What plans does Blue Star have for 2016 onwards, particularly in relation to the Middle East market?

Suneel M Advani, Chairman & Managing Director, Blue Star: For about a year now, we have been stepping up our efforts based on our decision to see the brand grow on a more global scale. With regard to the Middle East, we believe we are in a prime position to capture some good business as well as find good partners and associates to work with. As of now, though, we don’t believe that we have sufficient market knowledge, because we’re talking about several countries, each one with its own set of laws, problems and economic situations.

Suneel M Advani, Chairman and Managing Director, Blue Star.

It will take some learning, so we are going to look at forming partnerships, though we won’t necessarily be adopting the same business models in every market. In some places, we’ll supply the products directly, and in some, we’ll partner. But broadly, we have three areas of business – projects, products and after-sales service. Depending on the market and the opportunities, we’ll take one or more of these businesses to certain select countries. Our projects business, for instance, is already present in Qatar, and Dubai always remains a big market for products. We want to look at all GCC region countries, however, particularly Saudi Arabia. We’re not in a rush, but we are here for the long run. We want to take our time to understand each space, meet people and understand how business is done, and then make moves selectively.

Do you see the dip in oil prices affecting your plans for the region? Do you see it affecting your presence?

Suneel: We’re conscious of how some stakeholders are seeing a slowdown in the industry. So, yes, that is one factor that we are taking note of. There are even projections from some people of oil prices dropping to USD 20 [a barrel]. Who knows? Personally, I don’t think it’s going to get to that. But even at USD 40, we’re already talking about a lot of suffering. I don’t know how long the Saudi Arabia economy will be sustained at that rate. Not long, I think.

Iran is the big gorilla there. It’s about ready to become accessible to many players, though India has had a bit of a head start. We’ve always had good relations with Iran, and this offers us many opportunities. We’re hoping that we’ll find our way in that country.

Oil prices aside, there are two mega events coming up in the region – Dubai Expo 2020 and the 2022 FIFA World Cup. Is Blue Star engaged in conversations related to the two events?

Suneel: Qatar is a big market, and there’s big demand there. However, it’s not an easy market to do business in. We’ve been there maybe seven or nine years but still relatively small, because we’re very picky or choosy when it comes to contracts. We have some six or eight key conditions that must be in every contract before we bid on an order. If the conditions are not there, we won’t bid.

With regard to Expo 2020, we have a few more years before the event, so we’re getting more advice about doing business in Dubai. We have some 500 ex-Blue Star employees in the Gulf area, and we get together with them every now and then. They retain a strong bond with the company, and it is to them that we look for guidance. So, in answer to your question about Expo 2020, I would love to be in the contracting business here, but we have a few years. We don’t have to jump into it today or tomorrow. We’ll get a proper understanding of the situation and build up slowly. Our capabilities are recognised here. People know the Blue Star name, so I’m sure in a couple of years’ time, we’ll be ready for 2020.

But do you already have products or solutions in mind that you think would be suitable for the mega events?

Vir S Advani, Executive Director, Blue Star: Specifically for 2020, and also to go back to your question about our plans for 2016, there are two things that we’re going to be focusing on in the coming months, which will also impact our 2020 participation.

Vir S Advani, Executive Director, Blue
Star.

In the products business, we have a unitary product line – windows, split units, water coolers – which we sell in GCC region countries, except Saudi Arabia, but we have not supplied applied systems in these markets. We haven’t been selling chilled-water systems and VRF systems. This year, we will be entering the UAE market with a brand-new VRF solution. It will be our own India-designed and India-manufactured oil inverter VRF system that can go up to 88HP module, which is one of the largest modules that we know. Right now, we’re in the advanced stages of getting ESMA certification, which we expect to be done by April. By then, we would have a new distribution set-up in the UAE. Currently, we only have a sales office. We work through distributors. For applied systems, we are finalising a partnership, which we should be able to talk about in a couple of months. We’re timing that with the VRF being ready.

We believe that our VRF system is going to be a game-changer in this market. Our ambient range in India is quite wide. And although the bulk of India does not experience 55 degrees C, there is a certain part that does. So we have a VRF system that works non-stop up to 56 degrees [C], and actually does not derate all the way to 46 degrees [C]. It is an innovation that is unique to us. And we believe that once we get the right partner and we bring in the Blue Star VRF, things here would really start to change, because VRF is still quite nascent in this part of the world. As for its link to 2020, I think that VRF is going to become a very important technology and will be incorporated into the entire Expo 2020 infrastructure.

By May or June, we will also bring here an inverter-based screw chiller. In India, we don’t have District Cooling technology, but from what I can see here, at least in Dubai, District Cooling is not growing at the same pace as it did five years ago. I think everyone has done the math and figured out that given the connected load, there’s no adequate saving for the CAPEX. Many buildings are moving back to standalone plants, and there again, inverter technology is going to be critical.

India is a water-cooled market, which is why we have an inverter-based water-cooled screw going up to 550 TR. We are going to be introducing an inverter-based air-cooled just for this [UAE] market, in which I understand the inverter air-cooled screw has yet to also take off. We see those two technologies becoming key solutions in the future and tying into the UAE’s push for energy efficiency. So, yes, I think we have a role here to play, and things should be quite interesting for us, going forward. We’re going to be sensible about how we play this.

How is the market in this region compare to the Indian market?

