Summer of ‘25: Why India's AC companies are sweating over supply chain turmoil

The Holi season marks the onset of summer, and with it, concerns over a repeat of the 2024 air conditioner shortage have started blaring. As temperatures rise, so does demand for cooling solutions, making the AC industry a key driver of the summer economy. However, supply chain constraints and regulatory hurdles threaten to cast a shadow over the industry’s ability to meet peak-season demand. The question thus, remains that will the market be prepared for the summer surge, or will consumers face another season of delays and price hikes?

Not like 2024: what is causing the problem for the AC makers?

Last year, the country had faced a significant AC shortage leading to an estimated deficit of 4-5 million units. This was particularly because the demand had gone up by 60%. The country currently produces only 6 million compressors on the back of 11 million units needed to sustain the demand seen last year. This was driven by favourable weather and rising market penetration. The overall penetration rate for air conditioners in India remains at 7-7.5% which is expected to go up to 40% by 2050. With increasing incomes, shifting consumer preferences, and greater reliance on air-conditioned spaces, the industry is at a point of inflection.

However, industry players, do not anticipate demand to be a bigger problem this year.

“I do not anticipate this year 57-60% growth (like last year) because the market itself (including) FMCG or other durables are not doing extremely well. There is a pain there. Even mobile phones are not getting growing. It is not that people have abundance of money,” says B Thiagarajan, MD, Blue Star

Last year around 11 million units got sold, Thiagarajan says, there was a period of blackouts, but overall, it got sold. This year industry experts say the market will cross 15 million units.

Last summer, the massive 60% surge in demand caused disequilibrium in the industry, but in 2025, component shortages are the bigger challenge. However, industry experts predict that If extreme heat persists, demand could rise another 30-35%, straining supply chains further as capacity limits remain a constraint.

What is the problem with the supply chains?

Industry players say supply-side challenges are the biggest concern this year, driven by severe component shortages. Thiagarajan highlights three key components including compressors, electronics, and inner-groove copper tubes.

While India has a strong electronics manufacturing ecosystem, and imports are relatively unrestricted (except for bare PCBs with anti-dumping duties), compressor shortages remain a challenge due to system-specific variable frequency drive requirements.

“While the domestic production of inverter controller PCBAs has reached nearly 80% localisation, India lags behind compressor manufacturing significantly,” says Manish Sharma, chairman and EGSO, Panasonic Life Solutions India and South Asia.

Meanwhile, copper tube imports are allowed but face periodic restrictions, though local production is ramping up with players like Hindalco and Adani setting up factories. Most companies have stockpiled copper in anticipation of summer demand, but compressors continue to be the biggest bottleneck.

“The problem is that the 70% more than 60% of the compressors are coming in from China or are manufactured by Chinese manufacturers in India,” says Thiagarajan.

China dominates the global AC compressor market, producing 100 million units for domestic use and exporting 200 million. Its edge lies in technology, scale, and quality. While Indian subsidiaries of Chinese players like Highly India and GMCC have set up facilities in India, they still rely on China for key components to stay cost competitive.

China's production peaks between October and December, catering to the Asian summer, leading to fluctuating capacity utilisation, with the best case being 80-85%. Then, volatile commodity prices make stockpiling risky, adding to supply chain uncertainties.

This year, BIS certification delays have further disrupted supply chains, with nearly 50 Chinese component suppliers not receiving recertification as late as November 2024. While this number is gradually declining amid expectations of strong demand, the immediate compressor shortage stems from these lapses. BIS certification is mandatory for certain AC and refrigerator components, and many Chinese vendors, previously certified for limited periods in 2018-20, saw their approvals expire in 2024. Meanwhile, the government’s push for local manufacturing and FDI restrictions on China have made Chinese firms cautious about expanding in India. Adding to industry concerns, the Bureau of Energy Efficiency (BEE) will enforce stricter AC efficiency standards from January 1, 2026.

“The solution for these matters is consistent engagement with the authorities to lead in a structured manner these quality control orders, feed into the current demand and simultaneously build local manufacturing capabilities,” said one of the industry leaders.

