Almost half of China's air conditioner makers expect to increase export prices by 10 percent in 2005, on the back of rising raw material costs, larger research and development (R&D) budgets, and a shortage of compressors, according to a survey conducted by Global Sources, a business information firm which focuses on the Chinese market.

Market observers also said price hikes are likely in the domestic market this year.

Forty six percent of the 50 Chinese manufacturers surveyed said they wanted to increase export prices, with the remainder expecting prices to remain stable.

The survey profiled 50 companies such as Midea, Kelon, and Henan Xinfei, as well as 97 popular export brands.

The prices of plastic and steel, the raw materials of air conditioners, are still hovering at a high level and show no sign of dropping.

Also, rising research and development and design budgets will help push up prices, the survey said.

"The majority of (surveyed air conditioner suppliers) are willing to allocate bigger budgets for R&D," it said. Currently, they pump 1 to 6 percent of their annual sales back into R&D.

And a shortage of compressors, the main component of air conditioners, will also add to the hike.

The price of compressors soared 30 percent in 2004, leading to severe losses in sales and production delays among China's air conditioner suppliers, a situation not likely to change in 2005.

But in an effort to avoid a repeat of the 2004 shortage, manufacturers are taking measures to ensure compressor supplies.

China is the world's largest manufacturer of air conditioners, accounting for 60 to 70 percent of global output.

From January to September 2004, the nation's air conditioner exports reached US$3.3 billion.

In 2003, it exported 16.2 million units valued at US$2.5 billion. The European Union, North America and other Asian countries are the market's major export destinations.

Domestically, prices are expected to rise by a small margin, market insiders said.

"After years of heated competition and market reshuffling, the prices have already been at rock bottom, making a decline unlikely," said Zhou Li, a manager with a Nanjing-based distribution company.

"Many smaller manufacturers have been wiped out, but the wars will soon end," Zhou said. "So the time is ripe for survivors to raise prices."

According to the survey, the number of air conditioner suppliers in China has been shrinking by roughly 60 percent annually since the 1990s. About 200 suppliers remain.

But among those, the less well known brands will feel the pinch this year.

"The amount of R&D investment now required to remain competitive is outstripping the resources of smaller makers," said Michael Kleist, editor-in-chief of Asian Sources Gifts & Home Products.

"Small and medium-sized makers without ready access to compressors and refrigerants are losing ground to companies with longstanding relationships with component suppliers," he said.

(China Daily February 4, 2005)