Friday, 08 November 2024
How are Chinese brands navigating increasingly stringent regulations and rising consumer demand in a gigantic local market, while battling historical prejudice from overseas in a business environment where reputation is a valuable currency? Hannah Jo Uy of Climate Control Middle East has the story…
China’s concerted efforts at developing a modern silk road has injected its HVACR industry with renewed vigour, as companies eagerly showcase their manufacturing prowess and technical knowledge to raise the profile of China-made equipment abroad. While an immense market in itself, China is also grappling with global trends – and all this at a time when the government has undertaken measures to meet environmental and economic targets.
“After the Paris agreement,” says Moan Abraham, Vice President and General Manager for Air Conditioning, Hisense Middle East, “there was a big initiative from the Chinese government to implement these environmental regulations at the small scale as well as at the industry level.” Abraham says China’s commitment to the Paris Accord and to the broad cause of the reduction of greenhouse gases is unquestionable and that this has led to increased inspections and intolerance towards manufacturers, who do not comply with the increasing number of standards.
Mark Wang, General Manager of International Sales, Chigo HVAC, echoes this: “China keeps introducing new regulation towards air conditioning products,” he says, “and it’s mainly focusing on energy-saving.” Zhan Jie, Overseas Department Director, Haier Commercial Air Conditioning, says there has been joint effort between government and manufacturers to upgrade energy-saving products. “Products,” he says, “need to be in accordance with standard rules of government departments or third-party inspection agencies to obtain the compliance verification and certification permit.” Wang adds that a number of government tenders now require suppliers to demonstrate energy efficiency through certificates.
Jie says that recently, the Chinese government had signed an international agreement to phase out R-22. Further touching on trends related to refrigerants, Wang says that he has seen hydrocarbons taking the place of Freon and that there has been a shift from high power consumption to low carbon energy saving and that this has been a driving force in technology development among manufacturers. Currently, Wang says, R-32 is being viewed as the best replacement for R-410A.
“China continues to promote urbanisation as well as the development of the air conditioning industry,” Jie says, while speaking in the context of the company’s move to promote magnetic-bearing technology for energy savings to address emerging demands. Jimmy Liao, Technical Manager, Midea Commercial Air Conditioner (Middle East and Africa), says that new policies encouraging more efficient HVAC systems, have led to an uptake of air- source heat pump water heater systems. “There is a big project held by the government, called coal-to-electricity,” Liao says, “which encourages people, especially those in the countryside, to use the air-source heat pump system to supply heating as well as hot water to replace the traditional method of burning coal.” Jie shares a similar observation, saying that the change from charcoal heating into electric heating has increased demand for heat pump air conditioner, which accelerates R&D of such energy-saving products.
A household gaze
Wang says that owing to changes in government policy, mega projects have become saturated, and more and more manufacturers are shifting their attention towards the household central air conditioning market. Driven by increasing real estate prices, Wang says, 2017 saw a 50% increase
in demand for household central air conditioners compared to 2016. This, he says, is because the gap in price between traditional and central air conditioners is closing. The preference for central air conditioning, he says, is also owing to aesthetics, as stakeholders find it easier to design according to the wishes of the clients, and to the fact that an outdoor unit typically also takes up lesser space.
Wang says that in addition to the government increasing EER standards of products, there has been an uptake of high-end apartment projects, featuring inverter-based systems from real-estate developers, further driving demand for such systems, and that there has been palpable improvements in the mind-set of end-users in the local market.
“In the China market, inverter systems are dominating,” Liao says, “especially in the residential sector. More than 80% of the residential split air conditioning sold in the last two years were inverter-based. Most of the main suppliers, including Midea, already have a plan to stop producing non- inverter systems within a couple of years.”
The push from outside
Wang says that with more and more HVAC brands entering the China market, local manufacturers are being forced to improve and innovate to maintain market share and stand out among the competition. Jie seconds this: “The conventional rule for new products’ research and development,” he says, “[is the] need to acquire the requests of the local market by means of interaction with local customers as well as installers to develop the products that solve users’ complaints, especially to iterate and lead in the industry.”
