The second HARDI Industry Executive Forum took place on Oct. 10, during HARDI's 2007 Annual Fall Conference in Orlando, FL. HARDI invited a panel of executives from Refrigeration, Controls, Equipment and Supply to address and answer questions from the membership. This condensed and edited version of the forum provides readers with insight about the HVACR industry from the perspective of top leaders. John Ehlen, publisher of HVACR Distribution Business, served as moderator.
vice president, TAC Field Device Division
vice president, Sales, GE Commercial Motors Regal-Beloit
LEE J. ENSMINGER
national sales manager, Crown Boiler Co.
vice president, North America, Parker Hannifin Corp., Climate & Industrial Controls Group
vice president |of sales and marketing, Allied Air Enterprises
EHLEN: What are the biggest opportunities, from your point of view, that wholesalers in our industry can look forward to?
BREWER: From our perspective, it's almost like a perfect storm is coming for wholesalers, and that would be the convergence of the green movement, higher-efficiency equipment requirements and the influx of IT into every segment of our business. The greatest value is when you can bring all that together to create real-time demand satisfaction for your contractor customers in an environmentally responsible manner.
COLE: We see the technology push and clearly the future benefits that the consumer is looking at, which are health and comfort as well as the ease of replacement. Obviously the economy drives that a lot right now. We see our responsibility in terms of helping lead the technology and the service expertise.
ENSMINGER: Hydronics, it is less than 10 percent of the national market, but we're fortunate that we have a crystal ball in Europe. Their heating market is the reverse of here, and the dominant heat is hydronics. They are also about 10 years ahead of us, so we can see what innovations and technologies they've already introduced and get an idea on how it's accepted and bring that technology over here. That's happening now with a number of manufacturers. [We attended] a show in Germany and were really impressed with their system integration: a high-efficiency boiler with a geothermal system or solar package. I think that's a huge opportunity for distributors today. This technology comes with a higher-price-point product and increased profit margins while [offering] comfort.
MURRAY: There is opportunity for each of you in the audience in a number of areas:
Consider the economic outlook. Historically, when we have seen a downturn in the economy, more money is spent keeping outdated equipment running, which typically translates into more components sales and greater profitability. The bottom line is that when OEM sales are flat to down, wholesale business is generally up.
There are environmental issues and regulations that can drive HVACR technology. In short, they can be a good thing. Take 13 SEER — from the component standpoint — there are far more thermostatic expansion valves in the marketplace in the last two years than ever before. Now that the bar is set at a newer, higher level, this should be a good thing for everybody in this room, albeit down the road a little bit.
Energy costs are rising, which leads to innovation and technology, and the need for better education.
There is an increasing lack of skills in the industry. If you are willing to provide training — internally and externally — you will provide value that will make customers want to come back.
THORNE: There are many. If I were to pick one from our perspective, it would be to improve the velocity of products and the quality of information in the supply chain. By connecting the consumer to the dealer or contractor, the contractor to the distributor, the distributor to the OEM, and speeding up the flow of products and the quality of information, this will improve the bottom line of distribution and OEMs. Streamlining the flow of product and information is critical to our industry.
EHLEN: What current product technology do you see that is, or will be, important to wholesalers, contractors and our industry?
BREWER: As a components supplier in the systems business, one of the product trends that we think will be successful is wireless technology. It's all about reducing installation time and material cost. The next trend is the green movement. Whether you agree with the science or not, the fact is that it's here, and we're all going to have to react to it. In Europe right now, there is a directive called ROHS (the restriction of the use of certain hazardous substances) where minimum levels of lead, cadmium and other environmentally unfriendly substances are set. We're all going to have to react to such government activities as manufacturers, but anything you do to be green is good. I think if we get out in front of the green movement as an industry, it's going to be better for all of us. When the DOE originally set minimum SEER levels, this industry [decided] to police itself. We need to take a look at that from the green standpoint as well and take ownership of the definition of “green” in HVACR.
COLE: We see the challenges of the economy driving more replacement components. This week, we launched the Evergreen product, which is going to lead to the capability of meeting that consumer's need of comfort and health. It will allow the consumer to upgrade without a wholesale changeover.
