When the Prime Minister last year announced a Rs. 20 lakh crore economic package under the ‘AatmaNirbhar Bharat Abhiyaan’, to aid our country out of the Coronavirus crisis (by making us self-reliant) one of the sectors that was in focus was air conditioner industry due to its heavy reliance on imported components and compressors. Nearly one year after the announcement of ban on import of air conditioners, both split and window, statistics reveal some interesting facts.
Imports have fallen
Total imports under the banned categories have halved YoY to Rs 1,800 crore in FY21 as against Rs 3,600 crore in FY20. Indeed, lockdown in the aftermath of Corona breakout had its impact on the total imports but part of the credit goes to industry’s ability to adopt to new policy. Further, compressors, which are mainly imported, fell 19% YoY in line with the decline in the RAC industry in FY21. This clearly suggests that the impact of the import ban on RACs with refrigerants is visible.
Existence of multiple players
Indian AC industry is overcrowded with multiple brands, both domestic and international. This is also cited as the weakness of the industry which could not take advantage of economies of scale despite rapid growth shown in recent years. However, closer scrutiny reveals that the top six players enjoy 75-80% market share, the tail end forms the remainder and largely operates on a trading business model. Contract manufacturers like Amber Enterprises and PG Electroplast have gained from brands whose business model was largely import reliant. Meanwhile, the existence of numerous brands has helped the product penetration and market expansion.
Two consecutive washout seasons
After a complete washout of summer season in 2020 due to lockdown, the industry was expecting a complete comeback in the current summer season. The industry had good reason to believe so as the pandemic was under control during the initial months of the current calendar (when the dealers started stock piling) but sudden spurt in the cases in March and subsequent localised lockdowns disrupted the demand once again. The only consolation this year was that the situation was not as bad as last year though much below the expectations.
With a washout summer season and lower imports of finished goods, most brands are left with higher inventory in the form of raw material. With channel inventory at a normal level, there is a scope for brands to push sales at the onset of the festive season.
At the same time, it should be borne in mind that though there could be an element of an uptick in sales during the festive season its foolhardy to expect the festive season demand to recover what was lost during the summer season. At the brand level, new material procurement is anticipated to take place from December 2021 onwards. The industry expects RAC industry volumes to reach 6.2m units in FY22, higher than FY21 levels of 5.2m units, but lower from pre-Covid levels of 7m units.
PLI for air conditioners
The Union Cabinet, in April 2021, announced the Production-Linked Incentive (PLI) Scheme for White Goods (Air Conditioners and LED lights) to be implemented over FY 2021-22 to FY 2028-29 with an outlay of Rs. 6238 Crore. The PLI Scheme on White Goods is designed to create complete component ecosystem for Air Conditioners and LED Lights Industry in India and make India an integral part of the global supply chains. The Scheme shall extend an incentive of 4% to 6% on incremental sales for a period of five years subsequent to the base year and one year of gestation period. Only manufacturing of components of ACs and LED Lights will be incentivized under the Scheme. The Scheme will incentivize manufacturing of components of ACs and LED Lights. 90% Bill of Material (BoM) of ACs and 87% of BoM of LED Lights are covered under PLI Scheme. It will lead to increase in value addition in Country from 20% to 80-85% and developing a robust component eco-system for AC Industry and LED Lights Industry.
52 companies like Daikin, Panasonic, Hitachi, Mettube, Nidec, Voltas, Bluestar, Havells, Amber, EPack, TVS-Lucas, Dixon, R K Lighting, Uniglobus, RadhikaOpto, Syska among others with committed investment of Rs 5,866 crore have applied for manufacturing critical components of Air conditioners and LED Lights.
Apart from lockdown induced demand disruption, the industry is likely to see overall disruption in the long run. Though in the same industry, the business models of the top 5-6 players vary drastically. Leading brand Voltas is highly flexible with its sourcing strategy. With demand going up and import restrictions becoming stringent, capital intensity for leading brands may go up. Some of the international brands have already set up facilities within the country and some more may join the club soon. This may force the existing leading players to rethink their strategies in the coming years.