Abraham adds: “In China, growth rates are pretty much driven by real estate. The population needs housing, and the demand is still there. However, what the government wants now is for Chinese brands to offer global products.” This, he says, has driven companies to invest in technology and market themselves as a brand of choice, owing to the equipment’s technical advantages and ability to comply with international standards, and not merely as a low-cost solution.
Abraham also emphasises that affordability, which everyone is looking for, need not be associated with inferior quality, noting that many leading Chinese companies invest heavily in technology to reduce cost and increase efficiency through innovation and not by lowering standards. “If a product is made in the West,” he says, “there is a perception that the high cost is owing to labour and material [expenses]. What China is trying to do differently is using technical investment and innovation to help provide people with more affordable products of the same quality. Particularly
a better engineering product [that is] technologically more advanced, by being lighter in weight, through new methods of heat transfer, or through the reduction of coil sizes.” This, he says, reflects growing emphasis on R&D, which Hisense is investing five per cent of its revenues on. “We are
a technology-oriented company,” Abraham says. “We innovate to make it more affordable; it’s not just about labour cost. There is just a lot of automation and big-scale manufacturing in China, which brings the cost down.”
The foray of VRF systems
China is also known for the strong penetration of VRF systems. Wang says the explosive growth of real state set the stage for the technology. Jie seconds Wang’s view, saying that the continuous implementation of environmental-protection and energy-conservation regulations, combined with the energy-saving features of VRF technology, has also promoted its rapid development in the local market. “Within this decade, the market capacity of VRF has tripled,” Wang says. “The mini-VRF market also [has been able to] keep high-growth speed. With the continuous economic development, mini- VRF will occupy large volumes of the wall-mounted products’ market, because it is popular among the end-users.”
Wang adds that the strong uptake of the system is the result of Japanese brands entering the Chinese market in the 2000s, which helped local designers familiarise themselves with the technology and understand its benefits, compared with traditional water-cooled air conditioners, in terms of energy saving, easier maintenance, faster cooling and heating. Today, they prefer to use VRF in their project designs,” he says.
Wang says that with Chinese brands, such as Gree, Midea, Chigo and Haier, developing their own VRF systems, the price has dropped dramatically. “These brands take full advantage of their brand image and sales channels to let more and more end-users know about VRF,” he says. “We can also say that the Chinese brands drive the whole VRF market forward.”
Manufacturers, Wang says, are still eager to invest in VRF technology. For Chigo’s part, Wang says, the company enjoyed strong sales of its full- DC-inverter VRF in 2017, adding all manufacturers place great importance on innovation to meet demands of various market segments. Lately, he says, demand for good heating performance, low noise, high efficiency and big capacity are driving competition among VRF products. ‘In the Chinese market,” Liao says, “for most of the non-government projects, once the project owner decides to use VRF, consultants and designers will design the system according to the owner’s decision, even if they don’t prefer VRF technology. This has a very important impact in the beginning years of introducing VRF. As more and high-rise applications started installing VRF, and it works perfectly, the consultants, even for the government projects, have started to accept and acknowledge it.”
Jie points out that from a Chinese perspective, VRF in the Middle East market has much room for development. Abraham says that while VRF has become more acceptable, compared to five years ago, there is still a long way to go, citing resistance from stakeholders, who prefer to apply traditional systems as a bottleneck. “Some consultants won’t design anything using VRF,” he says. This risk-averse attitude, Abraham says, is especially noticeable in countries that have a high concentration of expatriates, as most are present to fulfil a contract and are scared to make a mistake. Liao, by way of sharing his perspective, says: “In the Middle East, if you want to sell VRF, you have to get the approval from the consultant, but sometimes, it is very difficult, especially when [you have] an experienced consultant that has been designing big chiller systems for many years, and suddenly you ask him to design the VRF system that he might be not so familiar with. He would be hesitant, question you or even refuse [to consider the technology] – it is normal. So, the key to [advance the] penetration of VRF technology is to convince the consultants to accept and understand that VRF can be used in high-rise applications and even performs better on some aspects compared to chiller system.”
