The Russian Market of Climatic Equipment in 2009-2010

In 2009 and the beginning of 2010, the situation on the Russian market of climatic equipment was formed under the influence of three key factors: global economic decline, drastic contraction of import quotas established for R22, and termination from January 1, 2010 of state licenses issued in the building sector and establishment of self-regulating organizations (SRO).

By the beginning of 2009, cold summer of 2008 taken with financial crisis developed into accumulation of large balances of household and semi-industrial air conditioners (about 400 thousand units) at distributors’ warehouses. Concerning about market collapse caused by the financial crisis, distributors soundly decreased volumes of supplies and supplied about 800 thousand units). As the result, approximately 1 mln household and semi-industrial air conditioners were sold, so by the beginning of 2010, there were about 200 thousand units of equipment available at distributors’ warehouses. Given that in the beginning of 2009 equipment from reserves of 2008 were sold, manufacturers found themselves in a much worse situation.

The market of split-systems final sales decreased by more than 30% in quantitative, and by more than 40% in monetary terms, as compared to the previous year. That of window-mounted and mobile air conditioners was in much more deplorable state.

The crisis made consumers more often decide in favor of inexpensive appliances. So in 2009 almost three-quarters of sales accounted for equipment of Chinese and Korean manufacturers. At that, middle-class production was in much less demand as consumers selected either cheap Chinese split-systems or expensive Japan invertor equipment.

Despite wish to decrease cost of equipment which is understandable amid the global crisis, the majority of manufacturers more actively switch from import schemes related with engaging distributors to arrangement of DDP warehouses (“delivered duty paid”). The “whitewash” of business is now becoming an issue of survival on the market for each company.

Measures to reduce HCFC turnover taken by the government of the Russian Federation raise extra difficulties for participants of the market. Implementation of provisions of the Montreal Protocol in our country has been postponed a great while, and at least now, in the year of the crisis, we unexpectedly “put the harness and set feet on the path”. At that even year ago, before introduction of the common customs space with Kazakhstan and Belorussia, it was out of the question. Today distributors have to correct their plans in a rush.

R22 equipment cannot actually be carried in transit across Europe from the beginning of 2010. Contraction of import quotas established for R22 from 12,000 tons in 2009 to 4,000 tons in 2010 (this actually took form of refusal to allot quotas to halon distributors without the justification of the use of refrigerants in governmental projects) has already resulted in considerable rise in prices of this coolant. Our Government has plans for setting quotas not only for R22 import, but also for production of R22 on the Russian territory and, probably, prohibition by 2011 of importation of R22 equipment as well as a range of other strict measures. And all this is taking place in 2010 – early 2011.

Establishment of self-regulating organizations is to exercise significant influence on the development of the market. Small companies lacking necessary infrastructure and opportunities to join SRO will not be able to work legally on at important objects. SRO will bear joint responsibility for its associates before customers and participate in development of industry regulations. Besides, they will engage in further training of employees of companies (actually – legalizing those workers since 80% of technicians at HVAC enterprises do not work in specialties indicated in their work record books).

Despite all difficulties, participants of the organized by APIC meeting of representatives of leading climate equipment manufacturers count the sales growth to increase by 5-10% in 2010. Hopeful prognoses are based, in the first place, on meteorological forecasts and, in the second place, on expectations coming from general recovery. Meanwhile manufacturers producing commercial equipment hope for “unfreezing” of up to 1/3 of large construction sites and that there will be no new surprises in the nearest future.

According to the Marketing Agency of APIC

Expert Comment*

Georgiy Litvinchuk, Director of Litvinchuk Marketing Agency

Three “Stalin’s Blows” to the HVAC Business

Situation formed in 2009-2010 added a headache to Russian distributors of HVAC equipment. These problems can be grouped into three categories:

1. Economic problems. The global financial crisis resulted in decrease in effective demand. It is natural that the market reacted to these events with sales slowdown. But there is another problem here. More painful was change in seasonal prevalence of demand. While, starting from 1998, the seasonal prevalence of sales was becoming less expressed , starting from 2007, 70% of sales of all air conditioners is falling on June and July. Spring purchase of equipment in expectation of heat and “after” purchase when air conditioners ordered in hot weather are installed in August-September are actually off the map. What are the results? Money turnover chopped. In HVAC industry, the pre-crisis level of this index reached 1.8-2.2 per year, today its maximum equals to 1.2. That is, to meet the market demand during the peak time of the season, more assets will be required than during the peak 2008, all of this being accompanied by 40% market decline in money terms! Considering fast post-crisis growth of value of money and inexpedience of using credits with current level of profitability, this factor severely restricts import volumes. Exactly lack of operating assets will cause equipment deficiency on the market in the summer 2010, which will give way to overstock. The situation can emerge again in 2011, but in a milder form. Besides, lack of operating assets caused actual curtailing of commodity credit system which hit hard installers who had to work with less stock reserves and were losing clients. All this resulted in equipment deficiency on the peak of 2009 and additional slump. Speaking of central plant and VRF market, it should be pointed that the performance of this segment depends on rates of commercial building. With 40% DROP ping in 2009, in 2010 its volumes are expected to lower by 20% as compared to 2009. Making forecasts for 2011 is thankless job, but there are still no reasons to be very optimistic.
2. Administrative problems. In this regard, several problems should be specified. First of all, license abolition and implementation of SRO with undifferentiated entry fee. That is a company with turnover of hundreds of millions dollars and a small firm have to pay the same fee to the compensation fund of SRO (minimum USD 10,000). For many small firms-installers, this amount became overwhelming in the crisis, so they found themselves beyond the legal framework. Another “gift” to HVAC business is launched fight against R22. A year ago nothing was of ill omen. But in the end of 2009 within the framework of harmonization of import norms of the customs union of Russia, Kazakhstan and Belorussia, Kazakh rules for importing ODS-containing equipment were actually adopted. It became a nasty shock for majority of market participants and its effects are not still appraised to the bitter end. Particularly, additional customs dues to equipment charged with “non-kosher” freon are expected. And the third administrative factor consists in sharp tightening of customs control. To avoid triple overpay at customs clearance, it is necessary to present a single source contract with manufacturer of equipment specifying selling prices. To comply with this requirement, all the system of equipment delivery and customs clearance needs to be rebuilt.
3. Weather conditions. As expected, the summer of 2009 falls within seasonal norm. In other words, it was neither cold, nor hot. In the south of Russia it is a brief but warm season and in the midland including Moscow it is absence of heat. Similar weather was observed in 2000 and 2005. Against the background of the crisis, lack of weather stimulus aggravated consequences of the economic turmoil. In 2010 and 2011, summers are expected to be hot but lack of operating assets together with sharper demand seasonality will cause deficiency of equipment on the peak of the season. Which will also adversely affect the market.

* The opinion of the editorial office does not always coincide with the opinion of independent experts.