ac industry_final

8/7/2019 AC Industry_Final

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MARKET ANALYSIS

OF THE

AIR-CONDITIONERINDUSTRY IN INDIA

Secondary Data

CollectionBy

GROUP- 8, Resonance

Semester II, Section-C

MBA GEN 2012


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Group Members

Sukanya Ghosh C01

Gaurav Acharya C25

Ayush Jaiswal C50

Kuldeep Singh C64

Piyush Sharma C62

Abhishek Bhawani C42

Shilpi Grewal C60


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Introduction

Depletion of the ozone layer, El Nino effect, global warming, and rising population are all

hot factors that are driving ahead the need for a cool world. Over the past quarter century,

the air conditioner industry has undergone a sea change. Its role in the economy haschanged significantly. Presently, comfort conditioning has become a necessity, from being a

luxury. This metamorphosis has opened a completelynew world of opportunities.

Evolution of AC IndustrySince the early 90s, the structure of the air-conditioning industry has evolved quite

differently. Till '88-89 the industryused to be dominated by the unorganised sector with 70

per cent market share. With excise duty as high as Rs.9000-10,000 during those times the

gap was wider. The participation of the organised sector remained small till the year 1995.The reduction in excise levels from 110 per cent to 32 per cent and import duties on

components from 185 per cent to 30 per cent plus CVD has not only expanded the market

but also narrowed the price gap for branded ACs. The share of the organised sector is now

80 per centwhile the unorganised sector constitutes a little over 20 per cent of the market.

Current scenario

Prior to 1997, corporates, institutions and government dominated the consumer segment.

Theydid around 85-90 per cent of the buying. It was only in the year 1997 that the homesegment picked up. In fact, in the last two years there has been a big spurt in buying from

the home segment, which now constitutes 35 per cent of the market from the previous 10-

15 per cent. The institutional segment accounts for 65 per cent.

The growth in volumes from the home segment has been to the tune of 30-35 per cent

while the institutional segment clocked just 4-5 per cent volume growth. The average

growth for the last five years in the residential segment has been around 24 per cent.

The reason for the same is that the AC is no longer perceived as a luxury. Better distribution

network, large-scale advertising and finance schemes have expanded the market.

The growth in the year 2000 was only 20 per cent, which was mainlydriven by segments

such as software services, retailing, healthcare, entertainment, hospitality and telecom. In

the current year, the AC industryhas recorded a 12 per cent growth in the first six months

of the current year. The WAC growth is expected to be about 20 per cent this fiscal.


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Growing Popularityof Packaged ACs

With a low installed price per ton, short delivery schedule, dependable performance and reputed

manufacturers recommending their use, more and more users are opting for the packaged unit

alternative rather than a central chilled water plant with recip/screw chillers. The central plant

market size is graduallybeing eroded bythe PAC market.

The PAC market, in turn, is being eroded, but to a smaller extent, b y the ductless splits. Literally

speaking, the market scene today is a free-for-all with the customer succumbing to market

pressures for the lowest price.

Table provides a comparison of the benefits and limitations of packaged air conditioners, designed

for the mass comfort sector.

Benefits and limitations of standard packaged air conditioners.

BENEFITS LIMITATIONS

Low installation cost Precise control of room conditions is not

possible

Readilyand easilyavailable Limitations on air flow and filtration levels

Being totally factory built, ensures better

qualityand reliability

Smaller compressor and hence higher

kW/ton consumption

Less plant room space required Operating sound levels can be quite high

Simple operation trained man power is not

required

Limitations on the amount of fresh air intake

Modularity permits phase wise air

conditioning

Variations in the room temperature due to

on/off cycles

Metering of consumed power by individual

customers is veryeasy

Must be greatly over sized for high sensible

load applications

Possible to switch off units catering to

unoccupied spaces thereby avoidingwastage.

Average life span of about 10 years.

Applications of PACs

Originallyconceived and manufactured for the small to medium size commercial sector comprising

restaurants, retails shops, banks and offices, manufacturers and their dealers have penetrated a

much wider market with great success. Larger capacities and speciallydesigned units, both made in


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India and imported, have helped to grow the market substantially. Let us now examine the scene in

India for different types, as it exists today.

