SSD MODEL IS NO LONGER SUSTAINABLE - PART IX

So we saw how the AC companies used the Service shops as a platform to increase their
volumes. After a period of a few years they found that these "small" (but profitable) shops were
not the right people to invest several lakhs of rupees as working capital to buy air-conditioners in
volumes of 50 and 100 and sell them in the market for lesser margin. Nor did they have the reach
in terms of storage and delivery logistics.

Therefore they were left with no other option but to approach the appliances wholesalers and retailers
to buy in bulk and distribute them to sub-dealers and technicians who had/have dedicated customers.

This being so there was another development. The BEE brought in the rating system of 1 to 5 stars.
The companies had to increase the models to have different star categories in each model and capacity.
SSDs with limited stocks found that to cater to the customer they had to carry  a fairly large stock, much beyond their means or capacity.

As the volumes to the companies soared providing service was becoming difficult. Thus the "Service Franchisee" model with toll-free number was brought up. While the retailers were happy to sell volumes
and make money the could not be expected to take up the burden of service and installation. This works well.

The AC&R repair shops became sophisticated SSDs selling more of air-conditioners and doing little of
repair and servicing work. The goose that layed golden eggs was transformed to goose that lay just ordinary eggs. (No fault of anybody - just the way the market dragged).

Now that goose is finding it difficult to even lay ordinary eggs!!

It is high time that a majority of the SSDs de-link the selling activity and release locked up capital and also lessen the burden of interest and storage. They have to go back to their roots. Servicing and repairng activity.

But is it possible?

to be continued....    Inputs are invited from experienced friends in this group...

SSD MODEL IS NO LONGER SUSTAINABLE - PART VIII

Free Installation !

Companies in order to lure the customer built-in the price of stabilizer and installation charges
into the pricing and began to say - Buy Air-conditioner - Free stabilizer, free installation, free delivery.

The market is ever-changing. On-line companies have begun to sell air-conditioners. They are not
much bothered about installation. How can an on-line company know what are all required in your
location to install the air-conditioner?

With severe shortage of skilled man-power and undue pressure of work during summer things
are going to change very soon.

A technician who was in my employment on a monthly salary of Rs.7,000  some years back
has now turned a contractor. A few days back I approached him to know if he could install a
few air-conditioners.

"Sir, people are standing in queue. If you pay me Rs.2000 per installation I can do something
that is very urgent for you"

You get the big picture. Contractors who very happy with Rs.600 to Rs.750 per installation
are now demanding Rs.800 to Rs.1,000 and much more. With unknown, untried contractors
we do not know the quality of work!

Thanks to mobile phones, technicians whom we have trained, have now become contractors
with their own contacts and forgetting our goodwill say that they are too busy with "their" customers.

Who are "Their" customers?

"They" are "our" customers taken away from us !!

.... to be continued

SSD MODEL IS NO LONGER SUSTAINABLE - PART VII

We saw how the revenue stream for a SSD gradually got diminished over the years.

But there was a silver lining. Companies stopped local manufacture of air-conditioners and went in for
global sourcing (Mostly China). The machines were of very good quality and people found that they
could now buy "imported" goods right here from Indian companies.

In the initial years (2000 to 2005 say) SSDs were the first to become dealers for AC Brands and
sales picked up with good margins. They were able to make a reasonable marging in the unit, the
stabilizer and installation charges.

Around the year 2005 air-conditioners became a "commodity".  Appliances stores began to
buy air-conditioners in bulk and started selling them at prices much lesser than the SSDs.
Since they were buying in bulk at negotiated prices the SSDs without much muscle power were
slowly losing the grip on sales.

There was also another handicap. Mechanics working in SSDs were lured into becoming contractors.
Those who were working in SSDs and earning upto 10K found that by installing one or two splits
per day they could easily earn upto 20K per month!  Of course, it was good for them, but put the
SSDs in a bad corner. Not only that, the mechanics took away the trainees and helpers along with
them to form a team!

When competition heated up all sorts of freebies were offered. Free stabilizer, free installation and so on.

So what has happened to the SSD in the meantime? No revenue stream, no sales, no mechanics....
The troubles only increased!

to be continued....

SSD MODEL IS NO LONGER SUSTAINABLE - PART VI

While looking at the SSD Model over a period of about forty years, we have seen that the profitability or rather the avenues of getting margins on different activities have slowly disappeared.

Let us recap these in short:

(1) Due to very good quality of machines and compressors being offered with five-year warranty - REPAIR JOBS HAVE COME DOWN.

(2) Owing to high quality refrigerators (frost free, stabilizer free) there is
no repair job on these. - NO TINKERING, PAINTING, REPLACING THERMOSTAT, RELAY, (SERVICING !) NO LONGER AVAILABLE.

