CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS
 

TABLE OF CONTENTS 

12.1 INTRODUCTION ....................................................................................... 12-1
 

12.2 METHODOLOGY ...................................................................................... 12-1
 

12.2.1 Phase I: Industry Profile........................................................................... 12-2
 

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide.................. 12-2
 

12.2.3 Phase III: Sub-Group Analysis ................................................................ 12-3
 

12.3 Overview of Industry Data........................................................................... 12-5
 

12.3.1 Residential Clothes Dryers ...................................................................... 12-5
 

12.3.2 Room Air Conditioners............................................................................ 12-7
 

12.4 PRELIMINARY MANUFACTURER IMPACT OVERVIEW.................. 12-8
 

12.4.1 Key Issues ................................................................................................ 12-9
 

12.4.2 Residential Clothes Dryers .................................................................... 12-11
 

12.4.3 Room Air Conditioners .......................................................................... 12-14
 

REFERENCES ........................................................................................................ 12-18
 

LIST OF TABLES 

Table 12.3.1 U.S. Census Data on Domestic Residential Laundry Industry Employment 


and Earning trends (NAICS Code 335224 – Household Laundry Equipment 


Manufacturing) ........................................................................................ 12-5
 

Table 12.3.2 U.S. Census Data on Residential Laundry Industry Manufacturing Costs 


(NAICS Code 335224 – Household Laundry Equipment Manufacturing)


 ................................................................................................................. 12-6
 

Table 12.3.3 U.S. Census Data on Residential Laundry Industry Inventories (NAICS 


Code 335224 – Household Laundry Equipment Manufacturing) .......... 12-6
 

Table 12.3.4 U.S. Census Data on Production Capacity Utilization for Residential 


Laundry Equipment (NAICS Code 335224 – Household Laundry
 

Equipment Manufacturing) ..................................................................... 12-7
 

Table 12.3.5 U.S. Census Data on HVAC Equipment Manufacturing Employment and 


Earning Trends (NAICS Code 333415) .................................................. 12-7
 

Table 12.3.6 U.S. Census Data on HVAC Equipment Manufacturing Cost (NAICS Code
 

Table 12.3.7 U.S. Census Data on HVAC Equipment Manufacturing Inventory Data 


Table 12.3.9 U.S. Census HVAC Manufacturing Capacity Utilization Rates (NAICS 


333415).................................................................................................... 12-8
 

(NAICS Code 333415)............................................................................ 12-8
 

Code 333415) .......................................................................................... 12-8
 

12-i 

EERE-2007-BT-STD-0010 COMMENT 20.3
 

CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS 

12.1 INTRODUCTION 

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify 

the likely impacts of amended energy conservation standards on manufacturers. The 

Process Rule provides guidance for conducting this analysis with input from 

manufacturers and other interested parties. The U.S. Department of Energy (DOE) will 

apply this methodology to its evaluation of amended energy conservation standards for 

residential clothes dryers and room air conditioners to the extent that it is appropriate for 

this rulemaking. The Process Rule gives guidelines for the consideration of financial 

impacts and a wide range of quantitative and qualitative industry impacts that might 

occur after the adoption of an amended energy conservation standard. For example, a 

particular standard level could require changes in manufacturing practices for residential 

clothes dryers and room air conditioners. DOE will identify and analyze these impacts 

through interviews with manufacturers and other interested parties during the notice of 

proposed rulemaking (NOPR) stage of its analysis. 

DOE announced changes to the MIA format through a report issued to Congress 

on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 

(EPACT 2005)), entitled “Energy Conservation Standards Activities.”1

 Previously, DOE 

did not report any MIA results during the preliminary analysis phase; however, under this 

new format, DOE has collected, evaluated, and reported preliminary information and data 

in the preliminary analysis. Such preliminary information includes market data, key 

issues, product mixes, conversion costs, foreign competition, market shares, industry 

consolidation, and cumulative regulatory burden information. DOE solicited this 

information during the preliminary manufacturer interviews and reports the results in this 

chapter. The appendices to this chapter include copies of the interview guides that DOE 

distributed to manufacturers to gather information for the preliminary MIA and other 

preliminary analyses. 

12.2 METHODOLOGY 

DOE conducts the MIA in three phases. In Phase 1, DOE creates an industry 

profile to characterize the industry and conducts a preliminary MIA to identify important 

issues that require consideration. Section 12.4 of this chapter presents initial findings of 

the Phase I analysis. In Phase II, DOE prepares an industry cash flow model and an 

interview questionnaire to guide subsequent discussions. In Phase III, manufacturers are 

interviewed, and the impacts of amended energy conservation standards are assessed both 

quantitatively and qualitatively. DOE assesses industry and sub-group cash flow impacts 

and industry net present value (INPV) using the Government Regulatory Impact Model 

1

 This report is available on the DOE website at: 

www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html. 

12-1 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

(GRIM). Then impacts on competition, manufacturing capacity, employment, and 

regulatory burden are assessed based on manufacturer interviews and discussions. The 

NOPR (published in the Federal Register) and technical supporting document (TSD) 

both present results of the Phase II and III analysis. 

