With strong summers anticipated and the economy now back on a roll, the air conditioner industry can look forward to stronger cash flows and improvement in profit margins and bottom lines.
It seems nothing can hold back the air conditioners market this season. The Indian Meteorological Department has forecast a hot spring and a much hotter summer this year, with the average temperatures likely to be above normal by more than 1˚C.
There has been a steady increase in disposable incomes, and this trend is expected to continue. The air conditioner is the first appliance consumers want to buy once they cross a certain income threshold. India is a highly under-penetrated market, and millions of Indians are expected to cross that threshold in the next 10–15 years. History might just repeat itself. In China, in a similar situation around the turn of the millennium, urban Chinese purchased 200 million room air conditioners in just 15 years.
Demand is currently emanating not just from metros and large cities but also from Tier-III and Tier-IV cities and semi urban areas. Increased urbanization, changes in lifestyle with more nuclear families, and increase in number of working women are the key drivers. Supply of power is no longer expected to be a constraint, with the government having declared that by April 2019, each household in the country shall get 24×7 power supply, as the major bottleneck is distribution and not production and transmission of power.
Growing construction activities in areas of transportation, retail, commercial buildings are providing the requisite impetus. Also, growing hospitality sectors, and increasing establishment of SMEs and commercial hubs have fueled the market. Moreover, the government’s initiatives such as Housing for All by 2022 which would lead to higher urban development over the coming years are expected to generate additional demand. Currently, the residential sector holds major share in the Indian air conditioners market, and it is expected to remain growing over the next 5 years.
There is a pent-up demand this season, as the consumers held back discretionary spending last year with demonetization and introduction of GST coming into play. And brands are warming up like never before. There is peak supply capacity available in the country today with Voltas, LG, Daikin, Godrej, and Blue Star building up additional inventory pipeline and ramping up production. Many brands are offering as many as 100-plus models each, including the entire spectrum of window, split, and inverter models in various capacities.
Indian Market Dynamics
The air conditioners market is estimated at 5.2 million units in 2017, poised to grow to 7.2 million units in 2020. Competition is intense, so consumers shall be spoilt for choice, with each brand jostling for an increase in its share in the pie. While Voltas stresses to maintain its dominance, LG is increasing its share by value having moved completely to inverter ACs. Daikin, has commenced production at its second plant, and increased their annual capacity from 0.7 million units to 1.5 million units. Lloyd, having been acquired by Havells is in an aggressive mood, and in the April–June 2017 quarter claims to have toppled Samsung off its third position. Blue Star with its wide offer of 135 models is expecting a good traction from non-metro, Tier-III, Tier-IV, and Tier-V cities. Godrej, recently having bagged a `207 crore order from Energy Efficiency Services (EESL) to supply, install, and commission 52,000 green inverter air conditioners for government and railway establishments has the pride of manufacturing super-efficient appliances that consume 30 percent less power.
Videocon, Haier, Mitsubishi Electric, O’General, Panasonic, Intex, Truvison, Cruise, Akai, Vestar, and Mitashi also have aggressive presence in the market. The vendors are looking at the government not playing spoilsport. At present, on an AC unit, the government has levied GST of 28 percent. The industry is requesting for an 18 percent GST tax bracket and is awaiting a revision.
The last few quarters have also seen a surge in raw material prices, including 10-12 percent by some compressor manufacturers and the brands in response have hiked retail prices by about 8 percent. The brands that do not have their own compressor manufacturing facilities source them either from GMCC and Highly, both Chinese manufacturers.
The split air conditioners segment accounted for major revenue share in the overall market, followed by centralized air conditioners. Within the split air conditioners segment, the fixed speed AC unit sub-segment dominated the market, whereas, the variable speed AC unit sub-segment is gaining popularity in the country. Also, the VRF subsegment is contributing the highest share in the market owing to increasing demand for energy efficient air conditioners; the VRF subsegment is expected to grow by double digits during the forecast period 2017–2023. By 2018, all air conditioner manufacturers have to adhere to the energy efficiency based ISEER ratings due to which manufacturers are shifting to the inverter models. Globally, all developed countries have migrated to inverter ACs, which comprise 90 percent of the category today. With growing concerns for energy efficiency, there is a perceived reduction in the replacement cycle from 9-10 years to 4-5 years.
