Air-conditioners are fast becoming must-haves as consumers become increasingly accustomed to air-conditioned environments at the workplace, homes, malls, cinema halls and in their cars. With the consumer durables industry in India growing at 15% annually, and the fact that the air conditioning segment remains among the least penetrated consumer durable segments, at less than 3%, more and more players are entering the AC market with hopes of tapping the growth opportunities. The AC market in India currently has more than 20 players who are fighting for a slice of the market amidst high hopes that it will grow substantially in the future.
According to the National Council of Applied Economic Research findings, only 52% of the 31.4-million strong middle-class households in India possess air- conditioners, suggesting that the remaining 48% has not been penetrated. By 2015, the number of middle-class households is expected to touch 53.3 million and grow to 113.8 million households by 2025. This bulging base of middle-class families presents an immense opportunity for air-conditioner manufacturers in India. Another key customer segment to focus on in the long term is the bottom-of-the-pyramid section, which as per NCAER findings, contributed to only 9% of the total private consumption. As new customer segments emerge and join the middle-class household bandwagon every year, the AC market is becoming more heterogeneous. However, the AC industry in India has so far failed to fully grasp the more complex needs and expectations of this newer, larger and more diverse customer segment. This lack of understanding means that the AC industry is behind the curve in areas like customer communication to easy financing. As a result, AC penetration in India lags behind other developing markets as well as other categories of consumer durables in India. In fact, the penetration of room air-conditioners compares very unfavourably with other markets in Asia: it is 8% in Indonesia, 50% in Korea, 53% in China, 72% in Singapore and 89% in Taiwan. This low penetration rate illustrates the huge opportunity the AC industry in India is yet to seize. And while rising household incomes and increasing urbanisation are fueling the growth of the broader consumer durables sector, the penetration of air-conditioning remains significantly lower than the level of penetration that other white goods have already achieved today. Currently, more than 77% of households in urban India have a TV, 33% own a refrigerator, 17% have an air cooler, and 13% own a washing machine
The fact that 97% of Indian households are still untouched by room air-conditioners – while the adoption of comparable products have surged ahead – indicates that industry players are far from realising the full market potential. This has led to players intensifying their efforts to grow the market and reach out to new consumer segments. But despite fierce competition and a sizeable market turnover in the room AC industry, which last year generated sales of 4.2 million units worth Rs.72 billion, there are several issues crimping the growth and potential of the industry. According to industry experts, lack of infrastructure in the form of inadequate power supply is the most important factor inhibiting the growth of the AC industry in India. “Globally, 40 to 50% of the electricity is used by buildings, and out of that 30 to 40% is accounted for by air conditioning,” says Gaurang Pandya, Managing Director of Carrier India. High up-front costs of an AC are also a major barrier to adoption for many Indian households. This is particularly important in India where the traditional air-cooler offers a cheaper substitute for households at a time when energy prices are rising. To increase penetration and accelerate market growth, AC manufacturers are now taking a leaf out of the automobile industry’s book and offering easy financing and purchasing options with the view to bringing air-conditioners within the reach of a much larger percentage of the population. Trade sources say that finance-driven sales in ACs have risen by seven to eight percentage points over last year. “Last year, finance-driven sales were 22-23% of total AC sales. This year, it stands at nearly 30%,” says Manish Sharma, MD, Panasonic India.
