As the after-effects of the global economic slowdown refuse to go away, the HVACR sector in Italy has turned to R&D in an attempt to remain competitive and relevant. There is a collective hope that the worst is over. Report by Pratibha Umashankar, with inputs from Jerome Sanchez

Europe has just about managed to survive the financial crisis that brought most countries in the continent to the brink of an economic precipice. Akin to the situation in Lewis Carrol’s Through the Looking Glass, where the Red Queen and Alice have to keep running fast on the chessboard just to be able to stay in the same place, the industry players are racing to remain on firm ground. In this post-downturn scenario, they believe things could have been worse. And Italy is no exception.

Michele Paccagnella, Managing Director of MP3 Srl, admits as much when he says: “The general situation in Italy from 2008 to today remains essentially unchanged. The financial crisis has caused a sharp slowdown in the housing market, which in turn, caused a sharp decline in work for companies in the HVACR sector.” Paccagnella spells out the implications: “The first effect of the financial crisis was that money was not circulating, meaning that many small- or medium-sized companies have been forced to close due to bankruptcy, and suppliers have had to suffer heavy losses on credits. The same financial system has been involved in these losses, and, as a result, companies still operating in the market have seen a sharp reduction in credit and a high increase in the cost of money.”

Marco Galluppi, Manager, South Europe and Middle East, Carel Industries, though a couple of notches toned down in response, admits as much when he says, “Because of the difficult economic situation, the HVACR industry in Italy is experiencing a significant decline in public procurements and national demand.” But on an optimistic note he adds, “But fortunately, our customers export a lot. This means a growth of the Carel turnover in the Italian HVACR market, which is 30% of the total yearly turnover of the company.”

Samuele Peli, General Manager for Sales, Europe, Africa and Middle East, Seeley International, echoes the opinion of the two other industry players, but adopts a positive view: “The economic crisis has badly hit Italy in the past years, and it is not yet completely over, although early signs of recovery are increasingly manifesting.” Peli shares the view that the crisis has forced a lot of companies out of business, particularly the small ones that were not specialised enough or were not properly structured to add value to the distribution chain. “To some extent, the market may be healthier once the economic recovery starts,” he says, expressing his optimism.

Survival strategies – innovation is the key

Paccagnella estimates that on an average, in Italy, the HVAC market has fallen by about 40%. Against the backdrop of continuing economic uncertainty, companies have focused on innovative product design, dictated by energy and cost efficiency. However, the dynamics that once drove the positive transformation fuelled by a buoyant outlook, which promised to flood the market with equipment and applications, has taken a beating. Turning to innovation in the present scenario is more of a desperate attempt to keep afloat, than an indication of an upbeat industry eager to invest its spare cash in R&D to spur technological advancement.

Paccagnella, corroborating this, says, “The only possibility of growth and development for Italian companies has been R&D.” But he sounds a caveat when he admits that the game plan is not easy to implement, due to lack of financial support and the search for new export markets. “MP3 can be of example,” he says, and explains that his company, with an annual turnover of about EUR 17-20 million, despite the high credit losses, between 2009 and 2012 invested about EUR 5 million in R&D.

Galluppi confirms that investing in innovation focused on high-efficiency solutions leading to energy savings is the current trend, which his company, too, is following, despite challenges, “We study [and] test in our laboratories and propose control systems that harmonise and optimise the various different functions of the units, including the use of innovative products,” he claims.

Hypothecated to this is the UNI EN 14825:2012 regulation, which requires manufacturers to provide the average seasonal performance coefficients for the units in specific reference conditions in terms of climate and applications (Energy Efficiency Ratio, EER).

“The factors that have weight in such calculations assume unit operation at part-load for a considerable amount of time, compared to operation at rated-load, which accounts for just four per cent,” says Galluppi, and explains: “Reaching the predefined seasonal performance target requires the use of cutting-edge technology to ensure effective control of the refrigerating unit at part-loads. This involves components, such as inverters, for managing variable speed compressors and electronic expansion valves for effective evaporator control.”

The regulation is also seen as an opportunity to pit superior quality products against low-end competition. The Italian industry is, therefore, strongly interested in fulfilling it, Galluppi explains, indicating the positive repercussions such strictures have on the industry.

However, Paccagnella is quick to point out that though there are existing regulations in Italy, there have been no recent regulations introduced governing construction of buildings and their heating and cooling systems. He succinctly sums up the situation: “Energy efficiency, although it is more cost-effective than using renewable energy resources, to date, is still a distant objective to achieve. Instead, a lot of Italian companies have developed high energy-efficient products aimed at foreign markets.”

(For more information on the current Energy Performance of Buildings Directive, see box “Promoting the energy performance of buildings.)

New technologies – subtext in italics

Paccagnella goes on to draw attention to the small print: “An example of a product and a current issue in Europe and, partially, in Italy, is heat recovery – high-efficiency heat recovery units ranging between 80% and 95% efficiency, which guarantee minimum energy consumption. Even within the AHU market, the trend is to produce increasingly high efficiency units.”

Another important aspect of the market vis-à-vis innovation in the HVACR sector is that of Controlled Mechanical Ventilation (CMV) used for the renewal of air inside buildings, Paccagnella informs, and reveals its flipside: “More frequently, modern buildings are built ‘air-tight’ for energy-saving reasons. But this brings problems linked to ambient air pollution, known as SBS (Sick Building Syndrome) and to the formation of moulds due to the accumulation of humidity,” he warns. “For this reason, it has become necessary to control the exchange of air without the need of opening windows or doors, which would eliminate the benefits of energy saving.” He believes that CMV systems are essential in guaranteeing the maximum performance of a building, unifying energy saving and ensuring indoor comfort.

