As Europe stands precariously on the brink of an economic precipice, the HVACR sector in Italy, as most other things, is predicated to the global economic slowdown in general and the European crisis in particular. Given the dismal outlook, the sector has braced itself for a protracted period of a sluggish market, but keeps hoping for a miracle. By Pratibha Umashankar.

The present economic scenario in Europe brings to mind an old joke:

Three men met at a park. The first one sighed. The second one sighed in response. The third one said irritably, “Oh, stop discussing the economy!”

The joke may sound cruel, but it is, perhaps, an eloquent comment on Europe’s present mood. And Italy is no exception. It is hard to miss the irony. The 2007 Chillventa country report on Italy said: “The refrigeration and air conditioning market in Italy has strong sales growth to show. A total of 13.4% more units were sold and 22.2% more of turnover achieved in 2007 compared with the previous year.”

Italy was dubbed the “Land of air conditioning” The Italian Association of Manufacturers of Air Conditioning and Ventilation Equipment Co. AER (Associazione construttori di apparecchiature ed impianti aeraulici), which published its statistics in March 2007, gloated that it was a positive year for the Italian HVAC sector with 13.4% more air conditioning units sold and 22.2% more turnover achieved compared with 2006. Although the production figures of the Italian companies had actually dropped overall by 1.4%, the turnover had risen by 13.4%.

There was a hidden subtext here, predicting the events to come. But the general mood of optimism, buoyed by statistics, prevented many from reading the signs of the times. Then came the global economic crisis, and the outlook in Europe changed completely. Michele Paccagnella, Managing Director, MP3 Srl, with its head office in Camposampiero, Padova, Italy, admits as much when he says, “The European/global crisis has been continuing to heavily influence the HVACR sector in the last three years. The market has fallen by no less than 30%.”

Salah El Deeb, MEA Sales Manager, Castel Srl, Milan, agrees. The economic crisis has definitely impacted Europe since late 2008 and early 2009,” he says and adds, “But in the last two years, the stronger companies have had a slight edge.

His company is a supplier of components for refrigeration and air conditioning applications and supplies to big and small OEM customers through distributors.

El Deeb, echoing Castel’s conviction believes that mega projects will continue as planned, the financial fragility of the market notwithstanding. “It’s a case of ‘stop and go’,” he analyses. “Projects that have been injured have suffered slowdowns and a few have seen accelerations. The market outlook is that this is a reality which must be faced.”

Speaking about his company’s game plan, he adds: “Our organisation is based on an Italian network of area managers and agents, and the strategies we use for facing the global slowdown are mainly to focus on our core business and approaching customers through area commercial dealers. We are also looking at a process of internationalisation, which includes opening a subsidiary in China.”

It appears that China is to Europe what Qatar and Saudi Arabia are to the Middle Eastern HVACR markets. Too many hopes are pinned on a growing Chinese market, thus rendering the Italian market vulnerable to the all-too-familiar domino effect.

Paccagnella succinctly sums up the HVACR market outlook when he says: “The growth of the construction sector is directly proportional to the growth of our country. In the absence of new constructions, the (HVACR) market will be in recession, and it is exactly the situation we are in now.”

GENERAL FEATURES

From small distributers to a consolidated market:

Unlike in many other countries in Europe, the wholesale trade in Italy is spread among and organised by many smaller regional distributors. This is true not only of the components and refrigerants segments, but also applies to refrigeration and air conditioning systems. The big companies are represented by many smaller associations, with no single federation. However, the trend is now moving from a fragmented market to a consolidated one, and also towards competing with international players.

“Our strategy is to gradually reduce our sales in the domestic market and increase our exports,” reveals Paccagnella, reflecting this. “The evidence to show this is that in the first five months of 2012, in comparison to 2011, the total sales was about five per cent more with -13% in the Italian market and +38% in exports markets. The main players are our main competitors.”

Hospital sector helps the ailing market:

Another trend is that the largest public investments have been in the hospital sector, though from 2011, there has been a significant reduction in the number of tenders in this sector, too, as a result of the economic crisis.

MP3, a manufacturing company, with distributors, installers and contractors as its customers, has managed to keep afloat with contracts in the healthcare segment, despite the slowdown.

“We are today among the most important companies in the sector, leading in the fire prevention market (fire dampers),” Paccagnella claims. “The most important contracts we have obtained are for the supply of components for new-restructuring of hospitals, UN military bases, as also airports. The value of the contracts range between €200.000,00 and €700.000,00”.

Going clean and green:

With green buildings being the buzzword, the concepts of environmental impact and eco-responsibility have gained greater traction in Italy. The focus has also shifted to Indoor Air Quality. There is a greater realisation, therefore, that cooling tower maintenance can pay good dividends, in terms of both energy efficiency and IAQ. Duct cleaning is also seen as playing a big role in better IAQ.