Jie believes that there is a need for local government, industrial associations and consultants to work together to promote the benefits of VRF technology. Drawing a comparison, Abraham says the strong uptake of VRF technology in Europe is owing to the full implementation of regulations throughout Europe, which made it a single market, enabling manufacturers to comply and enter the region. Whereas, in the Middle East, he says, regulation is still evolving. “Once a more cohesive regulation is in place and compliance is monitored,” Abraham says, “acceptance will go up. We need a level playing field, and the only way to do it is by regulation.” In such an environment, he says, country of origin is and should no longer be a barrier.
Battling wrong perceptions
Making a case for the competitive advantage of Chinese manufacturers, Liao says Chinese companies have more leverage to survive, develop, accumulate profit and, then, invest on the R&D of new products and new technologies, as it has the most complete supply chain and the biggest
air conditioning market. This, Liao says, is a winning formula for Chinese companies to go head to head, if not surpass, manufacturers from other countries. “At the same time,” he adds, “there is a huge group of highly trained professional engineers, consultants and designers, not to mention more and more graduates with superior educational background.” Jie also says the quality of Chinese products and the capability of manufacturers to innovate have significantly improved. “The gap with Europe, the United States, Japan and South Korea,” he says, “has gradually narrowed, and [China] will take up a larger market share in the future.”
Calling China the ultimate source for residential air conditioners in the market today, Abraham says that while there is brand acceptance, what needs to be developed is the commercial segment, where “institutions trust our band”. He adds: “There, we need to do a lot of work, building more on capability services, providing technical support and letting the people know about our quality through third-party certification.”
Jie says that in addition to trade-protection tariff barriers, prejudices against Chinese products, based on historical reasons, “have affected the global development of Chinese products and technologies to a certain extent”. Abraham believes that the negative perception is largely customer- driven. “Customers outside China go to China looking for a low-cost solution,” he says, stressing that it is not a fair indicator of Chinese companies’ capabilities. Abraham provides an example: “You can manufacture a glass for one dollar with safety requirements, or you could just say, ‘I need a glass at the cheapest price’. There is demand for [cheap products], which is causing the supply.” Abraham stresses that global companies, such as Apple, have manufacturing bases in China and receive the same high-quality products, as required by their own standards.
As evidenced from Hisense’s customer-optimisation strategy, Abraham, says that what Chinese companies are doing now is filtering customers. “We don’t want to deal with every customer that comes in,” he says. “We need good-quality customers. They need not be big, as long as they know what they want.” Customer optimisation, he says, is essential to create brand equity. Touching on the importance of marketing initiatives, in line with this, Abraham points to sponsorships undertaken by Hisense for the 2018 FIFA World Cup, as an example. The objective, he says, “is to increase sales and improve brand visibility to gain long-term customer confidence”.
Touching on certifications in China, Abraham says there is no need for manufacturers to obtain overseas certification, when the country has more than enough facilities and laboratories. China, he says, has all the leading certification bodies. “Just because, for example, a UL test facility is located in China, does that mean it is inferior to the UL test facility in the US?” Abraham emphasises that, as such, within China, there is strict regulation in certification of companies; however, the high standards in the country’s building practices, which are at par, if not higher than global standards, is not communicated well to international stakeholders, owing to language barriers. Internally, however, certifications to demonstrate the highest quality constitute a mandatory practice within the country.
Most companies in China, Abraham says, have adopted global standards for their own benefit. However, he says, mindsets must change, and this will only be possible through continuous education and more effort from the government to bring in leading players in China. “It’s a chicken-and- the-egg thing,” he says. “A brand has to be accepted, then the product is tested. If big brands manufacture in China, it’s accepted. It’s always brand acceptance before product acceptance.”
The Great Wall of China, Abraham says, was not built overnight. Similarly, the tedious task of raising the profile of Hisense and Chinese brands will be done “brick by brick, wall by wall and pillar by pillar”. “It needs that time,” he says, “and trust among partners ready to engage.”
Liao remains optimistic, not only for Midea but for the collective progress of Chinese companies, globally. Pointing out that there are many markets in the world, where Chinese suppliers are dominating, Liao believes that “Made in China” will ultimately be transformed into a tag that guarantees quality technology.
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