Manufacturing Executives Discuss the State of the Industry
3 executives discuss everything from the economic outlook to regulations in the industry
CHARLOTTE, N.C. — At the recent ACCA Conference in Charlotte, North Carolina, The NEWS had the opportunity to speak with three HVAC manufacturing executives about the issues facing the industry. Gary Michel, senior vice president and president of residential HVAC at Ingersoll Rand; Mike Branson, vice president and general manager of the air conditioning division, Rheem Mfg. Co.; and John Galyen, president of Danfoss North America, discussed everything from the economic outlook to regulations in the industry during this interview.
The NEWS: How do you see the economic outlook for the industry in 2016?
Michel: We had a mild winter which sets up a slow beginning of the year, but we are seeing moderate growth in our business. Residential new construction continues to be fairly strong. I think the multifamily component of that may be slowing a bit. Replacements are growing, but only in the low-to-mid single digits, which is good enough. People are starting to view their homes as investments again, so we are seeing an increase in higher-efficiency replacements.
Galyen: The first couple of months were a little softer than we expected, but the underlying industry sectors we serve are OK and have been growing slowly. I’m still fairly optimistic the balance of the year will be favorable.
Branson: We project a slight up year for the industry. We’re looking forward to some more stability as the industry adjusts to the impact of the regional standards changes from last year. Finally, in some ways, we can get to a normal year again. We see modest growth in new construction, which is encouraging.
NEWS: How did the industry handle regional standards?
Branson: I think people have done the best they can with regards to the changes. There is still a lot of uncertainty with the enforcement of the regulation, so the effects have not yet been fully stabilized.
Michel: Overall, the industry was pretty responsible, and it went fairly well. Everyone got their products out in the field, and I think most of that is behind us. Generally, efficiency changes are good as long as they don’t hurt consumers. Ultimately, the equation for energy efficiency works.
NEWS: How do you feel about the proposed 92 percent furnace standard?
Michel: We have some technological concerns. Not across the board, but in some areas. I’m not sure if it’s a benefit to customers across the board. Our position has been that we are for higher efficiency systems in homes, and we are all for improved comfort in homes, but it has to be a value to the consumer. That is what we need to work through as an industry with the regulators. First of all, is it possible? Second of all, is it economically feasible for the consumer? In the case of the furnace, I still think we have some work to do.
Branson: This is an interesting standard, as it could force many homeowners into a very expensive decision. It certainly impacts the repair-versus-replace scenario. And, if they opt to repair, they’re not reaping the benefits of more efficient equipment. It could easily drive homes from gas furnaces to heat pumps due to venting regulations. There will be a lot of challenges. Rheem supports higher efficiency furnaces, but believes we cannot let a federal standard ignore the safety concerns a condensing standard could have on the replacement market.
NEWS: Do you see regulation of the HVACR industry increasing or decreasing?
Galyen: I think we will continue to see increasing regulation. In the short term, we will see more focus on SNAP [the U.S. Environmental Protection Agency’s Significant New Alternatives Policy program] for selecting alternative refrigerants and delisting higher GWP [global warming potential] refrigerants. Longer term, I think regulators will recognize we are reaching the ‘max tech,’ or the point of diminishing returns, when you look at the cost-benefit analysis — driving the minimum efficiency standards higher does not give us the best return. We will soon see a shift in focus toward installation and a whole-building approach.
NEWS: What is the biggest trend you are seeing that perhaps our contractor readers are not aware of?
Branson: Rheem has taken notice of many innovative ways that contractors go to market. A number of them are savvy in how they connect and retain relationships with homeowners, and using social media has become an increasingly valuable practice. These smart contractors are also carefully evaluating the ramifications of selling online and asking questions like, ‘Is this a threat or an opportunity? How can I as a contractor take advantage of that and approach customers in a different way?’
Galyen: The Internet of Things is going to become more relevant in our industry. We will continue to see the use of big data in decisions about smarter components used in smarter systems in smarter buildings connected to a smarter grid. Homeowners and building owners will expect to be able to control the comfort of their environments from mobile devices in real time.
Michel: There are two. The first, which we have personally talked about several times, is connectivity. I think it’s a space that air conditioning contractors can and should really own. It’s more than just the comfort and efficiency in the home; it’s the entire envelope. We are talking lighting, blinds, security, and more. I think HVAC contractors are trusted in the home, which is a person’s most intimate environment. They are being asked for their advice on something people are not doing every day. The whole idea of home connectivity is a booming market and there are a lot of players out there. But nobody is integrating this for consumers. While there are do-it-yourself solutions, people are really looking for others to do it for them, or at least do it for them first, so they are sure at the beginning they’re not making any mistakes. I think this is a trend contractors should embrace.
The other one has been around for a long time, but I don’t think the industry has embraced it as well as it could, and that is air quality within the home. As home envelopes are tightened, there is an opportunity for us to play a larger role in homes and in buildings.
NEWS: Online sales are popular in every aspect of commerce. Do you believe online retail will alter the two-step distribution model in HVAC?
Galyen: I don’t think so, because there is a lot of value in having local expertise and local inventory — and that is looking at it from both an equipment and component standpoint. I am an Amazon Prime member, but I can’t imagine they will be delivering a 5-ton compressor to my house anytime soon.
Michel: I think there are a lot of things that can disrupt our industry. Things are sold online every day. In HVAC, about 45 percent of consumers conduct research online before making a purchase. The disruption is in breaking through the lack of transparency we have created around HVAC. We’ve made it a mystery and hard to understand. We use acronyms that people are unaware of, and we don’t do a good job defining them. That being said, contractors play an important role because, at the end of the day, someone has to install and service that equipment. We have to be aware of this world where information, products, and support are offered in different ways.
Branson: Distributors bring a tremendous value to our industry. Part of that is access to local inventory, which is crucial when a part is needed quickly, and that is just one aspect of it. Distributors are business consultants to contractors as well as lines of credit to them. They help with technical training, and, regardless of whether the path of the equipment might change, there is still a role for such local representation in the market.
NEWS: With the election, American manufacturing has been in the news a lot. What can the country do to make manufacturing in America more attractive?
Michel: Our Trane heat pumps, air conditioners, furnaces, air handlers, coils, and light commercial packaged units are assembled in our U.S.-based manufacturing facilities. We are proud of that. At the end of the day, we ask, what kind of value can you put in your product, and where do you want to manufacture? Every company has the opportunity to make those decisions. For us, it makes sense to have four North American manufacturing facilities. Our customers seem to appreciate that.
Branson: It is a global market, and we need to recognize the market is global and that manufacturers are global. We make products all over the world with manufacturing sites in North America, Central America, and South America, as well as Australia and in the Asia-Pacific. And, in some cases, we manufacture products in one market designed for sale in another. For instance, we produce equipment here in the U.S. that we export to the Middle East. I think the recognition that it is a global economy is extremely valuable and that certain manufacturing techniques and technologies might be more optimal in one location than another. That said, it does not discontinue the opportunity to continue manufacturing in the U.S.
Publication date: 4/25/2016