ENSMINGER: It's efficiency. That's what's driving the bulk of the hydronic market now. With the technologies that are available today, you get can get a cast aluminum or stainless steel heat exchanger with modulating input and weather-responsive controls; this all works together to give you higher efficiencies and lower emissions, so you have a greener piece of equipment. So, I think efficiencies and low emissions along with comfort are really driving it on the hydronics side of the business.
MURRAY: As it pertains to Parker, I would say electronics. We now have an electronic counterpart for most of our mechanical components. We have electronic expansion valves, electronic head pressure controls and electronic suction regulators, which are taking over the supermarket industry. Electronics, both as a current and a future technology, is where it's at in the component side of the business.
There certainly are external factors that drive technology: environmental issues and regulations, rising energy costs, a demand to grow the standard of living and a lack of skills in the industry.
There are market and customer trends such as consolidations in the industry. You've seen it; you've been impacted by it. Globalization. The world is just getting smaller these days. We're all aware of it — it impacts you — it impacts me. Emerging competition in low-cost countries. There are low-cost competitors, but there is still a value that goes with good quality and good-performing products, yet that is a trend of which we must be aware.
Finally, there are product and technology trends such as the increased use of electronics for control, energy efficiency and data collection. There is an increased awareness of “green” refrigerant alternatives including CO2. We should all strive to be green and environmentally aware.
THORNE: I would have to say integrated controls and diagnostic capabilities as well as monitoring capabilities. As an industry, what we have always struggled with, and will probably continue to struggle with, is the consumer seeing value in what we do. We are competing against dollars being spent on things like Pella Windows, KitchenAid appliances, granite countertops and cherry molding. With integrated controls, and by connecting the consumer to the dealer, we can help create value.
I think the one critical issue that might fall outside of the context of “technology” would be the impact of repair versus replacement. If you look at the realities of the market this year, the market has retrenched back to 1994 market levels in terms of HVACR units shipped. We can all get our mind around what's happening with RNC [residential new construction] and the decline, but the segment drop that is really puzzling is what is happening with the replacement segment AOR [add-on replacement] — why is it dropping? There is an aspect tied to price sensitivity — systems are now 35 percent to 40 percent higher in cost at the consumer level. There is an aspect tied to the fact that we are no longer just replacing the outdoor unit — we are replacing the outdoor unit and the indoor unit. With these factors and the fact that the disposable income level of the average consumer is under pressure, we believe that it is clearly driving change — a shift from replacing the outdoor unit to more repair. I assume that many people in this room today are seeing this in the form of increased sales of compressors. This has an impact on distribution strategy and it has an impact on our strategy as an OEM.
EHLEN: What is the most worrisome issue facing your segment of the HVACR industry?
BREWER: The thing that keeps me and our marketing people up at night is we're trying to figure out how to bring value to our customers' customer [the contractor]. When you talk about IT pervading every part of our business and real-time demand and customer satisfaction, we're struggling with how we can be a better partner with wholesalers in satisfying their customer. Does that mean holding inventory, EDI, electronic transfer of funds, things like that? We're working hard to provide a solution.
COLE: I think there is a lot of commonality here on the panel. We're faced with trying to meet the efficiencies to help drive green issues and the need for helping the contractor do the installation. We're moving our product line to an electronic-based product line — an integrated system — and that requires a higher level of technical support. Technicians need to understand it and cannot be afraid of it. We want to educate, and hopefully, you [wholesalers] can educate us on what we need to do to help meet those needs and improve the acceptance of products, especially with meeting efficiency [standards]. We're all trying to do more with less, and that's going to take a lot of training, a lot of education, and that's a challenge for us all.
ENSMINGER: I think the thing that concerns us as a company most is education; the innovation and everything we've talked about, controls, new equipment, higher efficiency, require education — we need to be able to educate not just you [wholesalers] as a supply chain but your customers, the contractor, who is going to ultimately be responsible for installing, maintaining and fixing the equipment. Sometimes it can be difficult to do because there are a lot of small, one- and two-man shops, and for them to take the time to get the education they need, it takes them away from their business. We have traveling equipment vans so that if they can't come to us, we can get to them. We'll meet them at their shop because we feel education is really important.
