Recycling programs challenge Europe's competitive white goods industry.

For centuries, numerous wars and conflicts have been waged in the peaceful fields and beautiful valleys of Europe. Today, a different type of war is being fought in European households. Appliance manufacturers from Asia, Europe and North America are battling to carve up a highly fragmented, but lucrative marketplace.

Spurred by new environmental regulations and new design innovations, demand for dishwashers, microwave ovens, air conditioners and other household goods is growing throughout Europe. In England, France, Germany, Italy, Spain, Sweden and other Western European nations, consumers are upgrading to sleek, high-tech devices. In other parts of Europe, such as the Czech Republic, Poland, Russia, Slovakia and Turkey, people are eagerly replacing archaic appliances. In some cases, consumers are experiencing the labor-saving convenience of electrical appliances for the first time.

Europe represents one of the largest, most competitive and most diverse appliance markets in the world. While the population of Europe exceeds the United States by almost 25 percent, the saturation levels for many major appliances are only half of what they are in the United States.

"Dishwashers are the appliances with the least penetration, even in Western European households, thus offering the greatest potential," says Hugh Bessant, managing director of Key Note Ltd. (Hampton, England), a market research firm. "Dishwashers have yet to be a standard inclusion in many homes, not least because they take up space in the kitchen required by other appliances."

For example, 99 percent of households in Poland have a refrigerator. In sharp contrast, fewer than 10 percent of those homes contain a dishwasher.

According to the European Committee of Manufacturers of Domestic Equipment (CECED, Brussels, Belgium), 50 million large appliances, such as refrigerators and washing machines, and 200 million small appliances, such as microwaves and vacuums, are sold every year in Europe. Germany is the largest market for European appliance manufacturers, followed closely by France, England and Italy.

Intense Competition

"The European market is more fragmented than the United States," claims Mike Deneen, appliance industry analyst at the Freedonia Group Inc. (Cleveland). "In the U.S., five firms control over 90 percent of the market in most categories. In Europe, the top five companies generally have about 60 percent market share."

Leading European appliance manufacturers include BSH Bosch und Siemens Hausgerate GmbH (Munich, Germany), Candy SpA (Milan, Italy), Elco-Brandt S.A. (Cedex, France), AB Electrolux (Stockholm, Sweden), Fagor Electrodomesticos (Guipuzcoa, Spain), Indesit Co. (Ancona, Italy) and Miele & Cie. GmbH (Gutersloh, Germany). Each company has numerous brands that appeal to various consumer budgets, tastes and regional differences.

Indesit is the newest competitor in the European market, but it is not a new kid on the block. To confront the challenges of global competition, 75-year-old Merloni Elettrodomestici changed its named to Indesit earlier this year to become what Vittorio Merloni, the firm's chairman, calls "a European company with an Italian soul." He says Indesit was chosen "because it is the most international of Merloni's brands and the one that best expresses the company's personality: young, straightforward, dynamic and reliable."

American appliance makers, such as Maytag Corp. (Newton, IA) and Whirlpool Corp. (Benton Harbor, MI), have staked out a major stronghold in Europe. In addition, a large number of Asian appliance makers have also set up camp in Europe, including Daewoo Electronics Corp. (Seoul, South Korea), Haier Group Co. (Shandong, China), LG Electronics Inc. (Seoul, South Korea), Matsushita Electric Industrial Co. Ltd. (Osaka, Japan) and Sharp Corp. (Osaka, Japan).

Many Asian competitors are offering smart appliances embedded with high-tech features, such as computer chips, sensors and video screens. These products include such capabilities as remote Internet monitoring and provide added convenience for consumers. Technology is an important means by which consumers can be convinced to replace existing, functional appliances, therefore shortening replacement cycles.

"Further technological innovation will be an important factor in persuading consumers to trade up and replace household appliances sooner than may be necessary," says Bessant. "Appliances that interact with one another show the direction in which the industry is headed."

However, Bessant warns that future growth may "be hampered by anticipated rises in interest rates and a consequential faltering of consumer confidence." In addition, ongoing environmental initiatives in Europe will affect the appliance market.

"As household appliances are now required to meet higher standards of energy efficiency, there are more products being introduced on the market that are classified as ‘A' grade appliances, meaning that they meet the highest standards of energy and water use," explains Bessant. "These are able to command premium prices. With water bills predicted to rise sharply in the immediate future, it is likely that consumers will be looking for appliances that use less water with the option of short [cycles]."

Environmental Initiatives

Appliance manufacturers in Europe must adhere to strict environmental regulations, which are about to get even more severe. Beginning in August, manufacturers of electrical appliances must finance the recycling of any products they sell. That's when the Waste Electrical and Electronic Equipment (WEEE) directive takes effect. In February 2006, the Restriction of Hazardous Substances (RoHS) directive will be enforced.

