PALO ALTO, Calif. - According to residential HVAC equipment manufacturers, the big roadblock to greater profits is contractors' reluctance to sell and install more sophisticated products and systems. These U.S. manufacturers are also striving to overcome their lack of product differentiation and increase imports of inexpensive equipment from Asian manufacturing centers.

These latest insights come from analysts at Frost & Sullivan in "U.S. Residential HVAC Equipment Markets." The report reveals this market generated revenues worth $10.78 billion in 2002 and is likely to reach $12.84 billion by 2009.

That market outlook is "pretty good," particularly for air-to-air heat pumps, said research analyst Jerry Davis. However, "Until manufacturers come up with sophisticated products which address air handling, heating, venting, purification, and cooling" - and contractors are willing to offer those products to consumers - "market maturity will continue to stalk the HVAC industry."

Translation: While the outlook is positive, players in residential HVAC could be making a lot more money.

Product Predictions

The study primarily deals with ducted unitary systems (central A/C, heat pumps, and furnaces); it also touches on space heaters, window units, geothermal systems, and ductless A/C, as well as the maturity of the market.

"The market is mature with standardized products, which use essentially the same designs, components, gasses, fuels, metals, and seals," said Davis. In a mature market, he explained, "Growth goes hand in hand with the economy. There are no dramatic new products to fuel new installations." Replacement is the biggest market, which is the main hallmark of market maturity.

"There's a couple of manufacturers that have more modern products," Davis said.

Those products may include complete air-handling systems, with purifiers, automation, filtration, cooling, and heating, possibly in a single package. Controls would use historical data to operate the system effectively, he said. Such systems would include sensors (indoor and outdoor), and "an intelligent box somewhere."

The biggest holdup to reaching this market, Davis said, is educating the consumer. A lot of that education could come from contractors.

"Contractors - that's where the rubber meets the road," he said. Davis believes the low-price mindset is hurting contractors' profit potential. Builder acceptance is also a key to introducing innovative residential products. "The industry needs to join in a cooperative effort to educate the consumer," Davis said, and thereby create market demand.

Rising fuel and electricity costs also may increase market demand for sophisticated new energy-saving products. "The subsequent increase in electricity consumption is placing immense burden on power grids," states the report, "compelling manufacturers to develop sophisticated yet affordable HVAC equipment that enables enhanced performance and energy conservation."

Davis said the manufacturers in the study didn't seem to be anticipating rebate programs to encourage consumer purchases, either from the government or utilities. "I don't know that rebates are actually that effective," he said, adding that increased utility costs should be enough to get consumers interested in saving energy.

Ductless A/C, radiant, and geothermal systems, and insulated concrete formed (ICF) housing, along with newer, "eco-friendly" refrigerants, are also driving replacement sales, according to the report. "Room air conditioners in particular are experiencing greater demand due to their widespread availability, easy installation methods, low operational costs, and consumer familiarity."

Competition At Home And Abroad

"A flood of low-priced products from Asian companies, especially those based in China, is also forcing the U.S. manufacturers to innovate, devise new strategies, and employ cost-effective manufacturing methods," according to the report. Their chief strategy, said Davis, has been to shift their own manufacturing operations overseas.

U.S. companies that shift their manufacturing facilities to Asian countries do so "to take advantage of the cheap labor and flexible legal systems that reduce the threat and cost of litigation, unlike in the U.S., where litigation is a growing obstacle to innovation," according to Frost & Sullivan. "This will enable them to compete efficiently with their Asian peers on their own turf, as well as in the U.S."

Litigation is only part of the cost of producing HVAC products in the U.S. "Consider OSHA, unions, the EEOC, EPA - they all influence the cost of manufacturing in the U.S.," Davis said.

He added that some reports have concluded that manufacturing jobs have gone out of the United States because it's time for them to go out of the United States. However, "If the industrial base of this country significantly erodes," it could create a deeper U.S. vulnerability to world problems. "We can't lose our ability and skills" in manufacturing, warned Davis.

The News has also heard concerns from contractors regarding foreign parts production and early component failures. We asked Davis if the report included any reports of this type of problem. While no components were identified within the HVAC study, Davis stated that in foreign manufacturing, quality control can be an issue. Specifically, "Mexican quality control just isn't there," he said. "It's a problem in a lot of industries." Better products seem to come from Asian outsourcing, he said.

Competition in general "is quite vigorous, and some of the major companies are facing difficulties due to poor planning and product choices in the past, creating market opportunities for better-managed peers," he said.

Ductwork And Quality

With so much U.S. market emphasis on ducted systems, it's reasonable to assume that increased emphasis needs to be placed on duct performance, in order to achieve the system performance customers pay for. Key areas identified in the report are sealing, joining, and insulation. "It's critical that it be done well," Davis commented.

Manufacturers voiced "some strong concerns over the quality of the seal," he continued. They stated that new chemical compounds are being developed to achieve a better, more durable seal. Overall, they said externally insulated duct is more efficient than noninsulated, and the best material of construction is metal.

Of course, manufacturers are aware of the public interest in IAQ. "The population is getting older," Davis rationalized. "People are concerned with their health and their homes. Also, think of things going on in the world today. Being able to go home to a clean environment is reassuring."

It is evident that design, installation, and service contractors play a major role in the ability of manufacturers to differentiate their systems based on performance quality. "Manufacturers are interested in contractors," said Davis. "So are distributors, who generally have the best relationship with contractors."

If the typical contractor doesn't want to learn about new products, technologies, and opportunities, and "this is holding back the market," he said. Consumers are looking for a solution that the contractor is interested in selling. When the market reaches that point, profits will grow dramatically.

"There's money on the ground," Davis said. "There always is."

This ongoing growth analysis is part of the HVAC and Building Controls Subscription. Frost & Sullivan also offers custom growth consulting to a variety of national and international companies. For a copy of "U.S. Residential HVAC Equipment Markets" (report A556), visit

Sidebar: The News' Online Poll - What's Your Dream HVAC System?

"U.S. Residential HVAC Equipment Markets," a report from Frost & Sullivan, states that the U.S. residential HVAC market lacks product differentiation among the major manufacturers. What kind of design changes would you like to see in unitary products, and why? Let us know by visiting our home page and participating inThe News'online poll. Look for "Surveys" in the left-hand column.

Publication date: 12/22/2003