Environmentally speaking, more efficient compressors and natural refrigerants, which reduce ozone depletion, are fast becoming the norm rather than a fad.

In the AHU sector, the main innovations are linked to energy saving and high efficiency heat recovery.

Ducting and fire safety:

“In the market for ducts, the main innovations seen in the last few years have been polyurethane ducts and antimicrobial treatments for ducts,” says Paccagnella. Apart from this, with tighter fire safety regulations being stringently followed all over the world, Italy has also seen the HVACR sector being co-opted into it with a call for newer technologies in ducting.

“In the fire prevention sector, as a result of the new European directive which is being introduced for all member states of the EU, new products are being developed, which, in addition to stopping the propagation of fire, must also block hot and cold fumes from spreading in buildings as these are one of the main causes of deaths in case of fires,” Paccagnella points out. “It is also necessary for these new products to undergo tests for all possible types of applications and very rigid construction and control systems must be put into effect as a result of the importance of these products.”

POWER STRUGGLE

Salah El Deeb

Mirroring the global predicament, steep energy cost in Italy has brought into sharp focus the need to implement energy-saving initiatives and reducing power bills. This, in turn, has underpinned the need for energy- efficient equipment in the HVACR sector, and highlights the importance of electric drives as advanced and cost-effective solutions for HVACR components.

“For this reason, a new association has now been set up as part of Co.AER, the Italian Heat Pumps Association, which represents the interests of the industry, promotes research projects and developments and is also a member of the European Heat Pump Association (EHPA),” says a Chillventa report. (Chillventa country report: ITALY, 2007)

“Heat pumps are also promoted by the Italian government,” the report continues. “Law number 244 on highly efficient heat pumps has been in force since 24. 12. 2007, under which, 55% of the costs can be deducted direct from tax. This also includes costs associated with the replacement of existing plants with highly efficient heat pumps.”

Maria Calabria, in an analysis of the HVAC sector, vis-à-vis the heat pump market, states that in Italy, energy consumption for civilian use corresponds to approximately 90% of the total consumption, and heating and air conditioning systems absorb about one-third of total energy needs. “The implementation of energy savings programmes in the HVAC area can have a significant impact on Italian energy consumption and allow Italy to reach Kyoto objectives and European Union commitments,” she says. “The use of GHPs alone could bring Italy to meet its renewable energy obligations by 2020.” (Italy: HVAC – Geothermal Heat Pump Market, US Commercial Service, United States of America, Department Of Commerce, September 2009)

Michele Paccagnella

It is interesting that the US Department of Commerce admits that US was once the world leader in GHP technology and market development, but that the European markets now absorb two to three times the number of GHP units annually as do the US domestic markets. According to EPHA, the European heat pump market is growing progressively in most European countries, and the most significant growth is found in the larger markets, including Italy.

In this regard, it needs to be noted that Italy is dependent on imports for 84% of its energy, 50% of which comes from France alone. With changing climate patterns, demand for air conditioning systems has risen in the residential and the industrial sector. Heat pumps are, therefore, increasingly being seen as a possible solution, as they can double up for heating and cooling in view of the Mediterranean climate that prevails in Italy. However, the fact remains that EU, as most of Europe, is tightening legislation affecting building energy performance requirements and renewable energies, to help cut down energy bills and improve sustainability.

TARGET 20/20/20

According to the European Commission: “In March 2007, the European Union (EU) leaders endorsed an integrated approach to climate and energy policy that aims to combat climate change and increase the EU’s energy security, while strengthening its competitiveness.” They committed Europe to transforming itself into a highly energy-efficient, low carbon economy.” (http://ec.europa.eu/clima/policies/package/index_en.htm)

To initiate this process, the EU heads of state and governments have set a series of of demanding climate and energy targets to be met by 2020, known as the “20-20-20” targets. These are:

A reduction in EU greenhouse gas emissions of at least 20% below 1990 levels

20% of EU energy consumption to come from renewable resources

A 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency

The EU leaders have also offered to increase the EU’s emissions reduction to 30%, on condition that other major emitting countries in the developed and developing worlds commit to do their fair share under a global climate agreement. (http://ec.europa.eu/clima/policies/package/index_en.htm)

In the light of this, reducing carbon emissions, energy consumption, promoting energy efficiency, cost savings and environmental sustainability have become not just a trend, but are mandatory.

Focus on design:

With a view to achieving the goals EU has set for itself, countries in the Union, including Italy have set their gaze on equipment and building design for achieving high energy efficiency. This has had a direct bearing on the country’s and the continent’s HVACR sector. High efficiency, energy saving and renewable technologies will eventually phase out traditional designs and technologies. The sector will, therefore, witness a complete system revamp and integration and incorporation of renewable energy.

