Legend of Dinosaur

Will Window Air Conditioners Become Extinct?

Chart 1

The last five years, with the entrance of trading houses into climatic market the interest of specialized companies to window air conditioners is on the wane. And it is quite understandable. Window air conditioners are bought by less affluent customers who are interested first and foremost in lower prices. And price competition with trading houses is not promising at all. Especially after they started to take their equipment through customs at 100% of its price (but at the rock bottom level officially stated to customs service of Russia by LG and Samsung). Such customs clearance procedure has sense especially in the case of 5, 000 and 7, 000 BTU/h models, because the factory prices of these models are substantially below the prices stated to Russian customs. Taking into consideration the share of these models in total sales of window air conditioners (see Chart 1) makes obvious the fact that there is nothing left for specialized companies in this segment of climatic market.

Shovels in Hands and Let Us Go and Bury Them

Chart 2

Nonetheless, there exists a reason to pay a thorough attention to this segment of the market. And here is the explanation of the reason. The share of window air conditioners in total equipment sales in Russia during the latest three years went constantly down (from 34% in 2002, 27% in 2003 and 24% in 2004 to 22% in 2005). Split systems were gradually filling the new commodity niche. It was expected that during the following five years the share of window air conditioners would smoothly slide to 8-10% thus making the Russian market to be a more “European” one. But a “force majeure” circumstance came into play. The LG company declared its stop of window air conditioners production. The point is that this line was unprofitable for Korean giants for years, especially the window air conditioners of 5 000 BTU/h capacity. The desire to get rid of the problem was nothing unusual. LG sold all its stocks in 2005 and in 2006 in fact refused to supply window air conditioners. The same was done by Panasonic and Fujitsu General in 2005, and Hitachi did it even earlier, in 2004.

Chart 3

Samsung will put for sale in 2006 about the same amount as in 2005, but this will not change much. There will be no possibility to meet demand for window air conditioners (see Chart 2). “LG-Samsung substitutes” are in short supply as well and are substantially more expensive. The situation is well illustrated by Chart 3, showing volumes of delivery, sales and in-stock balances of window air conditioners. It clearly shows that already in 2005 the stocks of window air conditioners were minimal, and new supplies were well below demand. In 2006 the supply will dwindle further and sales will fall drastically, since all outlet stocks were sold out by March 2006.

So, what have we got at the final analysis? Window air conditioners can follow the way of dinosaurs. Instead of gradual leaving of “ecological niche” we can witness a fast extinction of a whole class of equipment. And as it is well known the holy place is never empty.

World without Dinosaurs

Chart 4

So, what consequences can the extinction of window air conditioners have? To grasp the scope of the “calamity” it is necessary to analyze the situation in the south of this country. This region consumes 85-90% of all window blocks sold in the latest years. Building on 2005 results one can forecast demand for 2006 (see Chart 4). In case the year proves to be within average climate conditions one can expect a demand growth for split systems around 20% and for window air conditioners at 10%. The shortage of window air conditioners can be approximately 65,000 units. Is it many or not so many? For comparison, the expected growth of sales of all makes of split systems for 2006 is between 60,000 and 100,000 units depending on weather conditions.

If all customers unable to find a window air conditioner decide to buy a split air conditioner the market will feel a real shortage of equipment. And if the summer is hot this scenario is a quite realistic one. The leading suppliers with 76% of wholesale market between them have ordered 15-20% more equipment compared to the previous year. These order were to satisfy demand even in the event of warm summer. But those order did not take into consideration a possibility of an additional demand for cheaper split systems from the customers who planned to buy a window air conditioner. That is why in case of hot summer the market can face equipment deficit.

It will be the most felt in economy-class, and above all in models of 7, 000 BTU/ h capacity. Why so? It will suffice to throw a casual glance at Chart 1, showing the window air conditioners sales structure by capacity. As a result we can have an acute deficit of less powerful split systems, that will affect first cheaper models and then the more expensive ones by domino effect. The scope of the shortage will be in direct function of weather conditions. If the coming summer in the South is not hot enough the potential buyers of window air conditioners can simply abandon the idea of buying an air conditioner. If the summer is hot a great share of those who will not manage to find a window air conditioner will start looking for a cheaper split system.

Another segment where an unplanned surge of demand can take place is the segment of portable air conditioners. A choice of a window air conditioner is very often connected with lack of desire or possibility to deal with professional installation. And if we remember that the market of window air conditioners is tenfold that of portable ones it is obvious that even a small redistribution of demand towards portable air conditioners can result in shortage of that kind of equipment.