SAN ANTONIO - Contractors attending this year’s Air Conditioning Contractors of America (ACCA) conference had a lot of burning issues on their minds concerning the HVAC industry. Thanks to the much-anticipated CEO Forum that is held at the conference every year, attendees had the opportunity to ask manufacturing leaders about those issues that directly affect their livelihoods.
NEWSeditor-in-chief Mike Murphy compiled the questions and asked the leaders of six major manufacturers in the industry about the economy, recent elections, dry R-22 units, and much more. Those participating in the forum were Robert McDonough, president - residential/light commercial systems, Carrier; Brent Schroeder, president - air conditioning division, Emerson Climate Technologies Inc.; Dave Swift, president and CEO, Goodman Global Inc.; Gary Bedard, vice president and general manager, Lennox Industries Heating and Cooling; Bill Hanesworth, vice president and general manager, air conditioning division, Rheem; and Dale Green, vice president and general manager, Trane/American Standard Heating and Air Conditioning.
ECONOMIC UNCERTAINTYThe economy was on the minds of most conference attendees, and it was no surprise that the first question concerned how the industry fared in 2010 and whether the economy would be any better in 2011. Most manufacturers agreed that the year showed mixed results, given that furnace sales were up in 2010, while cooling equipment sales were down.
“It was definitely a mixed bag for our company,” said McDonough. “Residential looked really good in the first quarter last year, and we thought we were breaking out of this four-or five-year cycle of down shipments. That turned out to be a false dawn, thanks to a push of R-22 units that had been produced prior to the beginning of the year. It was a rough year for residential cooling, considering we had really hot weather, which should have driven a lot of equipment shipments and did not. That was disappointing. Furnace sales were up, probably as a result of tax credits. Light commercial unitary equipment sales were better than we thought they would be, too, with shipments up about 5 percent. It wasn’t a breakout year. The economy feels a little better coming into 2011, and consumer sentiment is better. We’re forecasting the residential market to be up this year. The heavy equipment will take longer to come back, but generally speaking, we feel better about 2011.”
Swift added that even though 2010 did not have the expected results in cooling, it was still the first time in five years that the industry was up. “It’s been a dramatic change the industry has seen in the last few years. I think in 2010, we hit bottom, and it’s now climbing, and we at Goodman forecast that shipments should be somewhere in that mid-single-digit range in terms of unit growth. There is still a lot of uncertainty around the unemployment situation, which may cause consumers to postpone investments in cooling equipment. But we still think 2011 is going to be an up year for the industry.”
As far as 2010 is concerned, Bedard noted that at the end of 2009, there were a lot of R-22 units that went into the channel, which boosted sales in new construction. There was also strong volume in commercial construction in the first quarter of 2010, which completely fell off after the tax credit ended. “As we look at 2011, there’s a lot more positive consumer sentiment out there, but unemployment is still a drag. Our belief is that in the new construction market, the first half of the year will have a very ugly comparison to last year, and therefore it will be down tremendously. There will probably be a little bit of growth in the second half, but it will be essentially flat for the year.”
Green agreed with most of these assessments, but he said that contractors should also feel heartened by the fact that they survived the recession. “The good news is that contractors learned to hone their skills and sell harder and stronger, which will be even more important in 2011. There’s a lot of uncertainty in the economy right now - consumers are not just going to race out and grab us. The lessons we’ve learned over the last four years will help us as we enter 2011.”
SUCCESS AND FAILUREThe tough economy has resulted in winners and losers in the HVAC industry. Some contractors went out of business, while others posted record profits. When asked why some contractors failed where others succeeded, Swift noted that those with high integrity, who focused on the consumer, and delivered great value for the services they provided were most likely to succeed. “There are a lot of contractors out there who do not understand those basics. As an OEM, we see the variability in contractors - there are huge differences in skill sets. We try to focus on making our products easier to install, but it starts with the commitment of contractors to be excellent at what they do.”
