CEOs See Better Days Ahead

May 10, 2010
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The CEO Forum at the recent annual ACCA Convention included high level executives from the HVAC industry, including the following (left to right): Bob McDonough of Carrier Corp., Brent Schroeder of Emerson Climate Technologies, Inc., Dave Swift of Goodman Global Inc., Doug Young of Lennox International, William Rau of Mitsubishi Electric & Electronics, and Tom Huntington of WaterFurnace Renewable Energy, Inc.


TAMPA, Fla. - The CEO Forum at the recent ACCA Convention drew a large crowd of contractors, most of whom were eager to hear what their OEMs thought about the state of the industry, the economy, and what new technologies might be in their future. NEWS editor-in-chief Mike Murphy asked the senior executives of Carrier, Emerson, Goodman, Lennox, Mitsubishi, and WaterFurnace tough questions that were submitted by contractors around the country.

The six companies participating in the panel discussion represented some of the ACCA 2010 Corporate Sponsors. Participating were Bob McDonough, president - residential and light commercial systems, Carrier Corp.; Brent Schroeder, president - air conditioning division, Emerson Climate Technologies Inc.; Dave Swift, president and CEO, Goodman Global Inc.; Doug Young, president and COO - residential heating and cooling, Lennox International Inc.; William Rau, senior vice president and general manager, Mitsubishi Electric & Electronics; and Tom Huntington, president and CEO, WaterFurnace Renewable Energy Inc.


WHAT ABOUT THE ECONOMY?

The Great Recession was on the minds of most conference attendees, and it was no surprise that the first question concerned what the CEOs thought about the economy in the short- and mid-term. Schroeder stated that Emerson is projecting a 7 to 8 percent growth rate in 2010 but that there is some concern about economic and political issues such as debt, which could suppress that growth.

“In 2010, I think a lot will be driven by the replacement and add-on market. We’re projecting double-digit growth in the replacement and add-on market. In the commercial sector, we’ve continued to see a tough market. We’re projecting down about 5 to 10 percent in 2010. We don’t think we’ll see that part of the business turn positive until sometime in the third quarter of 2011.”

Rau stated that Mitsubishi just finished its 16th consecutive record year, and he expects business to stay strong. “We’re very pleased with where we are. Energy efficiency and a green approach will definitely play out as we move into the future. During the last housing peak we were building 1.8 million single-family houses a year, so clearly that’s a big piece of the air conditioning business that’s gone. I’m not saying it won’t come back, but in the shorter term, we have challenges. In 2011 and 2012, though, I think we’re going to be in a reasonably good position overall, and for our business, we see a very positive future.”

The geothermal industry has enjoyed a lot of success during recent years, said Huntington, and there is evidence the economy is slowly rebounding. “There were concerns with the stimulus package that we could have an artificial boost then a second drop, and that hasn’t happened. I think we’re looking at a lot of chop on the water along the way, though. There’s so much conflicting data on the evening news. For example, home sales are showing a marginal improvement on selling price but then you find out that 24 percent of the homes that have mortgages today are underwater. What does that mean for us as a country and as an industry? Until we get below 9 percent unemployment, we’re probably not going to see a whole lot of progress going forward. Our exit from the doldrums probably won’t happen until 2011 or 2012.”

McDonough stated that it is a great time to be in the HVAC industry, because there is a lot of emphasis on energy efficiency, changing regulatory standards, and environmental sustainability, which are at the core of heating and cooling. “We feel great about the coming years. We’re seeing the light at the end of the tunnel. It’s been a tough slog over the last four years, but we’re all forecasting growth and that’s a place we haven’t been in for a long time, so I think we can all feel good about where we’re headed. I think it will be a multiyear expansion. Things are clearly heading in the right direction.”

At the ACCA Conference, The NEWS’ editor-in-chief, Mike Murphy, asked senior executives tough questions about the economy and the state of the industry.

NEW TECHNOLOGIES

When the CEOs were asked about the changes or advances the industry could expect to see in equipment offerings in the near future, McDonough noted that one of the issues that will vastly change the landscape is the impending standards for new home construction, as well as for energy upgrades and retrofits. “That will fundamentally change the way we apply cooling and heating. Tighter home standards will reduce the overall need for air conditioning, so perhaps smaller systems or more distributed systems may be on the horizon.”

Swift agreed about smaller systems, noting that Goodman is driven by the input from dealers, which is why the company has worked to make its units smaller. “As the efficiencies have increased the size of the units, they have become more difficult to install. We have been working on a technology called SmartCoil, which is 5-mm based copper tubing that allows us to make the units smaller and use less refrigerant. We’ll get that technology through heat pumps this year. By the end of the second quarter, we’ll also have light commercial rolled out through 20 tons.”

From a component perspective, Schroeder stated that more efficient compressors would be available to support market requirements. “You’ll also see us optimize designs for applications such as heat pumps or geothermal. You’ll also see a lot of investment in modulation technology to improve efficiency. We will also continue to invest in electronic controls at the component level with the compressor, as well as at the system level, in order to provide communication capabilities that will help the OEMs and the contractors provide the homeowner with diagnostics and installation verification.”