Over the past few years, the demand has been continually shifting toward energy-efficient air conditioners. Residential air conditioners constitute 40–60 percent of the summer peak load in large Indian cities. Energy consumption can be reduced by 30 percent on switchover to inverter air conditioners. At full load, a typical residential air conditioner consumes about 150 times the power of an LED light and 20 times that of a regular ceiling fan. The government is also keen to push for various schemes to increase the penetration of energy-efficient inverter air conditioners. All air conditioners that operate on inverter technology have now been compulsorily rated from this year, as per the Bureau of Energy Efficiency (BEE).
The government is the main driver of the energy efficiency change. It has set the ball rolling by initiating R&D programs and several pilot projects to provide the country green air conditioning. With better policy measures coming into the sector, the streamlining of the workings of the industry has also led to a major revamp in strategies, which has played a vital role in creating pertinent demand in the industry. Government policies on refrigerant use, stricter eco-friendly norms and safety pre-requisites, efficient use of products, services, and technical usage have made the players in the market retag their strategies which have played a greater role in creating a pertinent demand in the industry.
Sales of efficient, 5-star rated air conditioners currently comprise 5 percent of total air conditioner sales in India. Consumers tend to look for lower upfront costs, often unaware of the lifetime of energy bill savings offered by 5-star products. The star rating program developed by the BEE is being strengthened by adding annual operating costs to the product label to better inform purchasers. The BEE had introduced the new star rating methodology, the Indian Seasonal Energy Efficiency (ISEER) ratings on a voluntary basis for variable speed (inverter) air conditioners in June 2015, which has become mandatory from January 1, 2018. Thus, the rating for fixed and variable compressors is merged, a 4- or 5-star rated air conditioner is primarily considered an inverter, while an earlier 5-star rated air conditioner would be graded as 3-star. The new standards have been developed taking into consideration the changing Indian temperature. This will be a litmus test for the Indian air conditioners market and will pave the way forward in understanding the consumer preference toward inverter air conditioners. This will imply that the current 3-star fixed speed EER rating of 3.1–3.3 will be ISEER 1-star rating of 3.1–3.3, which is a two-stage increase in rating requirement.
EESL is pushing toward inverter air conditioners penetration. Initially, EESL plans to tap the institutional market in which air conditioners consumption is high. As per its plan, around 100,000 conventional air conditioners will be replaced by super-efficient appliances. In August 2017, the ministry of finance directed all central government offices to switch to energy-efficient appliances. Across India, 88 buildings have started using energy-efficient appliances. By March 31, 2018, 1500 buildings will be covered and by June 2018 all 2500 central government offices and public sector company buildings will be covered.
Keeping in tune with the global deal in Kigali to phase down hydrofluorocarbons (HFC)s, a class of potent warming gases used in refrigeration, the Indian industry is developing cleaner alternatives. The ministry of environment, forests, and climate change has released the plan, which will put India on track to reduce HFCs, demonstrating India’s continued progress and leadership on this issue. India’s HCFC Phaseout Management Plan 2 (HPMP2) is running from 2017 through 2023, and focuses on reducing HCFC use in air conditioning. By 2023, the plan will help reduce 800 ozone depletion potential (ODP)-weighted tons of HCFCs, and avoid 8 million tons of CO2 emissions annually. HPMP stage 2 will keep India ahead of schedule in achieving its commitment of reducing HCFC production and consumption, cutting by almost 50 percent 2009–10 levels in 2020 and by 60 percent in 2023. It will allow air conditioner companies to tap into USD 45 million in funding from the Montreal Protocol’s Multilateral Fund. In addition, HPMP2 is expected to provide training to nearly 16,000 service technicians in the refrigeration industry. Under the terms of the amended agreement, India will continue its efforts in phasing down HCFCs, but will also freeze HFC use at 2024 levels, starting reductions in 2028. HPMP2 includes plans by six of India’s largest air conditioner manufacturers to switch to a less harmful refrigerant, R32. The move puts India well on track to gradually reduce the global warming impact of refrigerants used in air conditioning, nearly a decade before any compliance for such reductions would become due under the Montreal Protocol.
