Ban on imports of finished ACs may hit small players

Ban on imports of finished ACs may hit small players

Trading business models would be impacted by the ban, says a report by Motilal Oswal

Representative image.

The government’s recent move to ban imports of finished air conditioners will not impact big manufacturers but may hit smaller domestic players that were dependent on imports.

Around 40 brands play the penetration story in India’s AC industry. The Top 6 players enjoy 75–80% market share, while the remainder largely operate on a trading business model. 

According to Blue Star Managing Director B Thiagarajan, the ban would not impact the leading companies, however it can hit smaller companies which import from FTA countries such as Thailand, Malaysia and Vietnam.

“The intent of the move is to put a curb on duty-free import of air conditioners from FTA countries as you can import a fully built AC through these countries at zero duty but if you are importing AC components, then you have to pay full duty," he said.

"Under the FTAs, finished products like ACs attract zero duty but the components have to pass through an inverted duty structure," he said.

The notification only implies that the import of gas-filled units are banned, but if you are getting an indoor unit and outdoor unit separately, it is allowed at full duty. Therefore the zero per cent duty route is now no longer available, he added.

“As of now, we do not have any plans to manufacture components, but we are manufacturing finished goods, so the move will benefit us,” said Thiagarajan.

According to a Motilal Oswal Report, trading business models would be massively impacted by the ban. 

“In the short run, this would imply greater business to OEMs (tail-end players would opt for Indian OEMs at first) as well as consolidation-led gains for leading brands (Top 5–6 players). Some of the brands (Panasonic, IFB, etc.) are also contemplating offering their excess capacities to other brands,” the report said.

Near-term gains notwithstanding, over the longer term, there would be disruption even for leading brands, the report said. 

Talking about the leading players in the sector, it said, "We see capital intensity going up for leading brands as well. However, some brands have already set up their factories in India. Thus, such disruption may allow them to regain some lost ground v/s leader Voltas. Thus, even Voltas would have to adjust its business model to maintain its leadership position.”

Total imports under the banned HS Code of 84151010 & 84151090 stood at Rs 3,600 crore in FY20. The Indian AC industry is sized at Rs 18,000–20,000 crore, with Rs 4,500 crore of finished goods imports and a similar value of component imports.

The industry’s total import dependency is 50%, according to the report. The HS Code pertains largely to CBUs (Completely Built Units) and ODUs (Outdoor Units).

Manish Sharma, President & CEO, Panasonic India & SA believes that the step is in the right direction. 

“At Panasonic, we had set up our Air Conditioner factory in 2012 in Haryana and we have been manufacturing 100% in India and catering to local demand as well as exports,” he said.

The company currently exports Air Conditioners from India to SAARC, West Asia and Africa.


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