Consumer Confidence Gives HVAC Manufacturers a Positive Outlook for 2018
Strong economy, housing market expected to fuel HVAC sales growth
For the year ending December 2017, sales of HVACR equipment showed solid mid-single-digit growth. That is according to Air-Conditioning, Heating, and Refrigeration Institute (AHRI), which reported that year-to-date combined U.S. shipments of central air conditioners and air-source heat pumps increased 6.5 percent over 2016, and shipments of gas warm-air furnaces also increased 6.5 percent for the same time period.
These figures come on the heels of surprisingly good news from the Bureau of Economic Analysis, which reported the real gross domestic product (GDP) of the U.S. increased at an annual rate of 2.6 percent in the fourth quarter of 2017, following an increase of 3.2 percent in the third quarter. Overall, real GDP increased 2.3 percent in 2017, compared with an increase of only 1.5 percent in 2016.
Add in low unemployment and a strong housing market, and it is no wonder why manufacturers are bullish about 2018.
For the last two years, Rheem Mfg. Co. has outpaced the industry in terms of growth, and the company is very optimistic about the outlook for 2018, said Mike Branson, executive vice president and general manager, Rheem Air Operations.
“The industry is stable, demand for housing is strong, and we are building a diverse product portfolio,” he said. “While we are optimistic about the economy and anticipate another growth year in 2018, we also appreciate the reality that it has been 10 years since the start of the Great Recession. The recovery has been strong and long, so we need to be prepared for the next cycle.”
Rheem’s diverse product portfolio includes a new residential platform and EcoNet™ connected solutions, both of which sold very well in 2017, noted Branson. The company also has a new commercial platform, which will be introduced this year. While sales were strong across the country, they were particularly robust in the southern U.S. due to growing demand as baby boomers retire and relocate to this region.
“Multifamily housing has been a solid growth area that will likely get even stronger as the rental market across the U.S. continues to outpace homeownership, predominantly in dense urban areas,” said Branson.
Lennox also experienced growth in 2017 and is expecting another solid year in 2018.
“I think this will be a strong year, with increases in the mid-single digits,” said Quan Nguyen, vice president and general manager, residential, Lennox Industries. “If you look at the economy, we have a high level of consumer confidence right now, with continued job growth and a strong housing market, which are all good indicators that 2018 will be a strong year for Lennox and for the industry.”
Sales of replacement equipment may be particularly strong this year, thanks to the millennium echo, which involves the record number of houses that were constructed between 2001 and 2007.
“Those houses are going to start needing replacement systems, and that could provide a little bit of additional tailwind for an even stronger 2018,” said Nguyen. “Those are largely R-22 systems, and with the new refrigerant regulations, it makes more sense to replace rather than repair them.”
Fujitsu General America experienced double-digit sales growth in both its residential and commercial equipment lines last year, said Andy Armstrong, vice president of sales and marketing, and he expects more of the same this year.
“We are very optimistic about 2018,” he said. “We are seeing strong growth in multi-head ductless products on the residential side of our business. This comes as more contractors are beginning to use whole-home ductless heat pump solutions where more traditional unitary systems have been used in the past. Contractors are getting comfortable with the technology, and homeowners are investing in better solutions for their homes, so we expect sales to grow.”
Strong sales of geothermal equipment are also expected this year, especially since Congress revived the federal tax credits in its recent tax reform package.
“With the passing of the tax cuts, we expect additional investments will stimulate growth and additional construction,” said Tony Landers, vice president of sales and marketing, The Whalen Co. “We anticipate multifamily and hospitality sectors will continue to grow because many young workers are moving from the suburbs back into the urban areas, creating a demand for high-rise housing with amenities.”
As far as regulations are concerned, 2018 will probably be a quiet year, said Nguyen.
“That said, we are preparing for the fan energy rating (FER) standard that will take place in 2019, and there will likely be some discussion about refrigerants that will impact our long-range plans, though I don’t think anything will have a significant impact on volumes or the mix of products that we sell in 2018,” he said.
One of the bigger challenges for manufacturers this year will be in the form of rising costs for wages and commodities.
“The good thing about low unemployment is job growth, but the challenge is, in order to keep those employees, you have to increase wages,” said Nguyen. “The cost of transportation is also going to increase, as will component costs, so there are a number of cost increases that we need to be aware of, and those will be challenges for us this year.”
The limited capacity of transportation carriers relative to demand is another challenge for manufacturers, said Branson.
“As the economy has continued to grow and the way people purchase has evolved, this has become even more of a concern because it creates risks in terms of OEMs receiving supplies and deliveries of finished-goods to customers,” he said. “There is good work happening with technology and supply chain optimization to address this and to minimize waste in the channel.”
The increasing commoditization of HVAC products is another challenge, as it puts pricing pressure on manufacturers to offer high-quality products at lower and lower prices, said Landers.
“This leads to us finding niche markets or products different from cookie-cutter products to provide something different at a reasonable price and profit,” he said.
Manufacturers are also concerned about the contractor labor shortage, which has been a struggle in the industry for a long time.
“Attracting enough people to the HVAC trade and then helping our distributor and contractor customers ensure that they are properly trained is our biggest challenge,” said Armstrong.
Nguyen agreed, noting whenever he talks with dealers, he hears that finding, recruiting, and hiring good technicians continues to be a challenge.
“Contractors seem to be in a perpetual state of recruiting and hiring because they just can’t get the amount of skilled labor that they need,” he said. “We want skilled labor installing our product because we make a great product, but if it’s installed incorrectly, it doesn’t matter which manufacturer it is, it’s going to tarnish the industry’s image.”
Of course, proper training is key to making sure products are installed correctly, which is why many manufacturers are teaming up with trade schools in order to provide the necessary educational resources.
“We just partnered with Lone Star College in Houston, Texas, to open a new Construction and Skilled Trades Technology Center, which enrolled 800 students in its first semester,” said Branson. “But there is a need for training and education at all levels, which is why Rheem opened five new Innovation Learning Centers across the U.S. and Canada in 2017. These are state-of-the-art training facilities that significantly increase our capacity to help contractors grow their businesses.”
Even though challenges are expected this year, manufacturers are feeling positive about the future.
“We have an optimistic outlook and are investing across the enterprise — from facilities, to product development, to training — to make sure we and our contractor partners are well prepared to meet the demand and changes in the marketplace,” said Branson.
Publication date: 3/12/2018