After five years of declining revenues, Australia's HVACR industry is preparing for moderate growth through to 2020.
According to IBISWorld research, industry revenue is forecast to increase at an annualised 1.8 per cent through to 2019/20 to reach $1.6 billion.
“The highly volatile nature of building construction contributes to the wide fluctuations in the revenue of HVACR equipment manufacturers,” the report said.
“But greater non-residential construction activity over the next five years is expected to drive revenue growth.” IBISWorld said revenue falls over the five years through to 2014/15 can be partly attributed to general declines in non-residential construction activity.
Industry revenue decreased at an annualised 2.8 per cent during this period to $1.5 billion. The report covers manufacturers of HVAC equipment including installed space heaters, refrigeration products and air conditioning systems ranging from eight kilowatts to over 5,000 kilowatts.
This includes 320 businesses with profits totalling $168.7 million. The overall profitability of industry manufacturers has increased from 8.9 per cent of revenue in 2009/10 to an estimated 11.3 per cent in 2014/15.
The good news is that increased domestic demand will contribute to higher industry employment with growth of 1.7 per cent per annum over the next five years. IBISWorld estimates employment numbers have declined by an annualised 4.5 per cent as industry demand decreased and improved capital efficiencies reduced labour requirements.
This turnaround has already begun. In fact construction activity in the high rise apartment building market is expected to grow strongly in the next few years as general economic conditions improve and finance for projects becomes easier to obtain.
Cheap imports
The industry has faced high and steady competition from imports over the past five years leading to some domestic firms outsourcing production to Asian countries in a bid to improve margins.
Competing imports are estimated to total $841.2 million in 2014/15 accounting for 37 per cent of domestic demand, a rise from 33 per cent in 2009/10. Although exports play a smaller role in the industry, totalling $62.6 million, its a critical income source for some companies.
“The value of the Australian dollar remained relatively high over most of the five years through 2014/15 causing domestic manufacturers to become less price competitive in the world market,” the report said.
“However, strong branding and the high quality of products made in Australia have contributed to exports increasing at an annualised 3.5 per cent over the past five years.
Although exports only account for a low proportion of industry revenue, their value rose sharply by 15.8 per cent in 2012/13 as the value of the Australian dollar fell. Steady growth is expected in 2014/15.” At the same time competing imports have become cheaper over the past five years.
With 37 per cent of domestic demand satisfied by imports in 2014/15, global manufacturing trends have had a strong impact on industry. The majority of imports have been from Thailand, China and Japan.
The Asia pacific region is home to the largest manufacturers of HVAC equipment in the world. IBISWorld expects imports to increase at an annualised 2.7 per cent over the next five years despite a weaker Australian dollar.
Competitive landscape
The industry is expected to be slightly less profitable over the next five years. Profit is projected to decrease from 11.3 per cent of industry revenue in 2014/15 to 11.1 per cent in 2019/20, as price competition increases.
Prices for steel, motors, compressors and pumps will remain stable and consolidation will be limited to only a small number of firms exiting the industry.
IBISWorld said concerns about the environment, energy efficiency and water usage by cooling towers will continue to impact the industry through to 2020.
“Growth in demand for commercial heating and cooling equipment may be assisted by the replacement of existing chilling systems that use chlorofluorocarbon (CFC) refrigerants, and the phase out of hydrochlorofluorocarbon (HCFC) sales,” the report said.
While some products increased market share, others have declined every year since 2009/10. For example commercial refrigeration equipment now accounts for 19 per cent of industry revenue as a result of increased demand from supermarkets and food retailers.
But commercial heating equipment has consistently declined every year. Large industrial and commercial ventilation systems are also in decline. This is largely due to increased demand for reverse cycle air conditioners, which is expected to account for 12 per cent of industry revenue in 2014/15.
Reviewing the competitive landscape, IBISWorld examined business locations in 2014/15 and found Queensland, New South Wales and Victoria account for 78.6 per cent of industry revenue. However, New South Wales and Victoria have both lost market share in recent years due to growth in other states, most notably Queensland and Western Australia.
Queensland has been gaining ground due to growth in the hotel, retail and entertainment sectors. The sunshine state has also accounted for an increasing share of installation companies over the past five years.
The report found that in the past year 11.7 per cent of revenue came from Western Australia, 1.7 per cent from the Northern Territory, 19.1 per cent from Queensland, 6.5 per cent from South Australia, 1.5 per cent from Tasmania, 31.8 per cent from NSW and 27.2 per cent from Victoria.
The industry has low concentration levels, with the four largest operators accounting for an estimated 32 per cent of revenue in 2014/15.
The largest two companies Daikin Australia and United Technologies Australia (which includes brand names AHI Carrier, Carrier and Toshiba) are estimated to account for 21.4 per cent of industry revenue.
There has been some rationalisation over the past few years, with several companies increasing their market share in some product segments. This has increased the industry's concentration level over the five years through to 2014/15.
IBISWorld expects this will continue over the next five years. “Larger companies will acquire smaller firms to increase market share and organic growth. In 2019/20 the four largest firms will account for 35.7 per cent of industry revenue,” the report said.
Cost structure
The industry cost structure is an estimated average of all firms operating within the industry.
In the five years to 2014/15 profit margins are projected to increase to 11.3 per cent of industry revenue, up from 8.9 per cent in 2009/10.
According to the Australian Bureau of Statistics (ABS) prices received for products have increased at an annualised 0.8 per cent over the past five years.
IBISWorld said purchases will account for 54.2 per cent of industry revenue in 2014/15, down from 59.4 per cent in 2009/10.
“Manufacturers with brand power such as Seeley, Heatcraft and Rheem, have been able to implement price increases and benefit from them in terms of revenue growth,” the report said.
A significant cost is wages, which accounts for 22.3 per cent of industry revenue in 2014/15, up from 19.7 per cent in 2009/10. This growth has been due to higher wages across the industry.
For new firms barriers to entry in this industry are high. Technical requirements are becoming increasingly important due to the amount of focus put on energy efficiency and noise pollution in the past few years.
Globalisation in this industry is also relatively high. “The industry exhibits a high globalisation level, with high competing import levels and foreign-owned firms accounting for over one third of industry revenue,” the report said.
“Industry globalisation is being driven by rapid development in Asia over the past five years, particularly in China and India.”
The findings of the IBISWorld report is in line with other business reports and surveys which reach the same conclusion - the global outlook in 2015 is better than 2014, but not by much.
The latest Australian Chamber of Commerce and Industry (ACCI)-Westpac Survey of Industrial Trends describes the current business climate as cautiously optimistic.
Survey respondents expect to increase capital expenditure on buildings and plant and machinery during the year. ACCI CEO, Kate Carnell, said that overall the survey results are encouraging with demand and output both returning positive indicators.
“This latest survey shows that Australian manufacturers are optimistic about the general business situation and their own firm’s future profitability. But firms are still holding back on making big commitments until they get further momentum,” she said.