Peace might have prevailed on Indo China border for decades now but the same thing may not be said about Indian industry which has been target of Chinese counterparts every now and then. The latest sector that is preparing for Chinese onslaught is the Indian air conditioning industry.
Why Indian market is attractive?
Of course, for Chinese AC manufacturers Indian AC industry is too small – while Chinese AC market is huge with 45 million units produced annually the size of Indian AC market is just 5 million units. However, its not the present size but the future prospects which are attracting international players including Chinese manufacturers into Indian market. In fact, Indian Ac market is dominated by few local brands and many Japanese and Korean brands. Chinese manufacturers are late entrants into the market. For them till now there was no need to look out for other markets as Chinese demand itself was huge. But now there are signs of Chinese market hitting the saturation point which has forced many Chinese players to look around the world for opportunities to maintaining their growth. And they find India the most promising AC market. As a result, we are seeing increasing presence of Chinese AC manufacturers In India nowadays. And this trend is expected to gain momentum in the coming years.
Indian room air conditioning market is highly fragmented with presence of almost 25 players. This in a way makes the foreign brand’s entry into India much easier than if it had been dominated by few handful brands.
In financial year 2018, AC industry registered reasonably good growth which encouraged all players to adopt an aggressive strategy and introduce a series of new products like all-weather ACs, WiFi enabled ACs and environment friendly ACs to gain market share. Meanwhile, sudden onslaught of Chinese brands including large players like Haier and Midea, while several small brands like Zamil Air conditioners, Tecumseh and York have been introducing products with aggressive marketing strategies has not gone unnoticed. Other large players like Gree, Xiaomi and TCL are reportedly still evaluating the market and their initial survey has thrown some encouraging results. Its just a matter of time before they too take a plunge into Indian AC market.
Chinese companies have chalked out investment plans
Some of the players have already announced their plans for India. For example, consumer durable major, Haier has signed an MoU with the UP government to invest Rs 3000 crore to create capacity for 2mn units of refrigerators, 1mn units of LED TVs, washing machine and air-conditioners each. Haier aims to increase its market share in the RAC industry which currently stands at 2-3%. This is their second large investment after already having a plant at Pune, Maharashtra. Midea is another leading Chinese AC manufacturer looking to have base in India. Midea already enjoys 25% share in Chinese market. The company is setting up new facility in Pune at an investment of Rs 1350 crore. It will focus on manufacturing compressors, HVAC products and home appliances such as RACs, refrigerators, washing machines, water purifiers, water heaters.
Another leading Chinese company, TCL electronics is investing Rs 2000 crore towards setting up a new facility at Tirupur in Andhra Pradesh which is expected to start commercial production in October 2019. Initially, the company will be focusing on televisions and then foray into ACs, refrigerators and washing machines. Xiaomi, which has already made a disruptive entry into mobile phone sets market in India, is also eyeing Indian white goods industry, including ACs. The company has already invested Rs 3500 crore in its Indian entity and will be entering the white goods industry. Currently, its identifying fast growth categories including air conditioners, washing machines, refrigerators, laptops and vacuum cleaners.
AC makers setting up domestic manufacturing base
Currently, domestic brands import CBUs, IDUs, ODUs, WACs and CACs and by doing so they expose themselves to the risk of rupee depreciation vis-à-vis major currencies. On the other hand, multi-national brands like Samsung, LG and Panasonic have exposure only to the extent of raw materials or components. Setting up domestic manufacturing capabilities, therefore, will lower exposure to forex risk.
Further, there is significant impact due to rise in duty structure since 27thSeptember 2018 when custom duties were increased to 20% from 10%, leading to incremental costs for importers. This once again emphasises the need for domestic manufacturing facility to overcome regulatory challenges.
Financial year 2019 has been one of the worst years for room AC makers in recent times. However, that doesn’t in anyway undermine the long-term prospects of the industry. Over the last decade, room AC has recorded 14% CAGR which is one of the highest in the world. At this rate, room AC market is expected to touch Rs 28,000 crore in next four years from the current level of Rs 14,000 crore. In terms of volume too, analysts believe that it will reach 8.5 million in next four years from the present level of 4.5 million. Apart from favourable demographic factors, increasing availability of electricity in tier 2 & 3 cities is one of the main factors contributing to the growth in the industry in the coming years.