12.2.1 Phase I: Industry Profile 

In Phase I of the MIA, DOE collects pertinent qualitative and quantitative 

financial and market information. This includes wages, employment, and industry costs 

for residential clothes dryers and room air conditioners. Sources of information include 

reports published by industry groups, trade journals, the U.S. Census Bureau, and the 

U.S. Securities Exchange Commission (SEC) 10-K filings. In addition, DOE relies on 

information from its market and technology assessment, engineering analysis, life-cycle 

cost analysis, and analysis of consumer prices to characterize the residential clothes dryer 

and room air conditioner industries. 

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide 

In Phase II, DOE will perform a preliminary industry cash-flow analysis and 

prepare written guidelines for interviewing manufacturers. 

12.2.2.1 Industry Cash-Flow Analysis 

DOE uses the GRIM to analyze the financial impacts of amended energy 

conservation standards on the residential clothes dryer and room air conditioner 

industries. Amended energy conservation standards may require additional investment, 

raise production costs, and affect revenue through higher prices and possibly lower 

shipments. The GRIM uses several factors to determine a series of annual cash flows for 

the year that amended energy conservation standards become effective and for several 

years after implementation. These factors include annual expected revenues, costs of 

sales, selling and general administration costs, taxes, and capital expenditures. Inputs to 

the GRIM include manufacturing costs, shipments forecasts, and price forecasts 

developed in other analyses. Financial information, another input, will be developed 

based on publicly available data and confidentially submitted manufacturer information. 

DOE compares the results of the GRIM against baseline projections where no amended 

energy conservation standards are in place. The financial impact of amended energy 

conservation standards is the difference between the two sets of discounted annual cash 

flows. 

12.2.2.2 Interview Guide 

DOE will conduct interviews with manufacturers to gather information on the 

effects of amended energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. These interviews will take 

place during Phase III of the MIA. Before the interviews, DOE will distribute an 

interview guide that will help identify the impacts of amended energy conservation 

standards on individual manufacturers or sub-groups of manufacturers. The interview 

guide will cover production costs; shipment projections and market share; product mix; 

12-2 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

 

conversion costs; markups and profitability; assessment of the impact on competition, 

manufacturing capacity, and other topics that are relevant to assessing the impacts of 

amended energy conservation standards on both the residential clothes dryer and room air 

conditioner industries. 

12.2.3 Phase III: Sub-Group Analysis 

Phase III activities will occur after publication of the preliminary analysis. These 

activities will include manufacturer interviews; revision of the industry cash-flow 

analysis; a manufacturer sub-group analysis; an assessment of the impacts on industry 

competition, manufacturing capacity, direct employment and the cumulative regulatory 

burden; and other qualitative impacts. 

12.2.3.1 Manufacturer Interviews 

DOE will supplement the information gathered in Phase I and the cash-flow 

analysis performed in Phase II with information gathered during interviews with 

manufacturers during Phase III. The interview process has a key role in the MIA, since it 

provides an opportunity for interested parties to express their views privately on 

important issues, so that confidential or sensitive information can be considered in the 

rulemaking decision. 

DOE will conduct detailed interviews with manufacturers to gain insight into the 

potential impacts of amended energy conservation standards on sales, direct employment, 

capital assets, and industry competitiveness. Both qualitative and quantitative information 

are valuable to assessing potential industry impacts of amended energy conservation 

standards. Interviews will be scheduled well in advance to provide every opportunity for 

key individuals to be available for comment. Although a written response to the 

questionnaire is acceptable, DOE prefers an interactive interview process, which helps 

clarify responses and provides the opportunity to identify additional issues. 

DOE’s contractor has a non-disclosure agreement in place with interviewees to 

allow consideration of confidential or sensitive information in the decision-making 

process. However, confidential information will not be made available in the public 

record. At most, sensitive or confidential information will be aggregated and presented as 

an industry-wide representation. 

12.2.3.2 Revised Industry Cash-Flow Analysis 

In Phase II of the MIA, DOE will prepare a preliminary GRIM. During the 

interviews, DOE will request information regarding profitability impacts, necessary plant 

changes, and other manufacturing impacts. Upon completion of the interviews, DOE will 

revise its industry cash flow model based on the feedback provided. 

12.2.3.3 Manufacturer Sub-Group Analysis 

Using average cost assumptions to develop an industry cash flow estimate is not 

adequate for assessing differential impacts among sub-groups of manufacturers. Smaller 

12-3 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

manufacturers, niche players, or manufacturers exhibiting a cost structure that differs 

largely from the industry average could be more negatively affected. Ideally, DOE would 

consider the impact on every firm individually; however, it typically uses the results of 

the industry characterization to group manufacturers with similar characteristics. During 

the interviews, DOE will discuss the potential sub-groups that have been identified for 

the sub-group analysis. DOE will ask manufacturers and other interested parties to 

suggest what sub-groups or characteristics are the most appropriate for the analysis. 

12.2.3.4 Competitive Impact Assessment 

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE 

to consider any lessening of competition that is likely to result from imposition of 

standards. It further directs the U.S. Attorney General to determine the impacts, if any, of 

any decrease in competition. DOE will make a determined effort to gather and report 

firm-specific financial information and impacts. The assessment will be based on 

manufacturing cost data and information collected from interviews with manufacturers. 

