TURNING UP THE COOL Realising untapped potential in India’s AC market

TURNING UP THE COOL
Realising untapped potential in India’s room air-conditioning market

AC

TURNING UP THE COOL
Realising untapped potential in India’s
room air-conditioning market

TURNING UP THE COOL

Kanvic is a management consulting firm helping businesses develop
winning strategies, drive profitable growth and achieve operational
excellence to reap long lasting rewards in the fast growing Indian economy.

We work with C-level executives to develop innovative solutions for the
business challenges of 21st century India by bringing in leading edge
management thinking informed by in-depth research and sound analysis.

TURNING UP THE COOL

TURNING UP THE COOL
Realising untapped potential in India’s
room air-conditioning market

Deepak Sharma
Shiv Kumar Sharma
David Daniel-Sainteff

July 2012

kanvic.com

TURNING UP THE COOL

About the Authors
Deepak Sharma is a partner and co-founder at Kanvic where he leads the strategy
practice. Shiv Kumar Sharma is an associate consultant and David Daniel-Sainteff is a
junior consultant in the strategy practice.

Acknowledgements
Kanvic would like to acknowledge the contribution of the team behind the report,
especially to Gehan Wanduragala and Vlad Flamind who provided editorial guidance.

Further information
We welcome your questions and comments on this report. For further information,
please contact us at:

Email: deepak@kanvic.com

Phone: +91 99283 77800

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Contents

Foreword 7

Executive Summary 8

The low penetration of AC in India 12
The paradigm shift in the room air-conditioning market
The huge market that remains largely untapped

Strategies for accelerating growth 19
Develop and communicate easy financing options
Innovate to reduce costs and satisfy customer needs
Develop customer-friendly communication
Improve the selling approach
Target new customer segments

Conclusion 38

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Foreword

India’s consumer durable industry has witnessed fast growth in recent years and it is
expected to grow at a similarly rapid rate for some time to come. However, India’s air-
conditioning industry has been something of a laggard compared to its peers. Despite
seemingly impressive headline growth rates, the penetration of room air-conditioners
remains strikingly low compared to other white goods, with a mere 3.8% of
households having adopted this product category.

In ‘Turning Up The Cool’ Kanvic sheds light on the cause of this low penetration rate
and shows the shift in demand that occurred from the commercial to the residential
segment. In so doing we can see how the industry has struggled to adapt to serve this
larger but more complex consumer market.

Whilst the long-term growth outlook for the air-conditioning sector remains positive,
the late onset of summer in 2012 has combined with an uncertain economic climate to
expose weaknesses in the industry’s current approach. In a growing market sub-
optimal strategies can survive for a time, but when they are buffeted by the chill wind
of an economic downturn, the entrance of new competitors or even the vagaries of the
weather, they are quickly blown away as a lot of hot air.

In this report we hope to provide the industry with practical strategy options that will
enable it to more quickly realise the untapped potential of India’s room air-
conditioning market.

Deepak Sharma
Director and co-founder

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Executive Summary

The air-conditioning market in India has witnessed rapid growth in recent times
thanks to the country’s strong economic performance, rising household incomes and a
favourable shift in consumer perceptions towards air-conditioners (AC). The market’s
compounded annual growth rate (CAGR) has run at 17% over the last three years. In
2011-12 air-conditioning sales reached around Rs. 17,600 crore 1. However despite
this rapid growth air-conditioners have still only reached a mere 3.8% 2 of Indian
households according to the most recent data. This low penetration rate illustrates the
huge opportunity the AC industry in India is yet to seize.

In recent years the Indian AC industry has been marked by a fundamental shift in the
source of demand for room air-conditioners. This shift has seen the bulk of sales move
away from the traditionally dominant commercial sector and toward the residential
sector, which now comprises 60% of the market. The AC industry in India has so far
failed to fully grasp the more complex needs and expectations of this newer, larger
and more diverse customer segment. This lack of understanding means that the AC
industry is behind the curve in areas from customer communication to easy financing.
As a result, AC penetration in India lags behind other developing markets as well as
other categories of consumer durables in India.

