CREATING ECONOMIC

AND SOCIAL VALUE IN THE

HVAC INDUSTRYBusiness Strategy, R-22 Phase Out, and an

Assessment of the HVAC Industry using two

Porter Frameworks: Five Forces and

“Creating Shared Value”

What could a “green” or sustainable value

chain look like?

1930’s – Present

Ongoing challenge of phasing out refrigerants

Increasing legislation

Why didn’t the markets naturally lead to more efficient air

conditioners?

Where is the innovation in this industry?

Environmental Impact of Air Conditioning

The U.S. has long used more energy for air conditioning than all other nations combined.

Rough estimate: residential, commercial, and industrial air

conditioning worldwide consumes at least one trillion kilowatt-hours of electricity annually.

Car conditioners in the United States alone use 7 to 10 billion gallons of gasoline annually.

World consumption of energy for cooling 10X by 2050

Or, put another way

Whoa, that’s a lot of Coffee!

1KW of Energy = 90 Cups of Coffee

90 Cups of Coffee x 1000000000 Trillion KW of Energy

= 90,000,000,000 Cups of Coffee annually!

Unsustainable

Global demand for HVAC equipment is projected to rise 6.1

percent per year through 2016 to $107 billion. North

America will achieve the fastest gains (US recovery in

construction). The Asia/Pacific region will post the second

fastest growth rate, led by India and Indonesia.

Who is responsible?

[エアコンで言うと、エネルギーは生産時に５％、使用時が９５％という割合である。トヨタ自動車のホームページによると、自動車は生産時２割、使用時８割のようだ。]

What about the other shareholders?

Business Threat

• Sectors at greatest risk include the food and drink

industry, petro-chemicals, pharmaceuticals, health, retail,

hospitality, finance and data-processing.

• Typical applications include refrigeration systems in

supermarkets, blast chillers, cold stores and process

coolers and many types of building air-conditioning as

well as in transport refrigeration.

• Many of these applications are absolutely critical to the

continued operation of their owner’s business.

Stakeholder Impact Phase-out solutions

Replace your system

• Old systems, (poor condition, inefficient, not meeting their

cooling load, should be replaced with new systems using

a non-ODS refrigerant.

• These can include HFCs or a “natural” refrigerant like

hydrocarbons, ammonia or carbon dioxide.

• Benefits:

• Significantly improve energy efficiency

• Reduce the charge of refrigerant

• Replacement is likely to be the most expensive option in up-

front cost terms (around 10 times more than a conversion).

Outline

• HVAC Industry Overview

• Porter’s Five

• Manufacturing Trends

• R-22 Phase-out Approaches

• History Regulation

• Assessing the Impact of Refrigerants

• Example of Daikin

• Lobbying Efforts

• Patent of R-32

• Research Questions for MBA Students

• How “green” are these companies?

• Where is the innovation in HVAC? Why didn’t the markets

naturally lead to to better refrigerants?

Industry Rivalry

• Numerous equally balanced competitors

• Highly competitive • Oversaturation

• Overall maturity of the market

• Largest manufacturers have come from Europe, Japan, and North America however• China has taken over with approximately 1/3 of the world-total

HVAC equipment

• The top 8 equipment producers account for nearly ½ of the global market in terms of value

Barriers To Entry

• High capital costs

• Economies of scale

• Growing niche markets are making participation in the industry easier

• Manufacturer-distributor channel

• M&A activity has grown dramatically in recent years • Acquisitions the main method for firms to expand their HVAC

capabilities

Threat Of Substitutes

• Cross Price Elasticity

• Shift from price-sensitivity to total lifetime value

• Trade Flow

• Traditionally equipment produced in North America, Western

Europe and Japan (where major firms were located)

• Recently production is happening more locally. Identical air

conditioning products are easily sold in a given geographic area.

Power of Buyers/Power of Suppliers

• Extended Warranties

• “Lock” customers into long-term relationships

• Service Solutions

• Success dependent on a manufacturer’s speed to market

• Firms who integrate vertically or are able to gain supply

chain synergies may have advantage.

Business Environment Is Rapidly Changing

1. Managing Change

Change = Risk

2. Decision Making

Risk = Opportunity

3. Growing the Business

Risk Encourages Innovation

History of Refrigerants

• Traditionally, the focus of the HVAC industry was simply

on finding a refrigerant that would provide effective

cooling

• Many of the early refrigerants such as sulfur dioxide,

methyl chloride and ammonia met that objective but

posed safety hazards due to their toxicity or high

flammability potential

History of Refrigerants

• 1930s

• chlorofluorocarbon (CFC) refrigerants were introduced as safe

alternatives to the chemicals used before them

• CFCs came to dominate first refrigeration and later HVAC because

of their safety and efficiency

• 1950s

• Hydrochlorofluorocarbons (HCFCs) were added to the portfolio of

refrigerant alternatives

• 1970s

• environmental concerns arise

• Scientists discovered that CFCs—and to a lesser extent HCFCs—

were contributing to the depletion of the ozone layer.

The Montreal Protocol

• 1987, scientists discovered nearly a 50% of the Antarctica

ozone layer

• The Montreal Protocol on Substances that Deplete the

Ozone Layer was the first global agreement to have

universal participation

• Unfortunately, as the Montreal Protocol has phased out

these ODSs, highly damaging global warming

pollutants—primarily hydrofluorocarbons, or HFCs—have

replaced them.