(3) Because of minimum use and sale of window air-conditioners -
NO REPAIR, TINKERING, PAINTING JOBS ARE AVAILABLE.

(4) Reluctance of customers to enter into AMC contracts for their machines. On the other hand if maintained in AMC spare parts like PCB's are hard to obtain for the Service provider. (Use and throw culture).

(5) Total absence of customers buying second-hand machines. - RECYCLING OF OLD MACHINES NOT POSSIBLE. EVEN REASONABLY GOOD MACHINES ARE SCRAPPED !!

(6) Additional burden on SSDs by way of Service tax and Sales tax. Though these are collected from customers and paid to Government no doubt, let us see what happens. If we charge Rs.1,500 for installation of split air-conditioner with tax, what we actually get is only Rs.1,315. I have not come across anyone charging Rs.1,500 plus service tax Rs.210 = Rs.1,710. ( I would like to know of anyone charging this way in any State of our country). (Tax calculated at revised 14% for demonstration purpose only).

to be continued...

SSD MODEL IS NO LONGER SUSTAINABLE - PART V

Point # 9

In the seventies and eighties the big companies had their own security staff, their own drivers, their own cooks. When the economy opened up and foreign companies came in, in order to cut costs, the companies:

(a) Gave the security work to security agencies
(b) The canteens were handed over to contractors to be run by them.
(c) Drivers were sent out and companies found that hiring vehicles from Travel companies was
economical.
(d) Companies maintaining maintenance departments gave the maintenance work to contractors.
Nowadays for Air-conditioning companies we have the Authorised Service Franchisee.
(e) Finally companies found that instead of making an air-conditioner found that importing
them was cheaper and the quality better and liked by people. This is the extreme case of
MAKE OR BUY decision where company finds that the buying decision is better than the
making process.

                                                                                     to be continued...

SSD MODEL IS NO LONGER SUSTAINABLE - PART IV

Point # 8

======

In the late seventies, there was a craze for foreign goods. A lot of workers were coming back to

India (mainly Kerala) after working in the Middle East for a few years. They were allowed to bring

back goods used by them under T.R. (Transfer of Residence). In order that they might make some

money by selling foreign stuff, each one of them started getting 2 air-conditioners  (some used, some new also). Most of these were General and along with the logo in front these units came to be popularly

known as "OG".   The name has stuck.

Many machines were brought to Chennai too for re-sale. Machines were available in Burma Bazaar too.

The popular brands were OG, National, Sanyo....   

The AC&R shops found that they could make some extra money by checking these machines, repairing/polishing them (to look like new!) and selling them for some profit.

This period marks the beginning of the end for AC&R shops, because they were lured into selling

machines for profit rather than concentrate on their core strength of repairing!!

In the late eighties CARRIER entered India setting up a plant in Gurgaon. 

Subsequently National set up a factory in Chennai. They completely toppled the market! They were given a five year tax holiday and they were among the first to offer a five-year warranty on the compressor.

We had put up a fabulous plant for manufacturing heat-transfer coils (condensor and evaporator coils)

but could not take it forward for a lot many reasons. We had ideas of selling these to manufacturers.

I was surprised when one day two executives from National landed up in my office telling me that they

had spare capacity for manufacture of coils and whether I would be interested in buying! How the cart had turned!!  (Later the National factory was shut down).

Now you can very well imagine the scenario...

(Inputs from readers are welcome)

                                                                                To be continued.....

SSD MODEL IS NO LONGER SUSTAINABLE - PART III

Point No.5

-----------

As the service persons and their company grew, they found that (a) It was easy to get workers residing nearby and train them (b) wages, rent and electricity bills and other overhead expenses like tea were quite low (c) All customers were within  radius of 5 Kms from the shop (d) customers could be reached by cycle and bus. The supervisor or chief technician had a moped and was proud of it!! (e) fuel price was low (when I bought my Yezdi bike in 1974 petrol used to cost Rupees three and paise forty per litre. (no traffic jams).

People used to report for work by 8.30 a.m sharp.

Well the city grew into a mega-city, we started to ape the west, and what happened?

(a) Technicians are difficult to get. Most of them stay 10 to 15 Kms away from the work-place.

(b) Technicians with even a minimum skill-set want to become contractors.

(c) 80% of the customers are very far off. Some even at a distance of 25 to 30 Kms away from the work place. (d) REnt, electricity and wages have shot up. Overheads have sky-rocketed. For instance a cup of tea costing Rs.2 in the year 2002 is now Rs.8 ! (d) All technicians are to be provided with motor-cycles, no other cheaper mode of transport is possible !! 

RESULT: Business is fast becoming unviable.