Residential. Most homes in India are not fully air conditioned and hence ducted splits are not

commonlyused. During the past fewyears, with dropping prices, aggressive marketing and rise in

disposable incomes, window AC's and ductless splits are becoming common place in many

bedrooms and living rooms in multi-storeyapartment buildings as well as in single familyand joint

family bungalows. The VRF unit imported from China or Japan is being installed in several large

multi-room mansions. The installed price of such units is much higher than regular ductless splits

but some of the benefits, quite often overrule the price factor. See details of VRF units further on in

this article.

Small Commercial. The packaged / ducted split AC is ideallysuited for the thousands of restaurants,

sari shops, jewellery shops, small food stores, car showrooms, bowling alleys, banks and offices

spread out in all urban areas of the country. Installed as a single unit or in multiples, depending on

the area and cooling load, these units are connected to an air distribution ductwork to evenlyspread

the cooling effect. Outside air is introduced in the return air path to provide a feeling of freshness

for customers and staff unlike window and mini-split ACs which are not designed to provide such a

facility.

Large Commercial. Even though the largest capacityPAC manufactured in the country is only16.5

tons, which can handle a small office building floor area of approximately3000 ft2, multiple unitshave been installed in many larger office buildings, adding upto 700 or 800 tons. Similarly, several

shopping malls designed for central chilled water systems have installed PACs with total capacities

of anywhere around 750 tons, mainlyfor economic considerations.

Such large installations of PACs suffer from increased maintenance costs because of the large

number of units involved, and inconvenience to occupants in case of breakdowns, since it is not

possible to have a standby for each unit. To a major extent the problem of not having a standby is

taken care of byhaving multiple refrigeration circuits in a single unit. Since the lifespan of PACs is

about 10-12 years against 18-20 years for a central plant, the owner must take this factor into

account before taking a final decision in his choice of the AC system.


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Determinants of Demand of Air conditiors

y Inventoryholding capacityIt is the key to success as demand for ACs is seasonal.

y Income levelsWith rising levels of disposable income and the attendant change in consumption

patterns, air-conditioners have become a thing of proud possession, especially for the

emerging middle class. The fastest growing and the most potential segment, namely,

middle class households, is expected to drive demand for ACs by leaps and bounds due

to growing pollution and more disposable income.

y Low Penetration LevelsThe industry has a major growth potential as the penetration rate is less than one per

cent The WAC market in China has grown from 1 million to 9 million in the last

decade. This represents a huge untapped market in India thus signifying a tremendous

growth potential. Computerisation in business and growth in service industrywill act as

keydrivers for commercial segment of air-conditioning.

The present penetration level in India for air-conditioners is a miniscule 1-2%. This

figure compares unfavourably to countries like the USA (35%) and Singapore (30%). In

addition, the penetration level is low as compared to other consumer durables --

refrigerators - 11%, TV's - 35%, Radio - 45% and Cars - 6%.

The National Council for Applied Economic Research (NCAER) conducted survey on

"Indian Market Demographics" has indicated that ACs, rank lower than even washing

machines on the priority list of purchases. Considering that washing machines have

achieved a penetration of only 2 million households, it is unlikely that households willbe the major demand drivers in the near future. This is especially true in the case of

rural households.

One reason could be the high maintenance and operational costs associated with

owning an AC. People owning a car usually get a sum as petrol/car allowance along

with their salaries, but their monthly electricity bills are hardly reimbursed. With rural

households, the problem is of frequent power cuts and low voltage. Competition also

comes from an altogether different product - desert coolers - widelyused in central and

northern India. One thing is however clear, lower penetration level is a pointer to the

vast potential that lies ahead. In the future, earnings will be driven by rising demand for

consumer durables in general.

Once upon a time, ACs used to be a luxurybut now theyare a necessity. Of course, this

could also be attributed to the reduction in AC prices and the rising disposable income

of the Indian middle class. The hot summer of 2001 has persuaded people to carry one

home to cool themselves off. The last fewyears have seen a spectacular demand for air

conditioners rising from the household sectors.


