Evolution of AC Industry
Since the early 90s, the structure of the air-conditioning industry has evolved quite differently. Till '88-89 the industry used to be dominated by the unorganised sector with 70 per cent market share. With excise duty as high as Rs 9000-10,000 during those times the gap was wider.
The participation of the organised sector remained small till the year 1995. The reduction in excise levels from 110 per cent to 32 per cent and import duties on components from 185 per cent to 30 per cent plus CVD has not only expanded the market but also narrowed the price gap for branded ACs. The share of the organised sector is now 80 per cent
while the unorganised sector constitutes a little over 20 per cent of the market.
Current scenario
Prior to 1997, corporates, institutions and government dominated the consumer segment. They did around 85-90 per cent of the buying. It was only in the year 1997 that the home segment picked up. In fact, in the last two years there has been a big spurt in buying from the home segment, which now constitutes 35 per cent of the market from the previous 10-15 per cent. The institutional segment accounts for 65 per cent.
The growth in volumes from the home segment has been to the tune of 30-35 per cent while the institutional segment clocked just 4-5 per cent volume growth. The average growth for the last five years in the residential segment has been around 24 per cent.
The reason for the same is that the AC is no longer perceived as a luxury and better distribution network, large-scale advertising and finance schemes have grown the market.
The growth in the year 2000 was only 20 per cent, which was mainly driven by segments such as software services, retailing, healthcare, entertainment, hospitality and telecom. In the current year, the AC industry has recorded a 12 per cent growth in the first six months of the current year.. The WAC growth is expected to be about 20 per cent this fiscal.
Demand drivers
• Inventory holding capacity is the key to success as demand for ACs is seasonal.
• Income levels
With rising levels of disposable income and the attendant change in consumption patterns, air-conditioners have become a thing of proud possession, especially for the emerging middle class. The fastest growing and the most potential segment, namely, middle class households, is expected to drive demand for ACs by leaps and bounds due to growing pollution and more disposable income.
• Low Penetration Levels
The industry has a major growth potential as the penetration rate is less than one per cent The WAC market in China has grown from 1 million to 9 million in the last decade. This represents a huge untapped market in India thus signifying a tremendous growth potential. Computerisation in business and growth in service industry will act as key drivers for commercial segment of air-conditioning.
The present penetration level in India for air-conditioners is a miniscule 1-2%. This figure compares unfavorably to countries like the USA (35%) and Singapore (30%). In addition, the penetration level is low as compared to other consumer durables -- refrigerators - 11%, TV's - 35%, Radio - 45% and Cars - 6%.
The National Council for Applied Economic Research (NCAER) conducted survey on "Indian Market Demographics" has indicated that ACs, rank lower than even washing machines on the priority list of purchases. Considering that washing machines have achieved a penetration of only 2 million households, it is unlikely that households will be the major demand drivers in the near future. This is especially true in the case of rural households.
One reason could be the high maintenance and operational costs associated with owning an AC. People owning a car, usually get a sum as petrol/car allowance along with their salaries, but their monthly electricity bills are hardly reimbursed. With rural households, the problem is of frequent power cuts and low voltage. Competition also comes from an altogether different product - desert coolers - widely used in central and northern India. One thing is however clear, lower penetration level is a pointer to the vast potential that lies ahead.In the future, earnings will be driven by rising demand for consumer durables in general.
Once upon a time, ACs used to be a luxury but now they are a necessity. Of course, this could also be attributed to the reduction in AC prices and the rising disposable income of the Indian middle class. The hot summer of 2001 has persuaded people to carry one home to cool themselves off.
The last few years have seen a spectacular demand for air conditioners rising from the household sectors.
As per the National Sample Survey Organization report of "Use of durable goods by Indian households", the per capita total expenditure on durable goods increased from Rs112.89 in 1987-88 to Rs148.02 in 1993-94. Similarly, NCAER estimates point to the fact that the number of households with monthly incomes above Rs10,000 in metros and Rs5,000 in non-metros is expected to rise from 22.7 million in 1995-96 to a huge 57.2 million in 2005-06. This will mean that firstly, there will be a perceptible shift towards branded products and secondly, the level of aspiration buying will increase. All this should be good news for players in the AC market.
.Price
Demand for room air-conditioners is fairly price sensitive. For demand from households to spurt, prices have to come down significantly. A study conducted by IMRB points to a potential of 0.35 million units for units priced at Rs18,000. Though a 0.75 TR unit is available at these prices, their efficacy under Indian conditions is doubtful. Ideally, prices should fall by another 20-25% bringing a 1.5 TR AC on par with a CTV priced at around Rs18,000.On the other hand, demand for central AC systems are broadly price insensitive. This is so because the number of players in the segment are limited (due to infrastructure and personnel requirements) and profit margins lower than those in room ACs.