Galluppi says that his company has invested in new technologies, and elaborates: “The main ones are the Electronic Expansion Valve, control for brushless DC motor (for fans, compressors, etc), adiabatic cooling systems and the local and remote monitoring/telemaintenance systems. Beside the fact that every country shows different climatic conditions, all these technologies can properly be used and contribute to increasing the energy saving in all HVACR machines and installations worldwide.”

Galluppi believes that the market is appreciative of energy-efficient technologies, as long as the benefits outweigh the price difference. “Carel’s commitment is to provide solutions, not just products, which leverage on the integration to put together different technologies, keeping the price difference as low as possible to its customers and to the market,” he claims.

Sharing insights about his company’s technologies, Peli says: “At Seeley International, we have Breezair to the market – an efficient direct evaporative cooler capable of cooling large areas, at a fraction of the cost of conventional compressor-based systems.” He shares that his company’s products are designed to deliver efficient performance even in the harshest of conditions. “To suit the European (Italian) market,” he explains, “we have developed an advanced control system capable of interfacing with BMS systems, providing plenty of advanced control options, but also improving the overall system performance.”

In addition, Peli shared the fact that in recent years, his company has introduced a cooling system, called Climate Wizard, said to be capable of achieving a cooling performance similar to, or even better than, refrigerated systems, but with much higher efficiency.

Also, mirroring the global predicament, steep energy cost in Italy has brought into sharp focus the need to implement energy-saving initiatives to reduce power bills, apart from addressing environmental concerns. This, in turn, has further underscored the need for energy-efficient equipment in the HVACR sector.

In search of new markets

With hardly any wriggle room in the domestic market due to its slow recovery, HVACR players in Italy are training their gaze beyond its shores.

“Our business is continuing to grow in BRICS countries, and also in some countries of the Middle East,” says Galluppi. Carel believes that the Middle East market will continue to perform well and register significant growth and offer business opportunities. “To consolidate this strategy, Carel will settle, during the first half of 2014, its own branch office in-charge of the Middle East market, located in Dubai,” Galluppi reveals. When it comes to Italy, “We are investing in HVAC consultants and designers in order to counter the actual crisis,” he says. “We are also supplying to the local HVACR manufacturing companies.”

As a direct result of bolstering its R&D efforts, MP3 has managed to maintain a constant turnover in the domestic market and increase its exports by 35% in 2013, Paccagnella claims.

“There are multiple markets to turn to, with special/different needs,” he elaborates. He, however, points to a major roadblock when Italian companies try to make inroads into other European markets: “Within the European community, while having common regulations, some countries like Germany and France, for reasons that are unclear (protectionism), apply additional restrictions to EU regulations, creating major difficulties for the sale of products in these markets. However, to date, for Italian companies, the main markets are in the EU and Russia.”

Penetration into markets in Eastern Europe is also being viewed as a strategic response to economic and energy challenges by the HVACR sector. But again, the path is riddled with difficulties. “The situation is different with reference to countries in Eastern Europe (Poland, Romania, Hungary, etc), where there are local companies against whom it is very difficult to compete because of the lower cost of labour, taxation, energy and overheads,” explains Paccagnella.

Manufacturers shifting their bases to Eastern Europe to reduce their production outlays and to cater to the increased automation needs of the countries in the region, may be seen as an option. However, investments made in infrastructure, expansion and production may not yield immediate dividends. Therefore, moving base could prove to be a futile exercise, at least for the present.

Closer home, speaking about the Middle East market for Italian HVACR products, Paccagnella underscores that it is not exactly a cakewalk, either. “The situation is again different when one wishes to export products to the Middle East markets,” he says, and gives the reasons: “It is very difficult to find local partners who understand the value of European products compared to local ones, as the unique and underlying factor remains price. And products built according to EU regulations are not considered, since American standards and regulations are used as reference.”

Qatar and Saudi Arabia are important markets for Italian companies, Paccagnella admits, but concedes that, even these pose a challenge. “We (MP3) have undertaken business activities, [made] numerous contacts, held meetings and visits, but have as yet not found suitable collaboration agreements because of issues related to the cost of products,” he reveals.

Commenting on Seeley, Peli says that beyond Italy, his company has maintained focus on other European markets and has increased distribution into the Middle East and Africa. “We have witnessed an increasing focus, especially on the UAE and KSA, though the market in the whole GCC area has been very dynamic. The GCC market is offering plenty of opportunities for reputable manufacturers with high quality levels.”

Conclusion

Italy is struggling to come out of the crisis mode in the post-downturn era. Though the worst seems to be over, the market remains sluggish, and there appear to be no quick-fix solutions. The challenges that the HVACR sector is facing are primarily linked to R&D. The race is on for coming up with innovative products with low energy consumption, low environmental impact, low pollution and reduced noise levels, while factoring in the cost element. This will, perhaps, see a shift in technology balance of power. The focus will be on design. Consequently, countries in the EU, including Italy, have set their gaze on equipment and building design that will tick all the above boxes.

Evidently, to lure more customers, the HVACR sector in Italy probably needs to deliver low-cost, off-the-shelf solutions for specific applications, and put grand breakthroughs in cold storage for the present.

However, in an incremental effect, new technologies will, perhaps, eventually phase out traditional ones. The sector is all set to witness a complete system revamp and integration and incorporation of renewable energy in the long run.

According to ReportLinker, based on research from Freedonia, the global HVAC equipment market is expected to record an increase in demand of six per cent yearly, through 2014, bringing market worth to more than USD 88 billion.

In an increasingly gloablised market, no country can insulate itself from the trends worldwide, positive or negative. By the same token, if the above prediction comes true, then, Italy’s HVAC sector could be a beneficiary of the trickledown effect.