MURRAY: Certainly, the economic situation — we are seeing a softening that keeps me up at night. The price of raw materials [is of concern]. I don't deal with it on a procurement basis, but we're one of the industry's largest users of brass and copper — just about everything we manufacture is brass and copper. Most of you know what has happened to the price of those materials during the last few years. It is an issue to address with my customers, you with your customers, so that's something that has [concerned] me more in the last year-and-a-half or two years than just about anything else.
THORNE: We are very concerned about the impact of the regional energy standards in the industry. If you can imagine the complexity at the OEM level of having products to support the [mandates] of 50 states and Canadian provinces at varying degrees and efficiency levels, both on the heating side and the cooling side, it has a significant resource and monetary impact, in terms of product development and distribution costs. The same holds true for the distributor. There are a lot of distributors in this room that cover a wide number of states, so they are affected similarly. The industry at large, through ARI and DOE, needs to rally to prevent individual states pre-empting DOE. The ultimate cost of regional energy standards at the consumer level will prove to have far more impact than the move from 10 SEER to 13 SEER if enacted. And if that were not enough, imagine the compliance side of this issue — it becomes even more complex once you have provided the product.
EHLEN: Does going green have long legs or is it just another short-lived campaign?
BREWER: Yes, it has legs. To reiterate what I said earlier, it would behoove us as an industry — HARDI, ARI, GAMA — to get out ahead of the green movement and define what green is and take charge of our future. Green right now is anything you say it is. Green has long legs; let's just get out in front of it.
COLE: There is no doubt that it has long legs, and from our perspective — we're a motor manufacturer, one of the largest in the world — it's very real for us, and we're committed to the fact that if you take a component, the motor's going to draw most of the electricity. It's our duty to be a part of the solution, to be engaged and help drive efficiency. There are some studies that say 50 percent of the electricity consumed in the U.S. is consumed by motor usage, and so it's kind of a double-edged sword. We're committed to it [improving efficiencies], and we think it's the right thing to do.
ENSMINGER: Yes. Green has long legs and also opportunities. The bathroom came out [from being just a] bathroom. It went from just being a shower, sink and a toilet to being a place that you live and relax in. When I say green has opportunities, it gives us the opportunity to take the equipment out of the basement and bring it into the home. Green resonates with homeowners, and some of the most successful HVAC distributors I know have showrooms for equipment where homeowners can come in and touch, feel and see the new technology and not be afraid of it.
MURRAY: I think the question may be whether we can reduce energy consumption and greenhouse gas emissions. There are environmental issues we must confront. We have to reduce our energy consumption, whether that's you and I, every day in our homes, or in engineering systems and helping our customers. It's [green] here to stay — no question. We can't afford not to do it from an energy and environmental standpoint.
THORNE: It definitely has long legs. In recent years, there has been a fair amount of apathy associated with just the word “green” or “green concepts”, but today when you attend meetings and seminars that address improving product, system and home efficiency, I see people sitting up in their seats and paying attention. It will be a necessity with the potential of $100-a-barrel oil by 2008. Allied Air Enterprises is committed to helping our distributors make “going green” a real possibility.
EHLEN: [During the conference], Adam Fein identified a trend toward a demand-driven supply chain where supplier shipments respond to real-time shared information from a network of customers and distributors. Is your company participating in a demand-driven supply chain, and if not, do you expect it to ultimately influence your business?
BREWER: Yes, we do. Actually, TAC Field Devices is getting ready to give increased levels of logistical visibility through all our channels. We intend to introduce a new electronic interface in the first quarter  to the wholesale channel. It's something that we call iPortal that will give real-time access to inventory, price, literature, where your order is, what truck it's on and where is it in the country.
COLE: Yes, we're very active in the demand supply chain. We serve a lot of large OEMs. It is a necessity utilizing EDI transactions and Web portals. We have a Web portal called EliteLink. We're continually improving the accessibility of information of everything from tracking your order to the shipment to inventory availability. We're trying hard to expand that communication chain, and I think there was a comment made earlier that the ease of information, the ability all the way from the starting of that demand from the consumer through to our factory, the better that information flow, the better the efficiencies, and hopefully, the better the economy for all of us.
