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CREATING ECONOMIC
AND SOCIAL VALUE IN THE
HVAC INDUSTRYBusiness Strategy, R-22 Phase Out, and an
Assessment of the HVAC Industry using two
Porter Frameworks: Five Forces and
“Creating Shared Value”
What could a “green” or sustainable value
chain look like?
1930’s – Present
Ongoing challenge of phasing out refrigerants
Increasing legislation
Why didn’t the markets naturally lead to more efficient air
conditioners?
Where is the innovation in this industry?
Environmental Impact of Air Conditioning
The U.S. has long used more energy for air conditioning than all other nations combined.
Rough estimate: residential, commercial, and industrial air
conditioning worldwide consumes at least one trillion kilowatt-hours of electricity annually.
Car conditioners in the United States alone use 7 to 10 billion gallons of gasoline annually.
World consumption of energy for cooling 10X by 2050
Whoa, that’s a lot of Coffee!
1KW of Energy = 90 Cups of Coffee
90 Cups of Coffee x 1000000000 Trillion KW of Energy
= 90,000,000,000 Cups of Coffee annually!
Unsustainable
Global demand for HVAC equipment is projected to rise 6.1
percent per year through 2016 to $107 billion. North
America will achieve the fastest gains (US recovery in
construction). The Asia/Pacific region will post the second
fastest growth rate, led by India and Indonesia.
Who is responsible?
[エアコンで言うと、エネルギーは生産時に5%、使用時が95%という割合である。トヨタ自動車のホームページによると、自動車は生産時2割、使用時8割のようだ。]
What about the other shareholders?
Business Threat
• Sectors at greatest risk include the food and drink
industry, petro-chemicals, pharmaceuticals, health, retail,
hospitality, finance and data-processing.
• Typical applications include refrigeration systems in
supermarkets, blast chillers, cold stores and process
coolers and many types of building air-conditioning as
well as in transport refrigeration.
• Many of these applications are absolutely critical to the
continued operation of their owner’s business.
Stakeholder Impact Phase-out solutions
Replace your system
• Old systems, (poor condition, inefficient, not meeting their
cooling load, should be replaced with new systems using
a non-ODS refrigerant.
• These can include HFCs or a “natural” refrigerant like
hydrocarbons, ammonia or carbon dioxide.
• Benefits:
• Significantly improve energy efficiency
• Reduce the charge of refrigerant
• Replacement is likely to be the most expensive option in up-
front cost terms (around 10 times more than a conversion).
Outline
• HVAC Industry Overview
• Porter’s Five
• Manufacturing Trends
• R-22 Phase-out Approaches
• History Regulation
• Assessing the Impact of Refrigerants
• Example of Daikin
• Lobbying Efforts
• Patent of R-32
• Research Questions for MBA Students
• How “green” are these companies?
• Where is the innovation in HVAC? Why didn’t the markets
naturally lead to to better refrigerants?
Industry Rivalry
• Numerous equally balanced competitors
• Highly competitive • Oversaturation
• Overall maturity of the market
• Largest manufacturers have come from Europe, Japan, and North America however• China has taken over with approximately 1/3 of the world-total
HVAC equipment
• The top 8 equipment producers account for nearly ½ of the global market in terms of value
Barriers To Entry
• High capital costs
• Economies of scale
• Growing niche markets are making participation in the industry easier
• Manufacturer-distributor channel
• M&A activity has grown dramatically in recent years • Acquisitions the main method for firms to expand their HVAC
capabilities
Threat Of Substitutes
• Cross Price Elasticity
• Shift from price-sensitivity to total lifetime value
• Trade Flow
• Traditionally equipment produced in North America, Western
Europe and Japan (where major firms were located)
• Recently production is happening more locally. Identical air
conditioning products are easily sold in a given geographic area.
Power of Buyers/Power of Suppliers
• Extended Warranties
• “Lock” customers into long-term relationships
• Service Solutions
• Success dependent on a manufacturer’s speed to market
• Firms who integrate vertically or are able to gain supply
chain synergies may have advantage.
Business Environment Is Rapidly Changing
1. Managing Change
Change = Risk
2. Decision Making
Risk = Opportunity
3. Growing the Business
Risk Encourages Innovation
History of Refrigerants
• Traditionally, the focus of the HVAC industry was simply
on finding a refrigerant that would provide effective
cooling
• Many of the early refrigerants such as sulfur dioxide,
methyl chloride and ammonia met that objective but
posed safety hazards due to their toxicity or high
flammability potential
History of Refrigerants
• 1930s
• chlorofluorocarbon (CFC) refrigerants were introduced as safe
alternatives to the chemicals used before them
• CFCs came to dominate first refrigeration and later HVAC because
of their safety and efficiency
• 1950s
• Hydrochlorofluorocarbons (HCFCs) were added to the portfolio of
refrigerant alternatives
• 1970s
• environmental concerns arise
• Scientists discovered that CFCs—and to a lesser extent HCFCs—
were contributing to the depletion of the ozone layer.
The Montreal Protocol
• 1987, scientists discovered nearly a 50% of the Antarctica
ozone layer
• The Montreal Protocol on Substances that Deplete the
Ozone Layer was the first global agreement to have
universal participation
• Unfortunately, as the Montreal Protocol has phased out
these ODSs, highly damaging global warming
pollutants—primarily hydrofluorocarbons, or HFCs—have
replaced them.