This report highlights the current low penetration level of AC in India and develops a
number of effective strategies the industry could adopt to accelerate growth and
thereby increase penetration. These strategies relate to financing, innovation,
communication and the selling approach. All of these strategies will need to be
targeted appropriately to both existing and emerging customer segments:

To begin with, developing easy financing options for customers will bring air-
conditioners within reach of a much larger percentage of the population. At present
the high up-front costs of an AC are a major barrier to adoption for many Indian
households. By following in the tracks of the automobile industry and making
financing the established means of purchase, AC manufacturers will be able to
increase penetration and accelerate market growth. However, simply providing the
financing options is insufficient, the industry needs to communicate their availability
and affordability more effectively.

1
AIACRA, Kanvic analysis

2
RAMA, Francis Kanoi, MarketLine, Businessworld - Marketing Whitebook 2010-11, Kanvic analysis

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Innovation will also play a central role in spurring industry growth if it focuses on
reducing the running cost of AC and increasing its benefits. Advances in technology
will help improve energy efficiency and therefore lower the currently high running
costs. This is particularly important in India where the traditional air-cooler offers a
cheaper substitute for households at a time when energy prices are rising.
Furthermore, by adding additional functions to air-conditioners like heating,
innovation can address the industry’s problem of high seasonality by providing year-
round benefits, while keeping the price-performance ratio aligned with customers’
expectations.

Simpler and more effective communication by AC companies will help customers
overcome their current doubts about air-conditioners. At present AC manufacturers
rely too heavily on industry jargon and exhaustive lists of technical features in their
customer communication. This fails to illuminate the real benefits the customer will
derive from their product and makes it difficult for them to compare different product
offerings.

Improving the selling approach will help manufacturers to engage more effectively
with the customer. In this area there are three major points for improvement:
customer education, solution-selling and cross-selling:

Firstly, customer education will improve the level of awareness of the benefits of AC
and help dispel existing customer concerns. However, customer education must not be
limited to sales staff. Any employee who comes into contact with the customer, for
example service staff, must be engaged in this process.

Secondly, adopting a solution-selling approach will unveil new ways to engage the
customer. Rather than focusing on selling a product, companies should diagnose the
customer’s problem and suggest the appropriate solution. For AC manufacturers this
could mean conducting home surveys to identify a customer’s air-conditioning
requirements.

Thirdly, cross-selling will allow air-conditioners to reach the larger number of
customers who have purchased other white goods. Many AC players also manufacture
other consumer durables, therefore they can use these existing sales and service
networks to identify the need for an AC and recommend a suitable product to the
customer.

To successfully implement all of these strategies AC manufacturers must have a
strong understanding of their customer segments. The AC market is becoming more
heterogeneous as new customer segments emerge. Industry players need to be aware
of these segments and their specific needs and wants, and they need to tailor their

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strategies in financing, innovation, communication and sales accordingly. In addition
to the established customer segments of ‘price conscious’ and ‘efficiency seeker’, we
have identified two new segments of ‘aesthetic design’ and ‘health conscious’
customers that are beginning to shape the market.

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The low penetration of AC in India

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The paradigm shift in the room air-conditioning
market

The Indian air-conditioning market reached Rs. 17,600 crore in 2011-12, rising from
Rs. 11,000 crore in 2008-09 at a CAGR of 17%3 . The room air-conditioning market
represents approximately 50% of the total market, with the other 50% comprised of
central and specialist air-conditioning systems. The room AC market can again be
divided into two sub-segments. On the one hand the residential segment which now
constitutes a majority 60% market share and on the other hand the commercial
segment which represents a smaller 40%4 (Exhibit 1).

