HVAC market chilly due to weakening demand, competitive prices

Improved original equipment systems, the sluggish economic recovery and a decline in vehicle collisions have reduced replacement rates for heating, ventilation and air-conditioning components in the aftermarket.

Manufacturer-level revenues for this category – which includes compressors, condensers, radiators, evaporators and heater cores – were estimated at $876.6 million last year. Unit shipment demand is increasing at approximately 1.5 percent annually, but suppliers continue to struggle to cultivate revenues as price growth continues to remain flat at approximately 0.6 percent annually.

The prolonged winter of 2013 threatens to add another challenge for heating, ventilation, and air conditioning (HVAC) aftermarket suppliers, particularly if it is followed by a mild summer.

The influx of low-cost new components from offshore manufacturers has significantly affected the buying behavior of aftermarket distributors. These low cost providers are supplying products that are priced 20 to 30 percent lower than the price of new or remanufactured components supplied by traditional North American aftermarket leaders.

For high-dollar products such as compressors, installers are increasingly choosing a new replacement part in place of a remanufactured one because of the perceived value provided from new product at a competitive price point.

The average service life of an HVAC component is five to seven years, but the increased integration of systems on newer vehicle models to achieve space and weight reductions will make it increasingly difficult for the aftermarket to service them in the future. Part failure will result in replacement of a large HVAC module rather than a single component. As a result, aftermarket manufacturers and distributors are dependent on older-model vehicles (seven or more years of age) to drive the bulk of their sales.

With average vehicle age in the North American market already at an all-time high (10.4 years), the outlook is unlikely to improve significantly over the short to medium term. As older vehicles are taken off the road and replaced with new cars and trucks, the replacement rate, currently at 6.1 percent (combined for compressors, condensers, radiators, evaporators and heater cores) will be threatened further.

While the HVAC aftermarket remains commoditized, there are some slow changes happening at the OE level that could help large, technologically advanced suppliers thrive. The first of these is the increasing pressure on OEMs to develop compact yet efficient HVAC systems for small segment cars. Sales of compact cars are expected to outpace mid-size cars and trucks in the coming years; as such aftermarket manufacturers will accordingly have to switch to new designs of HVAC components, such as compressors that are powered by electric motors rather than belts.

The impact of environmentally friendly refrigerants, such as R-1234yf, on the aftermarket also remains to be seen, though it is expected to be minimal. The switch requires little alteration to HVAC system design at the OE level and hence the aftermarket. R-1234yf has the lowest switching cost, $50 to $75 per system, for automakers among the currently proposed alternatives. In the aftermarket, the refrigerant can be handled in the same way as R-134a, although it requires different, specialized equipment to perform the service.

Similarly, manufacturers are shifting their focus from developing manual HVAC systems to semi-automatic and fully automatic HVAC systems. This gives aftermarket manufacturers the opportunity to differentiate their product offerings by introducing multi-zone systems, and providing improved air quality and sensors in their HVAC systems. Such technologies also help to achieve greater margins due to the unique value proposition that a manufacturer can build around the product.

Editor’s Note: Ratika Garg is an industry analyst for Frost & Sullivan’s Automotive & Transportation Aftermarket research group. For more information on Frost & Sullivan’s Automotive & Transportation Aftermarket research or any questions on this article, contact Jeannette Garcia, Corporate Communications at [email protected] or (210)-477-8427.

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