The window air-conditioner business provides a fabulous business opportunity for us to register high revenue growth and enhanced profitability. However, this new business should be conducted on an entirely new set of rules framed by competition and technology evolution. We need to fundamentally change and reorganise ourselves to effectively compete in this new (product oriented) business. The implications of such a change to our existing portfolio of businesses should be carefully evaluated before we decide to venture on this new business opportunity. It is precisely this trade off required in our approach to business combined with a careful assessment of opportunities and associated risks that would determine our presence or absence in the new business opportunity.
Chairman and CEO, Cool King Limited Product, Industry Characteristics, and Demand Drivers Market Size: The Indian air-conditioner market in 2002 was estimated to be Rs. 3,300 crore growing at 20-25 % annually. Of these, central air-conditioner, including packaged and ducted air-conditioner systems, was around Rs.1,300 crore and the window and split air-conditioners market was around Rs.2,000 crore.
Players: The industry consisted of three kinds of companies: MNCs, Indian companies and unit assemblers. The MNCs included Carrier, Hitachi (with Amtrex) and Fedder Llyod. The leading Indian companies were Voltas, Amtrex, Shriram, Godrej, Blue Star and Videocon. While the MNCs sold on brand and premium image, the Indian companies sold on established credibility. The assemblers (usually regional players) competed on price with an acceptable quality. The assemblers accounted for more than 50% market share.
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Tax Structure: Air-conditioner (AC) was considered a luxury product, and therefore subjected to high duty structure. The rate of excise duty was (as on 2002) 32% compared to 16% for all other consumer durables and white goods such as televisions, refrigerators, and washing machines. Demand Composition: The domestic demand for ACs was largely met by window ACs. The demand for room ACs mainly came from institutions with corporates accounting for 80% of it.
The government, which accounted for 70% of the institutional purchases, had shown a declining trend in recent times. The higher dependence on the corporate sector implied that the industrial climate exerted a strong influence on the total industry demand. The rest of the demand came from the household sector, which, incidentally, was also the fastest growing segment. Significantly, 20% demand from this segment related to buyers of second units. The demand was generally restricted to major cities and towns. Eight cities, which included the four metropolitan cities, accounted for nearly 65% of the total household demand. Erratic power supply was considered as the single reason for slow growth of rural demand.
Economy: The performance of the economy, in general, had a strong influence on Air-conditioner demand. In a high-growth economy, rising profits would induce the infrastructure and commercial sector to go in for air-conditioner systems. Heavy investments in the information technology and telecom sectors (since 1995) and a renewed governmental initiative on strengthening agricultural infrastructure (cold storage) have contributed to the higher sales growth of air-conditioners. Future growth for central ACs was largely dependent on developments in new user industries like software, telecom, hotels, food processing, multiplexes, etc.
Environment: The deteriorating environmental conditions in the cities and rising awareness of the benefits of working in controlled environment have contributed to a substantial demand increase for Air-conditioners and this trend is expected to continue as of 2002. Low Penetration Level: The penetration level in India for air-conditioners was a minuscule 1-2%. This figure compared unfavourable to countries like the USA (35%) and Singapore (30%). In addition, the penetration level was low as compared to other consumer durables within the country: refrigerators-11%, TVs-35%, radio-45% and cars-6%.
Income level: With the rising disposable income and the attendant change in consumption patterns, air-conditioner had become an object of aspiration, especially for the emerging Indian middle class. The per capita total expenditure on durable goods and the number of households with monthly incomes above Rs.10, 000 in metros and Rs. 5,000 in non-metros was expected to rise. This would mean that firstly, there would be a perceptible shift towards branded products and secondly, the level of aspiration buying would increase.
Price: Demand for room air-conditioners was price sensitive. A study conducted by Indian Marketing Research Bureau (IMRB) points to a potential sale of 0.35 million units when a unit price is fixed at Rs.18,000. Ideally, prices should fall by 20-25% in the next two years (by 2005) bringing a 1.5 TR AC on par with a CTV priced at around Rs.18,000. Substitution: Industry growth was also affected by the presence of cheaper substitutes like air coolers. One reason for the use of air coolers was high maintenance and operational costs associated with owning and using an air-conditioner. With rural households, the problem in using air-conditioners was frequent power cuts and low voltage.
Consumer Finance Schemes: Easy availability of consumer finance from banks and other financial institutions induced purchases during inflationary times. Companies like Carrier Aircon, Voltas, Fedders Llyod and Godrej-GE had introduced zero-interest instalment schemes. Product: Before 1998, air-conditioners (window and split) were marketed as an engineering product suitable mainly for the corporate and the commercial segments.
By 2002, this was slowly changing and air-conditioners were acquiring the status of consumer durables. In India, the room air-conditioner market was dominated by window units. This was in contrast to the world wide scene where mini-splits rule the roost. The dealer’s role in selling and providing after sale service had become critical and significant. The need for rapid product development and launch had increased. Brand-based positioning was fast becoming the norm of the industry. Also, the household sector patronises the unorganised players due to lower price and personalised after sales services.
Cool King Limited Cool King Limited (originally known as Cool King Engineering (Bombay) Pvt. Ltd. and founded in 1943) became a public limited company in 1969. The Company was initially engaged in reconditioning of refrigerators and air-conditioners. As of 2002, Cool King was India's largest central air-conditioning company with an annual turnover of Rs. 510 crores. It had a network of offices in 29 cities and three modern manufacturing facilities.
Cool King manufactured and marketed a wide range of air-conditioning and refrigeration systems and products. These included large central air-conditioning plants, packaged air-conditioning systems, split and window air-conditioners; commercial refrigeration equipment such as water coolers, bottled water dispensers, ice-cube machines, deep freezers, walk-in cold rooms and commercial kitchen; and laundry equipment. Cool King's other businesses included marketing and maintenance of hi-tech electronic and industrial products such as Testing Machines, Data Communication products, Medical and Analytical Instruments and Special Control Valves (see Appendix 1 for additional details).
Cool King entered into the business of window air-conditioners in 1998. Initially CKL room air-conditioners were sold to government departments along with the other customised projects. Window air-conditioner was a part of the cooling products division in CKL. Its products matched the range and designs of most of the competitors in this segment. The prices started at Rs.18,000 for window and Rs.33,000 for split air-conditioners. It had priced its product in comparison to Carrier and Voltas. LG and Samsung offered the lowest prices (about 7% lower than others). The window air-conditioner business was also perceived to have the potential of creating a public face as room air-conditioners had higher customer visibility and recall value.
Consumer Behaviour: The institutional (commercial and corporate) segments bought the air-conditioner mainly for business requirement. Purchase decision was primarily a top management decision. Most of them considered more than one brand before making a decision. They considered vendors' past performance and reputation as the prime reasons. Quick response from the company and appropriate price were also important purchase consideration. Residential customers bought the products as a consumer durable. They were influenced by (global) brand, product design and appearance, and price. It was bought as a “desirable” product. They considered two or three brands while deciding. They also sought the advice of friends and colleagues. For most of them it was a major purchase.
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