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As per the National Sample Survey Organization report of "Use of durable goods by

Indian households", the per capita total expenditure on durable goods increased from

Rs112.89 in 1987-88 to Rs148.02 in 1993-94. Similarly, NCAER estimates point to the

fact that the number of households with monthly incomes above Rs10,000 in metros

and Rs5,000 in non-metros is expected to rise from 22.7 million in 1995-96 to a huge

57.2 million in 2005-06. This will mean that firstly, there will be a perceptible shift

towards branded products and secondly, the level of aspiration buying will increase. All

this should be good news for players in the AC market.

y PriceDemand for room air-conditioners is fairlyprice sensitive. For demand from households

to spurt, prices have to come down significantly. A studyconducted by IMRB points to a

potential of 0.35 million units for units priced at Rs.18000. Though a 0.75 TR unit is

available at these prices, their efficacy under Indian conditions is doubtful. Ideally,

prices should fall byanother 20-25% bringing a 1.5 TR AC on par with a CTV priced at

around Rs18,000.On the other hand, demand for central AC systems are broadly price

insensitive. This is so because the number of players in the segment is limited (due to

infrastructure and personnel requirements) and profit margins lower than those inroom ACs.

y Availabilityof FinanceOne way of making price-sensitive consumers spend is to expand hire-purchase

schemes in the country. Here India has made substantial strides in the 90s. Firstly, there

has been a marked change in the attitude in favour of taking loans for purchasing

household items. Secondly, the easy availability of consumer finance from banks and

other financial institutions would induce purchases during inflationary times.

Companies like Carrier Aircon, Voltas, FeddersLloyd and Godrej-GE have introduced

zero-interest instalment schemes as an option for its customers.

y EnvironmentIndia is a countrysituated in the tropical zone with the weather being warm to hot in

most parts of the country. With surroundings in most of our urban centres becoming

increasinglypolluted and awareness as regards the benefits of working in a controlled

environment on the rise, the demand for ACs can onlygrow.

y Use of Alternatives and its SubstitutionEarnings would be affected by the presence of cheaper substitutes like coolers that

would discourage consumers in smaller towns and villages to at-least postpone

purchases, if not avoid them. But as the level of income goes up, aspiration needs will

lead to substitution or replacement of coolers with ACs.

y Impact Of ReformsLowering of taxes will make ACs cross the threshold between necessity and

affordability. Once this happens air-conditioning will see geometric growth in demand.

In the past, the AC industry was labelled as a luxury industry making it convenient for

the government to extract revenues. This resulted in the unorganized sector ruling the

roost with a substantial market share in the window AC segment. Individuals


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patronized the unorganized players because their prices were lower and personalized

after sales services were available.

Excise duty rates were a high 60% for room ACs even until 1994-95. Couple this with

the fact that organized players also paid sales tax, octroi duty etc., their prices turned

out to be largelyuncompetitive. Tax implementation is a verybig obstacle in the healthy

growth of the consumer durables industry.

The segment is heavily taxed both by the central and state government. White goods

manufacturers feel that the lower level of duties and higher abatement on MRP-based

products would push sales and drive higher growth for the industry.

On an average the duties are in the level of 20-25 per cent but it becomes as high as 40

to 45 per cent in India, which puts Indian manufacturers at a disadvantage. Reduction

in sales tax and excise dutycould definitelyspur demand.

Consumer Segmentation

It is impossible for a brand to think of a positioning strategy without at the same time

considering the segment for which it wants to offer the benefit and whether that benefit is

being offered byany other brand in the market. This is so because all the aspects related to

the positioning of the product such as the pricing, advertising and placement will be done

keeping in mind the end consumer.

