Recently, while watching the Netflix series “The Three-Body Problem,” based on the book by Liu Cixin, I was reminded of how business dynamics can be as unpredictable as the cosmos. The celestial mechanics of three bodies with their complex and erratic gravitational interactions mirror the reality of many modern markets, especially the AC-R market in Brazil.
It may seem unusual to start an article about the air conditioning market in Brazil with a reference to a fictional extraterrestrial civilization. However, the answer is clear: the unpredictability and complexity of the AC-R market in Brazil are as challenging as predicting the movement of planets in an unstable star system.
Let’s explore the three gravitational forces that shape this market: Climate, Economic Conditions, and Supply Chain Accessibility.
Climate
Veterans of the AC-R market know that climate can be both an ally and an enemy. El Niño years bring expansion with hot and dry climates that increase demand. But La Niña is the antithesis: contraction, excess inventory, and squeezed margins. The crucial question here is: How is your company preparing for these extreme variations?
The predictability of the climate is limited, and even the best forecasts can fail. AC-R companies must ask: Are we investing enough in technologies and risk mitigation strategies to face climate uncertainties? Climate forecasts, no matter how advanced, will never be perfect. Therefore, resilience and adaptability become essential.
Today, there are approximately 20 AC-R manufacturing companies in Brazil, and the vast majority follow the same production flow: components are imported from Asia, final manufacturing and assembly occur in Manaus (due to tax benefits), and distribution happens in other regions of the country. This production flow results in a lead time of approximately 5 months, meaning the need to anticipate future demand is crucial in this industry, as any forecasting error in S&OP results in excess inventory and the need for cash (with Brazil’s high interest rates, this is painful on the bottom line).
Managers in this industry are accustomed to analyzing, studying, and trying to anticipate the impacts of climate on their daily planning. Investing in climate consulting is normal within large companies in this sector. In addition to heat (which is the main seller in this market), planning professionals are also used to analyzing rainfall amounts, water reservoir levels for energy generation, river draft levels in the Amazon region, among other climate-related information.
Climate consulting firms can reasonably predict whether El Niño or La Niña will occur, providing future market trends. The difficulty lies in predicting the intensity of these phenomena, whether it will be very hot, very rainy, or of medium impact in heat and rain. This unpredictability is very complex for companies with medium/long-term S&OP planning cycles. Various investments in market intelligence and production and storage strategies are required to reduce the impact of a wrong forecast, which can be catastrophic.
Economic Conditions (Exchange Rate)
The exchange rate is another unpredictable force. Imported components and raw materials priced in dollars make financial management a dangerous game. How is your company mitigating exchange rate risks?
Exchange rate volatility challenges even the most experienced economists. Hedge strategies are essential but not foolproof. The reality of the foreign exchange market often defies predictions. Is your company prepared for a sudden devaluation of the real?
The exchange rate is one of the main daily concerns for the CEOs and CFOs of AC-R companies in Brazil. As this market is highly dependent on imported components, as explained above, the main raw materials for air conditioners in Brazil (copper, aluminum, polymers, refrigerant gas, steel) are commodities, meaning they have international pricing and are priced in dollars. This is one of the biggest headaches for industry management, as the high lead time associated with the need to finance customers (traditional retail and specialized retail) means the financial equilibrium of industries requires long-term financing sources, which is regularly supplied by suppliers.
In addition to working capital financing and exchange rate risk management, there is the factor of future exchange rate unpredictability for product costing and pricing purposes. Pricing strategy is an essential requirement for the correct and efficient management of product profitability.
Supply Chain Variability and Availability
Logistics and supply chain are other crucial factors. Fluctuations in commodity prices and logistical disruptions can be devastating. How is your company dealing with the volatility of commodity prices and the complexity of international logistics?
Transporting components from Asia to Brazil is a complex and expensive process, especially post-pandemic. Material planning becomes a nightmare with the limited availability of containers. Does your company have robust strategies to overcome these logistical challenges?
The prices and availability of the main commodities mentioned above are based on international prices and fluctuate according to global demand. Commodity management strategies are necessary to keep production costs under control.