3 AIACRA, Kanvic analysis

4 Francis Kanoi

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The commercial segment consists of retail shops, hospitals, hotels, restaurants,
commercial offices and educational institutes, while the residential segment includes
those using air-conditioners for their houses and apartments. The commercial
segment formerly represented the lion’s share of the market for room AC
manufacturers but over the last decade demand has shifted toward the residential
segment. (Exhibit 2)

The faster rate of growth in the residential segment has been propelled by three key
growth drivers. Firstly, rapid growth in the stock of residential housing in India,
particularly the supply of multi-storey apartments and modern homes that has
dramatically increased the exploitable market for room ACs. In urban India around
3.85 crore new houses have come up in last 10 years from 2001 to 2011. Secondly,
increasing household income has brought a range of consumer durables including AC
within the reach of more consumers. India’s monthly household income has increased
by 14.7% in 2011 to Rs. 20,555 from Rs. 17,918 in the previous year6. Thirdly a

5Housing, Household Amenities and Assets - Census of India
6 MarketLine, Kanvic analysis

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progressive shift in consumers’ perception of air-conditioners from that of a luxury to
a necessity is underway, as consumers become increasingly accustomed to air-
conditioned environments at the workplace and in their cars.

Meanwhile in the commercial segment the smaller amount of potential space to be air
conditioned and the increasing preference for central air-conditioning systems over
room air-conditioners has resulted in a lower growth rate. Thus, the market share of
the commercial segment halved from roughly 80% to 40% in 15 years, while the
residential segment has trebled from only 20% in 1995-96 to 60% in 20117.

7 Francis Kanoi, OEM update, Kanvic analysis

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A huge market remains largely untapped

In spite of the growing importance of the residential market, the overwhelming
majority of Indian homes are still untouched by air-conditioning with the overall
penetration rate standing at a mere 3.8% in 2010-11. This situation compares very
unfavourably with the scenario in other developing Asian economies. The penetration
of room air-conditioners is 8% in Indonesia, 50% in Korea, 53% in China, 72% in
Singapore and 89% in Taiwan8 (Exhibit 3).

8 Euromonitor, RAMA, Francis Kanoi, MarketLine, Kanvic analysis

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Closer to home, the wider Indian consumer durable sector is one of the country’s
fastest growing industries with a CAGR of about 15%. The industry is expected to
touch Rs.52,000 crore by 2015 9, fuelled by rising household incomes and increasing
urbanisation.

However, in spite of this high growth trajectory, the penetration of air-conditioning will
still be significantly lower than the level of penetration other white goods have already
achieved today. Presently more than 77% of households in urban India have a TV,
33% have refrigerators, 17% have an air cooler and 13% own a washing machine 10
(Exhibit 4).

Despite fierce competition and a sizeable market turnover in the room AC industry,
the fact that 97% of Indian households are still untouched by room air-conditioners -
while the adoption of comparable products have surged ahead - indicates that
industry players need to adapt their strategies to fully realise this opportunity.

9 ASSOCHAM “Emerging trends in consumer electronics and durable industry”

10 Businessworld - The Marketing Whitebook 2010-11

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Strategies for accelerating growth

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Strategies for accelerating growth

To address the low level of room AC penetration in India, industry players should
adopt comprehensive strategies. Based on our research, we have identified five
promising axes of improvement (Exhibit 5) for the room air-conditioning industry. By
adopting effective strategies along these lines, the industry can reach out to target
customers to influence and strengthen their purchasing desire.

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1. Develop and communicate easy financing options

The average price of an air-conditioner in India is Rs 30,000. This is still substantially
more than the average monthly household income which currently stands at just Rs
20,555 (Exhibit 6). As a result air-conditioners remain unaffordable for a large part of
the population.

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Furthermore, the availability of cheaper substitutes like air-coolers renders air-
conditioners less attractive for the mass market. The price of an air cooler starts from
as low as Rs. 4,00011, far less than the average price of an air-conditioner. The
penetration rate of air-coolers reached 17% in 2011 12, pointing out the high price
elasticity in the Indian consumer durables market.

Providing easy financing options can help address the issue of affordability. By
effectively boosting the purchasing power of a vast segment of consumers for whom
air-conditioning is currently out of reach, the industry can unleash a wave of untapped
demand. Realising this, most AC companies have recently introduced some easy
financing options for consumers, offering a specific low interest rate and an easy
payment process. For example, some manufacturers break the ticket price down into
easy monthly instalments (EMI) for credit card holders over a period of 10 to 12
months.

