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Is the Kingdom going through a rough patch?

With Saudi Arabia declaring a record USD 98 billion budget deficit for 2015 and preparing to lift subsidies from petrol, electricity, water, diesel and kerosene, it is now no secret that the Kingdom is facing severe headwinds due to the drop in oil prices. Against this backdrop, Rajiv Pillai explores the HVAC opportunities that exist in the ‘new normal’ and how the sector is bracing itself to weather the storm.

| | Feb 15, 2016 | 2:36 pm
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Sizeable government subsidies coupled with no personal income tax was a matter of privilege for the Saudi nationals. Even though oil had been going through rough weather in the past, the Saudi economy had been able to recover. But the situation has changed as oil price continues to dip. According to the Saudi Arabian Monetary Agency, the country’s foreign exchange reserves fell to USD 648 billion at the end of October 2015 from USD 742 billion, a year earlier. So the question remains whether or not the Kingdom will be able to sustain its growth with oil hovering around USD 30 per barrel, and by extension, how does all this pan out for the HVAC industry?

Zaid Al Aquil, Head of Marketing and Corporate Communications at Johnson Controls Saudi Arabia

Zaid Al Aquil, Head of Marketing
and Corporate Communications
at Johnson Controls Saudi Arabia

Zaid Al Aquil, Head of Marketing and Corporate Communications at Johnson Controls Saudi Arabia, says that although Saudi Arabia’s Deputy Crown Prince, Mohammed bin Salman, said in an interview with The Economist that the Kingdom was contemplating an IPO for the state-owned oil company, the air conditioning business remains unaffected. He says, “When it comes to oil prices, I think from a construction point of view it does affect other construction companies, but as far as HVAC is concerned, it’s fine.”

Uday Mahadeokar, Sales Director at Emerson Climate Technologies, explaining his version of the ‘new normal’, says: “Things are going to be tougher, definitely not only for the Kingdom but overall for the global economy. However, I think the market will keep growing. Government initiatives will continue to happen; the investments will keep on coming. The mega projects may slow down a little bit, but I think retail investment will continue to happen here.”

Pierre Abou Naoum cropped

Pierre Abou Naoum, Marketing Manager at Safid

The HVACR show – an indicator?
The other performance indicator for the sector in Saudi Arabia was the HVACR EXPO Saudi held from January 11 to 13, 2016. The event, which was held under the patronage of Adnan H Mandourah, Secretary General, Jeddah Chamber of Commerce and Industry, was a success as per the exhibitors and participants. This, perhaps, helps gauge the situation. Speaking at the event to Pierre Abou Naoum, Marketing Manager at Safid, Naoum said that he believed the show was quite successful. “The show is really interesting this year,” said Naoum. “This is a very specialised event that deals directly with the HVACR industry that we work in. And this gives it the competitive edge over other exhibitions. So the clients that are coming in are either the clients that we are maintaining or new clients that are really interested in this kind of business.” Adding to this, Al Aquil says: “Such conferences, specifically for the HVAC sector, really position us well to promote our products in a right way. We have invested tremendously in the past year in research, looking into the market strategy and into the pricing strategy. Such an event helps you to engage with the right customers, and we plan to capitalise on our Saudi-made chillers.”

According to the event’s website, the HVACR market grew at a CAGR of around 9.61% in value terms during 2010-14, and is further projected to witness growth at around 13.73%. The refrigeration market in Saudi Arabia grew at a CAGR of around 11.80% during 2010-14, and is projected to grow at a CAGR of around 12.27% over the next five years, the site further stated.

The way forward
From the insiders’ comments, it appears that despite the present economic scenario, the HVAC market is still booming. Based on this assumption, several market leaders reveal their strategies for the road ahead and how they are adapting to the ‘new normal’.

Kamal Pharran, CEO of Saudi Tabreed.

Kamal Pharran, CEO of Saudi Tabreed.

Kamal Pharran, CEO of Saudi Tabreed, believes that the demand for cooling is growing in Saudi Arabia. “I am sure that the government is facing many hard challenges to provide sufficient electricity to the Kingdom,” he says. “District Cooling is one of the best solutions for the government, and it is an improved technology that will satisfy almost 50% of the cooling demand.” Khalid Al Hariri, Managing Director at Mase Gulf, on his part, reveals that he is not afraid of the economic situation, and that he is very excited about the future. “We see this as an opportunity and not as a challenge,” he says. “I think the situation is very bad for low-quality products, and it’s the best time for quality products, especially for high-efficiency products. Fortunately, we are ready to face this market because all our products are environment-friendly and energy efficient.”

Speaking of the residential market, “Demand for window units will decline but it will still be there in the market,” Al Aquil says. “What we plan on focusing is the splits, and that’s where there is a huge market. So lots of changes there, but I don’t think it will affect us in terms of market share. On the chiller side, we are looking at investing heavily into marketing. That should boost our market share on the unitary side as well on the consumer side.”

Mahadeokar, too, sends a positive vibe when he claims that Emerson is well- positioned to take on the situation in Saudi Arabia. He says, “As you know, we are physically present in Saudi [Arabia], be it in air conditioning or refrigeration, and we have recently opened our condensing facility in Dammam.”

Naoum, speaking for his company, says that Safidhas ongoing expansion plans, and that they will be focusing on providing new products like Air Handling Units (AHUs). There is a general agreement among experts that the future of the HVAC sector in Saudi Arabia is still buoyant, the IMF issuing a warning that the country could exhaust its reserves within five years if policies remain unchanged, notwithstanding. However, the HVAC sector in the Kingdom is bracing itself for the worst. “We are diversifying our products to overcome this current slow market,” admits Naoum. “I hope we all come out of this economic slow or drop.” Hope and positivity seem to be the twin engines of the sector to help it steer through the financial turbulences ahead.

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