The manufacturer interviews will focus on gathering information that helps in assessing 

asymmetrical cost increases to some manufacturers, the potential increase in business 

risks from an increased proportion of fixed costs, and potential barriers to market entry 

(e.g., proprietary technologies). The competitive analysis will also focus on assessing any 

differential impacts to smaller manufacturers. 

12.2.3.5 Manufacturing Capacity Impact 

One of the significant outcomes of amended energy conservation standards can be 

the obsolescence of existing manufacturing assets, including tooling other and 

investments. The manufacturer interview guide will have a series of questions to help 

identify impacts on manufacturing capacity, specifically capacity utilization and plant 

location decisions in the United States and North America with and without an amended 

energy conservation standard; the ability of manufacturers to upgrade or remodel existing 

facilities to accommodate the new requirements; the nature and value of stranded assets, 

if any; and estimates for any one-time restructuring or other charges, where applicable. 

12.2.3.6 Employment Impact 

The impact of amended energy conservation standards on employment is an 

important consideration in the rulemaking process. To assess how domestic employment 

patterns might be affected, interviews explore current employment trends in the 

residential clothes dryer and room air conditioner industries and solicit manufacturer 

views on changes in employment patterns that may result from increased standard levels. 

The employment impacts section of the interview guide will focus on current 

employment levels associated with manufacturers at each of their production facilities; 

expected future employment levels, with and without an amended energy conservation 

standard; differences in workforce skills; and issues related to the retraining of 

employees. 

12-4 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

12.2.3.7 Cumulative Regulatory Burden 

DOE seeks to mitigate the overlapping effects on manufacturers due to energy 

conservation standards and other regulatory actions affecting the same products or 

companies. DOE will analyze and consider the impact on manufacturers of multiple, 

product-specific regulatory actions. 

12.3 OVERVIEW OF INDUSTRY DATA 

DOE compiled industry data to assess both the residential clothes dryer and room 

air conditioner industries cost structure and manufacturing utilization and capitalization 

rates. The following section summarizes public data DOE obtained from U.S. Census 

Bureau reports. 

12.3.1 Residential Clothes Dryers 

DOE compiled industry data to assess the residential clothes dryer industry cost 

structure and manufacturing utilization and capitalization rates. The following section 

summarizes public data DOE obtained from U.S. Census Bureau reports. 

12.3.1.1 Industry Cost Structure 

DOE developed the residential clothes dryer industry cost structure from the U.S. 

Census Bureau, Annual Survey of Manufactures (ASM), “Statistics for Industry Groups 

and Industries” from 2003 to 2006. Residential clothes dryer manufacturing is classified 

under the North American Industry Classification System (NAICS) code 335224 

(Household Laundry Equipment Manufacturing). Besides covering clothes dryers, this 

NAICS code also covers clothes washers, presses, and related laundry equipment; i.e., 

clothes dryers are but a subset of the total U.S. laundry equipment manufacturing base. 

Table 12.3.1 presents the residential laundry equipment manufacturing 

employment levels and earnings from 2003 to 2006. The statistics illustrate that both the 

number of production workers and the overall number of employees in the industry 

decreased by 11.1 and 14.2 percent respectively between the years 2003 and 2006. 

Table 12.3.1 U.S. Census Data on Domestic Residential Laundry Industry 

Employment and Earning trends (NAICS Code 335224 – Household Laundry 

Equipment Manufacturing)1 

Year Production Workers All Employees Payroll for All Employees 

(thousand 2006 dollars) 

2003 13,137 15,510 572,109 

2004 12,853 15,140 552,929 

2005 12,590 14,468 517,115 

2006 11,669 13,298 544,921 

Table 12.3.2 presents the costs of materials and industry payroll as a percentage 

of shipment value from 2003 to 2006. The cost of materials has increased slightly from 

12-5 

EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

 

 

 

 

2003 to 2006. The cost of payroll for production workers and the cost of total payroll 

declined by 5.4 percent and 8.5 percent, respectively. 

Table 12.3.2 U.S. Census Data on Residential Laundry Industry Manufacturing 

Costs (NAICS Code 335224 – Household Laundry Equipment Manufacturing) 

Year 

Cost of Materials 

(percent of shipment 

value) 

Cost of Payroll 

for Production Workers 

(percent of shipment 

value) 

Cost of Total Payroll: Production + 

Administration 

(percent of shipment value) 

2003 54.7 9.1 12.0 

2004 52.0 8.4 11.0 

2005 52.0 7.7 9.8 

2006 N/A2 9.0 11.1 

12.3.1.2 Inventory Levels and Capacity Utilization Rates 

Table 12.3.3 shows the year-end inventory for the U.S. residential laundry 

industry obtained from the U.S. Census Bureau, ASM, “Statistics for Industry Groups and 

Industries” from 2003 to 2006. Both in dollars and as a percentage of shipment value, the 

industry’s end-of-year inventory from 2002 to 2005 experienced an overall increase. 

Table 12.3.3 U.S. Census Data on Residential Laundry Industry Inventories (NAICS 

Code 335224 – Household Laundry Equipment Manufacturing)3 

Year End-of-Year Inventory 

(millions of 2006 dollars) 

End-of-Year Inventory 

(percent of shipment value) 

2003 210 4.4 

2004 192 3.8 

2005 217 4.1 

2006 273 5.5 

DOE obtained full production capacity utilization rates from the U.S. Census 

Bureau, Current Industrial Reports (CIR), “Survey of Plant Capacity” from 2002 to 

2006. Table 12.3.4 presents production capacity utilization rates for NAICS code 335224. 

Full production capacity is defined as the maximum level of production an establishment 

could attain under normal operating conditions. In the “Survey of Plant Capacity” report, 

the full production utilization rate is a ratio of the actual level of operations to the full 

production level. 

