China is a key link in the global supply chain in the air conditioning industry, in which manufacturers are facing greater challenges and pressures such as production halts during lockdowns, high raw material prices, semiconductor shortages, and turmoil in Chinese currency and maritime traffic. Manufacturers are meeting these challenges by devising various solutions.
Production Challenges and Their Solutions
Since March this year, the Chinese government has been applying strict policies to combat outbreaks of the pandemic. In many areas of the country, movement of people has been restricted, resulting in labor shortages and difficult factory operations. In Guangdong, Liaoning, Shandong, Shanghai, etc., many factories stopped production of air conditioners and their parts. Against a backdrop of a long-lasting and strong headwind, some manufacturers are struggling with insufficient funds, among other issues.
The prices of raw materials used in air conditioners have been rising since the initial outbreak of the pandemic in 2020. In such a context, air conditioner manufacturers have actively carried out measures to avoid price increases of their products. For example, some have reserved and hedged materials in advance. They have also conducted technical research on reductions in the size and weight of copper tubes as well as on aluminum as a substitute material for higher priced copper. In fact, aluminum is used instead of copper for some window air conditioners currently exported to North America. Despite such efforts, manufacturers were not able to completely eliminate the cost pressure and have successively issued price increase notices for their room air conditioners (RACs) and compressors. During the period spanning 2020 to 2022, RAC prices have increased by 20 to 30%, and rotary compressor prices have increased by more than 30% in China.
The Chinese commercial air conditioner (CAC) market has expanded substantially this year, thanks to rapidly increasing demand from the real estate industry. However, production of these air conditioners tends to be running late, because of a serious shortage of semiconductor products such as integrated circuit (IC) chips and power devices. This situation gradually eased in June and is expected to be resolved in August and September.
Channel Challenges and Their Solutions
Large channel inventory has long been a major problem in the Chinese RAC industry. Currently, this situation has improved greatly.
Since August 2021, almost no RAC manufacturers have been pressing their products to dealers during the off-season. Instead, the major RAC manufacturers generally use their financial advantages to support dealers with less inventory and reduced financial pressure, resulting in an overall reduction in channel inventory.
In addition, the Chinese air conditioner industry is now improving channel efficiency by revitalizing online and offline inventory sharing. As for offline sales, the products will be sent to collective warehouses across the country, realizing unified distribution of the entire value chain and automatic replenishment, thereby improving efficiency. Online sales have become widespread for RACs, and are expected to be extended to the CAC segment in the future.
Export Challenges and Their Solutions
China is a world-leading exporter of machinery such as air conditioners, and has a favorable balance of trade. However, the Chinese yuan has continued to rise this year, despite the raised foreign currency deposit reserve ratio applied by the Central Bank, putting it at a disadvantage for exports. In such a context, Chinese exporters tried to avoid risks in exchange rates, for example, by conducting forward foreign exchange settlement and foreign exchange derivatives.
As for marine transport, a shortage of containers and dockworkers as well as high freight rates have been serious barriers to exports from China. This year, sea freight rates are still high, but are showing a downward trend compared with 2021, which is a good sign for exporters. In addition, major exporters and shipping companies have signed long-term agreements to strengthen supervision of the international shipping system and to add comprehensive pilot shipping zones for products purchased by cross-border e-commerce.
To avoid difficulties in exports, some Chinese manufacturers are improving their global production networks. For example, compressor manufacturers such as Guangdong Meizhi Compressor (GMCC) and Highly expanded their production capacity in India to meet local market demand. Some air conditioner manufacturers also moved their factories to Southeast Asian countries such as Thailand, Vietnam, and Indonesia.
In addition, China supports the development of new foreign trade formats and models, in order to deploy more overseas sales channels and service networks, such as overseas warehouses, cross-border e-commerce, trade digitization, market procurement, and offshore trade. As a way to alleviate poor international logistics, China currently has more than 2,000 overseas warehouses with a total area of more than 16 million m2, covering North America, Europe, Asia, etc.