The difference is attitude, said Bedard. “Contractors who believe their fate is in their hands and not in someone else’s will take the steps necessary to change with the times, whether that means being more creative, making changes to the business, or obtaining additional training. That stems from an attitude of being in control and doing what needs to be done in order to make the changes to move with the industry. The most successful contractors are committed to that.”
Green said that attitude boils down to commitment, and as business owners, successful contractors are committed to running their businesses from the outside in. “What I mean by that is listening to the customers first and then building the business processes around what that consumer is saying. Companies that do that are way more successful than other businesses that do not.”
The ability to forecast trends and react accordingly is another reason why some contractors succeed while others fail, said Schroeder. “We survey homeowners, and while there are a lot of people who are price sensitive, there are big parts of the population that will value and pay for efficiency, technology, and comfort. Successful contractors can see those different segments of the market, anticipate those trends, and react in order to take advantage of them.”
Building long-term relationships is important to successful contractors, said McDonough. “They don’t just parachute in when there’s a problem. Contractors who build a relationship and stay in touch with customers will be successful. Recognizing these valuable relationships escapes some people during the go-go times, but it all comes back to roost when things slow down.”
ELECTIONS AND PHASEOUTSThe elections last fall resulted in Republicans taking over the House of Representatives, and many wonder how this will affect the HVAC industry. Bedard noted that as a result of the elections, the industry would probably see a lot less legislation and a lot more regulation. “There are many reasons why Congress is concerned about this industry. We use energy, and there’s an opportunity to save energy if you install certain products. This is an inviting target to Congress. At the end of the day, I don’t think we will see sweeping legislation, but the focus will turn back to the executive branch, the Department of Energy (DOE), and Environmental Protection Agency (EPA). That could result in more regulation as opposed to legislation.”
The sweeping legislative changes are definitely gone, said Hanesworth. “I think there’s been a move toward the middle. Clearly there’s going to be a lot of budget cutting, and I think there will be some tax increases to deal with the deficit and inflation.”
Americans sent a message to the government, stating they wanted a change in fiscal policy, said Green, and this means the days of big tax credits are over. “While we are huge consumers of energy, the government programs of the past have been very expensive. There are still 25C tax credits available, but the $1,500 tax credits are gone because the public will not put up with that anymore.”
Swift stated that the new balance in Congress means that small businesses can be more optimistic. “Prior to the election, many were concerned about where the administration was going as it related to business. Ultimately, businesses make America go, and if we don’t have a forum that supports successful business, we’re not going to succeed as a country. I certainly feel much encouraged by the elections - better now than I did a year ago.”
Questions regarding the possible phaseout of HFCs were also raised, but replacing R-410A is going to be difficult at the moment, given technology constraints, said Green. Swift added that as an industry, there is a need to think about the next refrigerant that will need to be embraced.
“We are earmarking funds to look at the future and investigate what those refrigerants might be. The long view of this is, we’re not going to see any change in the next 36 months. However, the best things OEMs can do are getting ahead of the curve and begin to understand the challenges that are out there. The only thing we can say with certainty is there is likely to be a change.”
McDonough does not see any acceleration in the phaseout schedule of HFCs. “Twelve or 18 months ago, there was a lot of discussion about an energy bill, a climate bill. That’s all dead, and it will stay dead for awhile. I believe HFCs will be in place for awhile - years most likely. There’s early research going on at our companies and at chemical companies, and there will be suitable substitutes when the time is right and it is required.”
Schroeder agreed that the phaseout of HFCs is not imminent, but he added that it is necessary to look at the global markets as well. “There is a lot of activity in Europe and Asia, as they have different strategies on refrigerants. In China, for example, they’re making a big move to an R-32 refrigerant, which is slightly flammable, and that’s a great concern.”
