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China's auto air-con market consolidates to refocus on quality

Over-supply and a lack of industry regulation has seen substandard products proliferate in the refrigerants and air-conditioning market, but now a long over-due restructure is set to squeeze out unscrupulous, low-quality suppliers.

Photo: Auto air-con filters: a soaring sector thanks to mainland car boom.
Auto air-con filters: a soaring sector thanks to mainland car boom.

This year's Guangzhou International Automotive Air-conditioning and Cold Chain Technology Exhibition took place against the backdrop of an industry that has had a trying couple of years. With the slowdown in economic growth and excess production capacity in the fluorine chemical industry, the price of auto air-conditioning refrigerants has been dropping and the market has entered a stage of consolidation.

Earlier this year, the China Petroleum and Chemical Industry Federation and the China Organic Material Industry Association for Fluorine and Silicon jointly released their 8th report into resolving the excess capacity issue. The report analysed the current state of the fluorine-silicon industry and proposed a number of remedial measures.

According to its conclusions, in 2009 the total output of China's fluorine chemical industry was valued at Rmb30 billion. In 2010, due to steep price hikes along the whole industry chain, the total output value rose to Rmb50-60 billion. It also indicated that unrestricted growth had led to substandard entrants to the market and a vast over-production capacity emerging.

According to a number of companies exhibiting at the event, the overall lack of industry regulation has proved hugely damaging to the market. One company that had suffered as a result was Beijing Starget Chemicals Co Ltd, a specialist in the production of auto air-con R134a refrigerant (an environmentally-friendly refrigerant approved and recommended by the majority of countries).

According to Gao Bo, a Senior Manager at the company, back in 2010, speculation pushed up the price of refrigeration products to very high levels. The wholesale price of a can of good quality R134a refrigerant gas with 99.9% purity, for instance, rose to more than Rmb20. This created an opportunity for a number of unregulated manufacturers to flood the market with low-cost, inferior products, adulterated with inappropriate materials. By offering such products at Rmb7-8 a can, these less scrupulous manufacturers dominated the market and made huge, short-term profits.

It is a problem that has not gone away. The Zhejiang Sanmei Chemical Industry Co Ltd is one of the mainland's larger manufacturers of refrigerant. Li Li, a Senior Executive with the company, believes that the current high level of unscrupulous companies trading in market has seen the problem of fake refrigerants remain quite severe.

Li, however, believes that the market is in the midst of moves to remedy this. In light of the supply-demand imbalance caused by the excess capacity in the fluorine chemical industry, he sees the sector as undergoing something of a restructuring, one which will result in the elimination of inefficient or substandard producers.

Broadly agreeing with Li, Gao says that this market restructuring has seen the average price of R134a drop dramatically to around Rmb10 a can. With substandard products losing their price advantage, large numbers of low quality manufacturers now face being forced out of the market.

Advantages of innovation

According to figures released by the China Association of Automobile Manufacturers at the beginning of the year, China's automobile output reached 22.1168 million units in 2013, up 14.8%. During the same period, sales reached 21.9841 million units, a rise of 13.9%. The figures set a new world record and saw China globally ranked as number one for the fifth consecutive year. In light of the continued development of the auto sector, the demand for in-car air-conditioning has inevitably continued to rise.

Assessing the importance of demand from the automotive sector, Gao said: "Currently the auto repairs market is one of the most important for refrigerant products, with all cars requiring maintenance work after they have been on the road for certain periods of time.

"At present, both the production and sales of cars on the mainland remain high. This means the auto repairs market will continue to boom for the foreseeable future, with a continuing knock-on benefit to us."

Although many in the industry are generally optimistic about the auto air-conditioning market, there is a feeling that further innovation is required if all of the emerging opportunities are to be capitalised on.

One of the few air-con filters manufacturers exhibiting at this year's fair was the Guangzhou YuanZhuang Filters Co Ltd, a company particularly proud of its track record when it comes to innovation. Its stand featured several models of auto air-con filters, a number of which can effectively filter PM2.5.

Photo: Automobile refrigerant.
Automobile refrigerant.
Photo: In-car air-conditioning.
In-car air-conditioning.

According to Zhou Manping, a member of the company's senior management team, over the last two years mainland consumers have become increasingly concerned about air quality. He believes that the high level of sales of air-con filters for domestic use gives a clear indication of the likely uptake in the automotive sector.

For the Zhejiang Sanmei Chemical Industry, it has been gradually expanding its mainland presence over recent years. According to Li, the company's R134a refrigerant production facilities came on line only after many of its mainland competitors had made a similar investment.

Despite this, its comparatively late entry to the market has given it a number of advantages. Most obviously, the company's installation is more advanced than that of many of its competitors. Similarly, drawing on the experience, innovative technology and techniques of many of the more advanced overseas players, it has managed to achieve high levels of both production efficiency and quality.

Rmb appreciation puts exports under pressure

As well as innovation, a number of exhibitors cited product quality and high-level of services as essential for achieving stand-out in what is, essentially, a "me-too" industry. According to Li, his own company, for example, now has dedicated personnel overseeing every stage of the production process – from raw materials selection through to output.

The company also has the advantage of having its own raw materials source, an asset that ensures a high quality of inputs. This results in products with high purity, low levels of moisture and competitive pricing.

Even for companies without distinct proprietary products, quality control can still provide a market edge. The Shanghai Inno-tech Auto Parts Co Ltd, for instance, mainly sells industry-standard auto air-conditioning compressors. Speaking frankly, Cai Hongwei, the company's Manager, says its compressors are only in the medium-range of the products available on the market. Yet, as the company has a good reputation for quality control and ensures its prices are always competitive, it has attracted a substantial number of loyal customers. Currently, it is also exporting its range to Europe, the US, Canada and Mexico.

Assessing the overall problems facing mainland manufacturers, Zhou Manping, Manager of Guangzhou YuanZhuang Filters, says: "At present there are a great number of manufacturers producing auto air-con filters here, but those offering products of a superior quality are far and few between.

"Using the right raw materials is the key to performance in the air con sector, currently, though, the filtration performance of high-end domestically-produced raw materials is only about 80% of that of overseas alternatives. As a result, we only use imported raw materials, which are very effective when it comes to filtering airborne pollutants, notably PM2.5."

Although a number of companies – including YuanZhuang Filters – are still enjoying export success, overseas sales have declined somewhat since their highpoint in 2008. Explaining the reasons for this downward shift, Cai says: "The appreciation of the yuan has greatly squeezed our profit margins. Today we can only export by slashing prices and achieving volume sales through low profit margins."

Li, too, agrees that export sales are now far more fraught than they were six years ago. Giving his own take on the causes, he says: "First of all, there is the sluggish global economy, something that is beyond our control. Secondly, many of the developed markets are now planning to take anti-dumping measures against mainland-exported refrigerants. In light of this, we really have to focus on the domestic market."

Photo: Air con or con artist? Checking for quality at the Expo.
Air con or con artist? Checking for quality at the Expo.

The Guangzhou International Automotive Air-conditioning and Cold Chain Technology Exhibition 2014 was held at Zone C of the China Import and Export Fair Complex from 22 to 24 February. According to the organisers, the fair attracted 486 exhibitors from 16 countries and regions.

Qi Heng, Special Correspondent, Guangzhou

Content provided by Picture: HKTDC Research
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