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Education will play key role in calming economic storm

The global financial meltdown of 2008 dealt a huge blow to the confidence of the HVAC sector and continues to threaten the survival of many businesses, warns Ziehl Abegg UK managing director Les Fish. Ian Vallely reports
Of the many challenges the HVAC sector faces, the most dangerous is probably the deepening economic gloom, both at home and abroad, which is having a dramatic negative impact on business confidence, according to Les Fish, managing director of fan supplier Ziehl-Abegg UK Ltd (Chelmsford).

Plummeting government spending resulting from the UK's crippling national debt has, Mr Fish believes, led to deferred or cancelled investment in projects where there is a HVAC element and a spectacular loss of confidence in the market generally. This has made many organisations unwilling to invest, a situation that is likely to persist as long as the financial outlook remains unclear.

Mr Fish puts it like this: 'People have to think really carefully and ask the question: 'Do we invest money in projects now in the knowledge that sourcing funds is a lot more difficult and we don't know what the future holds?'

'Projects in the pipeline will be scrutinised a lot more closely to see whether the go-ahead should be given now or whether they should be put on hold. It is highly likely that projects will be deferred or, in some cases, cancelled. On top of this, the Government is cutting back on expenditure in the public sector. Many of our products find their way into public sector projects and this places demand for those products at risk.'

Mr Fish believes the three areas on which organisations can focus to help survive the current turbulent business environment are diversification, disciplined credit control and a commitment to continued investment.

He says that, where practical, it makes good business sense to get involved in more market segments in order to help spread the risk.

Disciplined credit control means taking out credit insurance where possible and closer analysis of cost bases to enable more competitive pricing structures.

However, this is often easier said than done, as Mr Fish explains: 'In the current hypercompetitive market, margins are being squeezed more than ever and credit insurance organisations are lowering their cover for some customers, or withdrawing it altogether, exposing suppliers who would normally use such services to an increased risk of bad debt.'

And, he says, the riskier operating environment this creates tends to change corporate behaviour: 'Organisations hold onto monies due for payment, effectively using suppliers to finance projects. The
ramifications of this are felt all along the supply chain and they can result in considerably higher levels of bad debt.'

Ziehl-Abegg minimises its exposure to credit risk through insurance when it can: 'But we are finding that it is becoming more difficult to get credit insurance with new customers and even with existing customers the credit limits are being cut by the insurance companies or, in some cases, withdrawn completely.

Bearing the risk
'In that case, we have to make a commercial decision whether we can bear the risk and whether the credit limit we have with the customer is still relevant.'

Although diversification and tight credit control are important, for Mr Fish, it is a bone-deep commitment to investment that really separates the wheat from the chaff. As he says: 'If you don't innovate to gain a technological advantage and develop cutting edge products, it is very difficult to remain competitive.'

As an example of best practice, he points to his own company's 13 million euro technology centre in Künzelsau, south central Germany, which opened in May 2008 and which has since made a significant contribution to the development of pioneering new fans (see right).

For organisations unable to afford to invest significant sums, Mr Fish believes the best course may be to search for strategic alliances with companies able to manufacture products that comply with current and upcoming legislation.

The challenges faced by the HVAC sector, though, do not end with the negative effects of a dire economic situation. For Mr Fish, European regulations - particularly those concerned with energy efficiency - are also shaking up the sector.

The EU legislation currently occupying much of Mr Fish's time is the Energy-related-Products (ErP) Directive. This establishes a framework for setting eco-design requirements for energy using products and lays down minimum energy efficiency levels.

The ErP Directive is being implemented in two steps, the first in 2013 and the second in 2015. It is generally accepted that around half the fans currently on the market will not comply with 2015 ErP requirements and will therefore have to be replaced by more energy efficient systems.

As part of its commitment to educating the market, Ziehl-Abegg has launched a website - http://bit.ly/ I68GLw - that explains more about the upcoming ErP legislation. The company has also published a helpful PDF on the legislation, downloadable by visiting http://bit.ly/Hz4NNB

Profound consequences
The ErP legislation has profound consequences for the HVAC sector and creates a dilemma, as Mr Fish explains: 'Some manufacturers are going straight for the 2015 standard, but they may find that they are not cost-competitive with some of their competitors who have adopted an interim position.

'For example, in some cases the only option may be for an EC solution. So, if they go now for the 2015 standard there will be others who decide to maintain the lower efficiency products up until the end of 2014. They will be competing for the same business, but they are offering a less expensive AC solution for a relatively short period.

'That is from the manufacturer's point of view. The specifier, on the other hand, may only want to do the work once and may say 'let's jump immediately to 2015 standard'...

'Specifiers need to understand that they may be presented with two possible solutions in the interim period, one which is effectively over-engineered [until 2015] and one which meets the specification.'

So is the industry geared up for these changes to the ErP?

The picture is, Mr Fish believes, rather a patchwork: 'Some of our customers are fully aware of the imminent changes and may be pushing us to provide them with information and solutions. Others are relatively unaware.

'In these circumstances, our task as a responsible manufacturer is not only to make sure we have a range of products, but also that we discuss with our customers their needs so that they understand the implications of what is in the pipeline.

'We are, in effect, playing an educational and awareness role.'

25 May 2012

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