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.
Based on market research conducted by TV Veopar Journal in March 2018.