China continues to be the world's largest producer and exporter of air conditioners. The country manufactures an estimated 60 percent of global output in the line. It is also the largest exporter of air conditioners, accounting for a little over 30 percent of total global exports, followed by Thailand with a 14 percent share and Italy 7 percent.
From January to August 2006, China exported 23 million air conditioners worth US$2.9 billion, marking a rise of about 15 percent in both value and volume compared to the same period in the previous year.
Amid this steady growth, however, the industry is still consolidating. There are currently about 150 suppliers in the line, 25 percent less than when we reviewed the industry in 2004.
A number of factors including rising material costs, the EU's RoHS directive, anti-dumping duties and stiff competition are responsible for the consolidation.
The following are some of the key trends we see in China's air conditioners export industry:
• The industry is expected to continue restructuring during the next couple of years as surging competition and other factors force small suppliers out of business.
• A large number of suppliers will increase exports to the Middle East and Asia in 2007, due mainly to stiff price competition in the US market and technical barriers such as the RoHS directive in the EU.
• The RoHS is proving to be major challenge for most small and many midsize air conditioner makers in China. In fact, exports to the EU have dropped considerably since the directive came into effect.
• Many makers are planning to expand their production capacity in coming months, despite the fact that there is already spare capacity in the industry. However, most suppliers increasing capacity are large companies that are grabbing orders from their smaller counterparts.
• Wall-mounted models will continue to comprise most of the country's overseas shipments in the line.
• Most suppliers will focus R&D on releasing more energy-efficient and environment-friendly models.
This report covers wall-mounted, window-type, portable, floor-standing and central air conditioners.
The Products & Prices section describes the main materials used to make each type of air conditioner and the significant factors that determine price and quality.
The Manufacturing section discusses the start-to-finish steps makers perform during production, and how these differ in large and small companies.
Key trends in functionality and the typical R&D setup in companies are discussed in the R&D/Design section.
The Industry Overview analyzes the supplier base, differentiating companies and highlighting important market conditions and issues. It also discusses the critical challenges China suppliers are facing, and the key factors that have led to consolidation.
The bulk of China's output and exports of air conditioners are produced by a handful of large, high-profile suppliers. Many of these makers are profiled in this report, including Chunlan, Galanz, Guangdong Kelon, Hisense, Sichuan Changhong, Guangdong Chigo, Jiangsu Shinco and Wuxi Little Swan.
Industry Overview
China's air conditioner industry continues to consolidate and restructure as suppliers deal with a number of challenges including rising raw material costs, the EU's RoHS directive, anti-dumping investigations and overcapacity. Currently, there are about 150 air conditioner manufacturers in China, down from 200 when we reviewed the industry in 2004.
A number of small and midsize companies have been squeezed out because of severe competition from the industry giants. In fact, at least 25 percent of suppliers featured in our previous report have either stopped producing air conditioners, shifted to other product lines or closed down altogether. Almost all of these companies were small and midsize players exporting US$1 million to US$7 million worth of air conditioners annually.
On the other hand, some of the large companies have become even bigger by buying into or taking over others. The Hisense Group, for instance, acquired Jiangsu Shinco after a successful takeover in 2005. Another conglomerate, Guangdong Midea, procured Guangdong Hualing, also in the same year.
The industry is expected to consolidate further during the next couple of years as competition continues to intensify and smaller suppliers are forced to reduce output. According to industry estimates, China's current annual production capacity of air conditioners is about 120 million units. However, at approximately 50 million units a year, total output is less than half of installed capacity.
A number of factors are responsible for the restructuring of the industry. One of the main reasons is the rising cost of materials. In May of 2006, the cost of brass was 130 percent higher than a year ago. Costs of copper used for inner tubes and pipes, and steel and plastic for housings are still on the rise. The price of refrigerants also continues to increase by around 20 percent annually.
It is easier for large companies and conglomerates to deal with rising costs of production, as they have secure and stable access to key components because of bulk purchases from component suppliers. In addition, their high-volume production enables them to reduce per unit cost. Also, many of these makers are vertically integrated, which allows them to cut costs further.
In contrast, most small and some midsize exporters have been unable to absorb the higher manufacturing expenses. While some companies have been forced to close or shift to other product lines, others have resorted to cutting corners in order to lower costs. For example, these makers may use 0.5mm-thick metal sheets for the housing instead of the regular 0.75mm sheets. They can also install 0.18- to 0.2mm-thick brass pipes to replace the usual ones that have a thickness of 0.25mm. In addition, 1mm wires can be used in place of the regular 1.5mm ones.
The effects of severe competition are also clearly apparent in the domestic market. According to a report released by the State Information Center on the air conditioner industry in China, close to 30 domestic brands, all of which had small market shares, disappeared in 2005.
Supplier profile
Chunlan Group Corp.
Chunlan is one of the largest enterprises and first air conditioner makers in China. The group has more than 40 subsidiaries, among them, Jiangsu Chunlan Import & Export Co. Ltd, which distributes air conditioners in Spain, Germany, Saudi Arabia, Jordan, Algeria and Syria. It also exports to Italy, the UAE, Australia and Singapore, where Chunlan has aftersales service centers.
Air conditioners account for about half of the company's total sales. Close to US$900 million worth were sold in 2005, 20 percent of which came from overseas orders. The company plans to increase exports by more than 30 percent in 2007.
One-third of models carry the in-house Chunlan brand.
Apart from air conditioners, Chunlan offers washing machines, motorcycles, electric bikes, NiMH batteries, engines and compressors.
Products
Wall-mounted models with power ratings of 2,300 to 7,000W make up 65 percent of output. Central air conditioners with 2,300 to 100,000W power, and 5,000 to 12,000W floor-standing designs account for a combined 30 percent. The group also produces 2,000 to 5,500W window types and 2,600 to 3,500W portable units.
Models released between 2004 and 2006 carry CCC, CE, GS, SASO, UL, CB and MEPS approval. In addition, 20 percent of such products conform to the RoHS directive and are priced 5 percent higher than noncompliant versions.
Chunlan equips its models with locally procured R-22 refrigerants, R-407C from South Korea and China, or R-410A from Japan and South Korea.
Although costs of materials, particularly copper, have increased in 2006, the company plans to keep prices stable in the next 12 months. The R&D team will release 10 new models in 2007.
Manufacturing
Chunlan manufactures all air conditioner components in its 300,000sqm production facility in Taizhou, Jiangsu province.
The group continues to implement its three-stage product development process, which spans 18 months to two years. The procedures are described in terms of units manufactured at each R&D stage.
At stage one or “10”, 10 units are made, each tested for cooling and heating capacity through enthalpy analyses. Noise levels and performance in extreme temperatures are also examined.
During stage two or “100”, 100 air conditioners are produced, tested and improved on. These are inspected for compliance with standards at this point.
All this column of information contained in China Sourcing Reports is the result of original, independent and impartial research conducted by Global Sources analysts.
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