Pay me now or pay me later
As chairman and chief executive officer of American Standard Companies, Frederic Poses has a lot of business to take care of. FM Magazine asks him how one of its firms, Trane Air Conditioning, is gearing up for the introduction next year of new energy efficiency standards in the United States.
“In our three businesses, we don’t have a favourite child. We think all our children can grow and prosper,” says Frederic Poses, Chairman and Chief Executive Officer of American Standard Companies. Those three businesses are American Standard, for air conditioning, bathrooms and kitchens; WABCO, for vehicle control systems; and Trane Air Conditioning.
American Standard Companies is the largest chiller manufacturer in the world and the second largest commercial air conditioning company in the world, behind Carrier. The company’s promotional literature boasts that, on average, one of its air conditioning units is installed every minute of every day;
two out of three commercial vehicles with advanced braking systems are equipped with WABCO products; and one out of two bathrooms in Italy contains its products, while three out of five bathrooms in the US contain its products.
With approximately 61,000 employees in more than 100 countries, American Standard Companies makes revenues of around $10 billion a year ($5.3 billion from air conditioning). Around the same annual revenue as leading US homebuilding company Centex, which Poses happens to be lead director of. And as if that isn't enough to keep him busy, he is also on the board of directors for Raytheon, one of the biggest ‘defence’ contractors in the world, which brings in a cool $20 billion-plus a year in revenues. “That all takes some time,” concedes a jovial Poses, who, needless to say, is very generously compensated for his efforts.
On a whistle stop visit to Dubai, FM Magazine caught up with the man in the plush surroundings of the Dubai Royal Mirage Hotel’s Library Room to discuss the impact that new energy efficiency standards will have on this industry.
The United States Department of Energy has declared that as of January 23, 2006, all air conditioning products manufactured in the US must be 13 SEER or more. How is that going to affect American Standard Companies when 80 percent of your products are reportedly out of compliance with this standard?
‘Out of compliance’ would be a funny way to think of it. In the early 90s we went to a 10 SEER standard. Remember, we’ll sell air conditioning today anywhere from 10 SEER to 19 SEER. Legislation was passed with the support of the industry to move the energy rating to 13 SEER. For us, about 80 per cent of our products are less than 13 SEER. For the industry, 90 per cent of the products sold are less than 13 SEER.
By the 23rd of January , the industry cannot produce anything less than 13 SEER. So the whole industry is going through a transformation of redesigning their units for higher energy efficiency. And that means different compressors, a different coil system, a different size unit and a higher cost unit to the consumer.
Will that cost be around 30 percent higher?
Well, today a 13 SEER is 30 percent higher than a 10 SEER. But by the time people re-engineer 13 SEER for entry level, it will probably be about 20 per cent higher than the current 10 SEER, but it doesn’t matter because there will be no more 10 SEER.
So do you welcome this legislation or will it be more of a burden on the company?
Well I think that as long as it’s for the whole industry and energy efficiency is an important thing, then this is ‘progress’. We’ll spend about $100 million making that transformation from 10 SEER to 13 SEER but it’s a one-time expense.
And the cost of that will be passed onto consumers presumably?
The consumer will initially pay a higher cost for the unit but over time will save the energy associated with that and so in the long term it ought to be cheaper for the consumer.
How will this new legislation affect your markets outside the US? Will they effectively become dumping grounds for your 10-SEER products?
I wouldn't say ‘dumping grounds’. The 10 SEER is a well-engineered product. It performs very well. And remember that we don’t have a large residential business in places such as Dubai. In Europe we don’t sell residential units. The reason is that those units have a different design to the units in the United States. So there will be 10 SEER units available where people want to buy 10 SEER units and we’ll make good 10 SEER units for them.
Beyond 13 SEER, do you see a time when the bar will be raised to, for example, 15 SEER?