2

 The 2006 Cost of Materials was “Withheld to avoid disclosing data for individual companies; data are included in 

higher level totals”. This information can be found at: 

http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=AM0631GS101 

12-6 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

 

 

Table 12.3.4 U.S. Census Data on Production Capacity Utilization for Residential 

Laundry Equipment (NAICS Code 335224 – Household Laundry Equipment 

Manufacturing)4 

Year Household Laundry Equipment Manufacturing 

(Percent) 

2002 87 

2003 85 

2004 77 

2005 79 

2006 80 

12.3.1.3 Small Manufacturers 

DOE investigated manufacturers registered as small businesses by the U.S. Small 

Business Administration (SBA) under NAICS code 335224, and determined that no 

manufacturer falls into this category. DOE welcomes any comments clarifying small 

manufacturer status. DOE will study the potential impacts on any identified small 

businesses in detail during the MIA, which it will conduct as part of the NOPR phase. 

12.3.2 Room Air Conditioners 

12.3.2.1 Industry Cost Structure 

 DOE developed information relating to the room air conditioner industry cost 

structure from the ASM, “Statistics for Industry Groups and Industries” from 2003 to 

2006. Room air conditioning manufacturing is a small part of NAICS code 333415 (AirConditioning and Warm Air Heating & Commercial/Industrial Refrigeration Equipment 

Manufacturing). Most room air conditioners are now manufactured outside the United 

States so the following data provides only a rough estimate of the room air conditioner 

industry cost structure. 

Table 12.3.5 presents employment levels and earnings for the entire U.S. AirConditioning and Warm Air Heating & Commercial/Industrial Refrigeration (HVAC) 

manufacturing industry from 2003 to 2006. The statistics illustrate a 3.3-percent decrease 

in the number of production workers from 2003 to 2006; however, there was a 5-percent 

increase in the overall number of employees in the industry. 

Table 12.3.5 U.S. Census Data on HVAC Equipment Manufacturing Employment 

and Earning Trends (NAICS Code 333415)1 

Year Production Workers All Employees Payroll for All Employees 

(thousand 2006 dollars) 

2003 77,488 104,668 3,815,747 

2004 73,106 99,035 3,691,029 

2005 75,893 102,157 3,937,630 

2006 74,909 98,097 4,019,813 

Table 12.3.6 presents the costs of materials and industry payroll as a percentage 

of the U.S. HVAC industry shipments value from 2003 to 2006. The cost of materials has 

12-7 

EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

 

increased slightly from 2003 to 2006. The cost of payroll for production workers and the 

cost of total payroll declined by 7.3 percent and 10.3 percent, respectively. 

Table 12.3.6 U.S. Census Data on HVAC Equipment Manufacturing Cost (NAICS 

Code 333415)2 

Year 

Cost of Materials 

(percent of shipment 

value) 

Cost of Payroll 

for Production Workers 

(percent of shipment value) 

Cost of Total Payroll: 

Production + Administration 

(percent of shipment value) 

2003 51.5 9.5 15.4 

2004 51.1 8.8 14.2 

2005 53.7 8.4 13.6 

2006 53.1 8.8 13.8 

12.3.2.2 Inventory Levels and Capacity Utilization Rates 

Table 12.3.7 shows the year-end inventory for the HVAC industry obtained from 

the ASM, “Statistics for Industry Groups and Industries” from 2003 to 2006. Both in 

dollars and as a percentage of shipment value, the industry’s end-of-year inventory from 

2002 to 2005 experienced an overall increase. 

Table 12.3.7 U.S. Census Data on HVAC Equipment Manufacturing Inventory 

Data (NAICS Code 333415)3 

Year End-of-Year Inventory 

(millions of 2006 dollars) 

End-of-Year Inventory

 (percent of shipment value) 

2003 2,372 8.1 

2004 2,477 8.5 

2005 2,677 9.1 

2006 2,887 9.9 

DOE obtained its production capacity utilization rates from the CIR, “Survey of 

Plant Capacity” from 2002 to 2006. Table 12.3.8 presents production capacity utilization 

rates for NAICS code 333415. Full production capacity is defined as the maximum level 

of production an establishment could attain under normal operating conditions. In the 

Survey of Plant Capacity report, the full production utilization rate is a ratio of the actual 

level of operations to the full production level. 

Table 12.3.8 U.S. Census HVAC Manufacturing Capacity Utilization Rates (NAICS 

Code 333415)4 

Year 

Air-Conditioning and Warm Air Heating & Commercial/Industrial Refrigeration 

Equipment Manufacturing 

(Percent) 

2002 60 

2003 62 

2004 60 

2005 66 

2006 63 

12.3.2.3 Small Manufacturers 

DOE investigated manufacturers registered as small businesses under NAICS 

code 333415 and determined that at least one U.S. room air conditioner manufacturer 

12-8 

EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

falls into this category. DOE welcomes any comments clarifying small manufacturer 

status. DOE will study the potential impacts on any identified small businesses in detail 

during the MIA, which it will conduct as part of the NOPR phase. 

