A core component in the construction and real estate sector, the air conditioning market in the UAE has been dented due to the economic downturn. Though it is showing signs of recovery, the picture that emerges after toting up the positive and negative columns appears far from clear. We bring you an analysis…
Air conditioning is a necessity in the UAE, given its geography and climate. Air conditioners, therefore, will continue to be in demand in the country, in one form or the other, for the foreseeable future. Despite this, the market for packaged and split air conditioners has witnessed a dip over the last three years, though the nature of air conditioning itself has evolved.
The reasons for the sluggish air conditioning market are not difficult to ascertain. According to the IMF, the UAE’s GDP as a whole shrunk by 0.7% in 2009. The global economic slowdown, shutting down of capital markets, the fallout from Dubai’s property crash and the impact of the announcement concerning deferment of debt, could be enumerated as the main causes for the contracted GDP. This has obviously had a direct impact on Dubai’s packaged air conditioning sector, in particular, and the UAE’s in general.
In Dubai and the Northern Emirates, the rate of change of the GDP registered in 2009 was -1.3%, with predictions of further shrink by another 1.3% in 2010. In comparison, Abu Dhabi had a better economic report card. In 2009, the change in its GDP was -0.1%. It improved by 2.9% in 2010. Spurred by government’s fiscal stimulus, its economic activity remained on an even keel. However, it is predicted that it will be negatively impacted by a slowdown in government spending.
After oil and trade, the building and construction sector is the third largest sector in the UAE, constituting $23 billion or about 6% of GDP. But over 52% of construction projects were reportedly suspended, due to the economic crisis. Despite this, paradoxically, the construction and property market in the UAE is still by far the largest in the Gulf.
According to MEED, in August 2009, projects worth USD923 billion were still planned or under way in the country. Business Monitor International (BMI) forecasts that the contribution of construction to the economy will return to levels of over 10% of GDP in 2011. These facts, evidently give out mixed signals to the country’s air conditioning sector.
BLOWING HOT AND COLD
A perceivable decline in the air conditioning market began in 2009 and registered a further decline in 2010. Although a large number of projects were put on hold as the global economic crisis began to impact the region and the country in late 2008, interestingly, sales of air conditioners did not reflect a corresponding dip, as the market was kept afloat by a backlog of orders. However, predictably, the slim order books in 2009 affected sales figures in 2010. The market reportedly saw a gradual rise in order levels in 2010. The sale of air conditioning is expected to pick up slightly in 2011 and a further recovery is indicated by 2012.
The good news is that the UAE government’s fiscal stimulus, such as it is, is aimed at infrastructure, including its nuclear power plant, oil and gas facilities. The public sector has also injected money in renovating schools and police stations. All this will, perhaps, translate into healthier sales figures for the air conditioning sector in the coming months.
Masdar City in Abu Dhabi is a major on-going project. Touted to be the first zero-carbon city in the country, the project includes residential buildings, offices, hotels and retail areas. This, again, holds promise.
But despite positive signs, the pattern that is emerging is an ambivalent one for the air conditioning sector. While the construction sector’s shift in focus from Dubai to Abu Dhabi in itself is not a bad thing, a cause for worry for the sector is the fact that a large number of projects in the capital are mega infrastructure undertakings in roads, rail, airports and ports. On the other hand, private sector investments in residential and commercial construction are declining, particularly in Dubai. However, this decrease is not as pronounced in Abu Dhabi as it is in Dubai, as it reportedly has a shortage of accommodation.
An important reason that can be attributed to a lot of residential developments in Dubai being put on hold, is Dubai is mainly a foreign investment market, and is consequently hit by the economic crisis, whereas Abu Dhabi is driven by local investment and government projects. Due to the market shifting to Abu Dhabi, manufacturers who have had a stronger presence in the capital have shown more resilience to the downturn. This has, undoubtedly, helped the country’s economy as a whole, but Dubai’s recovery has been slow, as the emirate has forged itself as a separate business entity. The general global perception, too, has nurtured this image. While this is a useful perception when the economy is on the upswing, it is not exactly helpful during a downturn, such as the recent one.
The picture becomes even more confusing in the light of the fact that though many projects have been put on hold, the number of new hotels in the UAE continues to grow. In Abu Dhabi, construction is well under way to develop hotels on Saadiyat lsland.
AIR CONDITIONING – PROS AND CONS
Thanks to the low customs tax of five per cent, the UAE has a large re-export business. Air conditioning products are imported to the country via ports in Dubai, Abu Dhabi and Sharjah. According to the latest statistics published by the Abu Dhabi government, re-export jumped 43.4% during the first quarter of 2010 in Abu Dhabi. Bahrain, Qatar, Saudi Arabia, Kuwait and the Sultanate of Oman are the major destinations for the Abu Dhabi re-export market.
Under packaged and split air conditioners, the important products in the UAE are high wall mounted single split, ducted single split, window and rooftop single packaged air conditioners. While multi-split air conditioners are not found to be popular in the country, inverter and heat pump functions are not applicable, given the country’s climate.
Though a big wedge of the packaged air conditioning market pie is claimed by imports from China, Bahrain, Saudi Arabia, Thailand and South Korea, there are several local manufacturers with a product line-up for the UAE and its export markets – mainly other Middle Eastern and African countries.