Well I think there’s a limit to the legislation. At one time it was less than 10 SEER; then it went to 10 SEER. I don’t foresee in the near future going beyond 13 SEER, because 13 SEER is a very efficient unit. And as I said before, it’s going to cost more and the payback in a place like Maine where it is quite cold is relatively slow since you don’t use your air conditioning that often. I think 13 SEER is plenty. In the United States we are probably leading as far as energy efficiency is concerned, in things like air conditioning and refrigeration.
What would you say differentiates Trane’s products to make it a leader in commercial air conditioning?
I think that when someone is building a big water treatment plant or putting in air conditioning in a new building, one of the reasons they choose Trane is because we have tremendously efficient chillers. That’s why I think when you talk about Trane having the largest share of chillers in the world, one of the reasons is that ours are the most efficient air conditioning systems when you put them together with our air handling units and controls.
Personally, I'm a free market type of guy so I'd rather see energy efficiency driven by good economics, but there will be government regulation nevertheless.
If you think about a building, probably 70 to 75 per cent of the energy consumed is by air conditioning – so you want to put in energy-efficient chillers. Even if it’s not to adhere to a standard, people are going to look for more energy-efficient equipment. Personally, I am a free market type of guy so I’d rather see it driven by good economics, but there will be government regulation nevertheless.
Are there any groundbreaking technologies that we can expect to see in this industry over the next few years?
Everyone’s going to continue to work on energy efficiency but we’re also working on indoor air quality. We’re doing a lot of work on making sure that the quality of the air in a home or building continues to be improved. People have asthma, allergies and those kinds of things so with a good filtration system you can clean up the air and make a difference in people’s lives.
In the United States, we’ll introduce in our residential air
conditioning system a new filtration system in the Fall. You’ve heard of something called a HEPA filter [which is said to remove a minimum of 99.97 per cent of contaminants in the air at 0.3 microns in size], it’ll be significantly better. We’re starting in residential because we think there’s a greater awareness of indoor air quality in residential, particularly in the United States. But we’ll start to introduce that in our commercial systems in the not-too-distant future.
How important is the Middle East market for Trane?
I think the Middle East is important. You see the amount of growth here in Dubai. And I don’t think that Dubai is going to be the only place in the Middle East that will grow like this. In the Middle East, depending on where you are, I think we’re probably number one or number two. And there aren’t a lot of players who make chillers to begin with.
And there are other things besides chillers. We’re looking to develop what we call our air-side part. If you think about the chiller as the heart of the system, how do you take that energy from the heart to distribute it to this room? A little less technology in it but nevertheless these are things that we can do – controls. Besides that, these systems will always need service so we’re looking to build our service and controls business around that.
When we add it all up, we’re around $200 million in the region today, which is not insignificant and growing at double digits. That’s not so bad! We intend to be here for a long period of time and this market will develop into a commercial-intense wonderful service market and then a replacement market at some point in time.
In terms of maintenance, what advantages can Trane offer to facilities managers?
Well the tag line for Trane is ‘It’s hard to stop a Trane’. And that’s really around the reliability of our units and the ease of maintaining our units – that’s why we have a leadership position. As no one has more installed chillers than us in the world, we have a lot of experience on what it takes to make a chiller that lasts 30 years.
What message do you have for facilities managers?
One of the things you could maybe use your magazine for in a constructive way is to start to tell the story to facilities managers of the value of energy efficiency. There are lots of older buildings where the upgrade of a chiller, from an existing chiller to a new chiller, would have a relatively short payback – if nothing more than on energy efficiency. So it’s not like the chiller has to wear out or break [to be replaced].
In a developed market such as the United States, which has had air conditioning for 30 or 40 years, if we sell 100 chillers, 70 of them are
replacement. Whereas here, virtually every chiller we sell is new. And a portion of those being replaced in the US is for energy. And whether oil is $40, $50 or $60 a barrel, anything in that range is going to provide for an older chiller tremendous energy savings and good economic payback.
But no one wants to pay. I used to work for a company that made filters and they used to say ‘pay me now or pay me later’; meaning that if you didn’t improve your filter, you may not pay for the new filter but eventually you’d have to rebuild your engine. So in some senses, that’s what we are talking about now.