This will also see a shift in technology balance of power. The race is on for coming up with innovative product designs which will factor in the cost element. “There is big attention towards this, and the market demands for products that respond to this need for innovation is very strong,” admits El Deeb. Coming to specifics, he adds, “Certainly, in Italy, innovation passes through more efficient products from the point of view of energy savings and possibly with the use of refrigerants as alternatives to the current ones.”

INNOVATION AND PRICING – THE BALANCING ACT

There are many new directives and policies in place in Italy for the construction, energy-saving and energy-efficiency classification of buildings. The government also offers incentives for alternative sources of energy and encourages installations of photovoltaic solar panels and high efficiency systems. In fact, Italy was one of the first EU countries to provide incentives for adopting energy-saving technologies in the construction sector. This is, of course, in line with the 2020 target.

Since 2010, 57.5% of small and medium enterprises in Italy have invested in energy-saving practices. However, the bleak economic scenario has created setbacks to the collective good intentions of the government and the HVACR industry. Paccagnella voices this market sentiment: “Unfortunately, due to the current crisis, subsidies towards research for new technological solutions have been practically nil. Within the R&D help plan, the current government is evaluating whether to restart the support given to the industrial sector for R&D of sustainable solutions. Again, unfortunately, due to the current economic crisis, the policy for incentives faces constant changes and is slowing down significantly in this important sector, which, in the last few years, has had an exponential growth, and which has created many new jobs. With the market facing a significant slowdown, currently, it is not clear what will happen next.”

Speaking about his own company’s sustainable initiatives, Paccagnella claims that towards the end of 2008, MP3 started a new series of projects for the development of new products. “In 2009, 2010 and 2011 we invested over three million Euros and more is still being invested in this current year, 2012,” he reveals. “As a result of these investments, MP3 is able to tackle the recession in the Italian market with new technological products which will allow moving sales from Italy to overseas markets.”

Penetration into the regional markets in Eastern Europe is also being viewed as a strategic response to economic and energy challenges, with manufacturers shifting their bases to Eastern Europe to reduce their production outlays and to cater to the increased automation needs of the countries in this region. But heavy investments made in infrastructure, expansion of industries and production, including the HVACR sector, may not now pay the dividends expected. Moreover, with the entire Europe being in crisis mode, with small pockets as exceptions, moving base now may prove to be a futile exercise.

Against the backdrop of economic uncertainty and turmoil and the balancing act of reaching target 2020 with dwindling R&D funding, the increasing clamour by end users is to keep the prices of HVACR products and services low. Maintaining the price-quality ratio and yet trying to drive an economic advantage has been a real challenge for the country’s HVACR sector. Paccagnella puts the dilemma in a nutshell: “Any new solution becomes interesting for the end user only when the economic saving results from the sum of the initial cost of the new product and the management costs, compared to the previous solution.”

To lure more customers, the sector in Italy probably needs to come up with low-cost, off-the-shelf solutions for specific applications, and put grand designs in cold storage for the present.

CONCLUSION

The HVACR industry in Italy, as in the whole of Europe, is undergoing unprecedented change. But it is a negative change. The dynamics which once drove the positive transformation – technological innovation in building design and energy conservation – which promised to flood the market with equipment and applications, has taken a beating. What dictates terms to the sector now is cost for the end user and maintaining a decent bottom line for the manufacturers and service providers. Factors like spiralling energy costs and mandatory compliance with energy efficiency standards, together with a focus on IAQ and its impact on human health, are the big challenges.

Paccagnella spells out the roadblocks in the path to achieving sustainability in a climate of economic crisis, with an eye on the price tag: “The challenges that the HVACR sector is facing and will face in the coming years are primarily linked to the Research and Development of green products, with low-energy consumption, low environmental impact, low pollution and reduced noise levels. The growth of the HVACR sector in the global economic context will be influenced mainly by the situation in the construction sectors, that is, from construction and economic policies in various countries.”

In an increasingly gloablised market, no country can insulate itself from the trends worldwide, positive or negative. At present, they are negative and these, unfortunately, do not have quick-fix solutions.

El Deeb, voicing his company’s policy, says, “We are optimistic about the ability of HVACR Italian companies for the coming years, thanks to their power to become international, taking advantage of all the opportunities of the international markets.”

“As an enterprise, we must always maintain optimism,” concedes Paccagnella. “But we are also forced to be realistic. Today in Italy, there are no indicators that make us think there can be a quick recovery. In fact, many businesses are closing or are moving their factories abroad.” But he hastens to add: “It is also equally true that things could change very quickly if there was a change in strategy and greater attention paid to economic policy by the current government. Once it realises that Italian companies must be supported even if they are simple and concrete measures, like guaranteeing the circulation of money in short time spans, both between companies and public bodies, like in Germany and France, things will start to improve quickly.”

Probably, that would change sighs of anguish to sighs of relief.