ENSMINGER: It's been a long road for us, but we are gradually getting there. A lot of our customers are small to midsize family-owned businesses, so we're growing with them.
MURRAY: I think we are as capable as our customers. We handle transactions many different ways. From an IT standpoint, we get reports in different fashions from thousands of customers, and we can handle almost anything. We still must flexibly be prepared to adapt to the new technologies that come along in the supply chain, but we're in a good position to handle just about anything.
THORNE: We are not as far along in this area as we would like to be or need to be. We have EDI capability with some of our key customers right now, but it's interfacing through individual software — their legacy systems with our SAP environment. We are in the process of adopting a portal environment whereby we can connect with more of our customers through standard software vis-a-vis their legacy system. While this is being developed, we have developed a pull system to support the improved velocity and flow of products. For example, we have identified the “A” items, which represent 80 percent of our sales and we have established a kanban [a just-in-time concept] whereby these items are replenished as used daily from the factory. The remaining challenge is to connect the dealer to the distributor after we have the majority of our customer base communicating with us via EDI.
EHLEN: Is cheap energy in the United States gone forever? How will stringent energy-efficiency standards impact your business?
BREWER: I think cheap energy is a thing of the past. What is oil now, approximately $80 [a barrel]? If you tripled your price, and your customer's behavior didn't change, what would you do? You'd leave the price right where it is. Higher energy costs have not caused consumers to change their behavior. We have not yet reached our pain point. And we will keep consuming more expensive energy in greater amounts until a yet-to-be-determined level of pain is reached.
As far as efficiency standards impacting our business, we're a supplier of components into the OEM business — chillers, cooling towers, fan coils, unitary products of that nature — and we're already working with a number of our OEM customers on components that will help the overall efficiency of their products.
COLE: I certainly can't comment on whether it's gone forever, but it's a challenging environment for us all. I think it's going to drive the vitality curve of all products. It's going to create a demand for changes more quickly to meet the appetite of the consumer to drive those costs down, to meet the appetite of the government agencies, to meet different standards more quickly. The speed at which we can digest these challenges and develop products to meet those needs is where it's really going to be the difference between being successful with this group [of wholesalers] and your ability to be successful with the consumers, because I think they're going to start asking for things that we haven't thought of yet. They're going to really challenge us to find new and creative ways to help keep money in their pocketbook.
ENSMINGER: Inexpensive energy is not going to be coming down any time soon. We face a dual fight since we have both oil and gas equipment. There is still a lot of oil, hydronic equipment out there and we're already seeing innovation on that side. Interest in biodiesel is growing, and that has created new demands for burner equipment, so we're working with burner manufacturers for oil burners that will handle biodiesel. System integration is still important, such as an integrated solar hot water package with an indirect water heater and a high-efficiency boiler, so I think you're going to see that also influence things in the future.
MURRAY: Efficiency standards are driven by environmental issues and can result in real opportunity. They typically drive innovation and technology, and we see nothing but opportunity in newer, better technology.
THORNE: As we know it today, I believe that it is. Barring any major technological advances, there is going to be increasing pressure on the nonrenewable sources, and you are going to see cost of nonrenewable sources continue to escalate, in the face of supply issues. With respect to addressing it, I do not see the consumer yet voting with their dollars — driving less or using less. What we have seen thus far is mandated action — the U.S. government driving higher-efficiency products, for example, NAECA and what is now being considered in terms of increasing the minimum heating efficiency.
EHLEN: Are you concerned about overseas manufacturers not meeting industry safety and performance standards?
BREWER: Yes. We are a global company. We have factories in Rockford, IL; Gaoming, China; Genoa, Italy; and Vasterhaninge, Sweden. Our Gaoming, China, facility has to meet the same efficiency standards, environmental standards and safety standards as any of our factories around the world, and there won't be any “toy stories” coming out of our Gaoming facility.