For companies producing in the Manaus Free Trade Zone, there is a need to comply with the Basic Productive Process (PPB), which sometimes requires the use of locally manufactured components, increasing costs. Correct use and control of this PPB is a requirement to obtain the tax and fiscal benefits of the Free Trade Zone.
Another important and complex point is the “in” (raw material and components for manufacturing) and “out” (finished product for customers and resellers) logistics management. On the “in” side, in the post-pandemic years, we are observing fluctuations in maritime transport costs from Asia to Brazil, with costs at times reaching levels that practically “melt” product profitability. Current trade between Asia and Brazil, driven by electric car imports, is also affecting container availability, making material planning and product availability more complex.
On the “out” logistics side, there is the difficulty of transporting from Manaus, which is complex due to the distance from major distribution centers. There is also the dependence on river transport, which can cause delays and logistical difficulties, especially during droughts or floods in the Amazon River, in addition to the limitation of infrastructure with poor roads and ports that need improvements. To overcome these obstacles, companies frequently use multimodal transport, combining different modes of transport (cabotage, road, and air) to optimize cost-effectiveness and logistical efficiency.
The Good Side of the AC-R Market
Despite chaotic eras, there are opportunities in stable eras. The AC-R market in Brazil is growing, driven by urbanization and increased disposable income. Advanced technologies and energy-efficient models are in high demand. The market is expected to grow at a compound annual rate of 65% from 2024 to 2030. Is your business strategy capturing these opportunities?
Several factors are driving market growth, such as:
Urbanization
Low Penetration (less than 20% of the population has AC devices in their homes)
Tropical Climate
Disposable Income and Living Standards
Government Regulations and Policies
Increased E-commerce and Direct-to-Consumer Sales
Challenges and Strategies for Sustainable Growth
Based on this study and historical data (the graph below shows year-on-year production of Split Air Conditioners since 2012), this growth will not be constant or linear. In other words, companies must be prepared for cycles of reduced sales volume or stagnation for one or two years, so that the volume “jumps” when climate, exchange rates, and commodity scenarios are favorable. Is your business strategy prepared for these market highs and lows?
The executives and management teams of companies, whether manufacturers or distributors, must adopt business strategies, organizational strategies, pricing, distribution, and marketing that address the complexity of this market. The pursuit of market growth, expansion, and/or maintenance of profitability will only happen for those companies that continually challenge and question how their strategies are addressing the blind spots and greatest complexities of the operation.
Strategic Questions for Consideration by CEOs and Management Teams
Is our corporate strategy effective in achieving goals in a difficult-to-predict market?
Are we equipped to survive in a seasonal market and prepared for both good and bad years?
Does our distribution strategy effectively address the conflicts between Distributors and direct-to-consumer sales?
Is our organization investing resources in the right places to reduce market uncertainties?
Are we prepared to quickly adapt our operations and organizational structure in the face of unforeseen changes in the economic and political environment?
How are we facing the challenges of a highly competitive market and differentiating our products and services in a significant way?
Are we optimizing our pricing, distribution, and direct-to-consumer sales strategies?
Are we using market data and consumer insights to shape our marketing strategies?
Are we integrating digital solutions and automation into our operations to improve efficiency and customer experience?
Are we using technology and market data to inform our strategic decisions?
How are we using digital marketing intelligence to increase our online presence and reach new customers?
Conclusion and Call to Action
The questions addressed in this article cover critical aspects of corporate strategy, organization, marketing, sales, and digital, encouraging CEOs and management teams to deeply reflect on the complexity of their operations. The key to navigating an unpredictable and competitive market like AC-R in Brazil is to adopt a strategic approach that not only responds to changes but also anticipates them.
Companies that stand out are those that continually challenge their own strategies, identifying blind spots, and addressing the greatest operational complexities. Resilience and adaptability are essential attributes to survive and thrive in a volatile business environment.
In the coming articles, we will explore emerging trends, growth opportunities, and innovative strategies that can drive success in the AC-R market. These insights will be essential to prepare your company for the future in a dynamic and competitive sector.
Bizup Strategy is positioned as an essential strategic partner, offering the expertise needed to face market challenges. Our integrated and personalized approach helps companies achieve sustainable growth and competitive advantage.
Info: AC-R comprises Split, Window, Portable, and Cassette systems
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