NOT so long ago, China was referred to as the factory of the world and, at worst, a “copy-paste” hub when it came to developing technologies. In the last two decades, however, the country has responded to all the reproach by massively stepping up its efforts to patent technologies and increase the quality and efficiency of its products. The consensus is that the dragon has truly risen and spread its wings across every possible sector, including HVACR.
Considering the earth-shaking nature of the pandemic and a nagging trade war, China’s industrial sector has recovered after a few months in the red. This recovery is led by the manufacturing industry, whose profits rose 0.8%, year-on-year, in June after falling 6.5% in May. According to China’s National Bureau of Statistics (NBS), profits of industrial enterprises increased one per cent, year-on-year, to 4.27 trillion yuan (USD 631.1 billion) in the January-June period.
According to China’s Dunli, overall HVAC production continues to increase, and product energy-efficiency improvements are accelerating, especially in the cold chain, precision air conditioning and commercial air conditioning fields. Industry reports are consistent with this, as air conditioning manufacturing alone is expected to increase from around USD 33 billion in 2020 to USD 42 billion in 2025.
There are several reasons that make China the rising star in the HVAC industry, be they through innovative technologies to improve energy efficiency, large projects and partnerships at the international level or through improving brand image through sponsoring mega-sports events. The consensus is that the future for Chinese HVAC manufacturers looks promising, but it’s not without challenges.
According to China observers, two post-pandemic trends have helped Chinese HVAC manufacturers – a recovering home improvement retail market and projects, as well as economic policy improvements by the government at the local level. According to Dunli, China’s 14th Five-Year Plan focuses on economic growth through human development and ecological improvement and harmony with nature. Innovation, green economy and environmental protection are the main themes of the Plan.
IMPACT OF COVID-19
The pandemic significantly impacted air conditioning manufacturing, including unprecedented challenges following supply chain disruptions. Tao Wen, Vice President, Huayi Compressor Barcelona, believes that the pandemic has impacted lifestyles and IAQ innovations and mobilised commercial refrigeration. “Almost everything has changed in the past year, including the demand for air conditioners for homes and businesses,” he says. “The demand for cooling systems and refrigerated vehicles has also increased with lifestyle changes. I think the earliest demand for our compressors installed during the pandemic came from the health and medical sector, as the transport of vaccines became necessary. That, in turn, led to many adjustments in the equipment sector. In a way, we contributed to the rapid transport and distribution of the vaccine.”
Meanwhile, China has chosen to stick to its dynamic clearance policy and proactive pandemic response measures. According to Midea, the policy, which was highlighted in President Xi Jinping’s recent speech, opens new doors for companies in the industry, as international demand surpasses the domestic HVAC market. China’s manufacturing sector has shifted from manufacturing to smart manufacturing.
According to Midea, the Chinese government adopted six public health regulations by 2020. One of the mandatory regulations is the hygiene specification for the operation and management of air conditioning systems in office buildings and public facilities. It emphasised that the use of air conditioning systems must ensure adequate air exchange. This has led to many innovative technologies in the IAQ sector. Dennis Lee, Director of Midea Building Technology Overseas sales company in the Middle East and Africa region, says: “In addition to the installation of high-efficiency air filters in public places, solutions such as sterilisation modules with UV light and PCO (photocatalytic oxidation) ducts have been introduced in public places to ensure fresh air and adequate ventilation. China’s indoor air quality standards have recently been updated. The standard adds some new indices, including the capture of particulate matter (PM2.5).”
The most apparent change that Lianchi Zhao from Hisense’s product planning department has noticed is in the attitude of customers, who’ve started to pay more attention to the health benefits of air conditioning. “This trend has forced manufacturers like us to look at health benefits and artificial intelligence (AI) to provide more than just cooling with sterilisation, filtration and ventilation,” Zhao says. Lee, in his turn, lists many innovations Midea has focused on since the outbreak of the pandemic. These include ultra-thin duct machine products that enable long-term self-cleaning of heat exchangers. The hydrostatic duct fan generates static pressure outside the machine that matches a high-efficiency H12-grade filter, he says.