Despite the fact that there is no ground-breaking change in the construction practice in the country, end-users and design consultants are now more aware of environmental and energy issues.
Reflecting the global mantra of sustainability, the UAE government has thrown its weight behind energy efficient air conditioning products in recent years. As an upshot of this, the Federal UAE Emirates Authority for Standardisation & Metrology (ESMA) is working on a project on air conditioner energy performance standard. ESMA initiated a preliminary survey and data collection project in the first half of 2010, involving brands like O General (Fujitsu General), Super General, LG, Westpoint, Mitsubishi Electric, Carrier, Supra, Aftron and Samsung. The products on ESMA’s radar are window, ductless split, portable, multi-split and packaged air conditioners.
Since environmental concern has entered the equation, in the long run, air conditioners that are environment friendly and reduce energy bills are likely to survive and prevail, be they innovations from established brands or new entrants in the market which can deliver on these two counts.
WILL VRFS MAKE INROADS?
Though the concept of VRF is still new to the UAE market, it showed promise of growth in 2010 due to aggressive marketing of its products by Daikin in the last quarter of 2009. Daikin continues to actively promote its VRV (Daikin’s trade name for its VRF system) application to design consultants and end-users. The other main players in the VRF segment are LG and Mitsubishi Electric.
Given a choice, end-users would probably prefer VRF systems, as they are considered more environmental friendly and consume lower energy. The fact that VRF units are finding greater acceptance among buyers is, perhaps, a courteous nod to sustainability.
TRENDS AND FEATURES
The following are the broad discernable market trends:
The market is highly competitive with 64 brands vying for market share. Most of them are manufactured by OEMs.
Window units, high wall single split and ducted split are preferred air conditioners for residential applications.
Single high wall split units remain the most preferred type for the residential air conditioner range, and are also used to replace old window units due to their lower noise levels, better performance and a small price difference between the two.
The market for window air conditioners has shrunk. They are being used only in low-cost or temporary developments. Trends indicate that they could gradually be phased out.
Single duct split units were introduced about a decade ago, and are still an on-going trend in new developments.
Demand for high wall single split air conditioner is expected to grow in the next few years. BSRIA estimates that in 2013, the other commercially used split air conditioner market.
BSRIA predicts that the other commercially used split air conditioner market will continue to shrink. The reason being, it is heavily reliant on new construction market conditions and, therefore, a pre-recession peak would be difficult to achieve, given the present economic and real estate scenario. BSRIA forecasts that it will gradually pick up from 2012 onwards, but with a caveat: a large percentage of ducted splits were installed in high-rise apartments in Dubai, and most of these projects were foreign investment projects. It will, therefore, be difficult to recreate the same level of foreign investment projects post economic crisis. This is also one of the reasons why BSRIA expects to see a slower recovery in the single split commercial air conditioner market.
The market for rooftop packaged units registered a sharp drop in 2009 and 2010 due to the decline in new projects. Though a few residential villas installed units, demand decreased during recession due to their higher cost and lack of a strong selling point. It can be concluded that indoor rooftop packaged units do not constitute a big chunk of the market in the country. They are now mainly used in mosques, schools, warehouses and shopping centres. However, a niche market for customised rooftop products in the infrastructure sector has evolved in the last two years. The demand can be attributed to the government injecting money to build nuclear, oil and gas plants during the recession.
Brand has been found to be a key criterion in the decision-making process among buyers.
There is no domestic market for moveable air conditioners. However, they do have a re-export market.
When all the positive and negative aspects influencing the air conditioning sector are factored in, it becomes evident that predicting market trends with any degree of certainty will only lead us to the realm of supposition.
Since oil prices may continue to rise due to political upheaval in a number of oil producing countries, it is thought this will inject new life into the real estate and construction sector in the UAE, not only increasing its overall GDP growth, but also giving impetus to the air conditioning market in the coming months.
Midea, TCL, Chigo, AUX, Galanz, Kelon and Gree are the Chinese OEM companies for many of air conditioner brands. Fujitsu General (O General) and Mitsubishi Electric have factories in Thailand and Malaysia. Some companies have started sourcing their products from Saudi Arabia and Bahrain. Products imported from other GCC countries are exempt from custom tax, giving a price advantage to source products from the GCC countries.
Korean and Japanese manufacturers continue to manufacture a few of their premium product lines in their countries. However, a large percentage of their products are manufactured in their Chinese factories, though the quality control systems in these factories are considered below par.
There are no major local players in the split air conditioning segment. Super General and Aftron are two local brands from the UAE. Super General is the wholly owned subsidiary of Al Batha Home Products & Retail Group. Consumer and retail sales are their main market. Aftron is owned by Al Futtaim Electronics, and has a modest sales volume in the retail market. Both Super General and Aftron are OEM products.
Cooline is a brand manufactured in Saudi Arabia by Zamil, a Saudi Arabian local company. It is active in the retail and project markets, with a moderately stable market share.
In the retail market, the better known brands are O General, Mitsubishi Electric, Super General, LG, Westpoint, Carrier, Supra, Aftron and Samsung.
O General and Mitsubishi Electric are the two market leaders in both residential and commercial air conditioners. They are way ahead of their competitors in the split unit market.