12.4 PRELIMINARY MANUFACTURER IMPACT OVERVIEW 

During the preliminary analysis, DOE identified qualitative and quantitative 

public financial and market information to help evaluate the impact of potential new 

regulations on residential clothes dryer and room air conditioner manufacturer financial 

performance, manufacturing capacity, and product mix and profitability. In addition, 

DOE researched the cumulative burden that industry may face from the overlapping 

effect of new or recent DOE energy conservation standards or other regulatory action 

affecting the same product or industry. 

In addition to researching publicly available data, DOE conducted interviews with 

residential clothes dryer and room air conditioner manufacturers primarily to identify key 

issues and gain insights into the qualitative impacts of amended energy conservation 

standards. Interviews with these manufacturers were conducted during the second quarter 

of fiscal year 2009 and are the primary basis of the information in this chapter. To 

maintain confidentiality, DOE does not identify the individual manufacturers that 

disclosed information. The evaluation only reports aggregated information and does not 

disclose company-specific information. The following sections summarize the 

information gathered during interviews for the preliminary MIA. A copy of the 

manufacturer interview guides used when conducting these interviews can be found in 

appendix 12A. 

12.4.1 Key Issues 

Perhaps the most important aspect of the preliminary MIA is the opportunity it 

creates for DOE to identify key manufacturer issues early in the development of amended 

energy conservation standards. During the interviews, DOE engages the manufacturers in 

a discussion about what they perceive to be the key issues in the rulemaking. The 

following sections discuss topics that DOE typically explores during these discussions. 

Production and Product Mix 

DOE requests manufacturers’ views on what they perceive to be the possible 

impact of amended energy conservation standards on profitability. For instance, the 

capital and product conversion outlays needed to upgrade or redesign products before 

they have reached the end of their useful life may create significant conversion costs, 

resulting in reduced cash flow and stranded investments. Higher energy conservation 

standards may also result in higher per-unit costs that could cause consumers to shift to 

less costly products. 

12-9 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 Conversion Costs 

During the interviews, DOE asked manufacturers to quantify and explain both the 

capital and the product conversion costs necessary to raise the energy efficiency of their 

product lines to the proposed standard levels. In some instances, manufacturers may be 

able to meet proposed standard levels by modifying existing products. In other cases, the 

necessary changes may entail a complete redesign of a product line. Such circumstances 

would cause manufacturers to incur one-time capital and product conversion costs. 

Capital conversion costs are one-time investments in property, plant and equipment 

whereas product conversion costs focus on one-time investments for research, product 

development, testing and marketing. 

A potentially significant outcome of amended energy conservation standards 

could be the obsolescence of existing manufacturing assets, including equipment and 

tooling. The interview guide includes questions to identify impacts on manufacturing 

capacity. These questions were developed to understand the impact of potential amended 

energy conservation standards on: 

� United States and North American manufacturing capacity; 

� Capacity utilization and plant location decisions in the United States and North 

America both with and without amended energy conservation standards; 

� The ability of manufacturers to cost-effectively upgrade or remodel existing facilities 

to accommodate a new product mix; and 

� The nature and value of stranded assets, if any. 

DOE will explore current trends in production employment and solicit 

manufacturer views on changes in employment patterns resulting from amended energy 

conservation standards. Questions regarding employment impacts help to understand: 

� Current employment levels associated with manufacturing at each production facility; 

� Expected future employment levels with and without amended energy conservation 

standards; and 

� Differences in workforce skills and issues related to retraining. 

Market Shares and Industry Consolidation 

Amended energy conservation standards can alter the competitive dynamics of the 

marketplace, prompting companies to enter the market, exit the market, or merge with 

other companies. The preliminary MIA interview asks manufacturers to assess industry 

consolidation trends both in the absence and the adoption of amended energy 

conservation standards at various efficiency levels. The interview questions focus on 

gathering information that helps assess: 

� Disproportionate cost increases to some manufacturers; 

� Increased proportion of fixed costs potentially increasing business risks; and 

� Potential barriers to market entry (e.g., proprietary technologies). 

12-10 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

Anti-competitive effects of proposed amended energy conservation standards are 

analyzed to protect consumer interests. During the interviews, DOE also solicits 

information to understand if amended energy conservation standards could result in 

disproportionate economic or performance penalties for particular consumer or user 

subgroups. Manufacturers are also asked if amended energy conservation standards could 

result in products that will be more or less desirable to consumers due to changes in 

product functionality, utility, or other features. 

Cumulative Regulatory Burden 

While any one regulation may not impose a significant burden on manufacturers, 

the combined effects of multiple pending regulations may have serious consequences for 

individual manufacturers, groups of manufacturers, or entire industries. Assessing the 

impact of a single regulation may thus overlook this cumulative regulatory burden. 

Expenditures associated with meeting other regulations are an important aspect of 

DOE’s consideration of the “cumulative regulatory burden” industry faces. The 

interviews help DOE identify the level and timing of investments manufacturers are 

expecting to incur because of these regulations. Manufacturers are also asked under what 

circumstances they might be able to make expenditures related to regulations and energy 

conservation standards. 