Understanding Refrigerant Charges

Understanding Refrigerants: Options

Fluorocarbons versus Natural Refrigerants

ODP

GWP

Flammability

Toxicity

Cost

Ammonia (NH3, R717)

• Was one of the original refrigerants used in James

Harrison’s 1856 patented refrigeration machine

• Only a small number of installations recently in Europe

have started to use this as a refrigerant for coolers in

buildings (due to high price)

• Zero ODP

• Zero GWP

• The additional safety equipment adds cost, but many

argue that the long-term maintenance savings outweigh

the initial outlay costs

The Cons of Ammonia

• Odor

• B2 Safety classification (=some toxicity)

• Medium flammability risk

• Is compatible with some, but not all, refrigerant systems

• The price of equipment for this costs 250% that of equivalent

fluorocarbon units

• Using ammonia in populated areas can bring about some

safety, systems in Europe have addressed these concerns with

the introduction of systems such as containment casings,

ammonia absorption systems and flameproof electrical panels;

this additional safety equipment adds cost

• Ammonia systems around the world are facing more stringent

restrictions and demands to reduce the refrigerant charge

Why not ammonia?

• A glass of drinking water can contain as much as 1mg of

ammonia, a 200g steak as much as 13mg, and some food

additives can contain as much as 18mg

• Cigarette smoke and even the air we breathe also

contains ammonia in small amounts.

• ammonia can be used with relative safety in refrigeration

systems provided the proper safety measures are put in

place

Daikin’s R-32(Source: Daikin website)

Benefits of R-32

• Less ozone depletion

• Lower global warming impact compared to R22 and

R410a

• Higher energy efficiency

• Easier to recycle

• Cheaper for developing countries

Environmental Stewardship or Market

Share? Or both?“Daikin does everything it can to contribute to the

shift to refrigerants with minimal environmental

impact. Specifically, to promote adoption of

R32 in developing countries nearing

conversion to next-generation

refrigerants, in September 2011 Daikin

began giving free access to its "Basic Patent

Indispensable for the Manufacture and Sale of Air

Conditioners Using R32 Single Component

Refrigerant."

Strategic Questions

Legislation and Environmental Regulation:

Why didn’t the markets naturally lead to more

efficient air conditioners?

Innovation

Is the move to a less harmful refrigerant really

“innovation”? What about refrigerant-less

technology?

MBAs to save the world?Source: http://eosclimate.com/refrigerant-revolution/

References

• https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/182590/fgas-rac8-hcfc-phase-out.pdf

• http://businesstoday.intoday.in/story/case-study-daikin-turnaround-industry-in-india-market/1/201092.html

• http://www.trane.com/Commercial/Uploads/PDF/11612/Related_Literature/Refrigerant/HVAC_Refrigerants.pdf

• http://www.trane.com/commercial/uploads/pdf/cso/138/Refrigerants.pdf

• http://e360.yale.edu/feature/cooling_a_warming_planet_a_global_air_conditioning_surge/2550/

• http://www.goshen.edu/physix/160/gco/6.7.sp.php

• http://www.ieso.ca/imoweb/siteshared/images/One_KWh_Infographic-web.pdf

• http://www.daikin.com/csr/feature/02_2.html

• http://www.businessgreen.com/bg/news/2306617/how-a-start-up-is-making-refrigerant-tracking-a-hot-commodity

• http://eosclimate.com/refrigerant-revolution/

References• Shigeki Ichii, Susumu Hattori, and David Michael. How to Win in Emerging

Markets: Lessons From Japan. Harvard Business Review. May 2012. http://hbr.org/2012/05/how-to-win-in-emerging-markets-lessons-from-japan/ar/1

• Daikin Acquires Goodman for $3.7 Billion, achrnews.com, September 10 2012. Website Accessed July 2013. http://www.achrnews.com/articles/120887

• Hourahan, Glenn (VP Research and Technology Air Conditioning Contractors of America). ACCA Website. An Outlook on the US HVAC Industry, Evolving Contractor Response To Market Forces, August 2010 Website Accessed July 2013. http://www.hourahan.com/wp/wp-content/uploads/2010/08/Eurovent-final.pdf

• Capstone Partners Investment Banking Firm. HVAC Products Coverage Report “Market Intelligence for Industry Players” Quarter 4 2011. Website Accessed July 2013. http://www.capstonellc.com/sites/default/files/Q4%20HVAC%20Coverage%20Report.pdf

• Torpin, Joanna R. Manufacturers Predict Slow Growth in 2013. Achrnews.com. March 18, 2013. Website accessed July 2013. http://www.achrnews.com/articles/122763-manufacturers-predict-slow-growth-in-2013

References

• http://www.zdnet.com/panasonic-going-green-key-to-staying-in-the-black-7000006197/

• http://www.huffingtonpost.com/jennifer-schwab/fortune-green-consumers-w_b_3254512.html

• http://www.epa.gov/ozone/title6/phaseout/22phaseout.html

• http://businesstoday.intoday.in/story/case-study-daikin-turnaround-industry-in-india-market/1/201092.html

• Jacquelyn A. Ottman, Edwin R. Stafford, and Cathy L. Hartman. Avoiding Green Marketing Myopia. June 2006. Website accessed June 2013. http://www.greenmarketing.com/files/Stafford-MyopiaJune06.pdf

• Daikin Corporate CSR Website. http://www.daikin.com/csr/environment/production/06.html