COLE: We're a global manufacturer, and we have products coming out of India and China, Thailand and Mexico, and the U.S., of course. And we hold ourselves to the same standards across any of those plants. It does not change from a quality product standard, regardless of where it is in the world. We're going to make sure that we're doing the right thing, not only for our customers, but in terms of other countries — for the environment, for the product that we're building and the expectations of that product coming out of those plants and going into consumers' homes. We will have the same high standards regardless of where we are manufacturing.
ENSMINGER: We haven't seen anything to date. It's always a concern, though. For boilers, there are safety standards that have to be met for equipment to be sold or marketed as a boiler in this country. Even with what has come over, it must still meet those safety standards.
MURRAY: I don't have any great concerns about equipment from wherever it may have been built. There are regulatory requirements and standards that cover the performance of equipment. I think in the end, probably more than anything, it's a quality concern that I might have, regardless of where the equipment is manufactured. I'm quite familiar with the industry and the manufacturers in North America and their quality. When it comes to equipment coming in from elsewhere, you get what you pay for. I would be mostly concerned not from a performance and safety standpoint but from a quality standpoint.
THORNE: We've seen a few entrances and retreats — in some cases, in the same year — and the retreats have mainly been tied to performance and quality issues. ARI and ETL and UL have done a good job of creating and managing a level playing field in the interest of the consumer.
EHLEN: Give us an example of a product, service or program that your company provides or will provide that will help wholesalers grow their businesses.
BREWER: We were acquired by Schneider Electric just a little over a year ago. As part of a $17 billion global company, TAC Field Devices is part of a company that believes in investing in new products, hiring the best people and investing in market development. This translates into more product choices for you, a greater investment in inventory by us and the best people to provide you with customer satisfaction. An example is the iPortal Web access mentioned earlier, providing wholesalers with demand-driven, real-time order fulfillment and tracking.
COLE: There are two, and one of them is the ability for us to participate in forums of this nature. It has the elements of training and education. We're committed to making ourselves available to you and your organizations through the education and training process to help you move it [product]. And secondly, our latest launch with the Evergreen replacement motor is a unique mix of bringing technology to bear, where you can replace a PSC motor in an air handler with a motor that will bring enabling technologies to drive IAQ, provide comfort and healthier air for homeowners, and it's more energy-efficient.
ENSMINGER: One of the things that we do that is unique is that we manufacture to inventory instead of manufacturing to order. Allowing our distributors to offer our entire product line from the smallest boiler up to the biggest boiler, gives them the ability to draw upon our inventory. Distributors know it's going to be available and ready to ship to them, and it allows them to address all of their market needs for hydronics without having to take up space for inventory.
MURRAY: It's training. We're huge on training. We've had seminars on five continents in the last couple of years to sellout crowds. There's a thirst for knowledge, and I think that's one of the biggest things we bring to the table for our customers; our technical capabilities to support the products we sell — to call on the contractors that are your customers and support them on difficult jobs and with training. It's a requirement of every field sales engineer that we have and is a part of what the rep agencies provide to support the Parker and Virginia brands. This is successful no matter what you sell. There will always be a value assigned to industry education.
THORNE: One that is key for us is the distributor's ability to attract and retain new dealers, because with equipment sales, distributors are obviously pulling forward a significant amount of parts and supply business — typically at higher margins than the equipment side. That's the enviable position — be the best at attracting and retaining dealers.
One of the key tools that we provide is a new dealer program. We call it a dealer acquisition program, but the distributors are not really acquiring the dealers — just securing their business. With marketing funds, tools, education and training, [you will] be able to support and bring on new dealers and, most importantly, after they are brought on, working with them to make sure that they stay.
EHLEN: Will we have enough R-22 to keep existing AC systems running?
THORNE: [According] to a study that DuPont completed, if you look at the total market in terms of the total amount of R-22 that is being supplied, about 80 percent is going to new equipment, 20 percent or slightly less is going to the aftermarket. Based on the study, the available supply line crosses the demand line in 2015. In September, a significant meeting with Montreal protocol parties was held to accelerate that phase-down. I believe the reduction number bantered was on or about 10 percent. With 10 percent additional supply reduction impact, obviously the supply line will cross demand earlier than 2015.