What has come and what is to come in Russia?

The state of the climate industry at the beginning of the new season; the influence of the financial crisis on the industry, and the immediate prospects – Felix Tokarev, a leading analyst of APIC’s marketing and advertisement department and, Deputy Director.

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In the beginning of the year, Russian HVAC-market demonstrated rapid growth rates, thus continuing the trend of 2007. For some types of equipment, the volumes of import during the first six months of 2008 exceeded the volume for the whole 2007! And in the segment of VRF-systems only, this is unprecedented; this is due to the fact that this equipment is the last to be imported. In June, it became obvious that summer months would be cool and the import rates for household systems started shrinking rapidly.

TABLE 1. Comparison of HVAC systems (outside units and pcs) import volumes in 2007 and during the first six months of 2008.

The cool summer was not the decisive factor for import volumes. The potential of the Russian HVAC-market is very large and if the economical situation were more favorable, the upbeat trend of sales volumes would have generally remained. But, it’s common knowledge that the situation has changed. According to the data of APIC, the first signs of the crisis started coming out as early as in July of 2008. The purchases of equipment for objects under construction stopped, and, later, the construction works as such went down. Investors were transferring their assets from real economy sectors into foreign currency which, in particular, resulted in ascent of US dollar and Euro exchange rates.

During the second 6 months the situation with the rates of equipment import was rather curious. The inertia turned out very high and supplies continued. In my opinion, this was mostly due to operation under pre-paid contracts the distributors could not terminate. Besides, equipment from some segments continued on a regular basis. This relates primarily to VRF and Package.

TABLE 2. HVAC systems import rates change in the second half of 2008

The final amounts, as compared to 2007, despite the crisis and cool summer, demonstrate significant increase in climatic systems import rates. Marketing department of APIC collected and analyzed information from customs database of FEA, data obtained from representative offices of foreign manufacturers, importing companies, manufacturers in FEA of the Russian Federation (Kaliningrad); the results of this analysis are shown in table 3 below.

TABLE 3. Comparison of HVAC systems (outside units and pcs) import volumes in 2007 and 2008.

Chinese equipment is the leader of import in terms of market volumes , but this does not automatically mean its leading position in monetary equivalent. Other brands, especially, Japanese, are much more expensive because most of them are made using inverter technologies and R410 cooling agent. This is, for example, a tendency in the segment of Package, where Japan leads in terms of cashflow, and China wins in terms of number of pieces of equipment.

As to the volumes of Korean equipment supply, it is necessary to keep in mind that this country is represented just by two brands.

So, the figures for the Korean group can be considered rather high since it competes with 8 manufacturers from Japan and 15 – from China.

Japanese companies occupy the leading place in VRF segment of as Japanese companies are traditional leaders in hi-tech equipment. But the Chinese manufacturers should not be underestimated, too. The ratio of the price and technological features ensuring maintenance of comfort parameters is better for Chinese manufacturers and in the nearest future, they will most likely to say their word at the market of VRF or even to change the current market proportion.

Regarding the chillers import. It is harder to keep track of the situation with supplies of chillers than with other groups. According to the information from suppliers, it is possible to determine with high degree of precision only the overall cooling capacity (megawatts) of the equipment supplied. According to APIC’s data, the volumes of supplies were as follows:

Table 5. Import of chillers in 2007 and 2008

In March, there was successful exhibition “Climate World—2009”. Despite the macroeconomic situation, consumers and market players themselves show high interest in this industry. There appeared new goods, professional HVAC companies are working on widening the range of the goods and services for potential customers. Despite the crisis, the HVAC Business School of APIC continues to prepare well-qualified staff for the industry. All in all, we can make a conclusion that HVAC companies are prepared for the coming season.

The marketing department of APIC continues monitoring market situation. Of course, much depends on the equipment purchasers, their financial situation; this is particularly true for the companies working in construction segment. We are collecting information on the state of business of development and construction companies, exchange information with our colleagues from professional HVAC and engineering companies, we maintain relations with representative offices of foreign manufacturers and importing companies.