12.4.2 Residential Clothes Dryers 

DOE conducted a series of preliminary interviews with residential clothes dryer 

manufacturers to assess their concerns about the potential impact of amended energy 

conservation standards. In general, manufacturers identified seven major issues of concern: 

(1) cumulative regulatory burden; (2) impact on product mix; (3) ENERGY STAR program; 

(4) economic impacts; (5) impact on profitability; (6) product conversion costs; and (7) 

product innovation.

 Cumulative Regulatory Burden 

DOE is aware of several Federal and international regulatory programs that affect 

the markets for clothes dryers. See chapter 3 for a list and description of the regulatory 

requirements identified by the DOE. All manufacturers expressed concern regarding the 

proposed UL Safety Requirement - Fire Containment/Burn Resistant Standard, which 

would increase material costs and require development expenditures. Additionally, 

current and new DOE energy conservation standards rulemakings for other related, 

regulated equipment (e.g., residential and commercial clothes washers) were of concern 

to multiple manufacturers, as are potential Reduction of Hazardous Substances (RoHS) 

requirements. 

Impact on Product Mix 

According to manufacturers, amended energy conservation standards could result 

in longer drying times for clothes dryers, especially at higher efficiency levels. Multiple 

12-11 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

 

manufacturers noted the positive response they have gotten from customers whose 

washer and dryer take about the same time to finish a load. Conversely, manufacturers of 

clothes dryers with longer-than-average drying cycles (i.e., condensing dryers) report 

customer complaints. All manufacturers stated that dryers requiring much over one hour 

to dry one standard load would not currently be accepted by the majority of consumers. 

ENERGY STAR Program 

Multiple manufacturers mentioned that an ENERGY STAR program would 

certainly help justify programs for higher efficiency research. Consumers are becoming 

more educated on clothes dryers and would like to see them follow clothes washers in 

improving efficiency. With changes in energy conservation standards, some 

manufacturers mentioned they would begin to see parallels with the washer side, and 

would like to effectively communicate the benefits of higher clothes dryer efficiency to 

consumers to justify the higher cost. Some manufacturers believe an ENERGY STAR 

program is necessary for their products. ENERGY STAR could be the differentiator 

needed to ensure sales, particularly for high-end products. If manufacturers can position a 

clothes dryer as high efficiency, such a model would gravitate to a higher price point. 

Economic Impacts 

All manufacturers expressed concern regarding the current economic conditions 

and the impacts it has had on their operations and workforce. Having to cut jobs in 

certain departments, including engineering, has reduced the resources manufacturers have 

to devote to new product development. Additionally, for small manufacturers with low 

market share and profit margins, the reduction in workforce not only makes it difficult to 

justify new product development, but also to support product rulemakings. This is 

especially the case when the current personnel efforts are presently spent on supporting 

existing rulemakings. 

All manufacturers commented that with the current economy as it stands, capital 

expenditures are extremely controlled, with strict limitations on how much can be 

allocated for design improvements. Some manufacturers do not expect these conditions to 

change for years. According to multiple manufacturers, high-end product customers are 

only buying clothes dryers as necessary, lower-end product customers are still buying 

washers and dryers in pairs, and middle-end products customer are not making new 

purchases at all. All manufacturers described a shift from high-end to middle-end 

products. All manufacturers believe repairs will increase as customers try to maintain 

their current products longer. 

Impact on Profitability 

Multiple manufacturers indicated that if amended standards reduced their product 

performance to “baseline” status, they would re-evaluate the profitability of product 

redesign against available market share. Profit margins would most likely be affected if 

12-12 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

new or more costly known technologies must be introduced into the market to meet 

amended energy conservation standards. For some manufacturers, especially those with 

low market share, strict standards could reduce their profit margin to a point where the 

U.S. market is no longer attractive. Several manufacturers also mentioned that if they 

were forced to redesign products due to amended standards, costs would increase and 

they would reduce the scope of their products and even cut entire product platforms to 

remain profitable. If standards are raised high enough, some customers might be 

excluded, thereby reducing product sales. High standards could also change the balance 

point between purchase and repair.

 Product Conversion Costs 

Product conversion costs are expected to vary with each level of proposed energy 

efficiency. For lower-volume manufacturers, the high capital costs for new tooling and 

equipment may not be justifiable given their production volume. Instead, such 

manufacturers would likely try to minimize capital investments and instead resort to 

adding on purchased parts to boost energy efficiency, though at a higher per-unit cost 

than higher-volume competitors that can elect to pursue capital-intensive but low-cost 

solutions to boosting energy efficiency. 

However, lower-volume manufacturers are not expected to completely avoid 

product conversion costs, whether for capital expenditures or product development. Due 

to scale, lower-volume manufacturers are likely going to have higher per-unit 

depreciation/amortization costs for any product conversion costs than their highervolume competitors. Between higher per-unit overhead and more purchased-part content, 

clothes dryers from lower-volume manufacturers are likely to be higher than their highervolume competitors’, thus exacerbating pressure on their already low market share. 

Multiple lower-volume manufacturers stated that amended appliance conservation 

standards set at Efficiency Level 2 and above would most likely force them to exit the 

residential market due to the investment requirements and the resultant market outlook. 

