Residential HVAC Manufacturing

Part
01
of three
Part
01

Residential HVAC Manufacturing Industry: KPIs

The common key performance indicators (KPIs) for residential heating, ventilation, and air conditioning (HVAC) manufacturing contractors in the US include revenue per employee, sales or revenue per salesperson, and the number of maintenance and service agreements among others. These and other findings are outlined below.

HVACR Business KPIs

  • HVACR Business is an industry resource for residential heating, ventilation, and air conditioning manufacturing contractors in the US.
  • HVACR Business categorizes KPIs under three major categories: Operations and Sales, Marketing and Advertising, and Gross Margins.

HVAC Learning Solutions KPIs


Lennox HVAC KPIs


Common 3-5 KPIs

  • Based on a cross-reference analysis of the resources above, common KPIs for residential HVAC manufacturing companies include the following:
Part
02
of three
Part
02

Residential HVAC Manufacturing Industry: Challenges

The challenges that the US residential heating, ventilation, and air conditioning (HVAC) manufacturing industry are facing include stiff competition among manufacturers, the US tariff laws, and the new furnace regulations. Details on these challenges, as well as the ways companies are doing to address these challenges, are presented below.

Stiff Competition Among Manufacturers

  • An overview of Dun & Bradstreet's research indicates that the HVAC equipment industry in the US is concentrated, noting that the top 50 companies cumulatively account for around 65% of the total industry revenue.
  • An IBIS World research, as noted by Dataforma, also indicates that no company in the residential HVAC industry dominates the market since only a 5% market share of the industry revenue is accounted for by its largest company.
  • Having numerous competitors, the residential HVAC manufacturing market is fragmented, in which a lot of different brands and platforms have different specializations that focus only on certain areas of the HVAC system.
  • In this scenario, research also notes that the profitability of each company will depend on efficiency in operation and effective marketing.
  • To address this challenge, HVAC manufacturers continue to develop smart applications on their HVAC equipment and increase their energy efficiency to have a "leading competitive differentiator".
  • This strategy can increase the number of loyal and long-term customers who can give an advantage to the manufacturer when recommended to other customers.

US Tariff Laws

  • The US tariff law has impacted the cost of smart thermostats that are imported from China, but much impact is felt on steel and aluminum materials used for HVAC products.
  • The new import tariffs include 25% on steel and 10% on aluminum imported from foreign countries. These materials are used to fabricate home cooling and heating system components, from heat pumps to furnaces to air conditioners.
  • Air Conditioning Contractors of America (ACCA), the national association of contractors in the US HVAC industry, is concerned about the increase in the cost of HVAC equipment that will affect US consumers.
  • With this in consideration, it will also affect the affordability of products with higher quality and those that are more energy efficient.
  • With the hope to address or lessen the impact of this challenge, the Air-Conditioning, Heating, and Refrigeration Institute (AHRI) sent letters to the US trade representative Robert Lighthizer, commerce secretary Wilbur Ross, and to President Trump noting that they do not support the additional tariffs imposed on aluminum and steel due to their negative effect on HVAC manufacturers as the major users of these materials.
  • To lessen its effect, manufacturers either pass on the extra cost to consumers resulting in higher prices, or lessen its impact on their customers resulting in lower profits.

Furnace Regulations

  • Between the two main systems used for heating purposes in residential HVAC products, namely boiler-based and furnace-based systems, the prominent technology used in the North American region is the furnace-based technology.
  • Furnace regulations, specifically the ruling for fan efficiency rating (FER), limits the power consumption of furnace fans (watts per cfm) on some HVAC equipment.
  • In July 2019, major manufacturers, or those with sales of more than $8 million, are required by the Department of Energy (DOE) to have their furnaces in production to be FER-compliant.
  • The challenge is that with FER, furnaces can only be manufactured with ECM or an electronically commutated motor.
  • FER also has a different standard depending on the area. In the northern part of the US, furnaces should have an efficiency rating of 90% while only 80% is required in the southern states. This means manufacturers must consider local and regional data, instead of a general standard.
  • Additionally, manufacturers that will not meet the minimum standards set for residential furnaces will need to cease production.
  • To address this challenge, companies offer a full-line of furnaces that are FER-compliant and has a variable-speed airflow to enable homeowners to adjust the airflow and precisely control humidity levels.

Research Strategy:

To identify the challenges in the US residential HVAC manufacturing industry, we initially searched through industry reports and news articles from sources such as First Research, HVAC Distributors, and ACHR News among others. After thoroughly studying the current state of the residential HVAC industry, we identified the key challenges that the manufacturers are currently facing based on industry expert consensus and HVAC manufacturers and distributors' common areas of concern. For each trend, we also included the information around how affected companies/manufacturers address these challenges, as presented above.

Part
03
of three
Part
03

Residential HVAC Manufacturing Industry: Trends

Trends in the US residential heating, ventilation, and air conditioning (HVAC) manufacturing industry include strong growth in sales, the increasing use of smart home HVAC technologies, and the emergence of energy-efficient HVAC systems. Details on these trends are presented below.