ACs are basically classified as the white goods which have a penetration as low as 2 % in a

country like India. This is so because India is a developing country where majority of the

population is lower middle class. AC is targeted at the middle-middle class and upper

classes because of its high purchase price and also high operating cost. According to the

statistics given byBusiness World the middle income level group share is going to increase

by2005 expanding the AC market. Already there are players such as National, Hitachi that

appeal to the middle income group because of their pricing which ranges from 15,000 to

20,000.There are players which target the niche market such as LG, Samsung, Carrier and

Hitachi with an average price of about 30,000. Then there are players who are between the

two markets such as Voltas, Godrej. In order to expand their markets alread y brands like

LG, Carrier and Hitachi have started offering various finance options to their consumers.


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Room AC Market

The room AC segment comprises of window and split ACs. The market has a size of Rs.3800

crores in India. Window ACs account for about 54% of the total market for ACs with an

estimated market size of about 30 bn.

The room air-conditioning segment is characterised by large players like CarrierAircon, LG, Samsung, ,Amtrex-Hitachi, etc. LG has been successful in dethroning Carrier

from No.1 position in the room AC segment, followed by Samsung and Hitachi. Samsung,

for instance, has captured a 15% share in room ACs since it came here in Ma y 1998. LG

has wrested a creditable 19% share in less time.A sales growth of 300 per cent in 2002 over

2003 (40,000 ACs sold in 2003 over the 10,000 in 2002) finds it talking very

confidently.It started importing in January1998 but sensing the opportunities lying ahead,

built a plant near Delhi at Noida. Others like Hitachi chose to pick up stake in Amtrex;

while some others have gone in for a technical arrangement (for instance, Blue Star with

York, USA).

Market Share (Organized Sector)

Room ACs Share

LG 19%

Samsung 15.5%

Amtrex Hitachi 15%

Carrier 12%

National 11%

Voltas 8.5%

Videocon 5.4%

Bluestar 5%

Godrej 3%

Others 5.7%

The room ac segment is having a close rat race as compared to the central ac market. LG

has emerged as the leading player with respect to its innovation in offering superior

products. It changed the definition of ACs by terming them as health air systems. LG has

registered a growth of 110% in the year 2000 against an overall industrial growth of 30%.

LGs market share jumped to 30% in 2000 from 19% in 1999. LG now cla ims to be in the


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number 1 position in the RAC segment. LGs entry is already taking a toll over established

companies like Carrier Aircon and Hitachi.

Carrier Aircon is second in the RAC race with a 21% share in window ACs. Its market share

in split ACs is about 35%. During the first 9 months of FY01, net sales stood at Rs3.51bn

(up by21%). To compete with players it has launched models of Toshiba.

Korean major Samsung and Hitachi are fighting a close battle for the second place. Both are

relying on strong innovation and marketing to increase their market shares.

Amtrex Hitachi is a joint venture with Hitachi Japan and has an 11% share in the window

AC segment and 15% share in the split AC segment. After going through some stagnant

period, the company is now ready to take on the competition with its new range of

products. After a successful comeback in 2000, the company slipped into red again during

the first nine months of 2001 registering a net loss of Rs7.4 million against a gain of Rs6.2

million last year. However, the top line has soared by 31% to Rs1.6bn during the said

period. The companys problem is that of falling operating margins due to rising total

expenditure. Amtrex has recently launched a new digital range of split &window ACs

called 'Logicool'. Its mini split ACs registered a 25% volume growth to improve its market

share from 20-25% in 2001.

Also with its launch of Verdant range of ACs, Voltas registered a 28% volume growth

improving its market share from 11% to 17%.

Geographical Distribution of ACs

City-wise Market Share

Delhi 28%

Mumbai 35%

Hyderabad 4%

Kolkata 4%

Bangalore 2%

Chennai 7%

Others 20%

The above figures explain that the sale of ACs is restricted to metros. This is so because the

AC still has a very low penetration as compared to other durable goods.


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Theyare the last in the priority list after refrigerators, washing machines, vacuum cleaners,

microwave ovens. Also people dont have that much disposable income to operate and

maintain an AC. With increasing finance options the scenario is expected to improve but it

will take some time for ac as a product to really come into the reach of a middle class

consumer.