However, simply introducing such payment options is no longer sufficient. They need
to be conveyed to consumers through effective communication mediums. At outlets
and in advertising campaigns brands are not effectively communicating the available
financing options and consumers often have difficulty in obtaining the relevant
information.

The low level of sales finance is a challenge across the consumer durables sector, with
financing contributing a mere 5-7% of total revenues 13. By contrast, the automotive
industry has understood the leverage of financing options and it has quickly offered
them to customers in order to expand their market. In 2011 around 72%14 (Exhibit 7)
of cars purchased in India were bought on credit. Today, the possibility of buying a car
on credit is ingrained in the minds of consumers. Air-conditioning players should
follow this path, highlighting their financing options in their advertising campaigns to
appeal to the large number of consumers for whom the high up-front cost of an AC is
a major barrier to adoption.

11 Symphony Corporate Presentation

12 Businessworld - The Marketing Whitebook, 2010-11

13 Press clippings

14 Kotak Mahindra Prime

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Indeed, such financing options can effectively target the burgeoning middle and
upper-middle class consumer segments, which represent around 14%15 of the 242
million households in India (some 34 million households). These segments have the
growing desire and increasing means to improve their quality of life. Products like air-
conditioners that are designed to provide greater comfort appeal to the emerging
aspirations of these consumers and easy financing options will be an effective way to
convert these desires into actions.

15 NCAER, India census

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2. Innovate to reduce costs and satisfy customer
needs

Use technology to reduce the running costs of AC

Financing options will reduce the cost of the initial investment for consumers but the
operating costs of air-conditioners are a significant deterrent to purchasing. Many
customers prefer familiar substitutes like the air-cooler that have substantially lower
operating costs. The energy bill for an air-cooler with its simple fan and water pump
amounts to approximately Rs. 196 per month compared to Rs. 2,610 for an air-
conditioner (Exhibit 8). Nonetheless, new technology and innovation have the
potential to allow manufacturers to reduce costs and market affordable products to a
larger segment of the population.

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Due to the high price of energy in India, the operating costs of an AC represent a
significant ‘hidden’ expense for households. To better inform consumers about AC
running costs, the Bureau of Energy Efficiency (BEE) has introduced a star rating
system for air-conditioners, highlighting the efficiency of products in terms of energy
consumption.

Regulation and innovation: the star rating system

This labelling programme classifies air-conditioners
according to their energy consumption. The Bureau of
Energy Efficiency (BEE) attributes between one and five
stars to products according to their Energy Efficiency Ratio
(EER). This star labelling enables consumers to understand
the consumption of each product. The five star AC consumes
the least energy while the one star consumes the most.
According to BEE, a one star air-conditioner consumes
roughly 31% more than a five-star product.

Mandatory since January 2010, the star rating system influences the purchasing
process of consumers who are willing to increase their initial investment in order to
reduce their electricity bill. This labelling system also shapes the manufacturers’
strategies as they strive to offer a competitive range of products with high star
ratings.

Driven by both regulation and market forces manufacturers are developing and
marketing technologies that decrease the consumption of electricity. For instance,
inverter technology avoids peaks of electricity consumption and significantly reduces
the running costs of the air-conditioner. But this existing technology is not sufficient to
compete with the energy consumption of the substitute products in India. Therefore
manufacturers should continue to prioritise energy efficiency and integrating new
renewable energy technology (see below) in their research and development.

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Innovation at a glance: Solar AC

Solar powered air-conditioners could represent an efficient solution to reducing
AC running costs, especially in India. Most parts of the country have about
250-300 sunny days per year and regions such as Rajasthan are endowed with
some of the highest levels of solar radiance in the world. With major shortfalls
in power generation and poor grid connectivity, the forecast economic and
demographic growth will result in higher electricity prices. As a result
international developments in solar AC technology could have great potential
for the Indian market.

In this regard Ludivine Solar, a French
company, markets a hybrid solar air-conditioner
named Ultimate Blu Sun. The company claims it
cuts electricity costs by 60% during operation,
uses a non-polluting refrigerant, and decreases
emissions of carbon dioxide by as much as 20
kg per year.

