, and home technologies are meshing together like never before. As new technologies and increased adoption rates are having a galvanizing effect on consumer electronics sales and investments throughout the region, executives are relying more and more on consumer electronics to play an intrinsic role in everyday life.
Despite a global economic downturn, coupled with perpetually increasing inflation, global sales of consumer electronics will grow nearly 10% in 2008 and hit the $700 billion mark by 2009, according to recent studies conducted by the Consumer Electronics Association (CEA). In particular, the growth in the consumer electronics industry is being fueled by developing economies, and the emergence of large middle classes in those countries who bring with them a newly acquired buying power that has become essential to the growth of the industry.
The forecast for many of the developed economies, however, is not so bright. With growth in consumer electronics leveling out due to mass adoption rates of products such as digital cameras, MP3 players, digital television sets, as well as the effects of a global economic downturn, developed economies such as the United States have been hit the hardest. Nevertheless, consumer electronics sales in the US are doing better than expected with the CEA having to adjust its 2008 expected growth calculations, based on shipping revenues, by $2 billion to $173 billion equaling a growth rate of 7.3% (up from 6.4%). Figures in Western Europe are even lower as the CEA reports a mere 2.3% growth rate for all of 2008.
While higher than expected at the outset of the year, analysts are still hailing the end of the so called “super-cycle” that saw a compound annual growth rate (CAGR) of around 10.7% in the United States from 2002 to 2006, according to the CEA. Some market watchers such as NPD, a leading US retail market research firm, are even predicting growth rates as low as 1-3% for the last quarter of 2008 and all of 2009.
While growth in developed economies is stagnating, the driving force behind consumer electronics growth stems mainly from the BRIC (Brazil, Russia, India, China) economies and the Middle East. The Asian continent is leading this growth as revenues are expected to grow by 16.5% over 2008, according to the CEA. Most of this growth is rooted in India and China who are spurring on the global consumer electronics super-cycle because of their large populations that facilitate consumer electronics product sales across market clusters. “There is definitely a global ‘super-cycle’ that is being driven by Chinese and Indian markets in terms of infrastructure and growth. This cycle started in 2000 and is still going on today,” said Cesar Chalhoub, vice president of ITG Holdings. Furthermore, this foundation for continuing global growth is regarded as sustainable in light of the massive populations of both China and India. “[The] middle classes are emerging in these societies that where traditionally made up of lower income populations,” according to Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon, “and you have a population of 2 billion or so between India and China, so definitely we will see a lot of growth in those areas and this will continue in the future.”
The Middle East, and in particular the GCC, is enjoying the benefits of the global super-cycle as the consumer electronics industry is
expecting exceptional growth throughout the region in the coming years. As part of her keynote address at the International CES conference in Dubai this year, UAE Minister of Foreign Trade Sheikha Lubna Al Qasimi stated, “The Gulf’s consumer electronics industry is predicted to achieve a 30% growth in 2008.” This trend is also occurring in the wider region. As George Khoury, CEO of Khoury Home, Lebanon’s largest consumer electronics retailer, pointed out, “We are growing at an average of 50% yearly.” The majority of this growth is being attributed to a number of products that are fueling the global consumer electronics market like notebooks which have grown by 87% in the second quarter alone according to the International Data Corporation (IDC). However, the main impetus for growth in the region is the exponential adoption of flat-screen television sets. “We have seen a 100% growth in sales of both LCD and Plasma screens in 2008,” said Selim Antaki, CEO of LG’s distribution agency in Lebanon.
Investment is also playing a major role in consumer electronics growth as many global players are investing heavily in the region expecting to see large returns over extended periods of time. For instance, Sharp is expecting to increase its annual turnover in the Middle East increase from $200 million today to $500 million by 2011, according Sharp’s Middle East’s Managing Director Tomio Isogai in an interview with Emirates Business 24/7. Added Cherfan, “the Middle East in general is now more and more a strategic market for many of the big [consumer electronics] vendors and players in the world.”
Boom!