Availability Of Finance
One way of making price-sensitive consumers spend is to expand hire-purchase schemes in the country. Here India has made substantial strides in the 90’s. Firstly, there has been a marked change in the attitude in favour of taking loans for purchasing household items. Secondly, the easy availability of consumer finance from banks and other financial institutions would induce purchases during inflationary times. Companies like Carrier Aircon, Voltas, Fedders Llyod and Godrej-GE have introduced zero-interest installment schemes as an option for its customers.
Environment
India is a country situated in the tropical zone with the weather being warm to hot in most parts of the country. With surroundings in most of our urban centers becoming increasingly polluted and awareness as regards the benefits of working in a controlled environment on the rise, the demand for ACs can only grow.
Use Of Alternatives And Its Substitution
Earnings would be affected by the presence of cheaper substitutes like coolers that would discourage consumers in smaller towns and villages to at-least postpone purchases, if not avoid them. But as the level of income goes up, aspiration needs will lead to substitution or replacement of coolers with ACs.
Impact Of Reforms
Lowering of taxes will make ACs cross the threshold between necessity and affordability. Once this happens air-conditioning will see geometric growth in demand. In the past, the AC industry was labeled as a luxury industry making it convenient for the government to extract revenues.
This resulted in the unorganized sector ruling the roost with a substantial market share in the window AC segment. Individuals patronized the unorganized players because their prices were lower and personalized after sales services were available.
As the table below indicates, excise duty rates were a high 60% for room ACs even until 1994-95. Couple this with the fact that organized players also paid sales tax, octroi duty etc., their prices turned out to be largely uncompetitive. Tax implementation is a very big obstacle in the healthy growth of the consumer durables industry.
The segment is heavily taxed both by the central and state government. White goods manufacturers feel that the lower level of duties and higher abatement on MRP-based products would push sales and drive higher growth for the industry.
On an average the duties are in the level of 20-25 per cent but it becomes as high as 40 to 45 per cent in India, which puts Indian manufacturers at a disadvantage. Reduction in sales tax and excise duty could definitely spur demand.
Since the early 90s, the structure of the air-conditioning industry has evolved quite differently. Till '88-89 the industry used to be dominated by the unorganised sector with 70 per cent market share. With excise duty as high as Rs 9000-10,000 during those times the gap was wider.
The participation of the organised sector remained small till the year 1995. The reduction in excise levels from 110 per cent to 32 per cent and import duties on components from 185 per cent to 30 per cent plus CVD has not only expanded the market but also narrowed the price gap for branded ACs. The share of the organised sector is now 80 per cent
while the unorganised sector constitutes a little over 20 per cent of the market.
Current scenario
Prior to 1997, corporates, institutions and government dominated the consumer segment. They did around 85-90 per cent of the buying. It was only in the year 1997 that the home segment picked up. In fact, in the last two years there has been a big spurt in buying from the home segment, which now constitutes 35 per cent of the market from the previous 10-15 per cent. The institutional segment accounts for 65 per cent.
The growth in volumes from the home segment has been to the tune of 30-35 per cent while the institutional segment clocked just 4-5 per cent volume growth. The average growth for the last five years in the residential segment has been around 24 per cent.
The reason for the same is that the AC is no longer perceived as a luxury and better distribution network, large-scale advertising and finance schemes have grown the market.
The growth in the year 2000 was only 20 per cent, which was mainly driven by segments such as software services, retailing, healthcare, entertainment, hospitality and telecom. In the current year, the AC industry has recorded a 12 per cent growth in the first six months of the current year.. The WAC growth is expected to be about 20 per cent this fiscal.
Demand drivers
• Inventory holding capacity is the key to success as demand for ACs is seasonal.
• Income levels
With rising levels of disposable income and the attendant change in consumption patterns, air-conditioners have become a thing of proud possession, especially for the emerging middle class. The fastest growing and the most potential segment, namely, middle class households, is expected to drive demand for ACs by leaps and bounds due to growing pollution and more disposable income.
• Low Penetration Levels
The industry has a major growth potential as the penetration rate is less than one per cent The WAC market in China has grown from 1 million to 9 million in the last decade. This represents a huge untapped market in India thus signifying a tremendous growth potential. Computerisation in business and growth in service industry will act as key drivers for commercial segment of air-conditioning.