The costs associated with new or added components required to improve 

efficiency must either be absorbed by manufacturers or passed onto distributors, retailers, 

and consumers. Low-income groups are expected to be impacted the most, and may no 

longer able to purchase a clothes dryer due to increased material, labor, and overhead 

costs being passed on in the market price. 

Multiple manufacturers also expressed concern over how the implementation of 

new design changes for clothes dryers would affect their standardization of common 

parts. With these changes, not only would manufacturers be forced to produce and 

maintain two different designs and/or unique components, but facilities would have to 

add more space to the building to store the additional parts. 

12-13 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

Product Innovation 

Manufacturers expressed concern over the impact amended energy conservation 

standards would have on product innovation. Some manufacturers indicated that the 

implementation of amended standards could force a choice of technologies too quickly to 

meet a standard rather than allowing manufacturers sufficient time to assess different 

options to ensure the best decisions are made. Additionally, all manufacturers are 

concerned that new or amended standards would take away from investments in possible 

innovations that would take place without standards. Since manufacturers are usually 

facing more than one energy conservation standard at a time, prioritizing the investments 

becomes extremely important since the funds are taken from the same source. 

12.4.3 Room Air Conditioners 

DOE conducted a series of preliminary interviews with manufacturers to assess their 

concerns about the potential impact of amended energy conservation standards on room air 

conditioner manufacturers. In general, manufacturers identified six major issues of concern: 

(1) cumulative regulatory burden; (2) impact on product mix/ENERGY STAR program; (3) 

industry consolidation; (4) impact on profitability; (5) product conversion costs; (6) product 

innovation; (7) impact on consumer sub-groups. 

Cumulative Regulatory Burden 

DOE is aware of several Federal and international regulatory programs that affect 

the markets for room air conditioners. The market and technology assessment (chapter 3 

in this preliminary TSD) discusses in detail some of the notable initiatives that 

characterize recent developments in the room air conditioner market. See chapter 3 for a 

list and description of the regulatory requirements identified by DOE. 

All manufacturers reported challenges regarding the 2010 Environmental 

Protection Authority (EPA) phase-out of the use of HCFC-22 refrigerant in new 

equipment. While all manufacturers were in the process of developing room air 

conditioners which use alternative refrigerants at the time of the interviews, product 

development for most manufacturers was not complete. Multiple manufacturers stated 

that they plan to convert to R-410A refrigerants and that the higher manufacturing costs 

associated with these designs were a major concern to them. Other issues included 

concerns about reliability and performance of R-410A compressors, and size constraints 

of room air conditioners, which need to maintain existing efficiency levels and, in some 

cases, cannot easily do so without increasing the size of heat exchangers. 

In addition to the refrigerant conversion, manufacturers mentioned other 

regulatory issues which they are facing. Potential changes to electrical codes for fire 

safety could add further costs and manufacturing complexity by requiring the use of 

power cords with arc-fault interrupters, for example. Multiple manufacturers also 

mentioned possible carbon penalties associated with future greenhouse gas regulations, 

RoHS requirements, and Canadian product safety registration payments as additional 

regulatory burdens. 

12-14 


EERE-2007-BT-STD-0010 COMMENT 20.3
Impact on Product Mix/ENERGY STAR Program 

Multiple manufacturers reported lower efficiency with R-410A refrigerant units 

versus older HCFC-22 models which can reduce the cooling capacity for a given cabinet 

size. With the implementation of amended energy conservation standards on top of the 

refrigerant conversion, multiple manufacturers stated that the required changes would no 

longer allow their entire product line to fit into existing windows, through-the-wall 

sleeves, etc. As a result, multiple manufacturers expect total unit shipments will decrease 

especially for high-capacity units which may not be able to reach amended energy 

conservation standards within the constraints of existing box dimensions. 

Manufacturers stated that unit size limitations are especially relevant for the 

through-the-wall market, due to the cost of modifying building envelopes and the need 

for standardized wall penetrations. For manufacturers that produce a limited scope of 

products, amended standards have the potential to eliminate them completely from the 

room air conditioner market. In order to meet higher efficiency standards within the 

constraints of existing cabinets, manufacturers may need to reduce cooling capacity. This 

could force consumers to buy under-sized units, leading to performance issues during 

periods of peak usage. 

Manufacturers also indicated that possible increases in product size could have a 

significant impact on consumer utility. Many low-capacity products are purchased and 

installed by the consumers. In some cases, these purchases are discretionary and/or 

spurred by hot weather. The ease with which consumers can purchase, transport, and 

install the units hence has an impact on the sales of these products. Increases in size and 

weight, along with an increase in cost, would limit consumers’ ability to easily make 

these purchases and install the units, which would have a significant impact on sales. 

Some manufactures stated that higher efficiency standards could precipitate a shift 

from through-the-wall units (i.e., room air conditioners without louvered sides) to 

window units (i.e., room air conditioners with louvered sides). Since window units are 

usually less expensive than through-the-wall units, consumers could be inclined to buy 

and attempt to use a window unit in a through-the-wall application. This type of 

misapplication results in poor unit performance and often results in early unit burnout. 

Multiple manufacturers expressed concern that higher-cost room air conditioners 

would lead consumers to elect to repair units rather than replace them with newer, more 

efficient ones. 

