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Photo courtesy: Carrier CorporationOf India鈥檚 Rs 220-billion annual air-conditioning (AC) market, Rs 150 billion worth of components are imported. That鈥檚 68 per cent!Essentially, 鈥渁bout 30 per cent of AC parts are directly imported, and of the 70 per cent that are made in India, about half necessitate imported components,鈥� explains Gurmeet Singh, Chairman & Managing Director, Johnson Controls-Hitachi Air Conditioning India Ltd, and President, Refrigeration and AC Manufacturers Association (RAMA).To curb these imports, mainly from China and Thailand, and ensure more value and jobs are created in India, the Central Government is finalising a phased manufacturing programme (PMP). Chirag Baijal, Managing Director, Commercial HVAC, India Region, Carrier Corporation, hails this move as a step in the right direction鈥斺�淏ecause the import content in an AC system is currently significant, localisation will protect original equipment manufacturers [OEMs] from costs like import duties and levies, and currency fluctuations.鈥濃�淚mporting components increases the inventory you have to carry, warehousing cost, and many other costs associated with time lags in parts reaching production centres,鈥� explains Vishal Kapur, Chair, ISHRAE鈥檚 Technical Committee, and Managing Director, Meho-HCP Air Systems.End-to-end manufacturingTo derive both effectiveness and efficiency out of the PMP, Baijal emphasises that 鈥渢he focus should be on setting up a complete parts ecosystem that can help the HVAC industry as a whole.鈥漇o while compressors may be most talked about for being a high-ticket component鈥攁 compressor makes up over 60 per cent of the cost of an AC鈥攁nd for mostly being imported (more than 75 per cent are), other parts and subparts must be covered too.鈥淏eyond compressors, the initiative should impact the production of printed circuit boards and other electronic parts, fittings and accessories,鈥� opines Kapur.It appears that the Government is thinking extensively on the matter. Import duties on key AC parts are proposed to be hiked over the next five years. Duties on fully finished indoor and outdoor AC units are expected to be increased from 20 per cent to 30 per cent; duties on circuit board controllers, motors, cross-flow fans and evaporators, and metal and plastic parts from 10 per cent to 20 per cent鈥� and duties on compressors from 12.5 per cent to 20 per cent (the last in the next four years).These are components of all kinds of ACs; 鈥渨indow units, split units, variable refrigerant flow, chiller plants, etc,鈥� observes Kapur.However, it isn鈥檛 enough just to revise duties. 鈥淚nvestments could be made in the manufacturing of compressors, drives and other electronic parts, all subject to viability, as part of this programme,鈥� says Baijal.The key word is viability.Scaling upA cycle of demand and supply is at play in the AC market. 鈥淟ocalisation would make ACs more affordable and this could lead to an uptick in demand,鈥� Baijal points out. But localisation is heavily dependent on scale.鈥淔oreign suppliers work out of export-oriented units supplying to a wide section of industry players in different countries,鈥� Baijal explains. 鈥淭his gives them the scale to operate, which is important from the perspective of viability and unit economics.鈥漌ith an AC penetration of around 5-6 per cent (as per Kapur) and 10 per cent in cities (as per Baijal) as against 30 per cent globally, India today lacks scale.How might that change?鈥淎 huge opportunity will emerge with a rise in disposable incomes in urban and rural centres,鈥� says Baijal. Indeed, 鈥渁ir-conditioning is no longer a luxury but becoming a necessity as well as moving into smaller cities and towns,鈥� observes Kapur.Other demand drivers include ACs becoming more energy-efficient and the availability of better quality and less expensive power supply in the country.On the supply side, incentives would help drive growth.鈥淚f the Government intends to attract investment from global suppliers, it might need to look at attractive incentivisation schemes,鈥� observes Baijal. 鈥淚f the supplier base is to be developed in India, government support to MSME suppliers would be essential for them to be competitive.鈥漈he positives are that 鈥渁t the present time, the industry has the will to consolidate making in India and the Government has a strong resolve to facilitate this process,鈥� says Singh.鈥淐ompressor-maker Highly (current annual capacity of 2 million compressors) and another company with plans to start making compressors have said that if the basic customs duty is increased as the industry has suggested, they would be interested in ramping up operations in a year.鈥滱nother aspect is that about 80 per cent of the market, worth $ 2.6 billion, comprises room ACs, that is window or split type, says Singh. 鈥淎 focused effort on room ACs would help indigenise 80 per cent of the market.鈥滳ountdown to full localisationLocalisation is a gradual process because 鈥渋t isn鈥檛 as though only the middle or end part will be indigenised; you need access to all the raw material that goes into the supply chain,鈥� explains Kapur. 鈥淥ver six months to a year or more, the level of localisation will gradually increase from the current levels of 40-60 per cent.鈥漌hen the industry first embarks on the PMP, Kapur believes we may see a cost escalation. Only in the long term when localisation increases to near 100 per cent鈥攁nd the economies of scale kick in for all AC components鈥攄oes Kapur estimate a 5-10 per cent reduction in pricing. Now that鈥檚 a cool thought!Impact of COVID-19 on AC demand and supply鈥淒emand for indoor air quality (IAQ) solutions has grown significantly and companies are coming up with enhanced solutions,鈥� says Kishor Patil, Country Leader, Trane Technologies. 鈥淐ustomers are looking for cost-effective solutions with improved design and quality, irrespective of where they are sourced.鈥濃�淎s commercial spaces reopen after the lockdown, organisations need to be proactive and take stronger measures to ensure the safety of their workforce and their families,鈥� explains Pradeep Bakshi, Managing Director & CEO, Voltas. 鈥淭echnologically improvising existing central HVAC systems by introducing ultraviolet [UV] germicidal irradiation can help curb the spread of COVID-19 in offices, malls, etc. In line with this, Voltas offers UV-powered solutions for duct, air and surface disinfection to compliment the immediate and long-term need for safety.鈥