Point No. 6

------------

With only window air-conditioners in the market, good used machines were available. Shops used to frequently sell pre-owned (a new-age name for second hand goods) and make good money. The present day machines though far, far superior in quality than the earlier machines are not made to last long (>5 to 7 years). Nobody wants to buy a second-hand machine.

RESULT: Revenue loss.

Point No. 7

------------

Some years back there was no sales tax on second-sales. (Today we have VAT)

There was no tax on repair/ service. (Today we have Service tax - recently hiked to 14%)

RESULT: We are proud to serve our Nation. But margins get eroded.

SSD MODEL IS NO LONGER SUSTAINABLE - Part II

Point No.3

When air-conditioners were sold with one year guarantee, SSDs used to send AMC proposals by

post and through personal delivery to the customers. Many would enter into AMC and send in

their cheques by post!  Companies on the other hand would never hesitate to enter into AMC contracts.

We would have many good working window air-conditioners in stock and in case an air-conditioner is

brought to the workshop for gas charging/ compressor replacement, a stand-by unit would be provided.

In fact for companies and others, the units would be brought to workshop for water-wash and return

once in a year. (New name: Put-down service). Also the very name SSD is  recent . All the shops were  known as “Air-conditioning and Refrigertion Engineers” and all of the business was repairing, maintaining under contract. A few new machines were sold in any given year.

RESULT: Revenue loss. Hardly any AMC business is obtained these days.

Point No.4

Purchase of air-conditioners were “Capital” in nature and required Board sanction. Companies found

that it was easy to get air-conditioners on rental and write off the expenditure as expenses. Customers used to be charges anywhere between Rs.500 to Rs.800 per machine per month. Business owners used to buy old units and refurbish them , provide with new grilles and keep them ready to be given for rent.

The minimum rental period was six months. NRI’s coming back to their homes during summer insisted that parent’s provide air-conditioners and they in turn asked for 3 to 6 months rental contract.

This was a good revenue stream for many. After introduction of splits and disposable income increasing this business  segment is totally lost. Air-conditioners are ordered with impunity by executives in the Purchasing department.

RESULT: Revenue loss. 

SSD MODEL IS NO LONGER SUSTAINABLE - Part I

SSD MODEL IS NO LONGER SUSTAINABLE:

The SSD model is no longer sustainable.

Point no. 1:

Traditionally a SSD in this field was known as Air-conditioning and Refrigeration workshop.

SSD’s used to get revenue from repairing of refrigerators, replacing compressors in them, gas

Charging, tinkering and painting. People and small shops used to buy second-hand refrigerators.

The present-day refrigerators are very good and there is no-need of service or repair to these

and also no-body wants a second-hand refrigerator!!

RESULT: Revenue lost.

Point no.2:

Air-conditioners were of the window unit type with reciprocating compressors. New units came

With one year guarantee. Providing a stand-by unit was easy as all the units of different capacities

Were of the same dimensions. Repairing of compressors (i.e. cutting open, rewinding the coils, resealing) was done by skilled technicians. This resulted in a lot of repair jobs for the company and there was a revenue stream.  Today we have only rotary high efficiency compressors which seldom fail and these are offered with a five year warranty. No repair jobs (except those under guarantee/ AMC) are available to the SSD.

RESULT: Revenue lost.

                                                                                                      To be continued….

On-line attack !!

Companies were warning the public that guarantee/warranty conditions would not
apply if goods (air-conditioners in particular) were purchased on-line.

But it seems slowly they are changing their attitude?

A leading company has put up an advertisement in the front page in a leading daily
offering upto 35% discount on some leading brands of air-conditioners. It also
seems to say that the offer is for one day....

The very same paper has a news item elsewhere which says that the on-line company
is to invest Rs.940-1,250 crores in logistics in the next one year to ensure delivery
within four hours.

A representative from an on-line company met me a few days back and said that
we could put up our stock for sale through them and mention our price. He also
went on to explain that with their "deals" they might sell the goods at a lower price
still paying our price to us!!

But what is the bottom-line?

A person in business can easily understand a lot of things by reading the above.

Anybody selling an air-conditioner will realise that he/she cannot sell a unit with
a discount of 10 to 15% on the M.R.P.  Stop.

Carrying cost

The cost of keeping a product in our godown for a given number of days is an important
and real hidden cost which many among us fail to calculate.

To make it clear with a simple example, let us assume that a person has a
godown in which he can store say 100 given items and the rent for the godown
is Rs.30,000 per month.

In this example if a given item is kept for 30 days then the cost of keeping
that item is Rs.300.

Suppose an item worth 10,000 is kept in this godown for 40 days and then
sold for Rs.11,000 it goes without saying that out of the Rs.1,000 margin
a sum of Rs.400 was spent for just keeping the item till sold.

How many among us actually try to calculate this?