Market leaders must work harder

Unexpected prolonged economic pressures and a depressed construction market have delayed the expected upturn in air conditioning unit sales across Europe, and the UK has not been spared. Sales at the heavier commercial end of the market are largely dependent on the construction sector and with a depressed private market, companies have been competing strongly for the few new build contracts around, while most work is in the refurbishment sector.

Packaged products, such as movables and splits managed to pull out of the lull, helped by the hot summer of 2003. This was particularly the case in Southern Europe. However, the central market was less fortunate. Overall the European sales of chillers managed to see slight growth from 61 835 to 62 460 between 2002 and 2003. Although several markets were down, UK chiller suppliers were hit particularly hard and the lack of investment means that companies are under stiff competition for every project around, putting huge burdens on resources. Overall chiller sales fell by 9% by volume and 23% by value from 2002 to 2003, after a poor performance the previous year.

Potential changing market mix
In a key European volume market such as splits, the majority of products are imported and market volumes are being boosted by increasing levels of low cost imports from the Far East; particularly from Korea and China (from companies such as LG and Haier), while the Chinese are also gaining significance through sales of own label products to major retailers in Southern Europe. 2004 sees the introduction of ‘mini-vrf’ systems with a power range below 20 kW, which most of the key splits suppliers will have in their product range by the end of the summer, bridging a potential gap between multi-splits and existing vrf systems, while also attacking the cheaper end of the market with a lower cost (than traditional vrfs), more sophisticated solution.

On the central plant market there is a strong European manufacturing base and there has traditionally been a trend in pushing water-based solutions for heavier commercial and multi-dwelling residential applications. This is particularly the case in Italy, where the large number of local chiller manufacturers, such as Climaveneta, Clivet, Aermec, RC, Rhoss and Blue Box have a strong interest in maintaining the chiller market and have been increasingly successful in export markets.

Although the central plant market has been hit hard by the general economic slowdown and lack of investment, it could be a sign of changing times. Indications are that commercial markets to a greater extent are reaching a saturation point. With a lot of empty office space around, traditional market opportunities are diminishing and companies are chasing the same contracts, rather than trying to develop new markets. At the same time, dx vrf systems have now been on the market for over a decade and are becoming more acceptable to designers.

More suppliers are making solutions available to clients and forcing prices down, making them a good technical and economic alternative to smaller chillers. The market trend towards smaller multiple compressor and chiller solutions means that vrf systems are in a strong position. Consequently chiller manufacturers are now seeing the vrf system as a serious threat to their business. Although growth for vrf systems has slowed down across Europe, it has consistently been outgrowing chiller sales. Nevertheless vrf volume sales still remain small at 4000 units in Italy, Europe’s largest chiller market, compared with some 33 000 chillers sold. The UK remains the largest market in Europe with sales of 8500 units, but sales have flattened, while Italy and Spain have seen growth rates of over 20% per annum. Spain now has sales of around 7000 units.

Overall construction output actually increased by 4·3% in the UK in 2003. Although the main areas of growth have been in housing and public sector work, the penetration of fixed air conditioning in the housing market is still low in the UK at 1-2% of split sales. The hot summer of 2003 significantly boosted the movables market and upheld the commercial markets on splits, but the market really needs another hot summer to spark significant growth and develop the interest of the residential end-user.

Although we had a good late spring and early summer, the weather seems to have returned to a changeable British summer, which will not have the desired effect on sales. This is in contrast to some of the other European countries, where initial reports are that a good start in the summer in France and Southern Europe is expected to boost splits sales for the domestic and light commercial sectors, although June temperatures have been disappointing in Italy. However, in Southern Europe, the penetration in the domestic sector is already high, with between 65% and 85% of sales of splits below 5 kW going to the residential sector.

On the positive side, BSRIA’s quarterly consultants’ survey from April (see figure 1), shows that some optimism is creeping in on the office sector.

Changing distribution patterns
The UK has traditionally been able to maintain a higher level of margins than in many other European countries, primarily due to its focus on the commercial sector and the strength of the vrf market, where suppliers have been in a position to charge a premium for add on solutions. However, as more competitors have moved into the splits and now also the vrf market, prices have come down and suppliers are seeing margins being eroded.

In order to maintain profit levels, an increasing number of suppliers in the UK have looked at shortening their distribution channel in order to retain more value. Several major competitors have adopted direct selling operations, or are adopting a dual strategy by having appointed distributors as well as integrating down the distribution channel by setting up their own direct sales, such as Toshiba, or acquiring most of their distributors (Daikin).

In strong residential markets such as Southern Europe, large retailers play a strong role for small-scale air conditioners. This makes it difficult for suppliers to sustain reasonable margins and forces them to look into alternatives, such as ceasing production altogether and badging up imports as their own products.

Other options are: expansion into more add-on commercial markets, which require a higher level of technical back-up, through partnerships or joint ventures; or ultimately pulling out of that part of the business altogether. Market leaders are trying to maintain a competitive edge by pushing new refrigerants, low noise and energy saving initiatives, such as the Enhanced Capital Allowance energy labelling scheme in the UK.

On the central plant side, a competitive edge is becoming more important, due to the lack of projects available. Price is important, but the technical back up and after-sales service and maintenance are what make the package attractive. First costs are still key, but manufacturers are increasingly having to support the sales effort with direct selling to end users in order to get ahead.

So what may lie ahead?
Hot weather along with a favourable economic climate and affordable products are key for the splits market to continue to grow (figure 2). In Southern Europe the outlook is good; boosted by last year’s hot summer and very competitive prices, as well as an optimism about a general economic pick up and growth in residential markets. At the same time stock levels are low and distributors need to restock. This is also the case in vrf units (figure 3). In Northern Europe, with the focus on commercial sales and very small residential markets, hot weather is vital to help boost the small end of the market, which of course is impossible to predict.

Although everyone expects Europe to come out of its economic lull, expectations are more modest for chillers (figure 4), partly as they are more a commercial product, and across Europe the key investments are in new residential construction. The common denominator for all markets is heightened competition, with a larger number of market entries, particularly from the Far East. Market leaders generally will have to work harder to maintain market shares.