Thoughts on the COVID-19 impact on China’s HVAC industry

by Martin Li, BSRIA APAC

Some economic background data

After carrying out many conservative policies like Complete City Lock-down, China has started to recover from the COVID-19 related downturn. The economy has been opening since late March 2020 and is in wider re-opening stage by May 2020.

In the first two months of 2020, China’s total import and export value of goods trade reached 4.12 trillion RMB, a decrease of 9.6% comparing with the same period last year, with export, experiencing a particularly bad fall by 15.9%.

According to the latest statistics, both Manufacturing and non-Manufacturing PMIs slid down to the range far below 50% in February 2020, with 35.7% for manufacturing sector and 29.6% for non-manufacturing one. Manufacturing sector has been hit hard, and the central government is mobilizing companies returning to production to catch up with delays as soon as possible.

Construction industry represents a more mixed picture. According to Xinhua Finance, the total sales of residential housing by Top 100 developers dropped by 20.7% under the influence of the pandemic, but 24 among them, have achieved over 10 billion RMB sales, indicating that the competitive environment is going to become more concentrated in the coming months.. Another set of data from KERUIRC in its research on 27 Key Cities showed a decline of sales by 80%, and half of the cities in the sample pool supplied no new housing in February 2020.

2020 Prospects for China’s HVAC industry

Different impact in residential and commercial segment

Both global and domestic demand have fallen significantly in the first quarter of the year. Under severe lockdown rules, sales, installation, or integration work were not allowed and according to CICC, in January 2020, the entire domestic and overseas sales of AC fell by 34% and 28% respectively. The situation worsened in February and March, but the visible recovery has been noted in May.

Similar situation has been recorded in the domestic boiler market where during the first quarter 2020, sales remained heavily subdued with slow recovery noted from the April. Overall Chinese domestic heating sector shrank by 60% in the first quarter of the year.

HVAC products, like RAC-CAC or wall-hung boilers, belong to the “must have” category of products, hence market demand for those has mostly shifted and is expected to “make up”, in the coming months, for lost sales in the first quarter of the year. The whole year performance is expected to come close to the 2019’s sales levels, with the caveat, that there will be no second wave of the virus outbreak.

Commercial AC and Commercial/Industrial heating sectors have not been so severely affected by the pandemic, with many companies reporting successful achievement of their Q1 budget.

Strategic changes related to the offering and distribution business models

This pandemic seems to have forced transformation of conventional business activities. Owners of physical stores and off-line distributors have become acutely aware of the weakness of their business model. Many are now in the process of moving their operation to on-line platforms, which is likely to also accelerate their embrace of the global e-commerce.

From a product mix point of view, companies have become more aware of the importance of the variety of product offer and disadvantages of concentrating on sales of one product family type. An integrated shop/store, selling the idea of Comfort Home with a bunch of products delivering what is ultimately needed by the end user is expected to become a mainstream ideology. Integrating sales of Water, Air, Heating, Automation and Smart systems is where the industrial consensus is heading after the pandemic.

In summary, assuming the outbreak of COVID-19 can be contained and will not reappear in China, its impact on sales levels will possibly be limited in the overall year perspective. However, when debt, assets holding costs and opportunity costs will be considered, HVAC business owners will be looking for more options to mitigate unforeseeable risks in the future. In the short term some distribution and offering trends that have started to emerge before the pandemic will accelerate. In the longer-term higher market integration is likely.

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The importance of investigating failures in building services

Pinhole corrosion of radiator (outside surface)
Pinhole corrosion of radiator (outside surface)

A study from the UCL(1) revealed that building failures may cost the UK construction industry £1bn to £2bn every year. This was a conservative estimate made in 2016, based on 1 to 2% of the total value of construction.

As of March 2020, the Office for National Statistics has estimated the total value of all UK construction works to be worth £12.7bn, 68% of which is for new buildings or the repair and maintenance of existing buildings. This would give an estimated cost of failure between £85m and £170m, of which building services would account for a high proportion.

(1) Razak, D S A, Mills, G and Roberts, A (2016) External Failure Cost in Construction Supply Chains. In: P W Chan and C J Neilson (Eds.)

Types of failures in building services

Bathtub curve regarding types of failures in buildings
Bathtub curve

The typical pattern of failure arising against time is shown by the well-known bathtub curve. The curve is divided into three segments: an infant mortality period, usually marked by a rapidly decreasing failure rate; a random failure period, where the failure rate continues at a

The first period is usually detected during the defects liability period after a project is handed over.

The second period would happen during the operation of a system, and failures may occur due to inappropriate operating conditions or maintenance regimes.

The third period is when the system is reaching the end of its life. Failure could be imminent and there should be little or no surprise in this happening.

Importance of investigating these failures

Showing house made of money i.e. there is cost in everything, so always investigate to prevent repetitive failures
There is cost in everything: Always investigate to prevent repetitive failures

There are various reasons why every unexpected failure should be investigated. Below are some of the key ones:

  • Insurance purposes. Insurers may require an independent evaluation of the failure and investigation of its possible cause to identify possible fraudulent or malicious intentions.
  • Cost savings. Too often, failed components are replaced without investigating the root cause. Without understanding the origin of a failure, it is not possible to prevent its re-occurrence. Repetitive failure and replacement of components could add significantly to the operating cost for a building or estate.
  • Health and safety. In May 2009, a lift at London’s Tower Bridge tourist attraction suffered a vital mechanism failure that sent it falling with 9 people in it, four of whom suffered bone fractures. The malfunction was caused by the failure of a counterweight mechanism. The accident investigation by the HSE revealed that there had been several previous component failures with the counterweight mechanism, and the components had been replaced without proper review, and with no investigation into why they were failing so early. Tower Bridge was ordered to pay a total cost of £100k, and the HSE concluded that, had there been a proper review into the counterweight mechanisms, the catastrophic failure of the lift could have been avoided.

BSRIA can help with building services investigations

BSRIA has been in the building services industry for over 60 years and has been involved in hundreds of investigations.

Our independence makes us the ideal partner to provide non-biased failure investigations. Our expertise and capability in testing various materials and components of building services to determine the likely cause of failure is unique. We are able to perform investigations on site, examinations in our labs and analysis in our offices.

Our professional approach is such that there is no failure too large or too small to investigate today because this can save lives and costs tomorrow.

Read more about BSRIA’s Failure Investigation service here

Author: Martin Ronceray, BSRIA Engineering Investigation Lead

The BSRIA investigation team can be contacted at

+44 (0) 1344 465578

Investigations@bsria.co.uk

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