Companies' behaviour

This subchapter provides a summary of the description of companies’ behaviour in Subchapter 5.6. It starts with predominant market strategies pursued by companies and differentiates between the big ones of the sector and the smaller ones, as well as between companies from the new and the old Member States.

5.5.1 Tendencies in market strategies

HVAC

Most prominent representatives of the sector are those bigger manufacturing companies that pursue strategies that are close to “profit impact of market shares” (PIMS). The companies try to gain higher market shares than their competitors and get a lead by the exploitation of economies-of-scale. The standardisation of products and the reduction of costs in the manufacturing process by large-batch production using learning effects are high on the agenda. In the subsector HVAC this strategic orientation is not that obvious because noteworthy discrepancies between the markets in the Member States remain. This is above all caused by particularities in distribution systems and consumer

preferences. Therefore, the acquisition of competitors does not lead to the extinction of brands and products. The intangible market value of a bought firm is created by its brand’s awareness and reputation and it is used to take over its market share. An immediate exploitation of scale effects in the market would endanger the long-term effects of mergers and acquisitions. The exploitation of scale effects starts in production by standardisation of products and a restructuring of manufacturing networks.

These market strategies are above all observed with the final product manufacturers of HVAC but they are also applied by specialized manufacturers of key components for gas appliances, burners, heat-exchangers etc. In these market segments in the value chain of HVAC consumer preferences are to a lesser extent of importance and scale effects can be raised much easier and quicker.

The stake of European manufacturers in overseas markets has remained limited. This is true for the US, the Japanese and the Chinese market, in spite of the investment carried out by some firms. Only in the non-EU markets of the former Eastern bloc European manufacturers – above all from the new Member States – command noteworthy market shares. For production the situation is quite similar. There are locations in overseas countries. Facilities are predominantly run in China and Turkey. There are locations in the Americas and other Asian countries too, but they are of minor importance.

These market share strategies of the big HVAC manufacturers lead to an adjustment of the European market. Moreover the European players have invested overseas. But their footing in these markets is not that high that noteworthy economies of scale can be raised. Investments are dedicated to use additional growth potentials, for instance in the US, and to create global production networks to improve cost competitiveness. The most

pronounced global players in the subsector HVAC are the Danish pump manufacturers with high market shares worldwide.

There are other big manufacturers in HVAC, at around 1,000 to 2,000 employees that put much emphasis on technologies. They are on the leading edge with innovative products and try to maintain competitive pressure. They are permanently challenged by market leaders who are eager to catch up by imitation and can provide cheaper products. In coming years a technological leap forward with heat-pumps, fuel-cells and sterling engines is expected. It will be a challenge for these technologically oriented companies to raise sufficient resources to develop products based on new concepts. The bigger players applying market share strategies are already about to acquire small firms with that know- how.

Small firms in the markets for final products are focusing in niches. They design systems for specific applications and are customizing their products to the clients’ needs. These are services that can hardly be offered by big firms. Such strategies prove successful in particular in markets with clients who ask for technological advanced and

environmentally friendly products and are willing to pay a price premium for such systems. Germany is an important market which provides some opportunities for SMEs in this market segment. However, there is also similar demand in other Member States. Cross-border activities require co-operations in distribution and related services. Co- operations with adequate foreign trade representatives and engineering companies are usually applied channels.

The companies from the new Member States experienced tough competition from their competitors from Western Europe that are leading in terms of technology and marketing abilities. This has induced a structural change. Many firms have been taken over or became subcontractors, specializing in metal parts and components. They face tough

that build there competitive edge on production technology, can trust in economies-of- scale and high performance components in their Western European locations, but they also invest in the new Member States for the production of parts and components. An equilibrium has not yet been achieved and the major disadvantage of the subcontracting companies from the new Member States lies in poor access to financial markets. The intra-European division of labour is therefore expected to evolve further.

