Market size & growth prospects
The Indian Room Air Conditioner market is estimated to be around 7 to 7.5 million units per annum(FY20).The industry has grown at rate 10.3% (10 year CAGR) and 16.2% (5 year CAGR) suggesting a faster growth rate in recent years. This double-digit growth is expected to continue fuelled by a range of factors which include:-
1. Rising Income Levels
The rising per capita gross national income entails an increase in the the purchasing power of the consumers. With rising income levels the demand for non-essential items like ACs tends to increase.
2. Rising Temperature Levels
In India summers are hot with temperatures in May ranging from 32–40 °C (90–104 °F) in most of the interior. India’s average temperature has risen by around 0.7 degree Celsius during 1901–2018. The average temperature over India is projected to rise by 4.4 degrees Celsius, while the intensity of heat waves is likely to increase by 3-4 times by the end of the century. With temperature rising at such rate, AC is no longer a luxury equipment but is slowly becoming a necessity equipment in India.
3. Low Penetration Levels
India has one of the lowest penetration of ACs (7%) when compared to the global average of 30%. This presents tremendous growth potential for the RAC industry.
4. Easier Access To Credit
India has traditionally been a debit card market. But this narrative has changed in the last decade with the increase in the usage of credit cards. Credit card issuance has grown significantly in India at a compound annual growth rate (CAGR) of 20% in the last four years. The number of credit cardholders has increased from 29 million in March 2017 to 62 million in March 2021. This rise in credit cards coupled with flexible EMI options of up to 36 months makes the purchase of ACs more affordable.
5. Global Market Size
In 2018 the overall AC demand was 110.97 million units. Out of which China alone accounted for 44.3 million units(or 40.2%) making it the largest market. The second largest market was Asia(Ex china and Japan) with demand of 17.82 million units(or 16.05%). The third largest market was North America with demand of 15.59 million units(14.04%). India’s market share stood at 4.5%(with ~5 million units sold in 2018). This leaves enough room for expansion at global stage making it one of the key growth drivers.
Types Of ACs & Corresponding Market Share
There are primarily 2 types of ACs
1) Window ACs
2) Split ACs
Over the years, the market share has shifted from Window to Split ACs. The primary reason behind this shift is the reduction in the price difference between the two types, increasing consumer awareness about the overall life cycle cost to the upfront cost, rising electricity rates as window acs consume more electricity.
ACs can also be divided on the basis of Fixed and Inverter Acs. Fixed Acs means fixed speed ACs which operate at a fixed temperature until changed, whereas Inverter ACs have temperature control sensors and automatically adjust the room temperature.
Here too, the trend has shifted towards Inverter ACs in a major way with Inverter ACs contributing 57% of the total RAC sales in FY20 compared to only 10-12% in FY16.
This shift is trend indicates that companies focussing their efforts on inverter segments are set to benefit the most.
Supply Chain Analysis
The supply chain in the AC industry relies heavily on imports. Until late 2020, 30% of the ACs sold in India were imported as completely built units (CBUs).
When it comes to ACs manufactured/assembled in India key components such as compressors, PCB circuits, copper tubes, inverter drives etc which account for International roughly 75% of the overall cost of building an AC are imported from other countries particularly China. The value addition in India currently stands at only 25%. This is a key variable in the entire supply chain. Any issue such as Geo-political tensions with China, disruption in global supply chain (eg Covid-19) can severely impact the industry
The AC unit once manufactured/assembled goes through a series of distribution centers before it reaches the end consumer. Despite the rise in e-commerce, big ticket items like ACs are still purchased at large from local retailers. This makes the distribution centers and touch points of paramount importance in this highly competitive industry to maintain an edge over others
Government Initiatives
The government in recent years has aggressively promoted local manufacturing of ACs through its various schemes and initiatives.
1. Increasing the custom duty on compressors
Compressors account for 25-30% of building an AC and are largely imported from China. In order to promote local manufacturing, govt has over the years increased the custom duty on compressors.
