AC manufacturers gearing up for new season

AC manufacturers gearing up for new season

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Indian room AC market is moving fast toward invertor ACs, which is evident from the fact that the share of inverter AC has increased from 15% two years ago to 35-40% currently. This ratio is further expected to rise to 70-80% in next 4-6 years as the price gap between normal and invertor ACs has reduced significantly

2018 was one of the forgettable years for AC manufacturers. 2018 summer started with lot of hopes and enthusiasm for the AC manufacturers as the IMD had predicted hot summer season. Many manufacturers had launched new models to attract new customers but as the summer ended the manufacturers were left with huge unsold stocks. Unseasonal rains during summer which appeared with regular intervals spoiled the party for the AC manufacturers. This poor performance notwithstanding, AC manufacturers in general are positive about their prospects in the coming years due to various developments.

India has one of the lowest AC penetrations in the world, not only lower than global average but also behind many emerging markets. Lower penetration of air conditioners in India is mainly due to lack of continuous supply of quality electricity beyond major towns and cities. Though the government has set itself a target of lighting all the houses by this financial year end, continuous supply of quality electricity may not become a norm for some more years. Low voltage or fluctuations in voltage will affect the AC itself and also its efficiency which in turn acts as deterrant. Further, high purchasing and running costs and lower per capita income are also the major reasons for slower penetration of AC in the country. Availability of air coolers at much cheaper prices also come on the way of increasing the penetration of ACs in the country.

However, things are changing, especially on household income front as large number of consumers are added to middle income group every year. This has improved the affordability factor. Further, prevailing intense competition among the AC makers will ensure that products will be priced competitively and the consumers will always get the most modern models at reasonable prices. Indian Room AC market currently is of the size of Rs 140 billion and is expected to grow at the rate of 10-12% over next five years. (Also read: https://sawdust.online/industry-trends-snapshot/air-conditioning-warming-up-to-global-warming/)

It should be noted that the size Indian Room AC market, in terms of volume, is around 4.5 million units. It has grown at the rate of 14% CAGR during 2005-18 which in itself a commendable performance.

An important factor which may encourage increasing number of consumers to go for Room AC is the easy availability of funding by the banks as well as finance companies. In fact, this financing facility which was mostly restricted to major cities has now become available in smaller cities and towns. This may help the industry to expand geographically in the coming years. Another factor which may force the consumers to go for ACs is the ever-increasing temperature level. Global warming may be bad for the whole world, but here is an industry which thrives on it. As the level of temperature keeps increasing, more and more households will switch over to air conditioners and keep the ceiling fans just for ornamental purpose.

At the same time battle to capture market share will intensify in the coming years. Voltas has been able to maintain its market share all these years despite the intense competition in the market. During last financial year, that is, FY18, LG lost market share while brands such as Lloyd, Diakin and Hitachi have gained during the same period. While there are 37 brands available in the room AC segment, top five brands control 60% of the market share. Diakin is making impressive progress in market share gains and the brand is reportedly resorting to aggressive pricing to capture increased market share. Within room AC, split AC is the fastest growing sub-segment.

Regional analysis shows that North India is the dominant market for the room ACs due to rising temperature. Also, South and West have seen healthy volume growth mainly due to rising income level among the people.

Indian room AC market is moving fast toward invertor ACs, which is evident from the fact that the share of inverter AC has increased from 15% two years ago to 35-40% currently. This ratio is further expected to rise to 70-80% in next 4-6 years as the price gap between normal and invertor ACs has reduced significantly. Due to aggressive pricing by some brands, price gap between a 5-Star AC and Invertor AC has now reduced considerably and now stands at Rs 2,000.

However, in the short term, AC manufacturers are confronted with the problem of rising cost of raw materials and components. Of late, global commodity prices have been highly volatile along with the depreciation of Indian rupee, which has made life of AC manufacturers miserable. It is believed that Chinese vendors have also increased the prices of AC compressors and it happened for first time in last many years. Moreover, the recent increase in import duty by government on various products has also increased the cost of imports from China. It may be recalled here that last year the government had hiked the basic customs duty on AC imports from 10% to 20% and that of compressors from 7.5% to 10%.

Changed duty structure and increased cost of production have made the contract manufacturing more economical than manufacturing in-house. So, many AC manufacturers are thinking on those lines instead of importing the components and assembling them here. This will also support government’s Make in India program.

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