Those companies that managed to remain independent in the new Member States and manufacture final products exploit their trade linkages to the former Eastern bloc and expand their business outside the EU. The opening up of Western European market has proved to be difficult for these companies. There are only few possibilities to get access to the distribution channels and the products do not meet western requirements. However, some form of upgrading technology takes place in these firms. The manufacturers of final products from the new Member States have invested in newly designed condensing boilers and are upgrading the product quality by the procurement of key components from Western European manufacturers. However, they miss opportunities to exploit scale effects in a market environment that with regard to the predominant serial production provide important advantages in competition. Their main asset is their good reputation in the Central and Eastern European markets. They know the consumers’ needs best and build on their traditional distribution channels. The main challenge there are currently facing is competing with the more prestigious Western European brand names. Against this backdrop they are working hard on upgrading their products.

Domestic and portable appliances

Globalization of the domestic appliances markets is far more advanced than for HVAC. All of the big players command noteworthy market shares in Europe, the Americas and Asia. This can be explained by the market environment. Domestic appliances are highly standardized products that are directly sold to the consumer. Many of the products are plug-in appliances and do not require qualified installation, maintenance and repair. In HVAC the situation is a bit different. There is also a noteworthy manufacture of mass products, however, batch sizes are smaller and many of the products have to be installed by qualified personnel. Distribution via retail trade is the exception. This has an impact on companies’ global orientation. Europe has remained the by far dominant location for production and the European market is decisive for the success of these companies in the market for GA that fall under the scope of the GAD.

The big global players of domestic appliances run production facilities all over the world. Additional they procure products from specialized manufacturer who produce appliance due to their clients’ design and trading goods. As in HVAC it is necessary to use

numerous brands in line with their regional awareness and reputation. Moreover, there are differences in regional habits and preferences. For instance US-consumers have a high preference for bulky appliances whereas the Japanese and Europeans prefer

technologically sophisticated products.

There are some players in the European domestic appliances market that command brands with high consumer retention by awareness and reputation. The value of the brand might be supported by high quality or regional identification. These firms follow their

predominant activity is the cross-border expansion of their production network and global sourcing.

In the new Member States numerous medium-sized manufacturers of domestic appliances exist. They were privatized during the transition period and have not been acquired by Western companies. They heavily trust in their regional client base and their traditional distribution channels in Central and Eastern Europe. They face competitive pressure from two sides, the West European companies with their attractive brands and sophisticated products and competitors from Turkey or the Far East that supply, above all, low-end appliances. The latter competitors have an edge in labour costs and deliver very

competitively priced products. Companies from the new Member States pursue different strategic options to meet this challenge. However, their ability to allocate resources to develop more sophisticated products or to exploit cost-saving potentials is limited. The situation is precarious above all with stoves and ovens. Traditionally, China is strong in this kind of gas appliances due to traditional Chinese cooking habits. Exports to the EU have strongly increased in the recent past.

5.5.2 Research strategies

R&D has become an important issue for the GAS. Growing requirements on energy efficiency and CO2 abatement require new concepts and public schemes contribute to stimulate these activities. The activities are dispersed and national co-operations prevail. This has been perceived as a disadvantage in particular with the stringent Japanese policies that interlink research activities for HVAC with support for extensive field tests coming close to market introduction.

The sector comprises start ups and other small companies driven by advanced

technologies, such as for heat pumps and fuel cells. With growing maturation of these technologies these firms increasingly attract the attention of the big players in the market. Currently a consolidation takes place and indicates that the marketability is perceived as a forthcoming reality in the medium-term.

Some overseas co-operations in R&D of European HVAC manufacturers were identified, in particular in areas where non-EU players are on the leading edge. Dominant are activities together with Japanese firms. Their lead in prime drives and small air conditioning is above all of importance. There are also co-operations with US and

Canadian companies. In the latter case the focus is above all on fuel cells and related high tech components. In these technologies US companies get a stimulus from the aerospace and defence industries.

5.5.3 Procurement strategies

The manufacturing strategies pursued by companies of the GAS-M are different. There are firms with a high in-house production depth whereas others focus on the assemblage and have outsourced much of the production process. To a certain extent this different behaviour can be explained by a company’s legacy. Integrated conglomerates and groups with a stake in metal industries often command a wide range of product areas. They link

not mean that there is only one production location or a few locations in a certain area. This might have been the case in past days. Today even companies with a high in-house production exploit the advantages of the international division of labour. However, these firms prefer the manufacture of intermediary products in own production facilities abroad in regions with comparative advantages. Therefore the regional distribution of the

production network of integrated conglomerates and groups in principal does not differ from the regional distribution of companies that prefer outsourcing instead of won production.

