Daybreak - Every summer in India is a race against AC shortage. This year will be no different

Episode Date: February 17, 2025

Last year’s heatwave was great for the AC business—demand was over the roof and inventories were wiped out. Voltas, which sells the most room air conditioners in India, saw revenue jump 60% in the March quarter. Contract manufacturers like Blue Star, Amber Enterprises, and PGEL made 50–100% more money. This year too is going to be a long, hot summer. Air-conditioner makers know this. But they also know that, despite all their efforts to prepare this time, they might run out of air conditioners by mid-April.The same thing that happened last year will happen in 2025.You see, there are tiny but really important things that make an AC an AC like compressors, cross-flow motors. Suddenly, they were in short supply last year. Some manufacturers ended up airlifting emergency shipments—instead of regular shipping. You could think of this as the business equivalent of ordering from a quick-commerce platform at midnight: expensive, kind of desperate, but necessary. Overall the industry lost the sale of a million and a half units because of this.And this year could be worse because AC sales are projected to jump another 20%, crossing 12 million units.Tune in.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcast, you've probably heard me. My interruptions, my analogies and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Last year's heatwave was a great time for the AC business in India. Sort of.

You see, demand was over the roof and inventories were wiped out just like that. Voltos, which sells the most air conditioners in India, saw its revenue jump by 60% in the March quarter. Contract manufacturers like Blue Star, Amber Enterprises and PGL made 50 to 100% more money. This year too is going to be a long hot summer. They've already been warnings. So you would think that AC makers are expecting another great year, right? Not real. because they also know that despite all their efforts to prepare this time,

they might run out of ACs by mid-April. The same thing had happened last year and it is going to happen now. But what happened last year? You see, there are tiny but really important things that make up an AC, like AC compressors and cross-flow motors. Suddenly, these things were in short sense. supply. Some manufacturers ended up airlifting emergency shipments instead of regular shipping. You could think of this as the business equivalent of ordering from a quick commerce platform

at midnight. Expensive, kind of desperate, but necessary. Overall, the industry lost the sale of a million and a half units because of this. And this year could be worse because AC sales are projected to jump another 20% crossing 12 million units. All of this is basically a nice way of saying that we should probably buy an AC right now because nobody has figured out how to fix the core of the problem. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nagda Sharma, and I don't chase the new cycle. Instead, every day of the week, my colleague Rahal Philipos and I will come to you with one business story,

that is worth understanding and worth your time. Today is Monday, the 17th of February. Now, here is the problem with ACs in India. Despite all of this demand, AC makers are not entirely in control of how many units they can sell. For example, PGL expects a 30% sales boost this quarter, and yet, as a contract manufacturer, it warns off supply chain disruptions that could sap their usual bumper earnings. The reason, India still does not make enough AC parts.

Despite the government's push for local manufacturing, through the PLI or Production-Link incentive scheme for white goods that was launched in 2021, more than half of AC components are still imported. And that is before you factor in the Bureau of Indian Standards, which seems to be taking its own sweet time recertifying some Chinese suppliers. So the question is, will there be enough ACs this summer? Maybe. Will manufacturers scramble again? Almost certainly, at least for some raw materials.

At least half a dozen people close to the industry told my colleague, the Ken reporter Shrishdi Achar, that the AC industry's biggest headache comes down to one small but crucial component, the compressor. It is the heart of an AC. It's the part that pulls in hot air and cools it down and makes it the single most expensive piece of the entire puzzle. It alone makes up for over 30% of the total input cost for an AC maker. And right now, India does not make enough of them. This is especially concerning because a report by the International Energy Agency predicts that by 2050,

India will have more than 1 billion ACs in operation. And only four companies manufacture compressors in India. GMCC, which is a media group company, Highly India, Dakin and LG Electronics. Together, their total capacity is 6 to 8 million units a year. But the problem is that the industry needs 10 to 12 million units annually. So Indian manufacturers fill the gap with imports. mostly from China. In fact, nearly 65% of compressors come from China. Blue Star's managing director B Thayer Rajan believes that the industry might catch a break this time. But even Thieragrajan

concedes that if sales rise faster than expected, say beyond 25% this quarter, then getting the necessary components could become, quote-unquote, trickier. But why isn't India just making more compressors? You see, the lack of compressor manufacturing isn't a new problem in this country. The government saw this coming and launched the PLI scheme for white goods three years ago, meant for over 40 companies across five years, and it was specifically to boost local production of all AC parts. The government also made Bureau of Indian Standards certifications mandatory tightening quality control rules on imports.

And the numbers paint a very frustrating picture. For example, in the financial year 2024 alone, Indian AC makers spent more than 6,000 crore rupees on imported components. Now, this is almost equal to the entire budget that the government allocated for PLI incentives over five years. Satish Mena, the founder of data analysis firm Datum Intelligence, explained the reason for the slow progress. It is because of the delay in certification of certain AC components, which in turn is because the supply chain for those parts in India is taking time to build. Stay tuned for more on this. For Indian AC companies, setting up compressor factories is not an easy decision.

In the first two PLI rounds, only LG and Dakin invested in compressor production. Voltus joined in in the third round with more than 250 crore rupees of investment. But most of the other PLI applicants focused on cheaper, lower value components like heat exchangers and plastic molding. Why? Because compressors are hard to sell. Even though AC demand is soaring, manufacturers don't want to take the financial risk of ramping up compressor production. As Thiergarajan put it, PLI incentives are not based on production.

They are based on sales growth, which essentially means that the more ACs you sell, the more government money you get. But if you invest in compressors and they do not sell fast enough, well, tough luck. And then there is the import problem. Right now, even with higher import duties, which have gone up by 19% in the last decade, buying compressors from China is still cheaper than making them in India. Like Godrich, for example, despite being one of India's leading AC brands, completely skipped the PLI scheme. Instead, it chose not to expand its manufacturing capacities.

So, you see, the double-werexed. whammy of limited local production and cheap imports has left India's EC industry trapped in a cycle of dependency. While multinational players like Dakin and LG have an edge because they can source parts from their global supply chains for Indian origin brands like Havels, Wotas and Blue Star, the compressor problem is not going to go away anytime soon. So for now, the industry is not running out of buyers. It is running out of parts. And unless that changes, the next heat wave won't just test India's ACs. It will test the limits of the industry itself.

And India's AC boom might always be held hostage by the supply chain. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. To subscribe, head to the ken.com and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Snigda Sharma and edited by Rajiv CN.