Yet, for now the March, April, and part of May mediocre 20-25% growth in demand has been prepared for, industry players say. The problem only comes with a higher growth and that too precisely in sourcing the raw material. The air conditioner industry operates on a long lead time (turnaround time) of over 180 days, from component procurement to final consumer installation. AC makers usually have to order components 6 months in advance. This extended cycle creates challenges in demand planning, especially amid component shortages.

“Most of the players would have made the arrangements by December, January itself. Factories would have ordered the components and because the factories cannot suddenly produce this much, they would have already produced a material for March, April and part of it may, June material would have been in the pipeline coming, they would have received the assurance from the compressor suppliers,” says Thiagarajan.

“Air conditioner is such a long lead industry, the time you place the purchase for your components, once they are shipped and they arrive at your factories, and then you dispatch it to your warehouse again, to your trade partners. This whole cycle is 180 plus days. Aside from component shortage this causes difficulty in planning in advance for the AC output,” says Sharma.

An obvious question to ask would be why the Indian players wouldn’t make compressors themselves. The answer would be the deficiency of needed technology know-how and absence of scale.

“We are system integrators of various components to deliver an AC. Compressor manufacturing is like a car engine manufacturing or motor manufacturing. It’s a different game altogether and so Indian manufacturers do not have the technology, do not have the manufacturing know how,” says Thiagarajan.

“They do not have the huge capital, (they) don't have any unit (which) may call for some 400 crores kind of investment,” he adds.

For players like Voltas, Havells, and Blue Star to make compressors, “either they have to join hands and make it,” says one of the key industry players. Breakeven in compressor manufacturing is reached only once the 2.5 million units mark is achieved. Blue Star itself expects to invest in HVAC compressor facility only once a 2-2.5-million-unit sale is achieved while the brand is currently sitting on a sale of 1.75 million units.

Meanwhile, India’s local compressor manufacturing has grown from 1 million units to 6 million units in the last few years. Yet, of this almost 3.5 million units are manufactured just by the Indian facilities of Highly India and GMCC. India’s compressor production surged from 1 million to 6 million units, yet 65–70% of demand is still met through imports.

In this context the government launched its Production Linked Incentive scheme for AC components and not finished AC products, with an initial outlay of ₹6238 crore in 2021. Not just did most AC makers used this scheme to boost captive manufacturing, the India’s local value addition remains 15–20%, far below the 75–80% target, despite 84 companies under the PLI Scheme for White Goods bringing investments of Rs. 10,478 crore.

“Other manufacturers, such as Amber and PG, participated in PLI for inverter controller PCBAs, adding local production capacity,” says Sharma.

In the third round of the 2021 PLI scheme, the government selected 10 new companies for AC components in January this year of which only Voltas was eligible for compressor with a committed investment of ₹256.73 crore. The government launched a PLI scheme for white goods in 2021 (₹6,238 crore) to boost domestic production. However, most beneficiaries, including Highly India and GMCC, invested in captive manufacturing—producing only for their own needs. Their combined capacity expansion is 3.5 million compressors.

However, full self-sufficiency even in compressors is only 3-4 years away, industry players say.

LG, Mitsubishi Electric, and Daikin are expanding their manufacturing presence in India in HVAC (heating, ventilation, and air conditioning) compressors. LG increased its investment commitment from ₹300 crore in 2023 to ₹733 crore, aiming to raise local compressor sourcing beyond 50% of its demand, according to government data from the third round of selected applications in January.

Daikin, in a joint venture with Rechi Precision, also has planned to set up a rotary compressor facility, but production will begin only in 2026. Mitsubishi Electric had said in 2023 that the company was investing ₹1,891 crore in a Tamil Nadu facility, with 650,000 compressors expected to roll out starting December 2025.

“Now, once they meet their demand, they will be able to sell it to others like Indian players,” says Thiagarajan.

The industry leaders request the government that in the meantime the import route remains open, “allow foreign manufacturers to expand here, if they are following the law of the land, while staying committed to do the backward integration ourselves, but Indian players need time.”

However, compressors aren’t the only components that India has to build its capacity in.

“Things which have not happened so far properly is commodities like aluminium, which goes into air conditioners, copper tin wing work is in progress, but there we need to build capabilities fast. While the Bill of material contribution of these commodities are not as big as the compressor or motor or inverter controller, but we need to build those capacities faster,” adds Sharma.