Furthermore, in China, solar technology has
been applied to produce a fully autonomous AC.
Gree Electric Appliances recently developed the
world’s first off-grid solar powered air-conditioning unit, running without any
emissions or mains power supply.

Develop products that deliver convenience to customers

Only a few brands have developed convenient technology with clear and explicit
benefits for the customer. For instance, Onida, an Indian company, has recently
marketed the first air-conditioner which can be operated from outside the home. The
user sends an SMS from their phone and the AC gets switched on, ensuring their
home is cool from the minute they enter. This innovation caters to the real problems
customers face and provides them with a clear benefit. Manufacturers have to develop
this convenience angle further by offering simple to use technology with clear
improvements for the customer. Furthermore, the technology used needs to match
the expectations of specific customer segments.

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Address seasonality concerns through year-round features

In addition to regarding air-conditioners as an expensive or luxury purchase, many
consumers consider AC as a highly seasonal product, pointing out the sizeable initial
investment for what may be a relatively brief benefit over two or three months of high
summer. India’s diverse climactic regions and the seasonal extremes within these
regions demand adapted technologies to extend the benefits of AC year-round. By
focusing on their products as an air-conditioning solution rather than a cooling device,
manufacturers can change the current perception of the product as a seasonal
purchase and overcome a limiting factor on industry growth.

In this vein LG has developed a line of reversible spilt ACs which include a heating
option. This technology allows consumers to use their air-conditioner during summer
and the winter. Other manufacturers have also included a de-humidifier function for
use during the monsoon season. Furthermore increasing health concerns around
pollution, allergens and airborne bacteria offer yet further opportunities for players to
increase the benefits of their product and diminish the seasonality factor.

While year-round functionality offers clear advantages to the customer, manufacturers
need to ensure that their efforts in innovation are equally focused on delivering these
new products at an acceptable price-performance ratio for the target customers.

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3. Develop customer-friendly communication

Remove the jargon

Room air-conditioners are now primarily aimed at ordinary consumers rather than
businesses, but many manufacturers are still using technical language to explain their
features (Exhibit 9). Indeed the information about AC products is not provided in
terms of benefits for the consumer but often in technical jargon that is
incomprehensible for the larger part of the population.

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For instance, one company’s brochure - which is typical for the industry - refers to ‘the
MCC option’, the ‘BLDC compressor’ and ‘UTR technology’. None of these terms enable
the consumer to clearly understand the benefits embedded within the product. Plus, if
the customer decides to seek information directly online or in a brick-and-mortar
store, they will have to compare the available products. However, the complex
technical charts that are habitually used to highlight obscure performance data and
technical characteristics that make comparison difficult and time consuming.

AC manufacturers should assume the perspective of their target customer rather than
the perspective of their engineering teams to produce informative but jargon-free
marketing material. For example, when referring to the noise level they could
compare it to everyday products the consumer will be familiar and comfortable with -
like a ceiling fan - rather than in decibels.

Focus on benefits not features

Manufacturers should market their products keeping in mind the language and the
expectations of their consumers. Consumers do not seek a long list of features but
concrete benefits which bring them solutions to improve their quality of life. Instead of
highlighting numerous features, AC players should clearly define the benefits the
product provides for the customer.

For instance, grouping a company’s offering of air-conditioners into a few simple
ranges according to their main benefits to the customer could considerably simplify
the purchasing process. Currently, it is difficult for a customer to identify the most
suitable purchase according to their requirements because the range of products are
not clearly defined and communicated to customers. Simplifying the product offering
and aligning each product group with distinct customer segments according to the
products’ benefits would make the decision-making process significantly easier.

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4. Improve the selling approach

The selling approach adopted by a company is the cornerstone of its performance. In
the air-conditioning industry the technicality of the product emphasises the need for a
clear strategy in the selling approach. We have identified three points of improvement
which AC players could work on to unlock the market’s potential. These are: customer
education, solution selling and cross-selling (Exhibit 10).