Some manufactures stated that it would become more and more difficult to 

differentiate their products from those of the competition if the amended energy 

conservation standards are so high that the efficiency difference between ENERGY 

STAR-qualified and baseline efficiency products is minimized. As long as ENERGY 

STAR efficiency levels are attainable at reasonable cost, manufacturers expect to make 

room air conditioners at multiple efficiency levels. 

12-15 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

 

Industry Consolidation

 Whenever new standards come into effect, resultant market disruptions can 

accelerate the pace of consolidation among manufacturers, factories, and distributors. 

Multiple manufacturers stated that the number of factories supplying the U.S. market has 

shrunk from 20 to 30 factories making room air conditioners, to less than ten, even as 

production volumes have increased. Amended standards could accelerate the 

consolidation trend which has already greatly impacted the industry in the last few years. 

No major domestic manufacturing facilities for room air conditioners remain—most 

production is in Asia, (particularly China) and, to a much smaller extent, Mexico. 

Impact on Profitability 

Certain manufacturers believe they would experience a reduction in ENERGY 

STAR-qualified product sales with changes in efficiency standards due to the price 

sensitive nature of room air conditioner units being bought by lower-income consumers. 

Profit margins in the room air conditioner business have continually decreased and could 

continue to decrease with amended energy conservation standards according to multiple 

manufacturers. 

Product Conversion Costs 

Manufacturers commented that the availability of technology options for 

efficiency improvement and the cost of bringing them to the market is a key concern. 

Since the majority of room air conditioner users are low-income and their houses tend to 

be older, sales of room air conditioner are driven by affordability. If the costs of room air 

conditioners increase significantly, many price sensitive consumers will not be able to 

afford the cost, and hence will do without. 

The low margins in the room air conditioner business also make it difficult to 

recoup any product development, conversion, etc. costs. Manufacturers expect the 

amount of conversion costs and capital expenditures needed to meet energy conservation 

standards to depend on the availability of efficient components. For example, if efficient 

compressors are available, there will be less need for retooling heat exchanger 

manufacturing lines. Conversely, if coil sizes need to be increased, manufacturers 

estimate the associated financial costs would be in the millions of dollars. Multiple 

manufacturers estimated that an initial 5-percent improvement in efficiency could be 

achievable through relatively minor adjustments depending on component availability. 

For a 15-percent improvement in efficiency, a total redesign would be required which 

would require a 1- to 2-year engineering program. 

Amended energy conservation standards could exacerbate some manufacturers’ 

disadvantage of not controlling component development. Since some manufacturers are 

not vertically integrated, they do not control the development of some of the components 

needed to manufacture room air conditioners. Vertically-integrated competitors have 

better access to component technology and with amended standards the higher costs and 

lower profits would give them an even greater advantage in the marketplace. 

12-16 


EERE-2007-BT-STD-0010 COMMENT 20.3
 Product Innovation 

Manufacturers also expressed concern over the impact amended energy 

conservation standards would have on product innovation. Some manufactures believe 

that product innovation would be stymied. Resources would be focused on redesigning 

for efficiency improvement rather than on the development of new products. In contrast 

other manufacturers believe product innovation would benefit from amended standards as 

the potential for compressor and motor technology evaluation would increase. 

Impact on Consumer Subgroups 

Multiple manufacturers expressed concern regarding impacts of energy 

conservation standards on certain consumer subgroups, particularly low-income and 

elderly subgroups. Room air conditioners are installed by many people of these 

subgroups instead of central air conditioners, which are much more expensive to 

purchase and to have installed. If these consumers are less able to purchase room air 

conditioners, due to the higher costs that may be necessitated by amended energy 

conservation standards, they may choose not to buy such units. This would put those 

consumers at risk of heat stroke and other heat-related medical issues. Some 

manufacturers pointed out that the incidence of fatalities in summer heat waves indicates 

room air conditioners serve a purpose beyond just comfort for many people. 

12-17 


EERE-2007-BT-STD-0010 COMMENT 20.3
 

 

REFERENCES 

1

 U.S. Census Bureau. 2005 Annual Survey of Manufactures: Table 2 – Statistics for 

Industry Groups and Industries: 2005 and Earlier Years. December, 2006. Washington, 

D.C. Available online at: www.census.gov/prod/2006pubs/am0531gs1.pdf 

U.S. Census Bureau. 2006 Annual Survey of Manufactures: 2006 and Earlier Years. 

December, 2006. Washington, D.C. Available online at: 

http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=AM0631GS101 

2

 Ibid. 

3

 U.S. Census Bureau. 2005 Annual Survey of Manufactures: Table 6 – Value of 

Manufacturers’ Inventories by Stage of Fabrication for Industry Groups and Industries: 

Beginning and End of Year. November, 2006. Washington, D.C. Available online at: 

www.census.gov/prod/2006pubs/am0531gs1.pdf 

U.S. Census Bureau. 2006 Annual Survey of Manufactures: 2006 and Earlier Years. 

December, 2006. Washington, D.C. Available online at: 

http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=AM0631GS101 

4 U.S. Census Bureau. 2007 Current Industrial Reports: Table 1a – Full Production 

Capacity Utilization Rates by Industry: Fourth Quarters 2002 through 2006. November, 

2007. Washington, D.C. Available online at: 

http://www.census.gov/prod/2007pubs/mqc1-06.pdf 

12-18 


EERE-2007-BT-STD-0010 COMMENT 20.3