Profits halved to give way to Midea, Dong Mingzhu, who had been pushing for Gree's diversification, failed again in the face of single-mindedness

Gree has not had a good time recently, at least according to its financial report. According to the financial report, in the first half of 2020, it achieved a revenue of 70.602 billion yuan, a year-on-year decrease of 28.21%, and a net profit of only 6.363 billion yuan, a decrease of 53.73%. Gree explained that due to the impact of the special period, the entire retail market was hit hard.

This explanation is indeed valid.

In the first half of 2020, the retail scale of the domestic home appliance market was 336.52 billion yuan, a year-on-year decrease of 18.4%. Taking Gree's main air-conditioning industry as an example, the cumulative sales volume in the first half of 2020 fell by 17% year-on-year.

However, everything is afraid of comparison. In the same environment, Midea Group's total revenue in the first half of 2020 was 139.719 billion yuan, and its net profit was 13.928 billion yuan, both of which were twice as much as Gree.

More importantly, Gree's position as the number one air conditioner manufacturer, which it had held for more than 20 years, has also been replaced by Midea for the first time. In the first half of 2020, Gree's air-conditioning revenue was 41.333 billion yuan, almost halved, while Midea's HVAC revenue took its place with 64 billion yuan.

Faced with the same dilemma, Midea and Gree delivered results that were twice as different. The problem was obvious: Gree's sales were in big trouble.

In the operating income structure of Gree’s financial report, the main business of domestic sales accounted for 54.42%, a year-on-year decrease of 45.56%, while the main business of export sales accounted for 17.11%, a year-on-year decrease of 14.24%.

In the operating income structure of Midea's financial report, domestic revenue accounted for 55.54%, a year-on-year decrease of 15.74%, and overseas revenue accounted for 44.46%, a year-on-year decrease of 0.44%.

Throughout the first half of the year, Gree's export sales fell by 14.24% year-on-year, while Midea's fell by only 0.44%. The difference is obvious. Gree's main business relies more on domestic sales than exports, so it will be more affected by the decline in the domestic market. Midea's overseas sales account for almost half of its financial report, and there is no very obvious decline.

Data shows that in the first and second quarters of 2020, exports have always had a relatively good advantage over domestic sales. Although they were also in a downward trend in the first quarter, they turned into growth in the second quarter. In contrast, domestic sales are still in a downward trend.

Midea benefited from the export boom during this special period, and its good performance in foreign markets helped cushion its decline. In contrast, Gree suffered a major blow, with its main export business declining by 14.24%.

However, overseas exports are not Midea's only winning magic weapon. According to the financial reports of both parties, the gross profit margin of Midea's air-conditioning business in the first half of 2020 was 24.20%, a decrease of 7.88% from the same period last year, while the gross profit margin of Gree's air-conditioning business was 32.05%, a decrease of 3.97% from the previous year.

There may be many reasons for the decrease in gross profit margin. For example, Midea's operating costs remained the same as last year, while Gree's operating costs decreased by 44.66% compared with last year. The reduction in operating costs may be one of the reasons for Gree's higher gross profit margin, but the huge difference in gross profit margin is even more than double the difference between 32.08% and 36.02% in the 2019 semi-annual report, which shows how aggressive Midea's "discounts" are in sales.

For Gree, air-conditioning products account for 59.48% of its revenue, while other main businesses and household appliances only account for 3% and 8%, respectively, and smart equipment only accounts for a miserable 0.3%. The remaining 28.47% of other businesses, according to the financial report, mainly come from the growth of bulk raw material procurement sales. Gree makes profits by making large-scale purchases through the group's advantages and then selling them to upstream supporting suppliers.

However, in terms of profit, the gross profit margin of other businesses is only 2.63%. If the gross profit margin of air-conditioning products, which account for the main source of income, is further reduced, Gree's operating income will obviously be even worse.

In comparison, Midea's product proportions look better, with HVAC accounting for 46.04%, consumer electronics accounting for 38.14%, and the remaining robots and automation systems accounting for 6.85%. Although the gross profit margin of HVAC is 24.20%, it has a lower gross profit margin of 31.61% and 19% for consumer electronics and robots and automation systems, respectively.

The profit flexibility that diversification brings to Midea is self-evident, and Gree is not unaware of the benefits of diversification. After Dong Mingzhu took over, she proposed the ambitious goal of "increasing 20 billion yuan each year, achieving a revenue of 200 billion yuan in 2018, and rebuilding Gree in five years". The diversification goal includes multiple sectors such as air conditioners, household appliances, wearable devices and communication equipment.

Unfortunately, Gree's diversification strategy seems to be unsuccessful, or even failed. Although its products range from refrigerators to water purifiers to rice cookers, these small appliances are all non-Gree brands, and their revenue is negligible compared to its main air-conditioning business.

In the 2015 financial report, Gree Air Conditioner's revenue was about 83.72 billion yuan, while the revenue of household appliances and other categories was only 1.52 billion yuan and 2.69 billion yuan respectively. Comparing the proportions in this year's semi-annual report, we can see that the diversified Gree is still in the dilemma of single-brand.

At the 2016 Annual Meeting of Chinese Entrepreneur Leaders, Dong Mingzhu said, "I hope everyone will ride in a Gree car, use a Gree phone, control the temperature of the air conditioner at home, and enjoy the delicious food brought by Gree."

From now on, Gree, which has given up its position as the leader in air conditioners, should return to its original intention. Running on multiple tracks did not bring greater potential energy to Gree, but instead dispersed Gree's core strength.

The only good news is that Gree is still very rich, with 129 billion yuan in cash on its books, an increase of 3.06% compared with the same period last year.

What the future will be like and what will happen to Gree? The "rich woman" Dong Mingzhu should want to know the answer more than any of us.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.