On the residential side, Lennox will continue to focus on communicating controls, said Young. “That has enormous potential for the consumer, for the contractor, and for the manufacturer in the near future. When we combine the communicating controls with a superior system, it will give homeowners optimized performance and a level of comfort they haven’t seen before. This will also allow contractors to do remote diagnostics and set-ups at the thermostat rather than climbing up into an attic. Solar will also be used more often to optimize energy management in the home, which is why Lennox introduced the SunSource system.”

Rau noted that Mitsubishi has inverters in its entire product line, as well as SEERs as high as 26. “We have heat pumps that have the capability to generate 100 percent of their rated heat output as low as 5°F, and as much as 75 percent of their rated capacity as low as -13°F. We have turned over our entire product line in the last 12 months, and we’re having a hard time keeping up with the innovations coming out of the factories.”

In the geothermal market, the efficiencies at WaterFurnace are in the range of 34 EER for its top-of-the-line equipment. That being said, the company is looking at variable-speed technology, alternative refrigerants such as CO2, as well as breakthroughs on the loop side of the business. “Our challenge as a company is how do we innovate and get loops in the ground easier and more cost effectively,” said Huntington. “We have to develop some technologies that will make it easier to install.”

With the recent phase-out of R-22, contractors are concerned that another refrigerant transition may be looming on the horizon. McDonough stated that it seems likely that there will be some form of climate legislation over the next year that will compel the industry to develop an alternative refrigerant with a lower global warming potential.

“So far it seems clear that the greenhouse gas potential of today’s refrigerant, R-410A, is going to be too high, and there will be something to replace it. That will probably happen over an extended period of time. Eventually, R-410A will be phased out, and we’re not sure what will replace it. We’re doing a tremendous amount of work in our own labs, trying to understand if there’s a natural refrigerant, but we haven’t found it yet.”

PRESSURE FOR HIGHER EFFICIENCIES

The push for higher efficiency products in the heating and cooling industry has been strong for many years, and some critics say that may have come at the sacrifice of design comfort. When Murphy asked the CEOs if high efficiency has resulted in lower levels of comfort, it is not surprising that the executives disagreed with this assertion.

Huntington stated the industry has done a remarkable job in achieving high efficiency without sacrificing comfort. “In most cases, it’s been enhanced. I don’t see this as an issue where you have to suboptimize comfort in order to achieve higher efficiencies.”

Better installation is what optimizes comfort levels, noted Young. “I don’t see that there have been complaints regarding comfort as the levels of efficiency have gone up. I would counter that with a higher-level technician doing the installs, the comfort levels are optimized. I don’t think there’s an issue today, and I don’t see one going forward.”

A decrease in comfort is not driven by the equipment itself, said Swift, it’s driven by the installation and verification that contractors provide to consumers, so they feel confident that what they purchased is what they received. “That will become a bigger issue. The other piece of this is letting the consumer easily control these systems, which is why I think standards like ClimateTalk will be very important to this industry as we move forward.”

With higher efficiency comes higher cost, which is a concern to Emerson, said Schroeder. “As we increase efficiency and add all these neat technologies and capabilities to our systems, the cost of those systems to the homeowner starts to change. As you look at price elasticity and how consumers make decisions, do we start to get a system that is so expensive that people opt out of air conditioning or repair rather than replace? The impact of this on the consumer and what it could do to the total size of the market is a concern we all need to be sensitive to.”

McDonough agreed with Schroeder, noting that in the on-going drive for higher efficiencies, there needs to be caution that the standards aren’t set so high that they ignore the reality of today’s market, which is that the majority of the installed base consists of very low efficiency equipment. “I urge the regulatory authorities to be cautious and not over-reach because there is a chance that we will push a lot of these systems out of the reach of most people. Today, a lot of the very high-end systems are heavily subsidized with tax credits and energy rebates, and much of the population is not in an economic position to take advantage of that. It’s something we should all be concerned about because we don’t want to push our products out of the reach of the masses.”

The CEO forum was rounded out with a question on the sometimes contentious relationship between contractors and manufacturers. Swift noted that the HVAC industry is under the microscope more than ever these days, which is why communication between contractors and manufacturers needs to improve.

“We have a responsibility to work together even better than we have to this point. My sense is that communications need to get better. Contractors need to have a better understanding of what’s coming down the pipe from the manufacturers so they’re ready for it. And manufacturers need to be more supportive of contractors building their own brands in the market.”

The crowd of contractors responded positively to the panel discussion, with one attendee noting that the CEO forum is “always the highlight of the ACCA conference.”

ACCA Corporate Partners help make the association’s year-round work possible. The 2010 Corporate Partners include: Federated Insurance, Carrier, Lennox, Rheem, Jackson Systems, Goodman, Emerson Climate Technologies, Mitsubishi, WaterFurnace, The NEWS, North American Technician Excellence, and USA Refrigerants.

Publication date: 05/10/2010

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