In today’s Finshots, we talk about the changing fortunes of AC manufacturers.

Policy

The Story

We begin with FTAs or Free Trade Agreements. India has a free trade agreement with the ASEAN countries. Think — Indonesia, Thailand, Malaysia, Singapore, Philippines, Vietnam, Cambodia, Brunei, Myanmar (Burma) and Laos. But there’s one country conspicuously missing from the list — China. On most occasions, we wouldn’t have to worry about this too much. But China has been exploiting this agreement for a while even though they aren’t a signatory here.

Let me explain. With a free trade agreement in place, Indian manufacturers can ship goods and sell them in the ASEAN countries without having to worry about, say a 30% tariff. This way prices can remain competitive and Indian manufacturers can actually have a shot at selling a lot of their goods abroad. On the flip side, India will also have to open up its borders. So ASEAN countries can export finished goods to India (including ACs) by paying little to no duties.

Also, bear in mind, these FTAs are embedded with an ‘inverted duty structure’. Meaning, finished goods don’t attract heavy duties. But if you’re importing raw material or other parts, then you’ll be slapped with hefty duties. And that means if you are a local manufacturer producing ACs in India, you have a tough task on your hands already. However, things got worse.

Several Chinese companies set up manufacturing units in ASEAN countries in a bid to exploit the free trade agreements. In some cases, they even acquired defunct companies in the region with the sole purpose of exporting to India. The hope was that they could use these bogus entities to import finished ACs from China, relabel them in one of the ASEAN countries and then export to India. Almost making it seem as if the air conditioning units were coming from somewhere else.

In fact, around 35% of ACs sold in India were imported as fully built units with most of them making their way from China. However, all that changed last October when the government imposed a ban on importing ACs filled with refrigerants. It was part of the government’s ambitious Atmanirbhar program and almost overnight, local manufacturers found a $5–6 billion market to cater to. Soon they began expanding production capacity. By some estimates, the industry has already invested around ₹1,500 crores on this front. Even the government got in on the act after including white goods (such as refrigerators and air-conditioners) in the Production-Linked Incentive (PLI) program. Meaning manufacturers can claim up to ₹6000 crores in incentives if they achieve certain production targets within the next 5 years. And the stock price of certain select AC producers has been rallying like crazy since then.

Now there are two ways this could play out for consumers. For starters, it’s possible that Indian manufacturers might start flexing their muscles very soon. Without foreign competition, they’ll be in a better place to hike prices. Nobody’s saying this will happen for sure. But the axioms of demand and supply dictate that in the absence of intense competition, they’ll have better pricing power.

And while this might come at the expense of Indian consumers, there’s another side to this argument as well. Some people contest that Indian manufacturers still can’t price their products competitively because they haven’t been able to invest in beefing up their supply chains. Indian manufacturers are still dependent on China to source several key components like compressors. Manufacturers of inverter ACs import 80% of the electrical components from China. And this equation can only change when Indian manufacturers have the resources to produce their own key raw materials. Once again, that’s not to say that they will do this for sure. But considering duties on raw materials are already pretty steep, maybe they will look at this as an opportunity.

So yeah, hopefully, this little boost can help local manufacturers and maybe the benefits will eventually trickle down to consumers as well.

Until then…

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