While offering easy financing options is a good strategy for making air-conditioners affordable to a wider segment of consumers, many players are also banking on innovation and technology to lower their cost of production, which can then be passed on to the customer through a lower ticket price. Many companies have introduced air-conditioners endowed with inverter technology that has a shorter motor run-time and therefore consumes less electricity. Although energy- efficient products are relatively more expensive than the standard variants, a large number of consumers are choosing them to reduce long-term costs. Sanjay Mahajan, Vice President – Sales and Marketing, Carrier Midea India, says energy-savers, though 15-25% more expensive than the regular models, are viewed as ‘value for money’ by Indian consumers. For example, a typical 1.5 tonne, 3-star AC costs up to Rs.32,000, while a 5-star product could retail for Rs.37,000. But consumers are now willing to increase their initial investment in order to reduce their electricity bill
AC manufacturers are also adopting the strategy of offering a portfolio of lower priced products by resorting to economies of scale and focusing on obtaining cheaper components and materials. Currently, Haier and Onida are among the cheapest brands in the Indian market but other players – mainly Japanese and Korean – are also introducing products at cheaper price points. A case in point is the Japanese AC manufacturer Daikin, which in spite of its premium tag, is trying in earnest to tap all segments of the market. “We want to tap all segments, not just the top segment of the market. We have already launched products targeting each segment. And now it is time for us to penetrate the rural and semi-urban cities of India,” says Kanwal Jeet Jawa, Managing Director, Daikin Air-conditioning India Pvt Ltd. As part of its strategy to increase its share in the Indian market from 12% to 20% by 2015, Daikin plans to have dealers in all Indian cities with at least 100,000 population. Not only Daikin, which claims the No.1 position in the global air-conditioning market, other Japanese AC makers such as Panasonic and Hitachi have also made a strong inroad into the bulging AC market in India over the past couple of years. According to industry sources, both Panasonic and Hitachi have maintained a steady growth in the AC market and cumulatively account for more than 15% of the market currently.
“Being a relatively new entrant, Panasonic is growing at 80-100% in the split AC segment. In 2008, our market share percentage for ACs was less than 1% but we have grown to about 15% by February this year. We plan to invest Rs.1.20 billion in FY13 in the spilt air-conditioner segment with the aim to capture around 20% of the market share by the end of this fiscal,” says Sharma. According to the study by an independent market research agency, South Korean consumer durable majors such as Samsung and LG have lost their share substantially in the past year. This was partly because of the fact that last year, companies such as Samsung decided to get out of the window AC, a segment which is not growing any more. As per the industry estimates, split ACs currently dominate the room AC market, accounting for about 70% of the 4.2 million units sold last year. On the other hand, the share of the window ACs has come down from about 30% in 2010 to 20% in 2012, and it is likely to drop further this year. The past fiscal year, which saw the overall AC market in India post a negative growth of 26% year-on-year, was particularly bad for the Korean majors Samsung and LG. The market share of LG dropped to 17.3% in February 2013 from 26.3% in March 2011. Samsung’s market share, too, dipped to 11.3% by February 2013, from 19.5% in March 2011. On the other hand, the share of home-grown Voltas increased to 18.3% in February this year from 17.5% in March 2011. The company has attributed its latest growth to aggressive marketing of its new all-weather air conditioners introduced early last year. But its success has deeper roots than that. Over the past five years, Voltas has built its brand, introduced new products and expanded its retail presence to a total of 6,000 outlets. Fast-growing smaller towns and cities now contribute about half of Voltas’ sales and the company sees them as its main source of future growth.
For an industry that has been hit particularly hard over the past two years owing to weak demand, the delayed arrival of summer, rising inflation, increased raw material prices, and a fluctuating rupee, the current year is expected to offer some welcome respite. “Last year, the rupee had depreciated almost 4% and this had led to a 10-15% increase in prices, affecting demand,” says Mahesh Krishnan, Vice President (Consumer Electronics), Samsung India. But the tide seems to have turned favourable again this year. “Unlike last year, prices have remained stable this year, and this is boosting sales,” says Krishnan. Saurabh Baisakhiya, Business Sales Head – AC, LG India, also agrees that demand has improved considerably this year. “Demand for LG ACs has improved by 20% year-on-year. Consumers are buying more energy-efficient products. So, the 4- and 5-star ACs are selling faster.”
With demand turning buoyant, AC manufacturers are expecting y-o-y growth of at 10-15% this summer, driven by rising mercury levels. To make the most of the selling opportunity this season, manufacturers are also out to change the widely-held perception of AC products as a seasonal purchase by marketing their products as a complete air-conditioning solution rather than a cooling device. Keeping this in mind, manufacturers are adding extra functions to their products. A popular option is to include a de-humidifier function for use during the monsoon season. Other functions centred around increasing health concerns, pollution, allergens and airborne bacteria offer yet further opportunities for players to increase the benefits of their products and diminish the seasonality factor.
But while year-round functionality offers clear advantages to the customer, manufacturers need to ensure that their efforts in innovation are equally focused on delivering these new products at an acceptable price-performance ratio for the target customers. With the availability of so many brands and products before consumers, manufacturers who launch cheaper AC models without compromising on new features and technology will stand to gain and increase their market share in the lucrative AC market.