R&D: ABOUT IMPROVING COMPETITIVENESS
Aspiring to become a world leader in high-tech industries, strengthening domestic innovation and reducing its reliance on foreign technologies while moving up in global value chains, the Made in China 2025 strategy reportedly focuses on meeting and bettering international standards and R&D&I policies. The national R&D&I policy is expected to accelerate the clean energy transition necessary for the country to reach its carbon-neutrality target by 2060. According to Dunli, in 2022 alone, the proportion of technology research and development in GDP will be up to seven per cent. Still, the general view is that cohesiveness is needed in the adoption of technology among vertical industries. “In the last five years, we have spent 10-15% of our revenue on R&D, which includes not only testing and product development but also capability-building, in collaboration with famous universities,” a Dunli spokesperson says, on condition of anonymity. “We have also seen the development of smart building technologies in HVAC for monitoring and automation.”
Chinese manufacturers also feel that investing in R&D is as much, or more, important than marketing a brand. “We already have an international presence and are a recognised brand for compressors, but we realised early on that if we want to be a world leader, R&D will give us the data we need to make product improvements to meet the demands of an ever-evolving industry,” Wen says. “On average, we invest 4-5% of our sales revenue in R&D.”
Companies such as Hisense and Midea, by their own admission, also invest 4-5%, respectively, in R&D to keep up with international competitors in terms of product performance and efficiency. “Continuous improvement in product development is key to meeting the requirements of a dynamic market,” Lei Xue, from Hisense’s overseas marketing department, says.
BUILDING BLOCKS OF ‘BRAND CHINA’
Almost two decades ago, in 2004, Chinese state-owned petrochemical company, Sinopec secured the title rights for the first Chinese F1 Grand Prix, held in Shanghai. Since then, many Chinese brands have had an upward path in building their brand by linking up with elite sporting events, worldwide. Prominent Chinese sports sponsors can now be seen at many major tournaments, from the FIFA World Cup to the Indian Premier League. Xue points out that it has been proven many times that sponsoring sporting events is conducive to brand globalisation. Perhaps the most high-profile sports sponsorship deal by a Chinese company is that of Hisense as global partner of the 2022 FIFA World Cup, in Doha. Xue says: “Hisense aims to become a global B2B and B2C company offering home appliances and information technology, and sports-based marketing will be one of Hisense’s most important branding strategies in its internationalisation efforts. Hisense aims to become a more active and dynamic company in customers’ eyes, which is also in line with the spirit of sporting events such as the World Cup and European Championships.” Hisense hopes that through sports-based marketing, it will be able to present a young and dynamic brand image to customers and end-users and expects its overseas revenue to reach a total of USD 8.91 billion in 2022, of which OBM sales are expected to contribute USD 7.37 billion, accounting for 82.7% of total revenue and representing significant OBM growth.
Wen, however, believes that the road to becoming a top-of-the-mind brand is a long and painful one for many Chinese companies. “Even though our leading position is very well received and respected, many customers expect Chinese manufacturers to offer lower prices for their equipment,” Wen says. “The key to changing this is constantly delivering reliable and efficient products that offer better performance. The second key factor is to learn from the market and adapt your product to meet market needs until achieving a breakthrough.”
Weighing in, Lee feels that the transformational journey of a traditional home appliance company to a world-leading technology was backed by strategic positioning as a technology company and its own development based on global resource allocation and integration, in addition to partnerships and acquisitions.
ACQUISITIONS CLEAR PATH FOR MARKET EXPANSION
The tables are turning. From the world’s factory floor, China today is one of the economic powerhouses, shelling cash into international projects and companies; and acquisitions and mergers are other tools under the belt for Chinese manufacturers to raise the country’s global profile. Wen says that a more productive brand building and market expansion strategy is acquiring or partnering with international brands that share your product segment. “In addition to establishing your brand in the market, what this exactly does is establish trust among customers,” Wen says, pointing out that Huayi Compressor Barcelona reportedly saw great success after acquiring Cubigel Compressor, almost a decade ago. Midea, for its part, reportedly completed four large-scale global mergers and acquisitions, forming a pattern of multi-brand operations and starting a truly global journey. In 2021, Midea says, its total global revenue was USD 53.2 billion. The company says it has production bases in 13 countries, while nearly half of Midea’s revenue now comes from abroad.