When estimating the prospects it is necessary to consider the situation in the particular segment of HVAC equipment market. First, it is necessary to point out, that the volumes of import of equipment were rather large, but not all equipment has been sold. Besides, until the distributors sell out these air conditioners, they are not likely to import new ones which will lead to decreased volumes of import in 2009.

We can study each of the segments of the HVAC-market and to imagine the further development of the situation with purchases of various types of HVAC-equipment.

Typical housing. This market niche was always fraught with high risks for HVAC-companies. In hot season, the crowds of customers besiege offices and it is hard to satisfy everybody because each company has a limited number of mounting teams. But if, several days later, the heat gives way to cool weather, the flow of orders runs low. The occupiers of typical housing almost never plan purchases of HVAC-equipment and buy it only when it's too hot and soggy for them to sleep. So, it is highly unlikely for the clients from typical housing to change their behavior during this crisis year. So, the fall at the market of equipment for typical housing is expected to be very significant – around 50.

Elite housing, new construction, cottages. Behavior of clients from this market niche is different. The demand in this segment is much more stable. Constructions are stopping now, but we do not expect the fall similar to that at the market for typical housing. The volumes of purchases are to decrease, but the demand will remain because the customers who had purchased housing before the crisis and who managed not to fail with their mortgage, will be fixing their new houses and apartments. Correspondingly, they will purchase HVAC-equipment.

Hotels and small offices. There is a certain deficit of both in our cities. So, we do not expect a significant fall in this segment. 20 – 22, at maximum. It is necessary to point out, that, in most cases, the premises for this purpose are not green field, but are renovated. It is cheaper and faster than new construction; besides, some types of equipment can be installed in a room without any need to stop the work. Usually, at hotels and small offices, Package and VRF as well as wall-mounted split- and multi-split systems are used. So, proper selection of equipment and well-organized process of mounting may be favorable for the overall situation at this segment of market.

Large office buildings, “open space” premises and shopping malls. As of February, the situation at this segment is depressing. Most such objects are green field and require systematic long-term funding. In such premises, the central, roof-tops, chillers and high-capacity air-handling units are used. Usually, all types of climatic equipment are designed beforehand for a particular building. Today, all large construction sites are mainly stopped. and the projects are stored for better times. As at February, 2009, we see 70% fall of activity at this segment.

Some forecast for the amounts of equipment to be imported to Russia this 2009 year. In our opinion, the situation is expected to be as follows:

Table 7. Wall-mounted split- and multi-split systems

Table 8. Package

Table 9. VRF

Table 10. Forecast of demand decrease in the segment of high-capacity systems

Table 11. Overall figures

The opinion of APIC’s specialists about effect will the season of 2009 have on the current participants of the climatic market.

First of all, professionals who ensure quality, who can work with all kinds of HVAC-equipment, and who are capable of satisfying customer's needs at each segment – they will keep their business. During past several years, the climatic market was developing extensively. It was possible to relax, not to notice the faults of projecting, incompetence of sales staff, to compensate with money from high profit all defects of mounting and disproportions in the structure of the company's management, to keep unprofitable subdivisions. Today, with the current situation, this "grace" is a lethal risk for climatic companies.

The work of trading networks oriented to typical housing customer from and not capable of providing high-quality mounting and servicing is at serious risk today.

Companies who, until the recently, have been focused on the work with high-capacity climatic systems, should diversify their business because construction of new objects which need high-capacity equipment is practically frozen. It is necessary to start working in other segments, to re-structure sales departments and operating facilities to meet the needs of other customers.

Professional companies should analyze their costs carefully and get rid of the "office ballast". If possible, a company should attract qualified personnel present in excess at t labor he market or to use the released resources for advanced training of the existent personnel who wish to work better, who can sell technical solutions and not only "hardware in a box".

The more supporting points a company has, such as: work well with objects of any level of complexity, design, supply equipment, mount, start-up and service any climatic equipment – the more stable this company’s position will be at the market. APIC’s marketing department and our Training and consulting center are involved in creation of such supporting points.