Coronavirus Operations: HVAC Supply Chain Meets New Adversary
The news and the luck aren’t all bad as a global health crisis reaches the U.S., but potential threats loom for the industry
One HVAC manufacturing executive had spent the first half of March on the road, attending meetings with a host of industry professionals, including several contractors. More than a week into the month, he recalled, he had not seen anyone think twice about shaking hands.
“Nobody was bent out of shape (about COVID-19), or changing their mode of operation,” said the executive, who preferred to speak anonymously.
“I got back late Thursday night, and then literally by Friday, people were shutting their offices.”
As experts and those who lived through it in other countries had expected, COVID-19 achieved its foothold in the U.S. and quickly expanded its geographical presence. The back half of March found not only many offices but entire localities largely shut down.
The fluid situation has left the HVAC world with an unusual set of problems, an occasional opportunity or stroke of good fortune, and some early insights regarding the state of the industry’s supply chain
Wholesalers reside in the heart of the traditional HVACR distribution model. Heating, Air-conditioning & Refrigeration Distributors International (HARDI) has executed its own swift operation, launching a multifaceted resource page dedicated to COVID-19 related information and business-related guidance for its members.
TOE THE LINE – If transitioning counter sales completely to will call or delivery is not practical, HARDI encourages counter employees to maintain six feet between themselves and customers, and to consider measures like a tape line on the floor for customers while they wait. Photo by Tom Page (CC BY-SA 2.0)
In addition, HARDI conducted a mid-March member survey to collect experiences and comments from its members. Brandin Bursa, account manager for HARDI’s supplier and service vendor members, previewed some in-depth comments from three supplier/manufacturers. All of them had taken a range of now-standard precautions to protect their employees, whether their duties involve inside responsibilities or more interaction with customers.
None of the supplier members reported existing inventory or supply chain issues. One did not expect supply chain issues to develop “as long as this is limited to four weeks.” The continued availability of motors from Mexico represented the only factor beyond American borders.
That supplier and others may be relieved to hear that as of March 19, HARDI Mexico reports that “no manufacturer has reported a supply problem, and [the manufacturing community] does not foresee that in the next 60 days they will have problems delivering any of the products that the distributors need.”
Another member has seen a trend of some customers buying further out than normal, which has required some adjustment, but otherwise echoes the feeling of business as usual for the moment.
A third respondent had started to boost production several weeks ago and is encouraging its distributor partners to move up summer demand orders to get more equipment into the channel now, ahead of any potential disruptions. With so many more people working at home for the semi-foreseeable future, the third contact also theorized that homeowners might show more interest than usual in the condition and performance of their HVAC systems.
That hunch dovetails with what the first manufacturer quoted in this article had been hearing from contractors during his work trip. Although many of those conversations predated the U.S. tipping point for sending workers home, the contractors he met had already reported a stronger interest than usual in system replacement for this time of year. That burst of activity may prove helpful in the event a recession does develop, since downturns often portend more of an interest in repairs than new systems.
COULD HAVE BEEN WORSE – COVID-19 hit China the hardest during a period that included pre-planned factory closures for Chinese New Year, and many U.S. customers had planned accordingly. Supply normalcy will depend on how strongly China’s output rebounds for second quarter 2020, typically the busiest for U.S. demand.
As of March 17, he said, his company’s sales were within 3 percent of last year.
Elsewhere, Quan Nguyen, vice president and general manager for Lennox, added that his company’s “production has remained at normal levels, and product is at planned capacity in our facilities. We have faced similar challenges in the past and will overcome these challenges ahead.
Sarah Jilbert, HARDI wholesale account manager, shared a preliminary overview of distributor feedback from a just-completed survey. As with the manufacturers, the distributor comments reflected the top priority of employee health and proper adjustments during this time.
Differences start to crop up at the counter. Jilbert described some distributors as keeping their counters open, while others have moved exclusively to curbside pickup or delivery.
Syretta Williams, HARDI’s manager of training and HR Solutions, advises distributors who do continue their counter business to “ensure they are standing back as far as they can from the customers, perhaps even putting up a sign at the counter advising that for ‘your protection and ours, please stand back.’”
Williams added that taping off an actual line on the floor 6 feet away from the counter may help, and she endorsed shifting on-site counter sales to window or will-call service to minimize contact with, and among, customers.
Beyond the survey, Ferguson Enterprises CEO Kevin Murphy recently wrote a letter to customers that mentioned how proper norms for the times can cause even seemingly small changes to feel odd for a distributor or contractor.
“While not welcoming you with a handshake might feel awkward for us, please let it be a sign of how much we value you, your health, and the health of those you love,” he wrote.
According to a Ferguson representative, the company has also offered some advice to its customers for interactions with their own clients. In addition to skipping a handshake, those tips include calling ahead before delivery or install, rescheduling appointments if the tech is not well, and offering signature-free methods of accepting deliveries.
HARDI Mexico’s board of directors issued guidance mirroring many of these recommendations. Their guidance also advises letting the customer swipe their own card when necessary, and asks counter personnel to wear latex gloves for cash payments.