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Customer education

The technical nature of air-conditioners and their perception as high-cost are the two
greatest factors standing in the way of raising customer awareness about their
benefits. To deal with this situation customer education appears to be an effective
solution. By educating customers, the air-conditioning manufacturer helps them gain
insights about how their product better meets customers’ needs and expectations over
a competitor’s product or a substitute. Companies can train their own sales staff and
those of their retail partners to educate potential customers about their products and
their uses. However, other employees who come into contact with the customer - such
as service staff - can also play an important role. Manufacturers should re-educate
and re-orientate all their customer facing staff to understand their role in marketing
the brand and its products.

In addition to staff training and orientation, providing employees with simple tools can
help them to diagnose a customer’s problem and provide the best solution. These
tools can also be targeted directly at the customer. For instance BEE has introduced a
mobile phone based application called “AC Power Saver” that enables consumers to
calculate energy consumption and savings on their mobile devices. They have also
created a dedicated web site – www.SaveEnergy.co.in – with all the necessary
information including an energy calculator.

Focus on solutions not products

The days of simple selling are over, in the past decade the selling environment both
globally and in India has radically shifted. The focus is more on solutions rather than
products. In this shifting environment companies should adopt an innovative solution-
selling approach to first stimulate consumers’ desire for ACs and then convert it into a
final purchase.

For example, sales staff could conduct a home survey before suggesting a new
product to a customer. They could first visit a customer’s home and conduct an in-
depth analysis of the size of the space, the amount of sunlight and other relevant
factors before suggesting the right product. While carrying out this process the sales
person will have the opportunity to engage customers and build their trust in both the
product and the brand.

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Implement cross-selling

Cross-selling is a powerful and well-established selling approach. It is a proactive,
ongoing sales process which seeks to provide customers with a full range of products
and services. Most of the AC manufactures in India also produce other white goods or
electronic items and these products are sold through the same distribution network or
by dedicated sales and service teams. Companies can use their existing infrastructure
to cross-sell air-conditioners.

For instance, a service person for products with higher levels of ownership - like
washing machines or televisions - could identify the necessity for an AC while
servicing or installing these products in the customer’s home. Their knowledge about
customer’s other purchases would also indicate customer’s ability to afford an AC.
Based on theses observations they can then suggest a suitable AC product and
financing option to the homeowner.

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5. Target new customer segments

There is often a mismatch between consumers’ needs and wants and the areas in
which companies focus their efforts in product development, distribution and
marketing. An organisation cannot create value for customers unless it identifies and
satisfies their needs. In a competitive market, customer segmentation has become a
cornerstone for successful companies. Those companies that fail to satisfy their
customers’ needs often do so because they don’t have a clear picture of their target
customers. Understanding the customer is equally vital for AC players if they are to
increase the adoption of room air-conditioners.

Think beyond large cities

The presence of air-conditioning companies in India is concentrated in the country’s
metros and other large cities. Over the last decade the major players have built a
strong distribution network in these locations but have neglected smaller towns which
they deemed less profitable. With India’s extraordinary level of development the
situation is shifting and companies cannot overlook the tremendous opportunities in
these emerging segments.

Indeed, the percentage of households in peri-urban16 areas in each income category is
almost similar to that in urban areas. 57.6 million households in peri-urban India have
an income above 3 lakh rupees per annum, making it an attractive target for air
conditioner manufacturers. (Exhibit 11).

16
Towns with a population less than 1,00,000

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Increasing incomes and changing mindsets outside urban India offer air-conditioning
players a huge opportunity to leverage their current turnover and achieve a
breakthrough level of adoption. By focusing on small cities and towns now, players are
likely to catch the next wave of growth and promote their brands in a new and
untapped market. Nonetheless, the specific characteristics of these consumers have to
be completely grasped and the universe of potential customers needs to be accurately
segmented.

The shift from a twofold to a fourfold customer segmentation

The Indian air-conditioning sector is undergoing a shift from a simple twofold
segmentation of its customers to a more complex fourfold segmentation. Earlier AC
manufacturers were presuming a more homogenous market landscape with only two
major customer segments - focused on price and running costs. But the air-
conditioning market - like many other markets - has become more heterogeneous
with the emergence of new customer profiles. To achieve the next level of industry

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growth companies will have to design their products and services around these new
customer segments by catering to their exact needs and expectations. This will
require not only the correct identification of their profile but a deep understanding of
their behaviour. We have identified the four major customer segments that are
currently shaping the market (Exhibit 12). However, industry players should be alert
to the emergence of new segments as the Indian consumer evolves.