The regulations were enacted in 2003 to reduce the more than 915,000 tons of electrical and electronic waste-the equivalent of 400,000 automobiles-generated in Europe each year. Any company that wants to do business within the European Union must comply with the stringent rules.

The RoHS bans the use of certain chemicals and heavy metals in products. The WEEE demands that manufacturers establish and provide for an "end-of-life" recycling program. It specifies 10 equipment categories, including large household appliances and small household appliances. Computers, consumer electronics, lighting, medical devices, power tools, telephones and toys are also covered by the widespread initiative.

The 10 categories of the WEEE directive also have collection and recycling targets that must be met by Dec. 31, 2006. Manufacturers must either take back and recycle products on their own or pay third-parties to do it for them.

The collection and recovery targets range from 70 percent for toys to 80 percent for large appliances. The recycling targets range from 50 percent of that recovered for small appliances to 75 percent for large appliances.

"The WEEE directive will come into force [later this year] with the aim of reducing hazardous waste from the industry," says Bessant. "The directive states that all manufacturers must retain responsibility for their products throughout their lifecycles, meaning that take-back and collection schemes will become more commonplace as companies recycle their goods.

"Lengthening appliances' life spans will lower the amount of hazardous waste ending up in landfill sites and will encourage sustainable production," adds Bessant. "In the short term, it seems likely that prices of goods will increase as manufacturers allow for eventual recycling costs. But, as the scheme should encourage more efficient manufacturing processes, prices may decrease in the long term."

Independent companies are being set up throughout Europe to manage waste and recycling programs. Electrolux recently established a firm called European Recycling Platform (ERP, Paris) that will operate in Austria, England, France, Germany, Italy, Poland and Spain. It will take back WEEE from municipal collection points and retailers. Braun GmbH (Kronberg, Germany), Hewlett-Packard Co. (Palo Alto, CA) and Sony Corp. (Tokyo) are also part of the ambitious effort.

But, many appliance manufacturers are confused about the WEEE mandate. In a recent survey conducted by TUV Rheinland of North America Inc. (Newton, CT), more than half of the manufacturers that responded claim that they don't know what they need to do to comply with the directives.

"Many parts of Europe are still struggling to put in place suitable recycling for plastics," notes Dave McKeown, marketing manager at The Welding Institute Ltd. (TWI, Cambridge, England). "The materials are all marked, but the community services are not necessarily yet geared to accepting the spent plastics. There is, however, considerable pressure from governments and consumers to have these facilities installed."

Material Matters

McKeown and other observers believe the WEEE and RoHS initiatives will affect the types of material used by appliance manufacturers. And, some experts warn that it may add additional increases to raw material prices, which are already sky high.

European appliance manufacturers have recently been forced to confront unprecedented material price increases. "The main challenge currently facing all appliance manufacturers is the rocketing cost of raw materials, principally steel and nickel, and crude oil, used in the manufacture of chemicals and resins," says Alessandro Lombardi, procurement director at Whirlpool Europe (Cassinetta, Italy).

"Manufacturers are struggling in the middle of a market lacking adequate resources to absorb the value of the production and the increases in raw materials," claims Luigi Meli, CECED director general. He says some European appliance manufacturers have increased their prices 3 percent to 5 percent to offset higher material costs. And, many companies are looking at alternatives.

Traditionally, European appliance makers use more expensive materials, because they expect their products to last longer than in the United States. For instance, many dishwashers in Europe use stainless steel tubs. In contrast, American dishwashers often feature polypropylene tubs.

There are also major differences in laundry equipment. In Europe, most dryers and washing machines are front-loaders. Front-load washing machines tend to spin 40 percent faster on the spin cycle, which creates some engineering challenges.

"European washing machines are, in general, smaller than U.S. versions and most have horizontally mounted drums," McKeown points out. "These are usually stainless steel, but several now have plastic paddles. We have not seen complete plastic drums yet, but it can't be far away. This will be a cost issue."

European appliance manufacturers typically use more plastic components in their products. Typical molded applications include washing machine tubs, basements for washing machines and dishwashers, soap dispensers, pump housings, door frames and cladding.

"In white goods applications, plastics have grown from less than 1 percent of material content in the early 1960s to almost 30 percent today," claims Robert Fureder, market development leader at Borealis A/S (Kongens Lyngby, Denmark). He says thermoplastic materials, such as polypropylene, allow appliance manufacturers to reduce production costs and improve performance.

