The Covid-19 pandemic negatively impacted the commercial HVAC market, as global construction activities halted amid government-imposed lockdowns. Although construction activities resumed in Q3 and Q4 2020, which led to the growing demand for commercial HVAC systems and components, the rebound did not offset the drastic decline of low-voltage (LV) drives demand seen in the first and second quarters of 2020.
In Omdia’s latest research, the global commercial HVAC market for LV drives is estimated to have been worth roughly $1.4 billion in 2020, with over 2.5 million units shipped, down 4.4% from 2019. Although the commercial HVAC market is one of the best performing industries for LV drive sales, market decline was inevitable because HVAC is closely linked to global construction activities, which declined during lockdown periods. However, with a global focus on energy efficiency, sustainability, and green buildings, Omdia expects the LV drives market in commercial HVAC will return to pre-pandemic levels by 2022.
Go green, go sustainable
Sustainability has become a key topic globally. Increased public concern is putting more pressure on governments to reduce pollution levels, especially in China and Japan. As a result, governments around the world have come up with various policies and initiatives to increase national focus on energy efficiency in the industrial and commercial sectors, which includes green building technology and HVAC systems.
Legislation relating to energy efficiency has been the main driver of LV drive sales into the commercial HVAC industry over the past decade. Although legislation itself rarely requires the complete replacement of an installed base, when coupled with increasing energy costs and a greater focus on cost reduction, it has improved the adoption rate of LV drives.
In western countries, demand for LV drives in commercial HVAC will continue to be driven by government regulation and the focus on green building and sustainability. Growth is expected to accelerate when construction activities resume as normal, but Omdia is not expecting that to happen throughout the forecast period. Construction activity is expected to grow at 1.6% CAGR during the next 5 years.
However, there have been several new regulations that will contribute to the growth of low-voltage drive market. These include:
- The European Green Deal presented by the European Commission on Dec 2019 to target the EU to net-zero emissions of greenhouse gases by 2050 and to boost the efficient use of resources by moving to a clean, circular economy. The European Green Deal covers all sectors, including commercial and industrial. This opportunity is expected to provide additional opportunities for suppliers of LV drives, as architects, greenfield construction projects, and machine builders come under increasing pressure to incorporate energy-efficient technologies into their designs and products.
- The U.S. Department of Energy (DOE) has raised the seasonal energy efficiency ratio (SEER) rating for all commercial HVAC equipment in the 90.1-2016 standard. Referring to Figure 2, the focus on efficiency is still patchy within the country as currently only 7 states in the US are adopting 90.1-2016 and 14 states are still at 90.1-2013. As a result, LV drive sales in the US commercial HVAC sector are expected to grow at approximately 4.0% from 2021 to 2024, higher than the market average. Omdia expects some of these 14 states would move to 90.1-2016 throughout the forecast period, creating more opportunities for the LV drives market.
Price vs efficiency: The emerging market dilemma
Countries in Asia and Oceania are behind western counterparts in terms of regulation, as many are still a developing and energy efficiency is not the focus. However, this is slowly becoming a key topic due to public awareness and pressure.
Recent Asian government initiatives include:
- China’s 14th Five-Year Plan (2021-2025), announced in Q4 2020. This shows the Chinese government’s commitment to tackling pollution in the country, whilst aiming to recharge its economy. However, this Five-Year Plan is unlikely to have a great impact on LV drives sales into the commercial HVAC sector unless the Chinese government outline policies to strengthen existing energy efficiency standards or incentivize end-users, machine builders, and engineering, procurement, and construction (EPC) contractors to adopt energy efficient HVAC systems.
- The government in Japan aims to reduce greenhouse gas emissions by 26% from fiscal 2013 levels, by 2030. Commercial HVAC systems sold to the Japanese market must adhere to the commercial building energy standards developed by The Ministry of Land, Infrastructure, and Transport (MLIT). As a result, the adoption of LV drives is expected to grow along with construction activities in Japan. However, there hasn’t been new legislation since the building standard law that was introduced back in 2013 and there are still no green building codes in Japan, hindering the penetration of LV drives. To achieve the latest national goal on greenhouse gas emissions, the Building Center of Japan (BCJ) or MLIT will need to produce a revised standard with more stringent requirements for HVAC systems in the next two years.
Despite the increasing focus on energy efficiency and the implementation of environmental protection regulations and policies, price is still the largest driver in the decision-making process in South and Southeast Asia. This region accounted for approximately 19% of the Asia and Oceania HVAC market in 2020.
Demand for LV drives used in commercial HVAC applications in Southeast Asian countries such as Vietnam and Malaysia are expected to outpace the Indian market in the near-term, driven by greenfield development and construction of new facilities in the region. As the US-China trade war is unlikely be resolved in the short-term, and mainland China's production costs have been increasing, the trend of relocating investment from mainland China to Southeast Asia is likely to continue. Vietnam and Malaysia are expected to be a preferred option for many mainland Chinese and overseas companies. The LV drives market in commercial HVAC for the Rest of Asia is expected to grow at average of 4.1% from 2021 to 2024, above the global market average of 3.6%.
As urbanization and industrialization in Southeast Asia continues, the LV drives market will benefit. However, the lack of regulation and legislation will limit growth in the short- to mid-term. There would be more opportunity for LV drives if regulation and enforcement were introduced. For instance, in Malaysia, the Green Building Index (GBI), a rating system developed by the Malaysian Institute of Architects and the Association of Consulting Engineers Malaysia, offers a foundation for the construction of more green buildings throughout the country. However, if there’s no strong enforcement by the government in regulating the energy standard, or no government funding, end users would still focus on cost and pricing instead of technical aspects like energy efficiency.
Overall, legislation and sustainability are driving LV drive sales into the commercial HVAC industry in western economies; whilst industrialization and price are the most influential factors in Asia and eastern Europe. However, if the regional economies in the west are still badly affected by the Covid-19 pandemic, and the outlook of construction activities remain sluggish, the growth opportunity for LV drives will rely on the retrofit market and the penetration rate would be slower than expected. Whereas in Asia, the introduction of government policies might help the LV drives market in commercial HVAC to grow faster.
“Status of State Energy Code Adoption,” U.S. Department of Energy, https://www.energycodes.gov/status-state-energy-code-adoption
Joanne Goh, Senior Analyst, Manufacturing Technology