India's Air Conditioner Market Faces Scorching Demand Amid Supply Chain Hiccups

It’s February, yet temperatures are soaring up to 40°C in some parts of India including Maharashtra, Kerala and Telangana, and the India Meteorological Department (IMD) has issued a yellow alert for several regions including Maharashtra, Kerala, Telangana among others. This indicates an early onset of heatwave-like conditions arguably due to climate change.

Buoyed by increasing temperatures, the Indian air conditioner (AC) industry is on a sizzling trajectory, with sales volumes projected to surge by 20-25%, reaching a record 12-12.5 million units in the financial year 2024-25, according to a study by rating agency ICRA. This momentum is expected to continue with a 10-12% growth in 2025-26, fueled by rising temperatures, urbanisation, higher disposable incomes, and attractive consumer financing options. However, retailers are currently grappling with inventory shortfalls, primarily due to supply shortages of key AC components and delays in BIS certification for Chinese suppliers.

Speaking to The Core Ajay DD Singhania, managing director and CEO of EPACK Durable, an original design manufacturer for AC brands, said that the market has nearly doubled in two years, growing from 8.5 million units in 2023 to an expected 18 million units in 2025. Notably, Tier 3, 4, and 5 cities are outpacing Tier 1 and 2 cities, with growth rates of 20% compared to 10%, driven by aspirational purchases and accessible financing schemes. Interestingly, premium 5-star energy-rated AC models are gaining popularity in rural areas, surpassing urban demand.

Singhania further added that the majority of AC sales in smaller cities and towns are facilitated through EMI-based financing, with down payments as low as Rs 100, making ACs more accessible to a broader consumer base. He also noted that most AC purchases in rural areas are still conducted offline, as installation and servicing needs limit the penetration of online sales.

Supply Chain Disruptions

Despite the soaring demand, the industry is still grappling with significant supply chain disruptions. Singhania points out that retailers currently lack sufficient inventory to meet the projected demand. He attributes this to "BIS certification delays and supply shortages of compressors and copper components," which have severely disrupted the industry. The situation is exacerbated by black marketing of copper due to supply constraints, delayed BIS certification for a key Chinese supplier—cleared only in late December 2024—and compressor supply issues as China prioritizes exports to the U.S. ahead of tariff hikes, added Singhania.

“The industry faced an estimated 10-15% production loss due to compressor shortages in late 2024, with stock shortages potentially persisting until June 2025, impacting peak summer sales and potentially leading to significant retailer losses,” he added.

Singhania further anticipates some price corrections by manufacturers in 2025 to maintain business viability, though efforts will be made to keep ACs affordable. “Unlike previous years, brands are now adjusting AC prices quarterly instead of annually, operating on thin profit margins, which may necessitate slight price increases for sustainability,” he said.

India Heading Towards Shortage?

Currently, the Indian government has a production-linked incentive (PLI) scheme aimed at bolstering local manufacturing of components like compressors, motors, and PCBs. While the initiative has increased domestic component production from 25% to 75%, critical raw materials such as copper and aluminium are still imported, Singhania pointed out.

“Domestic production is also expected to scale up by the end of 2025. However, industry adoption has been slower than anticipated due to high capital investment requirements and extended approval times for new manufacturing facilities,” he added.

In summary, while India's AC market is experiencing unprecedented growth, supply chain challenges and regulatory delays pose significant hurdles. Some reports also indicate that despite the high demand expected for 2025, supply chain disruptions, production constraints and stock shortages may contribute to industry losses of Rs 1,200-1,500 crore in 2024. Addressing these issues promptly is crucial to meet consumer demand and sustain the industry's upward trajectory.