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Council on Energy, Environment and Water Integrated | International | Independent
REPORT
Technology Gaps in India’s Air-Conditioning Supply Chain
Enhancing Jobs, Growth and Sustainability
13 May, 2022
Himanshu Dixit and Shikha Bhasin

Suggested citation: Dixit, Himanshu and Shikha Bhasin. 2022. Technology Gaps in India’s Air-conditioning Supply Chain: Enhancing Jobs, Growth and Sustainability. New Delhi: Council on Energy, Environment and Water.

Overview

This report seeks to explore the challenges and technological bottlenecks faced by the heating, ventilation and air-conditioning (HVAC) sector in India. By analysing the sectoral supply chain and issues pertaining to research and development in firms, the report looks at the areas of technology adoption in small and big manufacturers to achieve global competitiveness. Further, the report recommends ways to improve the knowledge flows between suppliers while increasing  access to critical R&D, performance testing and certification infrastructure.

Key Findings

  • The import share in the HVAC sector is higher in case of technology-intensive components like compressors and drives, while components which are relatively easy to manufacture are sourced from the domestic market.
  • Despite the size and growth potential of the Indian market, not having scale is often cited as a major barrier to countering the dominance of imports. Because of the fragmented manufacturing base in India, there are too many small and medium enterprises (SMEs) while the large firms can also not be compared with their Chinese counterparts. These structural constraints cause a number of technology handicaps.
  • Manufacturing variable-speed compressors, which includes the extra component of drives, largely depends on imports from China. This poses considerable supply chain dependence as variable-speed compressors are used in about 40 per cent of total split RACs sold, with shares increasing every year.
  • India doesn’t have a semiconductor manufacturing base, despite the development of competent design capabilities. Most of the wafers and other subcomponents are imported from China, Taiwan, Japan and the US.
  • Economies of scale are key to make heat exchangers at a competitive price. This includes procuring raw materials such as high-grade copper and aluminium at cheap prices, maintaining precision in manufacturing, optimising the production time and reducing the labour costs.
  • The challenges in many component segments are ‘small-tech’ needs which helps manufacturers improve the overall quality and performance of their products. These include quality enhancement tools, new machinery, testing labs, etc. Another part of the technology challenge is the lack of ability in firms to deploy new technologies to add new competencies to make their processes optimal.
  • SMEs don’t have the financial heft to invest in testing laboratories and R&D. In the HVAC sector, there is no mechanism to provide access to shared laboratories and R&D facilities.
  • Given that the AC-parts sector is highly competitive, SMEs are found wanting in terms of quality assurance infrastructure due to the burden of extra costs. Lack of domestic standards informed by local manufacturing practices is also a concern.

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Himanshu Dixit
Research Analyst
"Air-conditioning as a targeted sector has the potential to contribute to jobs and growth in the economy, as well as establish domestic supply chains. However, technology remains a pain point for various reasons and must be addressed in addition to capital availability."

Executive Summary

The conversation about manufacturing, particularly in countries where it is low, is salient today as fundamental changes are afoot in the world. The energy transition is not going to be about energy alone; it will bring along with it big economic transformations. Industrial development remains a critical marker of the progress of a nation. As a fait accompli, the COVID-19 pandemic-induced economic disruption has brought into focus India’s manufacturing industries and the need to build back the economy better. India, therefore, needs a new social contract that is able to deliver on the trifecta of jobs, growth, and sustainability (CEEW 2020).

The HVAC industry in India is one such sunrise sector that has the potential to contribute to India’s manufacturing story. In an economic sense, it is one of those boats that rise with the rising tide. Economic prosperity creates better and bigger growth opportunities for the HVAC sector, which further fuel economic growth. With its climate footprint, it is indeed a crucial sector. It is also certain that the HVAC value chains will get reconfigured. Unsurprisingly, the India Cooling Action Plan (ICAP) has predicted eight times growth in cooling by 2037 based on the present penetration of around 5-6 per cent households, i.e. households with an air-conditioner. Further, the average growth will be 12 per cent up to 2027 and 10 per cent thereafter for the next 10 years (ICAP 2019).

India needs to meet the Kigali Amendment1 commitments with the freeze starting in 2028 (Press Information Bureau 2016) and voluntary commitments to be achieved by 2030. The multiple transitions necessitated by these commitments will warrant investment in adoption of new technologies by large manufacturers in system design and by MSMEs who supply the subsystems and components for the sector. Given its potential for growth, it will in the process.

a. create many skilled and semi-skilled jobs
b. have transformational impact on productivity and the economy as a whole
c. offer opportunities to decarbonise India by reducing emissions embedded in its manufacturing supply chain and secondary emissions by reducing electricity usage
d. imbibe and absorb technology across the supply chain
e. create an ecosystem to become self-reliant

Thus, embedded in the larger discourses about the Indian economy, levels of industrialisation, and the need to become self-sufficient (aatmanirbhar), this report seeks to explore the challenges faced by the heating, ventilation and air-conditioning sector in India. By analysing the sectoral supply chain and issues pertaining to research and development in firms, the report looks at the areas of technology adoption in small and big manufacturers to achieve global competitiveness. In this sense, the report provides the argument and basis to set the agenda for working on technology bottlenecks in India to improve and develop the domestic value chain in the cooling sector.

The report explores and answers the following research questions:

  • Across the HVAC—particularly RAC (refrigeration and air conditioning) —value chain, where and what are the most pressing R&D and technology challenges impeding the competitiveness of firms?
  • What are the challenges and barriers to address the R&D needs of the HVAC sector?
  • What can be done to address the technology challenges of the RAC sector?