Vir: The Indian market is, first of all, primarily a mini-split market, with a market size of four million units a year. We – Blue Star – sell 400,000 mini splits a year, so we have around 10% market share. The next largest part of the market is chillers, and mainly screw chillers. These are traditional, non-inverter chillers, because price plays an important role. There are five of us [manufacturers] playing in that market. And then, now, the third largest is the VRF market. That market has gone from zero to the third largest segment in only about seven years.

What would you say is driving the VRF market? What factors are behind its growth?

Vir: There’s this perception that India as a market is looking for affordable, low-tech solutions, but the truth is, power is so expensive in India. And that drives a lot of decisions and choices. Also, VRF has the advantage of fast installation. Again in India, we don’t have single-tenant buildings, unlike in this part of the world. We have multi-tenanted developments, and when you have those, VRF becomes an easy solution. It’s a modular solution. In India, the cost of capital for a developer process is 20%. That’s interest cost. Imagine being a developer building at 20% interest; you’ll have an idea of what your business model has to be – modular. You need to spend your CAPEX in that manner. The chilled-water system is 100% upfront. That’s also why District Cooling doesn’t even come into the picture, because with District Cooling, you need to have a negative interest cost. You cannot set up District Cooling at 20%. So, it is the nature of the real-estate market coupled with the technological advantages that have led VRF to becoming a more cost-effective solution than the chilled-water system in India. It is energy efficiency coupled with the CAPEX requirement – the modularity of it – that is driving its growth.

I don’t know if modularity will drive things here in the UAE, but energy-efficiency standards that are becoming the norm here certainly will. Frankly, our view on HVAC technology is that every single product, from a one TR mini split all the way up to a centrifugal chiller – everything will have variable speed. And whether it is inverter or some other form of variable speed, it will dominate. Already, in India, 10% of mini splits sold are inverter-based, and I believe in three years, it will become as much as 30%. I also believe that the ducted and chiller markets here will move to inverter. VRF, of course, will continue to grow as a category. That’s really where we are moving to, and fortunately in India, we’ve been investing in inverter technology for around six years now. As an organisation, R&D is a core area of ours, because many years ago, we decided not to do any technology tie-ups, royalty payments or joint ventures involving technology. The last time we entered into one was back in 1999, if I’m not mistaken. So we’re about 16 years of designing and building our own products, and about seven years since we started inverter investment. We’re very excited to move into this market on that platform.

Moreover, we’re also looking into refrigerants here. We already have a new range of R32 products available in India, and we will introduce R32 mini splits here sometime in the year. The GWP [of R32] is significantly lower compared to other refrigerants. We’ve done our own analysis, and it’s phenomenal. Interestingly, the product cost is actually coming down, because you can adequately resize your condensers and coolers. The incremental energy efficiency with the lower cost is something we have not seen in a while. Now, how fast can we move R32 into, say, ducted systems? And will it ever get into a VRF solution? Those are significant questions. With regards to the latter, I believe that they will, because the Japanese are using this refrigerant, and they will certainly find an application in VRF. I think that when the confluence happens, we will have an inverter-based technology again becoming far more cost-effective than other solutions.

There’s actually still some resistance to R32 here in the region, primarily due to its flammability. Some experts are questioning its suitability for the Middle East’s high-ambient conditions.

Vir: Yes, that is much debated on. R32, certainly, will never find its way into a window unit, but why not in a mini split? And we’ve done testing at high-ambient conditions. As was mentioned earlier, India has a full range of ambience, so we’ve done testing all the way up, and we did not see any issues.

Of course, it takes time. You have to educate the market, the consultants, the buyers – all of that will take time and effort, but I think if we could get a few more manufacturers to do the testing and the design, and to bring products in, because in India today, there are at least three or four manufacturers, including us, who have R32 products. It’s only a matter of time before that number grows, and then we can see how this part of the world can or will take advantage of that technology.

Other than cost and energy consumption, Indoor Environmental Quality (IEQ) is an issue that has been getting the attention of the industry, with studies proving the link between the health of the indoor space and the productivity and performance of occupants. What is Blue Star doing to address the issue of IEQ?

Vir: We have a third line of business, which is after-sales. In India, we have two million TR of air conditioning under maintenance. These are everything from residential to commercial units. As part of the maintenance business, we have a set of value-added services that we offer to our clients. In addition to energy modelling and energy management solutions, we look at indoor air quality. In fact, we regularly go around the world looking at new technology and solutions that address air quality, and we bring them to India. UV emitters, for example, are a solution that we recommend to all our clients. We find that Europe tends to have advanced technology, as does the United States. Our service business is not limited to the mechanic going to fix the problem; it also involves bringing new ideas to the client – ideas that can reduce the lifecycle cost of the building and manage issues like indoor air quality.

Suneel: Energy audits, energy management and noise reduction – those are just some areas we cover, because the focus should not only be new installation, where you have to have products that provide the right atmosphere, but also existing installations. HVAC ducts, for example. Just think of the amount of muck that is in the ducting. You cannot begin to imagine. When we send a robot in with a camera, we feel sick looking at the muck that we find.

Vir: Fast-forward to one year from now, after we introduce our VRFs and inverter chillers in the UAE, our next priority will be to get our service business here. We’re going to look at what specialised services the market is looking for or needs that we can bring in from India. That plan is not yet fleshed out, but we will work on it. Maybe, 18 months from now, we will have a running service business here.

We have 10,000 technicians in India. We run internal Blue Star institutes in three locations. We provide technician training, engineer training and managerial training, for both our contracting and service businesses, because they are people-intensive businesses. We’ll be looking to get that resource here [UAE/Middle East], whose FM industry – I understand – has problems.