The present penetration level in India for air-conditioners is a miniscule 1-2%. This figure compares unfavorably to countries like the USA (35%) and Singapore (30%). In addition, the penetration level is low as compared to other consumer durables -- refrigerators - 11%, TV's - 35%, Radio - 45% and Cars - 6%.
The National Council for Applied Economic Research (NCAER) conducted survey on "Indian Market Demographics" has indicated that ACs, rank lower than even washing machines on the priority list of purchases. Considering that washing machines have achieved a penetration of only 2 million households, it is unlikely that households will be the major demand drivers in the near future. This is especially true in the case of rural households.
One reason could be the high maintenance and operational costs associated with owning an AC. People owning a car, usually get a sum as petrol/car allowance along with their salaries, but their monthly electricity bills are hardly reimbursed. With rural households, the problem is of frequent power cuts and low voltage. Competition also comes from an altogether different product - desert coolers - widely used in central and northern India. One thing is however clear, lower penetration level is a pointer to the vast potential that lies ahead.In the future, earnings will be driven by rising demand for consumer durables in general.
Once upon a time, ACs used to be a luxury but now they are a necessity. Of course, this could also be attributed to the reduction in AC prices and the rising disposable income of the Indian middle class. The hot summer of 2001 has persuaded people to carry one home to cool themselves off.
The last few years have seen a spectacular demand for air conditioners rising from the household sectors.
As per the National Sample Survey Organization report of "Use of durable goods by Indian households", the per capita total expenditure on durable goods increased from Rs112.89 in 1987-88 to Rs148.02 in 1993-94. Similarly, NCAER estimates point to the fact that the number of households with monthly incomes above Rs10,000 in metros and Rs5,000 in non-metros is expected to rise from 22.7 million in 1995-96 to a huge 57.2 million in 2005-06. This will mean that firstly, there will be a perceptible shift towards branded products and secondly, the level of aspiration buying will increase. All this should be good news for players in the AC market.
.Price
Demand for room air-conditioners is fairly price sensitive. For demand from households to spurt, prices have to come down significantly. A study conducted by IMRB points to a potential of 0.35 million units for units priced at Rs18,000. Though a 0.75 TR unit is available at these prices, their efficacy under Indian conditions is doubtful. Ideally, prices should fall by another 20-25% bringing a 1.5 TR AC on par with a CTV priced at around Rs18,000.On the other hand, demand for central AC systems are broadly price insensitive. This is so because the number of players in the segment are limited (due to infrastructure and personnel requirements) and profit margins lower than those in room ACs.
Availability Of Finance
One way of making price-sensitive consumers spend is to expand hire-purchase schemes in the country. Here India has made substantial strides in the 90’s. Firstly, there has been a marked change in the attitude in favour of taking loans for purchasing household items. Secondly, the easy availability of consumer finance from banks and other financial institutions would induce purchases during inflationary times. Companies like Carrier Aircon, Voltas, Fedders Llyod and Godrej-GE have introduced zero-interest installment schemes as an option for its customers.
Environment
India is a country situated in the tropical zone with the weather being warm to hot in most parts of the country. With surroundings in most of our urban centers becoming increasingly polluted and awareness as regards the benefits of working in a controlled environment on the rise, the demand for ACs can only grow.
Use Of Alternatives And Its Substitution
Earnings would be affected by the presence of cheaper substitutes like coolers that would discourage consumers in smaller towns and villages to at-least postpone purchases, if not avoid them. But as the level of income goes up, aspiration needs will lead to substitution or replacement of coolers with ACs.
Impact Of Reforms
Lowering of taxes will make ACs cross the threshold between necessity and affordability. Once this happens air-conditioning will see geometric growth in demand. In the past, the AC industry was labeled as a luxury industry making it convenient for the government to extract revenues.
This resulted in the unorganized sector ruling the roost with a substantial market share in the window AC segment. Individuals patronized the unorganized players because their prices were lower and personalized after sales services were available.
As the table below indicates, excise duty rates were a high 60% for room ACs even until 1994-95. Couple this with the fact that organized players also paid sales tax, octroi duty etc., their prices turned out to be largely uncompetitive. Tax implementation is a very big obstacle in the healthy growth of the consumer durables industry.
The segment is heavily taxed both by the central and state government. White goods manufacturers feel that the lower level of duties and higher abatement on MRP-based products would push sales and drive higher growth for the industry.
On an average the duties are in the level of 20-25 per cent but it becomes as high as 40 to 45 per cent in India, which puts Indian manufacturers at a disadvantage. Reduction in sales tax and excise duty could definitely spur demand.