The production of GA requires certain key components, such as controls, burners and heat exchangers. There are few companies in the market that manufacture these parts for their own needs, but total supply is dominated by specialized manufacturers who are on the leading edge of product and process technology. They manufacture these components in big quantities and exploit economies-of-scale and deliver it to most of the GA-

manufacturers.

For some kinds of parts and components that are procured from European suppliers the GA-manufacturers do not know the country of production. This is the case for European brands purchased from European companies with different production location in and outside the EU. This must be taken into account when reading the following paragraphs. Controls

The market for controls is dominated by a few big manufacturers, Siemens (D), Honeywell (US), with R&D and production in the Netherlands, JohnsonControls (US) with subsidiaries in Germany and SIT La Precisia (It), a specialist in the market for gas appliances.

The control is a key element of heating systems. Its core functions are the control of the combustion process and the safety monitoring system. These features are complex high- tech areas and innovation is R&D intensive. Typically controls are OEM products and procured by the manufacturers of GA for the assemblage of final products. There are only few manufacturers which have invested in the development of own complete controls. Typically controls are OEM products and procured by the boiler manufacturers due to their requirements. They contain the core functions for the control of the combustion process and safety. However most of the boiler manufacturers pursue their own philosophy on peripheral control features such as the operator interface. There are different approaches and the design of a man-machine dialogue system which can easily be understood serves as a unique selling feature.

Electronic components and indicator units

The growing requirement for an efficient and environmentally friendly use of gas, the growing variety of gas quality and the use of different feedstock for heating and hot water production has led to more complex combustion processes and highly sophisticated GA. As a consequence, more electronic parts, such as probe heads and sensors are contained in the appliances. Cable harnesses are used to link in all components with the control, the actors etc.

Many of these small electronic parts are standardised products and manufactured in large quantities. In this area global sourcing is an issue for the purchasing departments of the GA-manufacturers. Although many of these parts are procured primarily from Germany, France and Italy, imports from China and other Asian countries have become important during this decade.

Other parts such as cable harnesses are customized. Although they are serial products long delivery times and logistic efforts aggravate global sourcing. The production of these parts is outsourced to southern European countries and the new Member States, in

particular on the Balkans. Even Northern Africa is a region of origin. This regional sourcing pattern is similar to the automotive industry.

Indicator units, such as manometer, thermometers etc. are procured from low-wage countries. There are some suppliers in Poland, Bulgaria and Romania, small units, spin- offs of the former state-owned conglomerates.

Burners and primary heat exchangers

The combustion process is carried out by the burner. Its technology is of key importance for an efficient and environmentally friendly burning of the feedstock. Most of the bigger companies of the GAS manufacture burners in-house. However, there are companies specializing in the supply of these components. They do not only manufacture these intermediary products, they are also active in R&D. There are long-term co-operations with their clients in the development of new burners and optimizing the combustion process together with primary heat exchangers. Such close relationships are of particular importance for the development of high performance GA, such as latest generation condensing boilers.

The procurement of burners and heat exchangers is more usual among the SMEs than among the OEM-manufacturers of the GAS. They trust in specialized manufacturers and focus more on system integration and the supply of appliances with the infeed of different kind of feedstock and renewables. Some of the independent OEM-companies of the new Member States (not affiliated to companies from the old Member States) procure burners and heat exchangers from specialized manufacturers.

Other parts and components

The market for pumps is dominated by two manufacturers who equip most of the OEM- manufacturers of the GAS, Grundfoss of Denmark and Wilo of Germany. For servodrives and actuators there exist numerous European companies. However Asian products are also marketed in Europe.

Other parts and components, such as taps, valves, cocks, recuperators etc., are procured from a broad range of manufacturers who traditionally are located in Southern European countries like Portugal, Italy and Spain. With the accession of the new Member States new suppliers tapped into the Single Market. Slovakia has become an attractive location for production and some companies reported investment activities.

Small internal combustion engines are the state of the art drives for micro-cogeneration systems (µCHP). Such engines are manufactured in high numbers in Japan and have been adapted to the use in µCHP. Many European manufacturers of GA import such engines as components for their own µCHP.