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CREATING ECONOMIC

AND SOCIAL VALUE IN THE


HVAC INDUSTRY
Business 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?
1930s Present
Ongoing challenge of phasing out refrigerants
Increasing legislation

Why didnt 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

Or, put another way

Whoa, thats 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?
[

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 owners 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
Porters 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 didnt 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 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 manufacturers speed to market
Firms who integrate vertically or are able to gain supply

chain synergies may have advantage.

Risk Encourages Innovation

Business Environment Is Rapidly


Changing
1. Managing Change
Change = Risk
2. Decision Making

Risk = Opportunity
3. Growing the Business

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 CFCsand 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


pollutantsprimarily hydrofluorocarbons, or HFCshave
replaced them.

Understanding Refrigerant Charges

Understanding Refrigerants: Options


Fluorocarbons versus Natural Refrigerants

ODP
GWP

Flammability
Toxicity
Cost

Ammonia (NH3, R717)


Was one of the original refrigerants used in James

Harrisons 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

Daikins R-32
(Source: Daikin website)

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 didnt 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?

MBAs to save the world?


Source: http://eosclimate.com/refrigerant-revolution/

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-turnaroundindustry-in-india-market/1/201092.html
http://www.trane.com/Commercial/Uploads/PDF/11612/Related_Litera
ture/Refrigerant/HVAC_Refrigerants.pdf
http://www.trane.com/commercial/uploads/pdf/cso/138/Refrigerants.p
df
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_Infographicweb.pdf
http://www.daikin.com/csr/feature/02_2.html
http://www.businessgreen.com/bg/news/2306617/how-a-start-up-ismaking-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/Euroventfinal.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%20Re
port.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-in2013

References
http://www.zdnet.com/panasonic-going-green-key-to-staying-in

the-black-7000006197/
http://www.huffingtonpost.com/jennifer-schwab/fortune-greenconsumers-w_b_3254512.html
http://www.epa.gov/ozone/title6/phaseout/22phaseout.html
http://businesstoday.intoday.in/story/case-study-daikinturnaround-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/StaffordMyopiaJune06.pdf
Daikin Corporate CSR Website.
http://www.daikin.com/csr/environment/production/06.html