"Polypropylene is lightweight, versatile and flexible, allowing technological innovation and design freedom," notes Fureder. "Plastic parts in washing machines, dryers and dishwashers enable weight savings and lower part costs [in addition to] savings on transport, storage and materials handling."

"Stainless steel is traditionally used for dishwasher tubs because it provides excellent corrosion resistance," adds Fureder. "However, the stainless steel tub [contributes to] high assembly costs in dishwasher manufacturing."

"Much of the driving force [behind plastics] is design and customer appeal," adds McKeown. For example, he says one innovative manufacturer "made a styling point by using colorful and transparent plastics, initially for vacuum cleaners but then for washing machines."

According to McKeown, European appliance manufacturers increasingly find themselves navigating between appealing designs that will attract consumers and low production costs that will maximize profit margins. That dilemma is challenging manufacturing engineers to find new ways to join incompatible plastics. "Most welding of plastics is still ultrasonic," says McKeown, "though we have developed procedures for laser welding.

"More attention is now being given to disassembly of dissimilar plastics," notes McKeown. "Thermosetting adhesives or welding [creates] recycling issues. We are working with manufacturers to develop thermoplastic adhesive techniques that have the required durability yet can be readily debonded for recycling."

Eastern Emphasis

One bright spot in the European appliance industry is located behind the former Iron Curtain. Eastern Europe represents one of the key global areas for growth in the appliance industry. Penetration levels of household appliances is still low in the region, which boasts a population of approximately 400 million people. For instance, only 70 percent of families possess a washing machine.

"Eastern Europe will provide the best opportunities through 2012," claims Freedonia Group's Deneen. "There are many outdated appliances there. In fact, some homes still have no modern appliances at all."

Manufacturers are pouring billions of dollars into new facilities in Eastern Europe to take advantage of lower labor costs and to be closer to consumers. For example, within the past year, Indesit has opened a washing machine plant in Lipetzk, Russia, and a refrigerator plant in Lodz, Poland.

"Construction of the new plants meet the need to redistribute production capacity between Eastern and Western Europe," says Indesit's Merloni. "The start up of the new plants will increase production capacity in the Eastern markets where growth is higher." According to Merloni, 86 percent of Indesit's total production comes from factories in Western Europe, while only 67 percent of sales are being generated in this area.

Other appliance manufacturers are following a similar strategy. Earlier this year, Electrolux closed its vacuum factory in Vastervik, Sweden, and transferred production to Nyiregyhaza, Hungary, where it also recently built a new fridge-freezer plant.

BSH is currently building a refrigerator assembly plant in St. Petersburg, Russia, that can produce 500,000 units annually. Production ramp up is slated for the first quarter of 2007.

In addition, several Eastern European appliance manufacturers, such as Arcelik (Istanbul, Turkey) and Gorenje (Velenje, Slovenia), are flexing their muscles on their home turf. Both companies produce a full line of large appliances.

Another bright spot on the European appliance landscape is also one of the coolest: air conditioning. While many Americans take air conditioning for granted, it's still a rarity in Europe. But, residential air conditioners are growing more popular with European consumers.

Record-setting heat waves in recent years have forced people to seek relief. For instance, a severe heat wave in August 2003 that killed 35,000 people across Europe suddenly boosted demand for air conditioners.

Unfortunately, the trend toward scorching summer temperatures is not a short-term phenomenon. The Intergovernmental Panel on Climate Change (Geneva, Switzerland) predicts that temperatures will increase 2.5 to 10.4 F over the next century, leading to more frequent and more severe heat waves in Europe. Not surprisingly, the air conditioning market in Europe has been experiencing double-digit growth and is expected to top $5 billion in 2005.

According to the Center for Energy and Processes (Paris), Europe currently accounts for only 6 percent of the total world market for air conditioners. In comparison, the United States accounts for 34 percent of the market. Only 5 percent of European homes are equipped with room air conditioners vs. 65 percent of U.S. homes. By 2020, 33 million room air conditioners are expected to be operating in Europe vs. fewer than 10 million today.

Last year, De'Longhi SpA (Treviso, Italy) unveiled a new air conditioner called the Pinguino Applique. It is a portable device that can also be mounted in a wall. Unlike traditional portable air conditioners, the product features a compressor that is located in the external unit to minimize noise.

In addition, several Japanese appliance makers have opened factories in Europe to mass-produce air conditioners. For instance, Daikin Industries Ltd. (Osaka, Japan) recently opened a factory in Pilsen, Czech Republic, that is assembling a wide variety of residential air conditioners. The company also operates a plant in Ostend, Belgium. Sanyo Electric Co. (Osaka, Japan) is currently building an air-conditioner factory in Hungary.