CREDITS AND REBATESAnother question that came up regarded whether or not there is a future in federal rebate programs, such as HomeStar, which most believe is dead. McDonough noted that the environment is not right for a tax subsidy. “There’s some merit to programs that drive a national agenda, if that agenda is energy conservation and less dependence on foreign oil. I think the government might find ways to have targeted programs that make sense. Certainly as a manufacturer, we can get behind something like that.”
The problem with the tax credits was that they were successful in terms of moving efficiencies up, said Swift, however, they did not result in creating jobs. “If you think about the environment we’re in today, the focus is on whether spending does anything to drive job creation, and unfortunately, we think the tax credits helped move products, but they did not create jobs.”
Contractors, however, did become dependent on tax credits, and many are concerned about what may happen after the tax credits are gone, noted Hanesworth. “That’s a real challenge. The contracting community has to sell one system at a time and create a value for the consumer. There is going to have to be life after tax credits.”
Green added that the tax credits were a drug that everyone got comfortable using. “I would hate to see any of us build a future strategic business model on a government subsidy. Ultimately, we have to get back to basics, and that is, how do we make sure that we’re delivering the right value proposition to the consumer? That’s what is going to help us survive going forward.”
Many contractors were successful before the tax credits, and they will be successful after they’re gone, said Bedard. “It may take some creativity, but there are a lot of creative people in this industry.”
Even though large tax credits may be gone, utility rebates may still be around for awhile, given the fact that utilities are always looking for ways to lower demand through the use of higher efficiency equipment. “Utilities can’t afford to build power plants because there’s no payback,” said Hanesworth. “They really have to come to the table in order to drive efficiency in the market.”
DRY SHIPPING DILEMMAOne of the more interesting developments in the HVAC industry over the last year is the manufacture of dry - or uncharged - R-22 units. Hanesworth noted that his company first started manufacturing dry units in response to customers who owned large apartment complexes. These complexes could not be retrofitted easily to utilize R-410A equipment, so owners were becoming desperate for a solution.
“We made a decision to go into that segment, and then it took off from there,” said Hanesworth. “We never intended it to be long-term. The way our orders are coming in, there’s a projection there will be 700,000 or 1 million R-22 units manufactured this year. Our institutional buyers bought a lot, but our distributors are not loading up on dry R-22 units.”
Swift noted that manufacturers, as well as the Air Conditioning, Heating, Refrigeration Institute (AHRI) representatives, met with the EPA last year to try to close the language in the regulation that allowed the legal manufacture of dry units.
“Unfortunately, EPA chose to not change the language. At Goodman, we decided not to disadvantage any of our customers so we are manufacturing the units. I personally think that economically, it’s a good thing for consumers. Think about what happened last summer, when we had one of the hottest years on record, yet we saw very slow performance in cooling equipment shipments. On the other hand, sales of room air conditioners were up over 40 percent. Clearly, consumers didn’t put money into repairing their systems; instead, they went out and bought an air conditioner for the bedroom. The economic environment is still challenging, so I think giving consumers a solution that is more economically viable for them is good for the industry.”
While there are valid reasons for manufacturing dry R-22 units, this does not represent the finest hour in the HVAC industry, said McDonough. “We had 20 years to phase out R-22. We knew it was going away, and here we are. I can point a finger at EPA, which didn’t do its job. But I’d like to think our industry is better than this - although I have to admit we’re manufacturing these units, too. We’re not going to disadvantage our customers. But this is not transparent to consumers - this is the intentional mismatching of coils. It’s a chop-and-drop, where a new unit is put on an old coil. There’s also a question about what this will do to quality, given that units will be charged in the field instead of in factory-controlled environments. And does EPA think people are going to recycle? No, they’re going to cut the line, blow the charge, and install the new unit.”
Given the resounding applause from contractors in this audience, it seems that most agree that manufacturing dry R-22 units is not in the best interests of the consumer or the industry. Contractors in the audience also appreciated the forthright responses from the manufacturers on all the topics covered in the forum, with one audience member noting, “This was one of the most honest discussions we’ve had in this industry in a long time.”