Import Duty | Year |
7.5%->10% | 2021 |
10%->12.5% | 2018 |
12.5%->15% | 2020 |
Effectively doubling the import duty in 3yrs from 7.5% to 15%
2. Ban on the import of Completely Built Units (CBU)
In October of 2020, India banned the imports on completely built units (CBUs) with refrigerants effectively banning CBUs as a whole. Prior to this 30% of the total ACs sold in India were imported as completely built units (CBUs). This ban had a major impact on the small enterprises which used to basically import from Thailand/Bangladesh and other Asian countries which had free trade agreements (FTAs) with India. These companies used to clog the market with these cheap imports during peak season. The large companies however were not impacted majorly by this ban since most of them have production facilities enabling them to replace the imports with assembled products.
3. PLI scheme by the government
Under the PLI scheme for white goods, the government has selected 42 firms out of which 26 firms are from the AC industry. The firms collectively have committed Rs 3898 crores. The scheme aims to incentivise the production of AC components which are currently being imported from select geographies.With this the scheme aims to increase the local value addition to 75% in the coming years, which currently stands at 25%. But given the small size of the Indian AC industry, the companies are likely to face problems related to economies of scale. This in turn could delay the planned investments.
Factors Affecting AC Industry/ Antithesis Pointers
1. Forex problems
Since the AC industry relies heavily on imports, events such as the depreciation of the rupee pose forex risks for importers. This leads to rise in production costs which are ultimately passed on to the consumers. The increase in price of AC can have a negative impact to the growth of AC industry in India.
2. Rise in commodity prices:
ACs are primarily made of a set of metals, namely copper, aluminium, sheet metal etc. Any increase in the price of these metals has a direct impact on the cost of production.Since the AC industry operates on low margins owing to steep competition, the price increase cannot be absorbed by the manufacturer and is passed on to the consumer.
Aluminium Prices
Copper Prices
Sheet Metal Price
With the soaring commodity prices, AC companies have constantly been hiking prices from December 2020 ( 6-8% increase in 2021 and 8-10% expected increase in the April 2022). This coupled with anti-dumping duties on aluminium is a matter of concern
With the soaring commodity prices, AC companies have constantly been hiking prices from December 2020 ( 6-8% increase in 2021 and 8-10% expected increase in the April 2022). This coupled with anti-dumping duties on aluminium is a matter of concern
3. Global supply chain
Because of its import heavy nature with an excessive dependence on imports from China, any type of Geo-political tension, COVID-19, trade war, can severely impact the supply chain of the AC industry. Initiatives like the PLI schemes are helping to address this issue.
4. Seasonality of business
The AC industry has an inherent seasonality in its sales, with peak sales happening in the month of April and May. Factors such as unseasonable rains, long winters, lock down can have a negative impact on the sales.
Market Share & Monopoly Opportunity?
The market share of different companies in the AC industry is as follows:
With a select few firms controlling majority of the market share, the market structure for the AC industry is an oligopoly. With AC being a commodity-like product companies compete on price. The barriers to entry are high owing to the low prices which can on ly be maintained with economies of scale. This also translates to low margins.
Key Differentiation
1. Distribution Points
As discussed earlier the number of distribution points are of paramount importance since ACs are still largely purchased from brick and mortar shops and not online. This means that more the number of touch points better is the translation to sales.
2. Price
As discussed, the market structure is an oligopoly with fierce competition happening on the price front. Being the lowest-cost producer presents one with an edge but maintaining that would require constant product innovation.
3. Ability to identify trends
It is very important to identify the prevailing trends in the industry and constantly adapt to the changes in order to avoid obsolescence. Trend such as shift from windows to split and non-inverter to inverter are some of the examples. Firms which pre-meditated these trends (like LG in Inverter AC segment) are reaping its benefits now ( LG has ~40% market share of inverter ACs in India).
Conclusion
Taking into account all the positive and negative pointers we can conclude that the positives outweigh the negatives. The primary reason being the incredibly low penetration levels and opportunity for growth. The major firms despite the stiff competition can expect an increase in sales because of the huge tailwinds present in the industry.
Great Article Shubham, Got lot of info about this industry