Apart from company mergers and acquisitions, a considerable amount of state funds funnelled to the international markets, and the Middle East region is no exception. According to news and industry reports, China is now involved in the reconstruction of Syria; in January this year, China’s ambassador to Syria and the head of the Syrian National Council signed a memorandum of understanding (MoU) relating to China’s Belt and Road Initiative (BRI), its multi-trillion-dollar project to revive the fabled silk road in order to transport and sell its goods to the markets of Europe and Africa. Reportedly, Beijing has invested USD 10.5 billion in 2021 in BRI-related and energy projects in Iraq, the third-largest supplier of oil to China after Saudi Arabia and Russia. If reports are to be believed, China has signed BRI-related agreements with 21 Arab countries.
Broadly speaking, BRI is expected to open many opportunities for Chinese companies in the region. Ethan Li from Hisense’s Overseas Technology Department is of the view that establishing a share in any market involves a strong market product demand analysis, product development and product quality assurance team. “Additionally, we cooperate with third-party testing institutions to interpret the global and local product testing standards,” Li says.
According to Dunli, to meet the high-quality needs of international customers, and European and American standards, the state works closely with leading manufacturers to upgrade HVAC standards to achieve international technical requirements. According to Midea, it took part in drafting the new standard for room air conditioners, published in 2020, to provide a manufacturer’s perspective. Efficiency is the most critical factor driving product demand in any market, including in the Middle East region, and it is precisely what the Chinese firms are working on. Lee says the quality of products made in China is increasingly being
recognised worldwide. “The products we export to various countries around the world are in line with the certification of each country for product safety, performance and so on,” Lee says.
With most developed and developing countries reaching a new consensus on carbon emissions, the high efficiency of industrial products in the future will become an essential requirement. In the words of the Dunli spokesperson, “If we want to maintain or expand export share, the only way is to innovate, improve efficiency and improve our product service capacity.” The Chinese government has proposed a specific timetable for peak carbon dioxide emissions and carbon-neutrality,
which provides a substantial driving force for improving efficiency in China’s air conditioning industry. With this, major Chinese manufacturers are also playing a role in the standardisation of air conditioning systems. Zhao says: “As China is a major exporter of air-conditioning products, the demand from Europe and North America will also have a strong driving force for Chinese air-conditioning upgrades.”
BUMPS ON THE ROAD
Despite expanding their global footprint and increasing their international presence, Chinese companies have some challenges on the road ahead. The trade war between the United States and China is one of the main factors clouding Chinese HVAC exports. SEMI – the Global Electronics Suppliers Association – has been monitoring the situation. It is concerned about a potential disruption that could jeopardise access to global markets, essential for maintaining free and open trade. Currently, many different consumer goods are manufactured in whole or in part in China. While the new tariffs aim to stop importing consumer goods from China, this may also affect semiconductor supply. They are essential for producing consumer electronics. As the cost of semiconductors increases, electronic circuits are likely to rise, making ACs more expensive.
Nevertheless, Chinese manufacturers are bullish about the future. “Crisis and opportunity coexist at any time,” the Dunli spokesperson says. “At present, there are many factors affecting the growth of export volume. Our company believes companies should not blindly expand capacity, and quantitative quality is more important than quantity. The degree of impact of the trade war on different industries varies. For example, supply issues in semiconductors will quickly drive the development of domestic chips rapidly, and this global high-tech push is also beneficial in the long run.”
The global chip shortage has also affected equipment manufacturers. Wen says: “In the last year, chip shortage has been a key issue. Fortunately, because we have a massive manufacturing capacity in China, that has a competitive supply chain to support our manufacturing process. We are paying extra attention to optimising our supply chain and choosing suppliers who ensure sustainable chip supply.” Meanwhile, Midea, apart from making a certain number of reserves of imported brands, is moving to domestic production to shorten the supply cycle.
COUNTING GOALS BEYOND THE GREAT WALL
Chinese manufacturers have lofty dreams. They are looking at ramping up product development and establishing a striking brand image. Elaborating on Hisense’s regional targets, Dick Shi, General Manager of Hisense HVAC Middle East, says, “Hisense HVAC Middle East wants to be among the Top 3 AC providers in the region by 2025. In addition to working with partners in the ecosystems, we would like to support the region in achieving their sustainability goals by improving the energy efficiency of products approved by Barjeel, Saafat, ADQCC and ESMA.”
Lee expects the regional projects market to pick up the pace. He says that even with soaring prices of bulk raw materials, the annual year-on-year growth has also achieved a year-on-year increase of 25% in 2022. He is emphatic when he says, “I believe this trend will continue.”