As China Emerges from Lockdown First, What Does It Mean for Smart Home?

China, the first economy impacted by COVID-19, is also the first to tentatively start re-emerging from the impact of trying to contain the spread of the virus. As the huge global manufacturing and national consumer market returns, it will act as a bellwether for many industries and countries as they seek to do the same. Although the smart home market has significant differences compared to other markets around the world, China may still provide insights into the changes COVID-19 may bring to consumer behavior and economic investment relating to the way other markets will have to adapt to the changes lockdown and recession have brought to their economies.

In 1Q 2020, China’s economy shrank 6.8% compared to a year earlier. It was the first contraction since 1992, when the country began reporting quarterly Gross Domestic Product (GDP). Within the period, according to the China National Bureau of Statistics, retail sales were also hard hit, although the 20.5% Year-over-Year (YOY) decline in January and February improved in March as some restrictions began to be lifted. Even so, it was still a significant 15.8% decline.

Over the years China has been building its consumer market to become less dependent upon exports for GDP, and with a broad stimulus package smart home spending could well benefit further from that drive. Domestic consumption contributed 58% of China’s GDP last year. An uptick in March speaks to the potential for a recovery and a return to consumer spending—dubbed “revenge spending”—in some aspects of China’s consumer market. Demographically it is older consumers who suggest they are most inclined to return to spending, which again is positive for smart home spending. However, with the reset of the world economies following China into drastic contraction, there is potential for a second wave of negative impact in China as its export revenues are impacted by fewer orders from overseas and many consumers remain wary of spending.

China’s largest national Information and Communication Technology (ICT) consumer players, including Alibaba, Baidu, JD.com, and Xiaomi, have, over the past three years, invested in voice control embedded in smart speakers and displays to strengthen customer engagement and expand future earnings. These dedicated in-home voice control devices draw customers into the vendors’ ecosystem and provide a starting point for smart home control via voice control, supporting a growing market for a wide range of connected smart home devices and appliances. Most recently, Alibaba has stated 236 million smart home devices are attached to its voice assistant platform, while Baidu has counted 110 million deployed using its BaiduOS.

So far, the impact on these major Chinese smart home players has been mixed. However, although strategic, smart home still plays a very limited role in these companies’ businesses.

• In February, Alibaba Group Holding Ltd. warned of changed buying patterns, with consumers pulling back on discretionary spending. The Chinese e-commerce giant reported strong financial results for the quarter that ended in December but warned that, while demand for goods and services remains, production, hampered by the closures, will negatively impact the company’s first quarter results, potentially significantly. While food delivery is growing, areas like clothing and electronics are running into logistical problems and Alibaba’s core e-commerce business has suffered.
• In February 2020, Baidu warned that, for the 1Q 2020, the company expects revenues to go down between 5% to 13% YOY. It also noted that the coronavirus situation in China is evolving, and business visibility is very limited. However, Baidu App's average daily active users reached 195 million, up 21% YOY, in December 2019.
• In March 2020, JD.com announced its results for the year up to December 2019 but added insight on the impact of COVID-19 measures on its business. It stated that net revenues for 1Q 2020 are expected to grow at least 10% compared with 1Q 2019, suggesting a confidence in spending on the company’s e-commerce platform, although it added its forecast is subject to change in light of uncertainties related to how COVID-19 develops. For 2019, the company’s revenues from electronics and home appliances (US$47.2 billion) represented two thirds of its net product revenues and more than half of its total net revenues.
• In March 2020, Xiaomi, which has pushed into smart home from its core smartphone business, announced the recovery in consumer spending had returned its sales to “80 to 90% of the normal level, said Chief Financial Officer Shou Zi Chew on an earnings call," confident that the global downtown would not impact smartphone sales, based on the Chinese market return.

China’s smart home market differs in many ways from other national and regional markets. However, the leveraging of voice control by major online retail and online advertising, as well as Consumer Electronics (CE) suppliers, is a model initially developed by Amazon and then Google and then Apple in the U.S. market.

At the end of April, Amazon, Alphabet, and Apple all reported regarding the impact of the global lockdown on their quarters ending March 31, 2020. All three highlighted strong growth for services and consumer online offerings:

• Alphabet’s Q1report included evidence of a significant slowdown in online advertising revenue in the final month of the quarter as pandemic response around the world accelerated. In addition, the company warned that the current Q2 would be “difficult” for its advertising business. There was no explicit indication that its Nest smart home business—which sits in its Other Bets unit regarding reporting—had been greatly impacted.
• Amazon’s Q1 results highlighted the impact of the global shutdown. A shift to online retail and delivery pushed overall revenue up 26% YOY to US$75.5 billion. Amazon’s business is heavily skewed to the North American market, which represented US$4 billion of net sales compared with US$19 billion internationally.
• Apple, the only one of the three with significant operations in China, noted in its Q2 reports that in China its retail locations are seeing a footfall recovery but remain below pre-lockdown numbers. However, while store traffic has not returned, a significant shift to online sales had the company seeing record online sales within China.

While such a shift to online sales is to be expected during lockdown, it also underlines the importance of the investment in smart home connectivity by China’s online retail, online advertising, and CE equipment providers and their U.S. counterparts. An uplift in online activity speaks directly to the value of strengthening the channel between voice control smart home provider and consumer. We expect all these players to continue to invest and, in many cases, underwrite the adoption of smart home devices in consumer homes going forward. Their investments will be seen in new functionality, greater integration with their existing business, and low-priced voice control options.

The International Monetary Fund (IMF) expects China’s economy to register 1.2% growth in 2020, down from a previous 6.10%. It also expects the economy to rebound to show 9.2% growth in 2021. ABI Research has adjusted its Smart Home forecasts for the Asia-Pacific region, also noting that the situation remains fluid and the long-term impact of the global shutdown is still developing. Even so, we believe there are aspects of the lockdown and the long-term drive for smart home that can underpin a relatively robust response from Chinese consumers regarding continued smart home adoption for the following reasons:

• A greater emphasis on the home environment developed during a shift to working from home and other pandemic-related measures
• Relatively low financial barrier to most smart home device purchases, especially given the additional importance and value of devices improving life indoors
• The overwhelming importance of voice control to smart home adoption in the region and its potential to drive consumer spending with key voice platform providers
• A greater emphasis on smart home from the largest online retailers, home delivery, and consumer goods players and the potential for in-home voice control devices to deepen customer engagement and drive smart home awareness

Even so, overall economic contraction and lower growth during 2020 will still impact Chinese smart home device shipments and investments for the rest of 2020 and potentially into next year. Across the Asia-Pacific region, ABI Research forecasts an 8.7% reduction in smart home device shipments from our most recent earlier forecasts. Even so, the market will still see more than 50% growth over 2019 shipments. For its part, China represents more than 65% of smart home device shipments across the region.

For a detailed analysis of the Asia-Pacific Smart Home market and forecasts for key nationalmarkets including China, ABI Research is set to publish its latest findings in The Emerging Growing Influence of the Asia-Pacific Smart Home Market (AN-5038) Application Analysis Report.