Understanding Refrigerants: Options
Fluorocarbons versus Natural Refrigerants
ODP
GWP
Flammability
Toxicity
Cost
Ammonia (NH3, R717)
• Was one of the original refrigerants used in James
Harrison’s 1856 patented refrigeration machine
• Only a small number of installations recently in Europe
have started to use this as a refrigerant for coolers in
buildings (due to high price)
• Zero ODP
• Zero GWP
• The additional safety equipment adds cost, but many
argue that the long-term maintenance savings outweigh
the initial outlay costs
The Cons of Ammonia
• Odor
• B2 Safety classification (=some toxicity)
• Medium flammability risk
• Is compatible with some, but not all, refrigerant systems
• The price of equipment for this costs 250% that of equivalent
fluorocarbon units
• Using ammonia in populated areas can bring about some
safety, systems in Europe have addressed these concerns with
the introduction of systems such as containment casings,
ammonia absorption systems and flameproof electrical panels;
this additional safety equipment adds cost
• Ammonia systems around the world are facing more stringent
restrictions and demands to reduce the refrigerant charge
Why not ammonia?
• A glass of drinking water can contain as much as 1mg of
ammonia, a 200g steak as much as 13mg, and some food
additives can contain as much as 18mg
• Cigarette smoke and even the air we breathe also
contains ammonia in small amounts.
• ammonia can be used with relative safety in refrigeration
systems provided the proper safety measures are put in
place
Benefits of R-32
• Less ozone depletion
• Lower global warming impact compared to R22 and
R410a
• Higher energy efficiency
• Easier to recycle
• Cheaper for developing countries
Environmental Stewardship or Market
Share? Or both?“Daikin does everything it can to contribute to the
shift to refrigerants with minimal environmental
impact. Specifically, to promote adoption of
R32 in developing countries nearing
conversion to next-generation
refrigerants, in September 2011 Daikin
began giving free access to its "Basic Patent
Indispensable for the Manufacture and Sale of Air
Conditioners Using R32 Single Component
Refrigerant."
Strategic Questions
Legislation and Environmental Regulation:
Why didn’t the markets naturally lead to more
efficient air conditioners?
Innovation
Is the move to a less harmful refrigerant really
“innovation”? What about refrigerant-less
technology?
References
• https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/182590/fgas-rac8-hcfc-phase-out.pdf
• http://businesstoday.intoday.in/story/case-study-daikin-turnaround-industry-in-india-market/1/201092.html
• http://www.trane.com/Commercial/Uploads/PDF/11612/Related_Literature/Refrigerant/HVAC_Refrigerants.pdf
• http://www.trane.com/commercial/uploads/pdf/cso/138/Refrigerants.pdf
• http://e360.yale.edu/feature/cooling_a_warming_planet_a_global_air_conditioning_surge/2550/
• http://www.goshen.edu/physix/160/gco/6.7.sp.php
• http://www.ieso.ca/imoweb/siteshared/images/One_KWh_Infographic-web.pdf
• http://www.daikin.com/csr/feature/02_2.html
• http://www.businessgreen.com/bg/news/2306617/how-a-start-up-is-making-refrigerant-tracking-a-hot-commodity
• http://eosclimate.com/refrigerant-revolution/
References• Shigeki Ichii, Susumu Hattori, and David Michael. How to Win in Emerging
Markets: Lessons From Japan. Harvard Business Review. May 2012. http://hbr.org/2012/05/how-to-win-in-emerging-markets-lessons-from-japan/ar/1
• Daikin Acquires Goodman for $3.7 Billion, achrnews.com, September 10 2012. Website Accessed July 2013. http://www.achrnews.com/articles/120887
• Hourahan, Glenn (VP Research and Technology Air Conditioning Contractors of America). ACCA Website. An Outlook on the US HVAC Industry, Evolving Contractor Response To Market Forces, August 2010 Website Accessed July 2013. http://www.hourahan.com/wp/wp-content/uploads/2010/08/Eurovent-final.pdf
• Capstone Partners Investment Banking Firm. HVAC Products Coverage Report “Market Intelligence for Industry Players” Quarter 4 2011. Website Accessed July 2013. http://www.capstonellc.com/sites/default/files/Q4%20HVAC%20Coverage%20Report.pdf
• Torpin, Joanna R. Manufacturers Predict Slow Growth in 2013. Achrnews.com. March 18, 2013. Website accessed July 2013. http://www.achrnews.com/articles/122763-manufacturers-predict-slow-growth-in-2013
References
• http://www.zdnet.com/panasonic-going-green-key-to-staying-in-the-black-7000006197/
• http://www.huffingtonpost.com/jennifer-schwab/fortune-green-consumers-w_b_3254512.html
• http://www.epa.gov/ozone/title6/phaseout/22phaseout.html
• http://businesstoday.intoday.in/story/case-study-daikin-turnaround-industry-in-india-market/1/201092.html
• Jacquelyn A. Ottman, Edwin R. Stafford, and Cathy L. Hartman. Avoiding Green Marketing Myopia. June 2006. Website accessed June 2013. http://www.greenmarketing.com/files/Stafford-MyopiaJune06.pdf
• Daikin Corporate CSR Website. http://www.daikin.com/csr/environment/production/06.html