The peculiar challenges of the HVAC sector, non-availability of quantitative R&D data of firms and certain theoretical issues with measures of technological upgrading are some unavoidable aspects of this research. It, thus, leads us to choose a qualitative research method to collect insights from key persons of the HVAC sector.

The interviewees were shortlisted keeping in mind the following points:

  • There are sub sectors in the HVAC & R (refrigeration) industry ranging from room AC to chillers and from retail refrigeration products to Cold Rooms and the technology requirement for each sub sector is different.
  • There are quite a few HVAC and HVAC component segments.
  • Each segment has its own value chain nuances.
  • R&D and technology issues differ at different points in the value chain.
  • Experience of successful and not so successful firms will vary. Struggling firms might provide a unique perspective as to the reasons for it.
Component manufacturing and technology challenges

The manufacturing in HVAC sector is often described as following an import-assembly model. Some of the major components are sourced from countries that manufacture them at very competitive prices. These components are then assembled here by different manufacturers. Completely built units (CBUs) of ACs are also imported, although it has stopped due to India imposing a ban on this practice. At a granular level, significant variations are seen in the share of domestically manufactured and imported AC components. The noteworthy point here is that the import share is higher in case of technology-intensive components like compressors and drives, while components which are relatively easy to manufacture are sourced from domestic market. Some of these nuances have been captured in Figure ES1.

Figure ES1: Share of imports and domestically manufactured AC components

Share of imports and domestically manufactured AC components

Source: Market research commissioned by CEEW

An interesting paradox of the Indian HVAC sector is that, despite the size and growth potential of the Indian market, not having scale is often cited as a major barrier to countering the dominance of imports. This is explained, in large part, by the fragmented manufacturing base in India. There are too many small and medium enterprises (SMEs), and even the large firms are not large enough when compared with their Chinese counterparts. These structural constraints of the sector cause a number of technology handicaps.

An important facet of this technology challenge is that it is not the cutting-edge, state-of-theart technologies, which are difficult to access and not available in India. Compressors and drives are examples of that. However, in a big measure, the challenges in many segments are of a type that can be characterised as ‘small-tech’ needs which helps manufacturers improve the overall quality and performance of their products. These include quality enhancement tools, new machinery, testing labs, etc. Access to these technologies and research infrastructure enhances the marketability of products and creates scope for further product innovation. This is particularly relevant for SMEs. Another part of the technology challenge is the lack of ability in firms to deploy new technologies to add new competencies to make their processes optimal.

In addition to these general challenges, we also identify specific technology challenges with the manufacturing of major air-conditioning components.

Table ES1: Technology issues identified for different components

Technology issues identified for different components

Source: Authors’ analysis

Way forward to address technology challenges

Quite a lot of technology challenges identified above require: a) better coordination and knowledge transfers across the supply chain; b) collaboration between industry and academia; c) access to critical infrastructure for R&D and quality improvement such as testing and accreditation labs. In addition, SMEs need to be given special focus to ensure the robustness of supply chains.

With the technology issues identified in the sector, it’s clear that we need to take measures at different levels to improve the competitiveness and attractiveness of Indian air-conditioning enterprises and develop local options in the supply chain. These key issues and possible interventions have been mapped as follows:

  • Enhancement of vendor development programmes: Lack of process knowledge and product requirements is often cited as a handicap by small component manufacturers. Through better coordination between OEMs and SMEs, technical know-how and product knowledge can be effectively transferred and imparted to SMEs. This can help SMEs standardise, improve and adopt updated management processes.
  • Capital support for technology adoption: Component manufacturers are always trying to balance expected quality requirements with their bottomline. Their weak cashflow cycle makes these matters even worse. To improve technology diffusion and upgradation, debt-linked support in the form of soft loans can help SMEs acquire new machinery and facilities to bring their manufacturing units up to the mark. Technological upgradation will help in improving processes and demand for quality consistency.
  • Access to affordable public certification labs: For small players in the supply chain, cost of certification and compliance with standards is quite high. It is also an extremely important part of technology infrastructure to make the sector export-ready. Certification gives authenticity to the claims of the vendor as well as act as the first stamp of approval to manufacturers and tells buyers about various compliances the manufacturers adhere to. Low-cost certification facilities can mitigate these barriers and gaps, and enhance attractiveness of sellers. This can be achieved by building adequate capacity of labs and issuing licenses to provide affordable access to relevant players.
  • Industrial upgrading programmes: It is observed that inefficient management practices are followed in the MSME space for a variety of reasons. One of the major reasons is the availability of right people and expertise at desired wages. The knowledge required to rectify these issues can be imparted through a concerted effort of industry bodies and the government. This can be coordinated by international agencies like UNIDO to improve the factory floor practices followed by SMEs such as Six Sigma, The Toyota Way, etc. While most of the entrepreneurs have knowledge and vigour as a start-up in the initial days, they need help in devising growth strategies and management skills at different levels of business turnover. Targeted short courses diffused to the lowest level are needed. Cost of poor quality should be made an important management criterion.
  • R&D collaboration platform and opportunities:Technology diffusion with respect to standardisation of manufacturing processes and benchmarking is a persistent pain-point. An industry-academia-government platform can make this knowledge and research infrastructure accessible to a large number of players. Centres of excellence with SME focus can also have a wide-reaching impact. This needs to be an ongoing process. A forum of retired technical experts at different levels can be formed and integrated in such initiatives.
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Himanshu Dixit
Research Analyst

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