India, included under A5 of the Montreal Protocol, not only has a very large consumption of HCFCs, but also has a significant manufacturing base of HCFCs and HVAC products. Having met its obligations to the Montreal Protocol by implementing phase-I of the HPMP, India has entered phase-II, which makes it very close to further strengthen its regulations, including the ones on energy efficiency, to implement the transition to low-GWP refrigerants. Phasing out CFCs and HCFCs has increased the demand for other refrigerants, particularly HFCs. R32 is being considered a viable option for replacing current HFC refrigerants used in air conditioning applications with cooling capacity greater than about 5.2 kW (1.5 tons). For ductless split ACs, development of R32 has been led by Japanese manufacturers.
Currently, key components of air conditioners, such as heat-exchangers, microprocessors, and compressors are imported, contributing to increased costs for the consumer. Fluctuations of the currency exchange rate further add to import costs; hence, indicating the need to localize component supply. With support from the Make in India initiative, the air conditioning industry is inviting investment and collaboration with overseas component manufacturers. Investment in local manufacturing can yield benefits in redesigning air conditioners for higher efficiency while moving out of refrigerants with high global-warming potential.
Solar air conditioning making great impact in the near future. The usage of solar energy for air conditioning opens up an array of alternatives and a massive unexploited potential for market players. Since the technology is relatively new, the global market for solar air conditioning is still in its nascent stage. However, a strong interest of investors as well as vendors in this technology is evident. The rising demand for energy, growing government endowments and subsidies for deployment of solar devices, policies and regulations such as renewable portfolio standards, and the rising focus on renewable energy as an important source for power generation is anticipated to bolster the demand globally.
At the same time, the dearth of knowledge about this technology creates hindrances for these players. Moreover, the high cost of solar air conditioning systems, compared to standard cooling appliances, dearth of adequate technical and financial support, very few experiences and materialized applications, and inadequate monitoring of data and follow-up activities may disturb the growth pace of this otherwise steadily rising market.
In terms of geography, Europe is anticipated to hold a significant amount of share in the global solar air conditioning market owing to the initiatives taken by the governments in the regions in order to increase the share of renewable sources of energy in the total power-mix of the region. Countries such as France, Germany, North America and APAC are expected to show promising growth rates in the near future.
Global Market Dynamics
The air conditioners market is projected to reach USD 155 billion by 2022, on account of the booming construction sector, changing lifestyle of the middle class population, increasing disposable income of consumers, and changing climatic conditions. Global construction output is projected to grow at a CAGR of around 4.5 percent through 2020, thereby boosting growth in the global air conditioners market. Split air conditioners, cassettes, window air conditioners, and concealed ductable splits dominate the market owing to growing demand from residential as well as commercial sectors. The market is also witnessing growing demand for inverter technology. APAC dominates the demand for air conditioners across the globe.
With increasing awareness among consumers about air pollution and its adverse impact on health, leading manufacturers are offering air conditioners with built-in air purifiers, which are gaining popularity. Moreover, average cost of purchasing air purifier based air conditioners is comparatively lower than the average price of purchasing air conditioners and air purifiers. This is anticipated to boost sales in the global air conditioners market in the coming years. Stringent government policies and regulations in many countries toward emission and control of greenhouse gases (GHG), and consumption of electricity are also contributing to the growing demand.
The market for split air conditioners is growing the fastest, representing 88 percent of worldwide air conditioners sales. Window air conditioners market is declining or disappearing in some countries. Inverter split air conditioners are widely available in markets such as the European Union, Japan, and USA, and are gaining popularity in China, India, and other developing economies. Portable air conditioners are less popular worldwide; however, there are growing concerns in some economies about their increasing market share due to their lower cost and easy installation. The air conditioners market worldwide is growing at an average pace of 10 percent per year, with the fastest growth in Asia-Pacific (12 percent) and Latin America (8 percent).
Intense price competition in the market is influencing profit margins of prominent players in the market. Crunched profit margins have a negative impact on revenue of key players and indirectly affect future investments and R&D activities, which may hamper overall growth of the global split air conditioning systems market over the forecast period. Nonetheless, prominent players are focused on improving product specifications; operating efficiency is a potential opportunity for prominent players in the global split air conditioning systems market.