Entryof New Players

A notable feature of the reform period has been the coming of foreign players into the

Indian market Among the new brands jostling for space with the older players this summer

are: Electrolux-White Westinghouse and Whirlpool from the US, Fujitso General Ltd and

Daikin from Japan and TCL from China. Needless to say, the entry of a host of new brands

will impact the AC market in India dominated byplayers like Carrier Aircon, LG, Samsung,

Godrej, National, Blue Star, Voltas etc.

The foremost reason whymore and more brands are entering the Indian market is that the

penetration level of ACs in India is barely 2 per cent which makes the market extremelyattractive. Secondly, the home segment witnessed an almost 30 percent growth in the last

two years compared to the commercial segment. This is because AC is no longer perceived

to be a luxury, and better distribution network, finance schemes and large scale advertising

have expanded the market.

Small wonder, Daikin Shriram, the new 80:20 joint venture between $ 4.5 billion Japanese

companyDaikin and the SiddharthShriram group companySiel Ltd, aims to grab an 18 per

cent share of the premium AC segment. A 0.75 tonne Daikin AC costs

Rs.39,000. Meanwhile, Electrolux India has brought in its world-renowned White

Westinghouse brand of AC which offers an attractive six year guarantee and hopes to

capture approximately five per cent market share. Having test-marketed its ACs lastsummer, Whirlpool launched its products earlier this summer. The new Whirlpool AC

Range is targeted primarily at the house hold segment. They are offering a comprehensive

range of 8 new world class models and hope to get a 10 per cent market share by2003.

The AC market is currently witnessing a proliferation of brands. However, a shakeout is

imminent in the next 18-24 months. Secondly, branded players will gain market share at

the expense of the unorganised sector. If the unorganised versus organised sector

marketshare ratio was 60:40 in 1997-98, it changed to 30:70 in 2000-2001. The

unorganised sector is likely to lose another 10 per cent share this year, thanks to the new

players coming in the market.

Evasive Action byEstablished Players

Brand proliferation will also make life difficult for the branded players. Most of them,

therefore, are investing heavily in advertising and marketing besides offering a wider

choice of models. . Considering that there has virtuallybeen no change in the AC prices this

year, the market is likely to see a 20 per cent growth. Considering that besides microwaves,

this is the only category in consumer durables that is growing at over 20 per cent, AC


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manufacturers are going all out to woo the Indian consumers.

The established players are taking the following steps to consolidate their position in the

market.

Samsung

Korean major Samsung too has added two new models to its range and hiked its spends onACs by15 per cent. It is also using the Internet for speedyorder and deliveryof spare parts.

It is offering a combination of better services, features and a zero per cent finance schemes

to garner more market share. To fortify their position the company plans to expand their

dealer network to 2000 from current 1500.

LG Electronics

LG has increased its advertising budget to Rs25 crores and is planning to invest over 200

crore in R&D along with increasing its distribution network. It is working on incorporating

its plasma technology in window ACs as well. It would be pumping $ 230 million in India

by2005 to expand manufacturing facilities.

Carrier Aircon

Carrier is launching 40 models this year to regain its leadership. Carrier's advertising

budget this year is Rs17 crore while the company is expanding the distribution network for

the home segment from 440 to 1,250 retail outlets.

Hitachi

Hitachi is relying on its new range of Logicool air conditioners to increase its market shares

backed by strong promotional budget which has been increased from 8 crores last year to

20 crores for the year 2001-02.

Online Selling scenario of AC Market

This is again going to be a key issue in the air conditioning market in the near future. It will

not be important because all the sales will be through the net but will be important because

it show the attitude and professionalism of the brand towards the consumer.

Hardly5% of the sales are being carried through LGs website, lgezbuy.com but consumers

respect them for this. This is so because a consumer can go and have a look at the range of

products and their prices sitting at home thanks to LGs site.It gives him a fair idea aboutthe product he is going to buy or wants to buy. LG has got another website lgservie.com

which gives the consumer an opportunity to place its complaints in front of the

company. This shows that they care for their customers and want to give them what they

want rather than milking their own money.

Other brands will have to learn from LG and create their existence on net and make people

aware about their service. This will have to be done through strong marketing.


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ac industry_final

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