Manufacturers obviously hope for another record year in 2005, but they're keeping their eyes on several key issues, including competition from foreign manufacturers, raw material prices, and new efficiency standards.

The Global Economy

Those who attended the Air-Conditioning, Heating, Refrigerating Exposition (AHR Expo) in Orlando in February noticed an interesting trend. Namely, Chinese and Korean companies that have traditionally manufactured only mini-split systems were exhibiting split system air conditioners. This type of equipment has normally been the domain of North American manufacturers.

"There is no doubt that the advent of the global economy has made everyone acutely aware of foreign competition," stated Michael K. Blevins, director of government affairs and communications, GAMA.

Foreign competition is definitely a concern for many manufacturers. "It's something we're watching," stated Tom Huntington, president, York Unitary Products Group, Norman, Okla. "We believe that the best place to manufacture unitary products for the North American market is in North America - closer to the majority of our suppliers, and obviously closer to our distribution."

Warren Heeley, president, HRAI, said that while they're starting to see some offshore competition in Canada, manufacturers don't seem too concerned yet. "I have heard distributors say that they're hearing the landed costs for a particular Chinese product is maybe only 75 percent of the landed cost for a U.S.-based product. So, there's definitely some awareness about the lower cost."

The lower costs are due to the fact that it is often just less expensive to manufacture an air conditioner in a country like China than in the United States.

"One of the most prevalent concerns among GAMA member companies today is how to continue to compete successfully in the global marketplace, given the cost of doing business in the U.S. compared with developing nations," stated Blevins.

This is of particular concern, especially considering a recent report that stated the average hourly pay (including benefits) of production workers in China is 80 cents, compared to $21.86 in the United States. Strong, healthy HVAC businesses are needed if good jobs are still to be available for American workers, noted Blevins.

These businesses must remain competitive in a global economy, while being committed to improving manufacturing efficiency and increasing productivity.

"However, our industries must look to the U.S. government to rein in regulatory costs or influence overhead costs such as skyrocketing energy prices, which undermine our ability to compete," he added.

Materials And Efficiencies

The world steel market was very unstable during 2004, and it continues to look volatile for 2005. The first quarter of 2004 alone saw steel prices increase by 60 percent. So far this year, steel costs have surged at least 30 percent due to strong global demand. Manufacturers also face rising costs of other materials such as plastic and copper and higher freight costs due to increasing fuel prices.

These rising costs of raw materials are hitting everyone hard - including China, which is the world's largest manufacturer of air conditioners, accounting for 60 percent to 70 percent of global output. In addition to the rising costs of raw materials, China experienced a compressor shortage, which caused the price of compressors to soar by nearly 30 percent in 2004.

This led to severe losses in sales and production delays among China's air conditioner suppliers. The situation is not expected to change in 2005.

To offset the rising prices of raw materials, many U.S. manufacturers are looking at other ways to reduce costs. "While we can't control the price of steel, copper, and other materials, at York Unitary Products Group we continuously seek production efficiencies, supported by state-of-the-art technology and processes at our three North American manufacturing plants," noted Huntington.

Improving production efficiencies will be a necessity, especially when the new 13 SEER minimum efficiency standard takes effect in January 2006. Huntington stated that York is already in production with systems up to 18 SEER, so the design, engineering, and manufacturing aspects are in place.

"We've been marketing high-SEER systems all along, so we think the real change now will take place primarily at the retail sales level." Dealers must embrace a new sales strategy and a new sales message, noted Huntington. "We like to put it this way: ‘Don't let a minimum efficiency standard be the maximum value you deliver to the customer.' In other words, efficiency is important, but it's not the whole story. We also need to sell comfort, humidity control, healthy indoor air, warranty and service support, and so on."

Huntington predicts that the majority of 10-SEER inventory will be cleared out in the first quarter of 2006, with the remaining inventories clearing out in the second quarter. All channel partners at every level will have to properly plan for this transition; however, he believes this is manageable.

Heeley added, "Today there are many different approaches to inventory amongst manufacturers and distributors. Depending on their customers, some distributors may stock up on 10-SEER equipment so they can have a price advantage. I don't think the situation is clear enough to try to make a norm about what the industry's going to do."

Blevins summed up the current industry concerns this way: "Affordable, reliable supplies of energy; overly burdensome state and federal regulation; unfair trade practices by foreign competitors; piracy and counterfeiting of brand names, trademarks, and products - all these are difficult and complicated challenges for the members of our industries."

Sidebar: Canadian Efficiency Pressures

The United States is under pressure to increase its efficiency levels in air conditioning equipment, but, according to Warren Heeley, president of the Heating, Refrigeration, and Air Conditioning Institute of Canada (HRAI), Canada is under even more pressure. "Canada ratified the Kyoto Protocol, and now the federal government, along with the provinces, are trying to implement a plan that will reduce greenhouse gas emissions and meet the country's international commitments," said Heeley.

In Canada, the pressure is on the heating side: Currently there's a push towards having a 90-percent condensing furnace be the minimum standard. The good news is that the federal government and utilities are looking at incentive programs that are all predicated on the 90-percent-plus products. This could mean some price relief for consumers.

The bad news is this mandate would eliminate the mid-efficiency furnaces from the mix, thus reducing consumer choice. "Some of our manufacturers are quite aghast that our federal government is bringing this up again. There's no question it's still on their minds. The question for our industry is, can we continue to convince them that eliminating mid's just doesn't make sense? That's where the controversy will continue to be focused," stated Heeley.

- Joanna R. Turpin

Publication date: 03/28/2005