Geopolitical factors and tariff concerns are also influencing production shifts.

“The global supply chains (all because of the US) are in a mess now, who has got copper, who has got steel, who has got aluminium, what tariff it is,” says Thiagarajan.

As a result, players are playing “let’s wait and watch.” Yet, demand is expected to keep growing every 3 to 3.5 years, making supply chain resilience even more critical.

Yet, industry players are calling this a blessing in disguise.

While some shortages are expected, industry leaders see an opportunity to optimise inventory management. Improving total lead time by even 15 days could significantly enhance supply chain efficiency.

For international players like Daikin and Panasonic among others, the strategy has been to make use of their already present global supply chain bringing in raw material and components from elsewhere other than China. “We are doing our best, either bring in material from elsewhere simultaneously nudge and push our local compressor suppliers to build upon their capacities. We've been engaging with them so that in this whole process, we make ourselves ready for next summers,” says Sharma. Yet immediately, the supply will be met by materials from various locations, including coming in from Malaysia and Thailand

“So, if we could improve the local capacity by 30% in last one year, we should look at doubling it in next one year,” adds Sharma.

“Anticipating that there is a shortage of raw materials, we set up a war room in November itself. In fact, it started in October. We are investing ₹500 crore more into working capital. And we started buying the material from October onwards. For the summer season we are fully secured,” says Thiagarajan.

In addition to preparing for a shortage like last year, in the anticipation of high demand and increased supply constraints, this summer, industry players have started with high starting inventory levels that will help improve cash flow for the industry. However, manufacturers must carefully manage supply to avoid stock depletion.

“At Panasonic, we are doing all what we can to not let customers lose the opportunity of picking up, and therefore our intention is that as much as possible, can we look at utilising and drying up the inventories across our raw materials, warehouses, factories,” adds Sharma.

There are reasonable pipelines of raw materials enough to cater to April and May, barring some few exceptions that there might be tiny shortages.

Panasonic is working to clear out inventories across raw materials, warehouses, and factories to avoid opportunity losses. “We are also open to do inter branch stock transfers because there might be situations that some of the regions may have inventory left and some of the regions may not,” adds Sharma.

A growing trend is that consumers are increasingly opting for 5-star energy-efficient models over lower-rated ones. Demand for smart, connected appliances is rising, however, higher energy efficiency models still make up a smaller portion of the overall market, so OEMs are cautious in building up large inventories for these segments.

Sharma expects that there will still be a shortage of high-efficiency air conditioners (3-star, 4-star, and 5-star models). Supply chains are expected to ease after summer, and local manufacturing capacity will then be sufficient to rebuild inventories. Industry players expect that the four and the five stars will flow out of the shelf starting May.

Preparing for next 2-3 years, but what happens this summer?

While industry players seem to have gotten the supply chain issues more or less under control for a moderate demand growth, if the repeat of 2024 happens, there will be a huge shortage, and “the consequence of that will be that the product you put in the market is of bad quality,” says Thiagarajan.

The anticipation of a compressor shortage has led dealers to advance their purchases, stocking up now for April and May. As a result, products meant for later months are being sold in March itself, creating an artificial demand surge.

“Because compressor shortage story is in the market, the dealers are trying to buy the material now itself for April-May. So, what is supposed to be sold in April or May is getting sold in March itself,” says B Thiagarajan of Blue Star.

While primary sales have been pulled forward, actual consumer purchases (tertiary sales) will follow their usual cycle. This means that by May, factories may face raw material shortages due to this early buying pattern.

“In May itself you may not have the material, but it is only in the primary sales. Tertiary sale will happen as it is supposed to happen,” adds Thiagarajan.

Dealers with higher stock may gain a competitive edge, but such supply-demand imbalances typically moderate as the season progresses.

However, from the consumer point of view, this has already pushed prices by as much as 5% from last summer and can push them much further.

“If there is an input cost increase, we will pass it on. Right now, it is a chaos. We don't know what will happen to copper, what will happen? Exchange rate there. There is a storm going on there. As of now what we have done 3 to 4% but we have to wait and watch how the raw material prices or exchange rate going to impact,” says Thiagarajan.

So how much will the global supply chain heat impact the cost of your air conditioner, is an unfolding question.