As for what the wholesalers in the HARDI survey are hearing from contractors, Jilbert reported a mixed bag.
“Some distributors report that contractors are still getting jobs, and others report that they are extremely slow, or that their contractors are only doing emergency jobs,” she said.
That last scenario raises the possibility that some dealers may elect to throttle their own workloads depending on circumstances.
Tim Fisher, HARDI’s team leader for market intelligence, wrote what might the cornerstone of HARDI’s new COVID-19 online resource.
In his article titled “COVID-19 and the HVAC Supply Chain,” Fisher reported that over the last five years, the U.S. has imported an average of $1.8 billion in unitary a/c equipment and over a quarter billion dollars in parts and intermediate goods for a/c equipment. This sets the scene for a more global, data-driven look at shipments, changes compelled by the virus, and possibly some darker clouds on the horizon.
UNBROKEN CHAIN – The virus and proper precautions against it will tend to expose any weakness in the interconnected world, whether that is a link in a supply chain or vulnerability to a single infected person entering the building.
The critical role of Chinese manufacturing and the effect of COVID-19 are fairly common knowledge at this point. So are the extreme difficulties that many in northern Italy have experienced as the virus has ravaged that area. Fisher relayed a lesser known fact: Deeply affected regions like Lombardy and Veneto also happen to be “an important source of highly engineered parts for HVAC systems.”
On the other hand, the industry may have caught a couple of breaks regarding the timing of the virus and Chinese production patterns. Fisher writes that due to the Chinese New Year and the annual factory closures that accompany it, experienced U.S. suppliers had scheduled around much of the first quarter of 2020, when that country had to deal with the hardest blows of the illness.
As a result, the second quarter traditionally represents the U.S. HVAC industry’s peak demand for Chinese parts.
“With few exceptions,” he reported, “those suppliers are broadly indicating that many of their Chinese factories have reopened and are expected to reach full capacity by the end of March.”
One caveat for distributors interested in tracking related indicators: Data regarding Chinese regional energy consumption or demand for materials may be manipulated. The metric worth following for a sense of how China’s economy normalizes, Fisher said, is “the volume of shipping containers arriving at U.S. ports from China.”
Stateside, Fisher points interested distributors toward worker availability trends due to COVID-19, as well as signs of any broader construction slowdown.
“However,” he wrote, “distributors should be mindful that even in the leanest years of the Great Recession, replacement demand only dipped to 5 percent of the total installed base. Total replacement demand for a/c equipment, whether in good times or bad, generally remains between 5 and 7 percent of the total installed base, and there is little reason to believe that this time will be different.
In Fisher’s assessment, the takeaway is that distributors should take steps to guard against product shortages, since “threat of dwindling supply remains the greatest threat” to wholesale distribution during this onset of COVID-19.
Dr. Anirban Basu concurs with the short-term emphasis on smart inventory management. Basu contributed to this month’s HARDInomics analysis, which the association chose to open to the public in light of current events.
Basu outlined how the Chinese New Year did result in reduced cargo deliveries, and that any lingering virus-related slowness in shipments will only worsen availability.
Even then, he said, tight availability would not necessarily have a negative impact on profit margins. Those supply chain slowdowns or interruptions could drive up the prices of certain items already in U.S. warehouses.
“Distributors need to fully understand the nature of scarcity and customers’ willingness to pay before parting with precious inventory,” Basu wrote. “This may be especially true of technologies that relate directly to the crisis or may appear to, including technologies such as ultraviolet disinfection systems.”
China may have commanded the headlines with regard to COVID-19 and manufacturing abroad, but Guitze Messina, executive director of HARDI Mexico, noted the U.S. imports more goods from Mexico than any other country. That should serve to comfort the industry in this circumstance.
“President Trump already made it clear that no commercial trade will be affected between Mexico and the U.S. So if trade with China was not stopped, we can be sure that it will not be stopped with Mexico,” he said — especially since Mexico to this point has had a much less harsh experience with COVID-19.
Messina reported that in Mexico, a larger factor has been the exchange rate, which spiked a full 25 percent since the beginning of March.
As a result, he said large commercial projects have been delayed in hopes that rate will calm down in the weeks to come. Messina said this trend supports the trend he sees toward residential business, where contractors there can assist homeowner at the start of the warmer season and where demand for parts has remained normal.
The final member of HARDI’s analytic trio is market research and benchmarking analyst Brian Loftus. In the HARDInomics report, he noted that forecasters were already concerned about 2020 before COVID-19 developed, due to declining U.S. industrial production as far back as July 2019.
That trend, Loftus expects, will continue in light of the virus, recent Boeing troubles, and lower oil prices.
Loftus discussed a graph representing Bloomberg Economics’ Recession Probability Indicator, a figure that lurched above 50 percent with the current crisis. While it may well move higher in the near future, Loftus observed that it is not a sure thing, either.
“If it moved this quick one way, then it can quickly recover also,” he wrote to HARDI members. “For the economy, this could be an exogenous hiccup instead an enduring economic illness.”
(Note: The various mentions here sometimes only scratch the surface of the complete analysis and information on the HARDI resource page, where visitors can also submit questions.)