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Is this a maturing industry or what?

August 15, 2000
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At the turn of last century, America counted dozens of automobile manufacturers. Now, six months away from the turn of this century, the U.S. counts three manufacturers (two-and-a half, actually, considering the Daimler-Chrysler merger). This is an earmark of a maturing industry: fewer players producing more product.

Within the past two months, evidence surfaced that this trend has been intensified in the hvac industry. Lennox buys the hvac business of Ducane; Carrier buys International Comfort Products. In these two deals, upwards of a million furnaces and air conditioners will move from one manufacturer to another.

There is even a lot of cross-product fertilization going on, as in the proposed marriage of Honeywell (controls) and AlliedSignal (refrigerants), and in the acquisition by A.O. Smith of the electric motor line of MagneTek.

When it started

We invite you to turn your attention to the chart, which symbolizes the 1979 starting point for the consolidation of manufacturers of residential and light commercial cooling equipment.

At that time, it took about 40 manufacturers to produce 2.7 million unitary products, a volume that a handful of manufacturers now routinely attains in six months.

Within a month of our making the original chart, General Electric (12% share) departed the hvac business, selling its unitary business to Trane. If GE couldn’t be number one in this market, it didn’t want to play. And Whirlpool (6%) was folded into Heil-Quaker, which in turn was folded into Inter-City Products which will, regulators willing, be folded into Carrier (The News, June 28 and July 5.)

Consider the “20 others” in the pie chart who had one-third of the market. Over the past two decades we have diligently reported on their fate, from “A” (Airtemp, acquired by Fedders) to “Z” (Zink, now part of AAON).

Some, like Fedders, left unitary to concentrate on window units and ductless systems. Others, like Williamson and Southwest, succumbed to Chapter 11. Still others, like Singer, were absorbed into SnyderGeneral, whose ultimate fate is too complex to describe here — except to note that leveraged-buyout ace Richard W. Snyder has surfaced as a 20% shareholder of International Comfort Products.

Fast forward to 1999, where four of the 1979 players (Carrier, Lennox, Rheem, York) are still standing. Lennox’s acquisition of the Ducane business adds a point or two to their unitary share, and Carrier adds about 11 points, putting it over 30%, according to our estimates.

Today, number two in market share (18%) belongs to Goodman Manufacturing, which wasn’t even in the production business in 1979.

Natural selection?

In a way, much of the tooling, assembly equipment and buildings used to produce the tens of millions of unitary systems made during the last 20 years have stayed constant; only their ownership changed.

Ditto for the scores of labels that attach themselves to central air conditioning systems. Some ancient labels like Tappan and Philco (now owned by Nordyne) have gotten a second chance, thanks to their brand recognition.

“I got a Mueller Climatrol condensing unit that needs a coil,” or something like that we hear almost daily. “Can you tell me where to get a replacement?”

All of this churning is a reminder that business survival is a Darwinian process, even during an exploding market growth.

Doubters should compare our 1979 NEWS Directory Issue with the current volume. This will hint at the mortality rate among equipment manufacturers since the waning days of the Carter Administration. During that 20-year span, when America produced more than 20 million housing units and the industry pushed out tens of millions of unitary systems, more than half of the producers dropped out.

Poor design, bad financial controls, bad product planning, inept marketing — the reasons for failure are many and diverse. As the big get bigger, economies of scale kick in, making it successively harder for smaller producers to stay afloat.

(This analysis, by the way, originated in a weekly newspaper founded in 1926, just out of its adolescence.)

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