“A cycle within a season” is how Steve Tusa described the recent past for the HVAC manufacturing sector. Tusa, managing director, electrical equipment and multi-industry at JP Morgan Securities, moderated this year’s Voice of the Supplier session for the virtual HARDI Summit in early December.
Before the panel, Tusa offered some reflections on year-to-date data and some predictions. Tusa sees OEM stocking patterns and any price moves as keys to watch in 2021. He noted that with Lennox and Trane standing out as recent share gainers and Carrier heavily investing in product line as a public company now, how major players approach pricing will be critical.
With product availability on everyone’s mind, Tusa cited the “pretty significant divergence” in how OEMs handle their own distribution strategies as another variable.
Tusa outlined that Lennox does 80% of their own distribution, while Carrier uses others including Watsco for the bulk of theirs. Johnson Controls “performed extremely well” while using a lot of independent distribution, he said, while noting that Carrier has also performed well, outperforming through the third quarter of 2020.
A major dynamic this summer, Tusa said, involved Goodman, where a plant experienced some Q2 fulfillment issues that spilled into the next quarter.
If Goodman can crank up a new factory and “start to claw back those drops,” he said, that would be another significant factor for 2021.
All in all, Tusa said, he sees limited pent-up market demand continuing into the new year. With the economy possibly facing some residual sluggishness in the first quarter or two, he takes a more cautious view about demand than some, expecting “low single-digit rates” of growth, “more in line with installed base norms over time.”
Following Tusa’s comments, Steve Yurek, AHRI president and CEO, hosted a conversation including Nathan Walker, senior vice president with Goodman Manufacturing, and Mike Branson, president, Global Air at Rheem Manufacturing.
Yurek asked the manufacturing executives what distributors have done well through the pandemic. Branson lauded distributors who were quick to react and respond with safe solutions to keep doing business. Adjustments included curbside pickup, touchless interactions, and expanding into PPE and cleaning supply offerings. He noted that distributors who had already invested in their e-commerce presence found an unexpected payoff for that work.
Goodman Manufacturing’s Nathan Walker thinks pandemic experiences could change some companies’ inventory strategies from “just in time” to something more like “just in case.”
Goodman’s Walker added that some distributors made the most of a lull earlier in the year by engaging in more online training, in turn making employees more productive coming out of the dip.
Asked for examples of what distributors could have done better, Walker preferred to look at it through an industry-wide lens. Contingency was the key word, in his opinion.
“Our industry has looked pretty stable since 2010,” he said, apart from some mid-decade regulatory changes. He noted that it is easy to assume that status quo will continue when in reality, all parties “can do a better job thinking about ‘what if’ in our business plans.”
Turning the post-2020 spotlight toward the manufacturers themselves, Branson noted that “all of the stresses of the supply chain got exposed.” That included weaknesses in manufacturers’ own supply chains, issues in how fast they can ramp up, and the inability to forecast problems better.
He bottom-lined these lessons learned as “never go light on inventory.”
AHRI’s Yurek built on that to ask if the pandemic’s supply chain challenges might put a dent in the popular “just in time” manufacturing strategy that works to reduce the amount of stuff sitting on shelves.
Walker thought pandemic experiences would indeed change some inventory strategies from “just in time” to something more like “just in case.” Distributors who already had that kind of mindset fared better over the summer, he said, although the longer-term impact is harder to predict.
What Will Stick?
It was a disruptive year for contractors, down to altering daily habits, but all agreed that the pandemic forced some useful adaptation and learning.
“Some contractors prefer face-to-face,” Walker said, “going in person and grabbing a coffee and chatting with counter sales.” But those people were forced into digital interaction and more familiarity with e-commerce tools.
Walker said that temporary level of embracing e-solutions might linger for a while — “might hold on for another five years or so, before turning the company over to their son-in-law or whomever” — but sees the adoption of e-commerce tools as only heading upward.
While acknowledging that the early birds in e-commerce adoption did pick up some extra worms, it’s not too late for others to find affordable ways to interact with others digitally. He noted that as an OEM, his company is extremely limited in its travel right now, “but we’re staying connected even more than we were before,” and he sees wholesale partners doing the same.
Rheem Manufacturing’s Mike Branson sees this year’s shakeup as “an opportunity for distributors to rethink their entire operation and footprint” — a chance to streamline what interactions look like and how they’re providing service to customers.
Branson sees this year’s shakeup as “an opportunity for distributors to rethink their entire operation and footprint,” — a chance to streamline what interactions look like and how they’re servicing customers.
Yurek asked for advice that distributors might consider to improve their value to both OEMs and contractors in 2021.
“When I think about how our industry uses data,” he said, “it’s very much in arrears.”
While many companies tend to get aggregated data three weeks later, he said, “collectively, we have a lot of real-time data where we could be more proactive when it comes to big changes,” he said. He pushed the different entities in the chain to partner to make better use of that data, working together toward better real-time solutions for their customers.
Branson finished his comments by reminding attendees that their work matters.
“We saw people having to quarantine this summer, and they could do it in comfort. Remind yourselves, remind your teams, what we do is important.”
Parts and Components Perspectives
The supplier landscape isn’t only about the biggest players. At this year’s HARDI Summit, team leader of market intelligence Tim Fisher discussed a fresh survey of 27 parts and components manufacturers to provide a deeper understanding of what has happened and is happening in the HVAC supplier world.
HARDI’s Tim Fisher shared survey results including manufacturer hopes that distributors will invest in greater outside sales presence, emphasize long-term relationships rather than individual products, and provide more direct access to customers to help pull demand through the channel.
Just over half of the companies exceed $25 million in projected 2020 revenue, and 22 of them sell in every HARDI region. Seventy-four percent prefer the wholesale distribution method, slightly higher than the overall preference.
Over half (56%) project 2020 to be better than 2019. Fifteen percent expect about the same result, while 30% project a drop. The bigger companies (more than $25 million in revenue) have tended to do better this year, and only 25% of them expect to end the year down in sales compared to 36% of the smaller participants.
Sixty-two percent said COVID and the associated recession had affected revenue negatively or very negatively, while 24% answered positively or very positively. Again, the positive responses tiled significantly toward the larger companies.
Fisher noted that smaller companies tended be hit harder in the commercial segment, while larger companies were seeing positive tailwinds in their residential business.
Perhaps surprisingly, 42% said they had seen no impact or limitation on supply. This was an area where the big/small dynamic reversed: more than half of the larger companies said the pandemic had a “heavy impact” regarding supply issues.
Priorities and Prognostication
Asked to rank which attributes were most important to them, the participants’ top three were product availability, price, and customer service, in that order. Product availability topped the list regardless of company size. Smaller companies placed accuracy as second, whereas larger companies put customer service in the next slot, although Fisher cautioned that difference may have been due to the relatively small sample size.
Part of the survey invited open comments about what distributors could do better to help suppliers. Some of Fisher’s picks to share here included investing in greater outside sales presence, emphasizing long-term relationships rather than individual products, and providing direct access to customers to help pull demand through the channel.
Finally, HARDI asked surveyed companies to predict which product category they expect to grow the most in 2021.
The larger companies’ most popular choices were IAQ, refrigerant recovery, energy-efficient motors/fans, next-generation refrigerants, and ductless equipment.
IAQ began the smaller companies’ list, too, but expectation diverged from there. Their eyes are on scroll and screw compressors, ductless equipment, connected products and controls, elastomeric foam insulation, and small-duct, high-velocity systems.