PLI Scheme: Air Conditioner Makers Worried About Competition, Deep Discounts

India is offering incentives worth at least Rs 2.75 lakh crore to boost local production of semiconductors and mobiles to electric cars. But that may end up creating excess supply in the short term and hurt profitability. At least, makers of air conditioners are worried about that.

“Capacity will double over the next one-two years, but since PLI (production-linked incentive) is paid on incremental sales, there will be intense competition,” B Thiagarajan, managing director of Blue Star Ltd., told BloombergQuint. "And it will not put money in the hands of investors."

The incentives will be passed on to consumers in the form of discounted prices as companies will compete to meet revenue targets to avail the benefits, he said, doubting if firms would be able to balance gaining market share and maintaining profitability.

The concerns underscore challenges India faces in its effort to boost local manufacturing. More so after the pandemic disrupted demand across sectors, including air conditioners.

The government has offered Rs 6,238 crore worth of financial incentives to the makers of appliances and electronics. Companies can avail subsidies worth 4-6% on net incremental sales over the base year of FY20 or FY21, whichever is higher, on products made in India from FY22 to FY29. Investments after April 1, 2021 qualify.

As many as 42 consumer durables makers, including Daikin, Panasonic Corp., Syska LED Lights Pvt. and Havells India Ltd., have agreed to invest a combined Rs 4,614 crore under the scheme.

Bulk of the commitments worth Rs 3,898 crore came from 26 aspirants under the air conditioner segment. Hindalco Industries Ltd., part of the Aditya Birla Group, and Daikin Industries have committed the most.

The air-conditioning industry's participation reflects its growth potential. According to Kanwal Jeet Jawa, managing director and chief executive officer at Daikin Airconditioning India Pvt., the penetration rate (or households with air conditioners) is estimated to increase to 30% in 2026 from about 7% now.

Stiff Conditions

To avail the incentives, companies are required to show net incremental sales of up to five times the investment made under the PLI scheme in the previous fiscal.

For example, an AC components company making a 'large investment' of Rs 150 crore in the first year will have to show incremental sales of Rs 750 crore in the second year. It will then be eligible to avail incentives worth Rs 45 crore (at 6% of incremental sales) in the third year.

The PLI incentive is calculated at 5% each for the third and the fourth year and at 4% of the incremental sales in the fifth year.

Thiagarajan called the revenue growth condition “very aggressive”.

Eric Braganza, president of the Consumer Electronics and Appliances Manufacturers Association, said the manufacturing companies will need a strategy to decide how much of the benefit they want to retain and how much they wish to pass on to achieve the sales target. “There will be undercutting, but are you going to undercut below your bottom line, making a loss?”

One of the aims of the PLI scheme is "to build a component ecosystem to compete with global players and make the country an export hub", said Jawa.

But local manufacturers who assemble finished units also need to add value by growing their component production. Due to this caveat, local producers are not as excited by the sops under the PLI scheme.

Key components that are being imported require massive investments to manufacture locally. The kind of scale required to turn such investments profitable does not exist in the local market, said an industry executive, who spoke on the condition of anonymity citing business concerns.

Almost 70% of the input materials required for the industry — including compressors, high quality copper tubes, and variable speed motors in indoor units — are currently imported. “Over the long term, this will change, but there would also be large-scale market consolidation with smaller players getting eliminated,” Jawa said.

“Companies will have to enter into new geographies, penetrate deeper into existing markets, and start exporting the goods to remain competitive.”