For Air Conditioner manufacturers, the season started on weak not as a result of which many of them had feared 2019 season too would be a repetition of 2018. For them,2018 was a washout as unseasonal rains across India had spoiled the show. However, this year didn’t see much of unseasonal rains and above all Monsoon got delayed as a result of which their season got extended by couple of weeks. Due to this, whatever shortfall they saw in April could be made good in the latter part of the season.
The latest season saw robust growth in demand also due to last year’s low base. Some of the leading dealers have estimated this season’s growth to be between 15 & 20% which is a good rate considering the fact that industry is passing though one of the toughest times due to liquidity crisis following the NBFC mess. Our survey has revealed that the industry saw robust growth in May and Jun 2019, while April saw moderate growth on the back of strong demand as also low base. Some of the dealers have also indicated that delayed onset of summer and later the Monsoon, have pushed higher sales in April-June 2019 vis-a-vis February-March period.
Demand was strong in North and South, with East being a dampener, as heavy unseasonal rains have impacted demand. Though demand in North was low initially, it picked up very well later on due to series of heat waves and delayed Monsoon.
No price hikes
Another highlight of the season was there was no major price hike during this season despite the good demand. Dealers attribute stable price during the season mainly to intense competition in the market and the race to pocket larger market share. In the beginning of the season in February, AC manufacturers were keen on liquidating their high levels of inventory which they had carried forward from the previous season. As the season progressed, manufacturers resorted to discounts and promotional spends to retain their market share and also increase it. Also, the entry of Chinese consumer durable major, Haier into AC market has alerted many existing AC makers and they wanted to remain competitive against new entrant. Haier’s AC is one lowest priced brands and during the season the Chinese major was one of the few AC makers to resort to price cuts. However, the price reduction was marginal.
Localisation is the main strategy
Almost all the manufacturers of AC in India have been moving in the direction of localisation of their components as they have realised that higher import content would expose them to sharp volatility in rupee. Rupee volatility has become a major issue for the importers especially during last one year. Also, the government is also pushing these manufacturers to source locally through rationalisation and upward revision of customs duty. Last year the government had hiked the customs duty of AC components thus making their import commercially unviable. Players are shifting towards localisation either via investing in manufacturing facilities or outsourcing from EMS (Electronics Manufacturing Services) players. The localisation is more focused on manufacturing of indoor and outdoor units. However, compressors will continue to be imported from China, due to lack of compressor capacities in India. Higher localisation will help control costs and give players the ability to dynamically respond to changes in demand trends.
No major impact of budget
In the budget 2019-20, the Finance Minister, Nirmala Sitharaman has hiked the customs duty from 10% to 20% on indoor unit (IDU) and outdoor unit (ODU) on split system air conditioners. However, this move is unlikely to have major impact on the industry as majority of the players manufacture ODUs in India. Maximum impact of this move would be around 2% increase in the cost of raw materials for some players like Voltas. To accommodate this increase, Voltas may have to increase the price of its finished product by just 1%. Further, duty hike has come at the end of the season and most of the manufacturers are increasing their local footprint and hence impact will further decline by next season.
Shift towards inverter ACs
Shift in demand towards inverter ACs had started a couple of seasons ago and this move has further intensified during the just concluded season. With rising focus on energy efficiency, both industry and customers are moving towards inverter ACs. Now inverter ACs account for 40-5 0% of total split AC sales. Moreover, the price gap between inverter ACs and fixed speed ACs has reduced substantially over last few years, enabling faster shift to the former. According to the dealers, price gap has narrowed down to just 4-5% as against 15-20% earlier. For the manufacturers the higher share of inverter ACs is driving scale benefits and helping them to reduce costs of inverter ACs.
E-commerce gaining ground
For AC manufacturers tweaking their marketing strategy has become necessary as E-commerce, of late, has emerged as a key distribution channel. According to the available information, e-commerce now contributes 5-10% of sales for the industry versus 2-3% a few years ago. Shift towards E-commerce has hastened as the urban middle class population, millennials, etc., who constitute major portion of the consumers, prefer to use E-commerce platform to make purchases. Although the channel initially faced challenges relating to installation and after sales services, companies now have a vendor network for the same. However, companies are developing completely different range of products at different price points for the e-commerce channel versus the physical distributor channel, considering a different customer profile.
Meanwhile AC manufacturers are eagerly waiting for the outcome of government’s latest move to sell air conditioners at competitive rates. Though some feel this move may further add to the existing competition, optimists hope that it would help to expand the market.