Manufacturers Mull Magnificent Year
Consider that for the fourth consecutive year, manufacturers shipped a record number of central air conditioners and air-source heat pumps, exceeding 8.6 million units in 2005, up 16 percent from the just over 7.4 million units shipped in 2004. The news is also rosy on the heating side, according to Gas Appliance Manufacturers Association (GAMA) president, Jack Klimp, who noted that "sales dollar volumes in 2005 demonstrated healthy increases."
But manufacturers of 13 SEER equipment do not have time to rest on their laurels this year. Not only do they have to retool to meet the demand for their new, higher efficiency units, but they also have to make sure that distributors and contractors are aware of the need to properly size and match the new systems. In addition, manufacturers are facing increased competition from foreign manufacturers, as well as rising costs for vital commodities such as copper and steel. There's still a lot to do, and manufacturers say they are primed and ready to face these challenges.
WHOLE NEW WORLDAll manufacturers agree that the transition to 13 SEER is their biggest challenge - and opportunity - at the moment. As Chris Nelson, director of ducted systems, Carrier Corp., stated, not only is there a whole new mix of products in the factory, but there are different logistics, including larger sizes of equipment. "It's not a small transition, and it's not immediate," said Nelson. "It's one of those things that will be a focus of our residential business for the year. It really is a whole new world."
That sentiment was also echoed by Ed Raniszeski, director of market development and communications, Rheem, who stated, "We worked hard at anticipating and navigating through the trickiest production and distribution transition challenges ever seen in the history of this industry. Aligning production schedules with materials and component availability and shifting product mix required nimbleness, patience, and a good Ouija board."
Terry Johnston, vice president, marketing, Lennox Heating & Cooling, agreed, stating that the biggest challenge in 2006 continues to be the strain on the supply chain for key components. "Unprecedented demand in the last half of 2005 stretched the entire supply chain, and the pressure has been continuing into 2006. Our manufacturing facilities are working hard to maintain our high standard of supply, and we've continued to meet our customers' needs," said Johnston.
Drew Fitzgerald, vice president of marketing, residential and light commercial, Nordyne, said that the transition was a major change that "affected every area of our business and the industry as a whole." Nordyne had been working toward the transition for several years, and according to Fitzgerald, "We're shipping new 13 SEER products as we speak and will be working hard to make sure our customers have the products and programs they need to be successful in this new market."
Customer support is definitely one of the largest concerns for most manufacturers. Tom Huntington, vice president and general manager, Unitary Products Group (UPG) of York, a Johnson Controls Company, stated, "Our ability as an industry to sell at 13 SEER and above is crucial, and this will require a new â€˜retail selling' approach to consumers. On the technical side, dealers must understand the importance of matching the indoor coil to the outdoor unit, among other things, and take the time to educate homeowners about these issues, which can affect system performance and reliability."
NEW OPPORTUNITIESIt is somewhat serendipitous that along with the transition to 13 SEER came a spike in energy prices, which has fueled a huge demand for higher efficiency products. This is a great area of opportunity for manufacturers, who naturally want to sell their higher SEER equipment, as well as for contractors, who are frequently being asked to replace older, worn-out systems with high-efficiency equipment.
"Business growth and increased customer satisfaction lie in creating customer understanding that they can afford unprecedented quiet operation, longer life cycles, trouble-free comfort, healthier homes, lower utility bills, on-demand humidity control, active system function monitoring, and countless other features," said Raniszeski. "This is the perfect time to rewrite the menu."
"We see some great opportunities for growth in 2006," said Fitzgerald. "We're seeing new technologies start to enter the market. Along those lines we're very excited about our new iQ Drive Series of products. These ultra-high efficiency systems will be available in our Maytag, Frigidaire, Tappan, and Westinghouse brands."
Fitzgerald added that the increased emphasis on total home comfort would also help contractors provide a wider range of total indoor air quality (IAQ) solutions. Dealers who spend the time to better understand a homeowner's comfort needs, whether it's reducing their energy bills, improving air purification, humidification, ventilation, or zoning, will be able to deliver a true comfort package along with higher efficiency, he noted.
Carrier also sees a big opportunity in IAQ, as it is launching a new Infinity air purifier. "This product isn't unrelated to the transition to 13 SEER in the fact that as consumers look at more efficient systems and integrated systems, they start thinking about the overall comfort and home healthy air as well," said Nelson. "We think that's a very large opportunity for us. In addition, we're expecting a lot of growth in our higher efficiency Infinity systems as well."
IAQ is also a cornerstone of Lennox's plan for the year. "Our company has been aggressively pursuing IAQ for the last several years. New IAQ products like our HC16 pleated media filter that reaches 95 percent effectiveness without a power source, along with improvements in our industry-leading PureAir products, help position our dealers and ourselves for growth in this dynamic category," said Johnston.