The main reasons for such an unprecedented growth rate in the Middle East are rooted in the economic structure associated with developing economies in the region — an economic boom in the GCC fueled by high oil prices and growing government expenditures. “Our region is an oil based income region. Whenever we see a price increase in oil, it immediately induces an excess of cash in the region, so we are definitely enjoying this,” remarked Chalhoub. This increase in buying power is stimulating local markets, as GDP per capita in the region has shot up recently. “The average per capita income for the GCC is likely to reach nearly $30,000 in 2008, more than double the level recorded in 2004,” according to Samba Group (formerly Saudi American Bank). The region is also viewed by many industry players as one that presents a transparent and clear-cut operating environment as well as a gateway to other markets “The Middle East region is relatively more straightforward (with ever more Free Zones emerging) and perhaps more transparent for foreign companies,” said Adam Dent, Optoma’s Middle East & Africa Sales Manager. “The increased economic power of the region is a key driver, as is the fact that it is recognized as a gateway to other significant markets, such as Africa and COS,” Dent added.
Such an atmosphere has encouraged the major players in the consumer electronics market to change their corporate strategies from investing in capital rich and developed economies such as the US, Europe, and Japan to focusing their efforts more on the Middle East and other developing countries. “The boom in the GCC and high oil prices, growing government expenditures and new projects means more business for us. This is different to the US, where there are so many financial problems and a fear of rising oil prices,” explained Isogai.
“In places like the US, Europe or Japan people are pessimistic about the future, but here in this part of the world we see a lot of potential and faster growth for our business,” he said. This investment trend is also beginning to act as a catalyst to the accelerated pace of technological adoption and the production cycle, “as manufacturers see the increased potential of a region, they will invest to gain share in that region through sales and marketing efforts, which causes the whole cycle to accelerate,” according to Dent.
Consumer electronics growth in the Middle East can also be seen as a consequence of high household ownership rates and the emergence of a tech-savvy middle class demographic. “People are more educated — we have more communications in terms of advertising and the Internet, [so] people are more familiar with technology,” Antaki said, a view echoed by Robert Chahwan, general manager of Khoury Home. “Whoever has access to the media and the Internet is demanding more, and this demand is multi-faceted so we need to constantly update our products to meet this demand,” Chahwan said. According to a CEA study, household ownership rates for major consumer electronics products have skyrocketed in recent years with mobile phones leading the way with a 97% ownership rate followed by televisions (88%) and desktop computers (87%).
Age is also contributing to the growth of consumer electronics in the Middle East, where 65% of the population is under the age of 30, according to the Middle East Youth Initiative. Having grown up accustomed to technology this demographic is regarded as a ‘cash cow’ for consumption of consumer electronics goods. “A major issue [in the consumer electronics industry] is that the population scenario in Arab nations […] is composed of about 65 percent young people, which produces a demographic that is tailored to being more tech-savvy,” Chalhoub remarked. Moreover, the ‘Millennial Generation’ (16-27 year olds) in particular is steering demand in the region and worldwide according to a recent study by Motorola. “Technology is the lifeblood of this generation […] It is not surprising therefore to see their influence on technology purchasing,” said Joe Cozzolino, corporate vice president and general manager of Motorola Home & Networks Mobility Europe Middle East & Africa (EMEA).
Political Uncertainty
Despite all the promise in the regional consumer electronics industry, lurking on the horizon is the constant threat of political uncertainty that has plagued the Middle East and North African (MENA) region for decades. Political instability has already taken its toll on markets such as Lebanon. “The confidence factor of the consumer was not high and was very moody. Every time you had an explosion or a postponement of an election people were postponing their decision making,” stated Antaki.
“Everyone feels like the area is passing through a stressful time, especially with what is going on in Iran and Israel. Political struggle is a major constraint to enjoying the prosperity that the oil prices now bring and this reflects on Lebanon instantly,” Chalhoub pointed out.
He believes that it is not only politically volatile countries like Lebanon that are losing out on potential growth opportunities, but also the region as a whole, as some FDIs are reluctant to invest too heavily in the region.
“The main concern and issue that is restraining this growth is the political struggle in the area. If we have the right environment to really absorb an excess of cash and the prosperity of the region, I think we would be better off by far,” explained Chalhoub.