Strong Growth in Sales

  • Strong growth of the residential HVAC equipment is seen in the residential sector due to a recovering housing market in the US and high consumer confidence.
  • Additionally, the housing boom that happened from 2000 to 2006 is now approaching the replacement cycle which adds to "residential replacement demand" as residents now include innovations in HVAC equipment.
  • According to AHRI or the Air-Conditioning, Heating, and Refrigeration Institute, the combined US shipments of air-source heat pumps and central air conditioners increased by 6.9% in 2018 compared to the previous year, while gas warm-air furnaces shipments increased by 9% for the same period.
  • At the manufacturer level, the size of the residential HVAC equipment in the US was valued at $19.4 billion in 2019 and is expected to reach around $20.5 billion in 2023.

Increasing Use of Smart Home HVAC Technologies

  • A market trend report published by Refrigeration School, Inc states that the market on residential HVAC equipment for smart homes is projected to grow up to 29.5% by 2024.
  • It is also projected that about 26 billion devices will become IoT connected this year as smart home HVAC technologies continue to meet customer demands.
  • This technology allows users to control their heaters and air conditioners by using apps that are easily accessible on their smartphones.
  • The integration of home automation technology with residential HVAC equipment provides convenience due to better temperature variability, temperature control, and energy-saving opportunity compared to conventional systems.
  • Mike Smith, the senior manager of marketing communications at Mitsubishi Electric Trane HVAC US, stated that sales growth in single- and multi-family residential units will continue to grow as architects and builders are embracing these new technologies.
  • Some changes around HVAC use in the residential sector include the use of intelligent devices that offers pre-scheduled diagnosis, text alerts, and real-time updates.

The Emergence of Energy-Efficient HVAC Systems

  • Climate change, energy consumption, and the benefits of renewable energy stimulates the demand for resident owners to avail eco-friendly HVAC systems to replace their less-efficient ones.
  • The technologies used in new HVAC equipment help co-opt the renewable sources of energy such as solar and geothermal, which past models of HVAC equipment do not have.
  • In line with this, the US government promotes energy efficiency by giving incentives to local homebuilders whose building practices incorporate energy efficiency through its "Energy Star qualified new homes specification".
  • New homes that are Energy Star certified, in which benefits include an improvement in indoor ventilation, are between 15%-30% more energy efficient compared to standard new homes.
  • Similarly, quality installation guidelines were set in the US to ensure that cooling and heating equipment run efficiently and residential HVAC systems are installed properly.
  • Compliance to these guidelines, as well as the benefits that the US government applies to those who will use energy-efficient HVAC systems, is giving the manufacturers the hint on what is becoming in demand in the future, thus making it an emerging trend.

Research Strategy:

To identify the trends in the US residential HVAC manufacturing industry, we initially searched through market and industry reports from sources such as Grand View Research, P&S Intelligence, and Refrigeration School, Inc among others. We then consolidated the trends that are consistently mentioned in several sources and backed-up by industry experts and leaders in the HVAC manufacturing industry, with a specific focus on the residential sector. For each trend, we discussed the factors driving the trends to better understand their increasing popularity and growth, as presented above.

Sources
Sources

From Part 01
Quotes
  • "KPIs in the HVAC Industry 1. Revenue and revenue growth. Revenue growth measures the performance of the company in terms of sales. "
  • "2. The performance of the service and installation departments. The following should be considered: The first time completions of the service techs, the number of callbacks, the installation of equipment completion time, and the execution of the service process in the customer’s home."
  • "3. The operational performance of the company. The following should be considered: The overall cost of operations (SG&A) is less than 30%."
  • "4. The overall profitably of the company. The following should be considered: The bottom-line performance of the company, and whether the company is at 10-15%, 5-10%, 0-5%, or 0% or less."
  • "Mike Moore is HVAC Training Director at HVAC Learning Solutions. Mike Moore offers HVAC advice for managers, technicians and sales teams on a daily basis"
Quotes
  • "The KPIs we're talking about today deal mainly with replacement sales."
  • "1) One-Day Installs 2) Selling, General & Administrative Expenses 3) HVAC Business Model 4) Ethical Culture 5) Revenue per Employee"
  • "6) Gross Profit Per Man Day 7) Understand the Numbers 8) Maintenance Agreements 9) Gross Margin 10) Service & Maintenance Revenue"
Quotes
  • "Lennox has a significant list of KPIs as to where a business needs to be to operate successfully. For example: • Percentages on the financial statements • The number of sales each salesperson should be generating"
  • "• The amount of revenue for each technician • Amount of revenue for each installation crew • Amount of revenue per employee in the business"
Quotes
  • "Over the five years to 2019, residential construction activity expanded due to strong underlying drivers, including rising per capita disposable income and relatively low interest rates. These trends bolstered industry sales, as HVACR equipment is required in most new buildings to regulate climate and provide ventilation. "
  • "Analyses key performance and operational metrics so that you can benchmark against your own business, that of your customers’ businesses, or your competitors’ businesses."
Quotes
  • "Operations and Sales Revenue per co-worker Service agreements [er $1 million retail revenue Revenue per service-agreement customer"
  • "Marketing and Advertising Percentage of revenue spent on advertising Percentage response to targeted direct-mail advertising Customers/Non-Customers"
  • "Gross Margins Diagnostic and repair service Replacement A/C and heating IAQ accessories and services"
Quotes
  • "OF THE TOP 50 HVAC COMPANIES ANALYSED: • Average gross profit margin of 32.9%, median 31.3%"
  • "• Average EBIT margin of 5.8%, median 5.1% • Average EBITDA margin of 8.0%, median 7.2%."