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1. Price conscious

Consumers in this segment are attracted by low prices. Innovation and technology
play a fundamental role in offering affordable air-conditioners by lowering the cost of
production which can then be passed on to the customer through a lower ticket price.
Currently, Haier and Onida are among the cheapest brands in the Indian market,
focusing their research on providing affordable air-conditioners. Tapping this segment
requires a strategy towards economies of scale with a focus on obtaining cheaper
components and materials. However, the competition for this segment has intensified
with the arrival of Korean and Chinese players with their global production chains and
portfolio of low-priced products.

2. Efficiency seeker

In recent years a focus on high energy costs and ecological issues has driven
consumers toward more energy efficient products. Many companies have introduced
air-conditioners endowed with inverter technology that has shorter motor run-time
and therefore consumes less electricity. Although energy efficient products are
relatively more expensive than standard variants, a large number of consumers are
choosing them to reduce long-term costs. The choice of these consumers will be
shaped by the published energy consumption of the product and its star-rating label
given by the BEE. Alongside clearly displaying the running costs, manufacturers
targeting this group could compare their products with those of less efficient older
models to demonstrate the falling running costs to wary consumers.

3. Aesthetic design

This segment of consumers is seeking aesthetic and customisable products. Aesthetics
play an increasingly important role in Indians’ choice of products as they become
increasingly conscious of interior design. The decorative paint segment for example
has recorded an 8% average growth rate over the last five years17. With this aesthetic
trend, consumers are increasingly choosing air conditioners which suit their home
interiors. In order to tap this growing segment, manufacturers should offer wider
ranges of colours and more discrete designs that help the product blend in with their
home decor. Whirlpool for example has developed an innovative digital tool that
enables the user to recreate their interior online in order to find the model of AC that
most suits their aesthetic preferences.

17 Snapshot of Indian coatings industry 2011, Indian mirror

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4. Health sensitive

Another trend that offers many opportunities for the AC industry is the increasing
focus on health and well-being. Indian consumers are becoming more and more
aware of safeguarding the health of their families and are seeking items which provide
concrete solutions. Hitachi has quickly recognised this trend by introducing the i-Clean
system. This technology automatically removes the dust accumulated on the AC filter
that would otherwise be disbursed into the room.

Along similar lines Samsung markets a range of air-conditioners with «Virus Doctor»
technology which eliminates air-floating particles such as bacteria and viruses. This is
increasingly relevant with the recent H1N1 epidemic and the increase in allergy cases
due to increased air pollution. To be credible however, this technology must have
certifications and labels. For example, Samsung is working with academic research
centres in order to prove the efficiency of its technology. Manufacturers could take this
approach further by seeking endorsements from panels of doctors and other experts
in respiratory diseases.

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Conclusion

India’s room air-conditioning market with its current low penetration rate offers huge
opportunities if the industry understand and cater to the shifting needs and wants of
Indian consumers. The penetration of other white goods at comparable prices is
substantially higher, pointing out several shortcomings in the current strategies of the
major AC players.

Through working along the five axes of improvement we have highlighted,
manufacturers have the opportunity to turn-up growth in the coming years. Better
financing options, well-directed innovation, new approaches to selling and more
effective communication can all be developed and effectively implemented through a
better understanding of established and emerging customer segments.

Manufacturers should not rely only on the strategies and customer segments that
were sufficient to drive growth in the past. As Indian customers become more
heterogeneous, persisting with the old approach runs the risk of neglecting the needs
of an ever larger number of consumers, and thus hindering overall industry growth.

TURNING UP THE COOL

kanvic.com

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Ravindra Beleyur

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E: ravi@kanvic.com

Jaipur

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E: deepak@kanvic.com

London

Bharat Vagadia

M: +44 7711 898089
E: bharat@kanvic.com

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TURNING UP THE COOL Realising untapped potential in India’s AC market

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