International Comfort Products (ICP) is looking forward to many opportunities this year, as it just introduced 97 new product groups. As president Herman Kling noted, "The new 13 SEER minimum efficiency standard gave us an opportunity to redesign our split-system products from the ground up and to make major improvements in our package air conditioners and heat pumps. We expect to come out on the other side of this transition as a much stronger company with a greatly improved product line."
UPG of York is also excited about its new offerings, which include fully modulating gas furnaces and new cooling products, including 13 SEER [mc]2 air conditioners, coils, and air handlers. "In 2006, we will continue our track record of technical innovation, product design that appeals to consumers, and a full suite of support programs and services that allow our dealers to compete successfully even against the big-brand, big-box retailers," noted Huntington.
ON THE HORIZONWhile manufacturers are excited to talk about all the new products and opportunities they are rolling out this year, there are also concerns about what lies ahead. One of those concerns is the unprecedented increase in the cost of raw materials and components. This, along with rising insurance and fuel costs, forced all manufacturers to take a very hard look at their respective costs and associated pricing in 2004 and 2005.
"While many of these types of costs were passed along, productivity efforts by our company helped offset a large portion of these costs and the increases were not passed along to our customers," said Johnston. "As always, we will continue to pursue aggressive productivity initiatives and will always strive to keep our dealers competitive, but we will take pricing actions as warranted to maintain our obligation to our shareholders."
Foreign competition is also on the minds of manufacturers, as there are a number of offshore manufacturers that are looking at the domestic heating and cooling market. "Domestic manufacturers will need to be constantly evaluating our sources of equipment and components if we are to remain competitive," said Fitzgerald.
"We all have to understand that the heating and cooling industry is operating in a global market. Those companies who can best leverage their domestic strengths along with what can be provided from offshore will be the winners in the long run."
Sutton noted that energy efficiency, at the state and federal levels, as well as the phaseout of R-22, would also be issues. "As the 2010 deadline to transition to HFCs gets closer, certainly more manufacturers are beginning to change their processes. We expect the percentage to grow this year, and every year until the deadline."
Huntington noted that in 2005 more than 25 percent of 13 SEER and above products sold in the industry were R-410A, while the total market was under 10 percent. "That leads us to believe R-410A will see a dramatic increase in 2006. We expected this type of shift and have a product plan that supports our contractors in the shift to R-410A, regardless of how far they have progressed in their transition."
Nelson agreed that moving to R-410A will be the next big transition, and to that end, Carrier has designed its products so that R-410A is available at every one of its efficiency points. Beyond the transition, though, he sees higher efficiency as the next biggest challenge. "Consumers and regulations are demanding higher efficiency as well as improved home comfort. We need to ask ourselves, â€˜How does the HVAC market play into that?' â€˜How can we make sure we have proper installations?' â€˜How can we make sure customers get what they pay for?' â€˜What technology is needed to provide all these things to the marketplace?' It will be an exciting year."
With manufacturers focusing on all those types of issues, the next several years should, indeed, be very exciting.
Sidebar: Important IssuesWhile much of the focus in the HVAC market concerns the transition to 13 SEER, it's equally important to look at what else is going on in the industry. Gas Appliance Manufacturers Association (GAMA) president, Jack Klimp (pictured right), explained that the following issues are currently of importance:
"The asbestos litigation crisis and associated legislation are garnering a lot of attention now, not only within the business community but in the popular media as well. Like most American industries, some of our member companies would like to see this situation resolved through appropriate legislation.
"Also of interest to many GAMA members is a proposal to allow companies to band together through associations like GAMA to negotiate lower premiums for the health coverage they provide their employees. While the House passed such a bill allowing so-called association health plans, or AHPs, in mid-2005, the same proposals stall in the Senate without resolution. If and when such legislation is enacted, GAMA will determine whether this is an opportunity it wishes to pursue on behalf of its members.
"GAMA has also identified the problem of counterfeiting as an important issue for our members, and we are working on both national and international levels to achieve objectives that protect our members' interests. Having returned late last year from leading GAMA's first mission to China for business development, I can report that there is a need for serious action to address intellectual property rights.
"I am pleased to report that GAMA has been working on this issue for some time already. In early November, the Senate passed its version of a bill to address loopholes in current anticounterfeiting statutes. The bill, S. 1699, parallels the House bill (H.R. 32) passed earlier this year. Both bills close a loophole in anticounterfeiting statutes by providing heightened criminal penalties for trafficking in counterfeit marks. The bills would also ensure that counterfeit goods and labels seized in violation of the statute are destroyed and not allowed to re-enter the marketplace.
"The bills are now in conference committee to have minor differences reconciled. GAMA is working with other members of the Coalition Against Counterfeiting and Piracy to get anticounterfeiting proposals such as S. 1699 and H.R. 32 enacted. This will not only strengthen U.S. law, but will give U.S. trade negotiators the ammunition they need to insist upon similar provisions in new trade treaties, precisely like the one now being negotiated by the World Trade Organization."
Publication date: 03/13/2006