Air-conditioners -- Household demand hots up market

Suresh Krishnamurthy

THANKS TO the fabled Indian middle-class, the air-conditioner market is hotting up.

An inordinately hot summer in 2000 appears to have convinced the people the comfort of an air-conditioner and a large number appears to have decided to take one home this year. Indeed, in the last few the years, the demand for air-conditioners from the household sector has been growing rapidly. Still, the demand growth in 2000 was particularly noticeable, and was also the most significant change in the industry during this period.

According to some industry estimates, growth in volume terms has been 45-50 per cent this fiscal. But official statistics underestimate this and even report a decline in production. Nevertheless, by all accounts, including a study by the Confederation of Indian Industry, there has been a noticeable jump in the demand for air-conditioners from the household segment.

After several years of relatively modest growth, which was totally at variance with the latent potential of the product, the sharp growth in demand the summer past was very welcome for air-conditioner companies in many respects. One, it relatively reduced their dependence on the corporate sector which is still the major demand driver. Corporates traditionally accounted for about 60 per cent of the total demand for air-conditioners. But the burgeoning demand from the household segment could level the ratio in the near future.

Moreover, the demand growth comes at a time when the industrial investment climate is still sluggish. Barring the investments made by software and healthcare companies, industrial investments continue to remain on hold. In this backdrop, the response of the household segment must have been most welcome for the air-conditioner industry.

Industry overview

The size of the air-conditioner industry in India is about Rs 2,000 crore. The industry can be sub-divided into non-ducted and ducted products. The demand for non-ducted products -- window air-conditioners and mini-splits -- comes from both households and corporates. The demand for ducted products -- central plants, packaged air-conditioners and ducted splits -- is only from the corporates.

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One of the significant factors influencing the fortunes of the industry is the taxation structure. The industry has come a long way from the time when the excise duty structure favoured only the unorganised sector. The steady fall in the excise rate in the 1990s helped the organised sector cope with the competition from the unorganised sector on more favourable terms. Still, the unorganised sector continues to meet a sizeable proportion of the demand for non-ducted products.

There was a significant change in the excise duty structure in 2000. The rate was raised from 30 per cent to 32 per cent and this was expected to adversely impact the industry. However, the shift to a maximum retail price based system for the levy of excise appears to have helped the manufacturers. In the MRP-based system, an abatement of around 40 per cent was provided. This ensured that the impact of the increase in excise was minimal if not positive.

Another major fiscal change is the removal of quantitative restrictions on imports. Imports are, however, not all that competitive considering the Customs duty structure. An import duty of 44 per cent along with a countervailing duty which is equivalent to the excise duty is a large enough protection for the domestic companies.

Non-ducted ACs, the growth driver

The demand for non-ducted products grew steadily in the latter half of the 1990s. The demand for mini-splits has grown at a higher rate compared to window ACs because of the lower base. The demand switch from mid-sized ducted products, such as packaged ACs or ducted splits, to mini-splits is also one of the reasons for the larger growth rates in the latter segment.

Another major reason for the growth in demand was the increased attention this product category has attracted in the recent past. Prices of air-conditioners dropped sharply in the past few years because of competition. Most established players upgraded their manufacturing facilities, while fresh capacities were created by companies such as Matsushita (National brand). The marketing and advertisement spend by companies has also been on the rise.

With such investments flowing into building both the product and the brand, the expansion of the market was inevitable. As seen with other consumer durables, in the initial years of increased intensity of competition, more cash gets invested by both existing and new players. This leads to a drop in prices, fuelling demand and the result is a much larger market.

And the non-ducted segment has attracted a lot of players in the last few years. The latent long-term demand potential from Indian households has led to a number of multinational companies making a beeline to set up base in the country.

Major players in this product category are Carrier Aircon, Voltas and Blue Star. Brands such as Hitachi, Videocon and Godrej also have a sizeable presence. Among the recent entrants, the Korean brands such as Samsung and LG have been able to make an immediate impact. Other brands that have positioned themselves for a share in this fast-growing market are National, Fuji General and Daikin. On a much smaller scale, Whirlpool and Electrolux have entered the market to cater to household demand.

Initially, the entry of new players did have an adverse impact on the established players -- especially Voltas and Carrier Aircon. The reduced sales of window ACs by Carrier Aircon and Voltas in 1999-2000 compared to 1998-99 is testimony to the adverse impact caused by the entry of the new brands, especially Samsung and LG.

However, since the beginning of 2000-01, it does appear that the established players -- Carrier Aircon and Voltas -- have started to hit back. They may have even picked up some of the market shares they lost in the earlier period. Again, initially, margins of established companies suffered as larger outlays in selling and distribution failed to translate into superior sales growth. The trend now appears to have been reversed.