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 (N AICS 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 Capaci ty 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-iCHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact anal ysis (MIA) is to identify and quantify the likely impacts of amended energy conservation standards on ma nufacturers. 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 c onditioners to the extent that it is appropriate for this rulemaking. The Process Rule gives g uidelines for the consideration of financial impacts and a wide range of quantitative a nd qualitative industry impacts that might occur after the adoption of an amended ener gy conservation standard. For example, a particular standard level could re quire changes in manufacturing practices for residential clothes dryers and room a ir 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 Activi ties .” 1 Previously, DOE did not report any MIA results during the preliminary analysis phase; however, under this new format, DOE has collecte d, evaluated, and reported preliminary information and data in the preliminary analysis. Such preli minary information in cludes market data, key issues, product mixes, conversion costs, fo reign competition, market shares, industry consolidation, and cumulative regulatory burde n 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 ga ther information for the pre liminary 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 conduc ts 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 ind ustry 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/build ings/appliance_standards/2 006_schedule_setting.html

.

12-1(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 inc ludes 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 assessm ent, 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 c lothes 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 st andards become effective and for several years after implementation. These fac tors include annual exp ected revenues, costs of sales, selling and general a dministration costs, taxes, and ca pital expenditures. Inputs to the GRIM include manufacturing costs, shipme nts forecasts, and price forecasts developed in other analyses. Financial information, another input , will be developed based on publicly available data and c onfidentially 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 betwe en the two sets of discounted annual cash

flows.

12.2.2.2 Interview Guide

DOE will conduct interviews with manuf acturers to gather information on the effects of amended energy conservati on standards on revenues and finances, direct employment, capital assets, and industry competit iveness. 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 impa cts of amended energy conservation standards on individual manufacturers or sub-groups of manufa cturers. The interview guide will cover production costs; shipmen t projections and market share; product mix;

12-2conversion 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 publica tion of the preliminary analysis. These

activities will include manufacturer inte rviews; revision of the industry cash-flow analysis; a manufacturer sub-group analysis; an assessment of the impacts on industry competition, manufacturing capacity, direct e mployment 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 manuf acturers to gain insight into the potential impacts of amended energy c onservation standards on sales, direct employment, capital assets, and industry competitiven ess. 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 comm ent. Although a written response to the questionnaire is acceptable, DOE prefers an interactive intervie w process, which helps clarify responses and provides the opportunit y to identify additional issues.

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

allow consideration of confidential or sensiti ve information in the decision-making process. However, confidential info rmation will not be made available in the public record. At most, sensitive or confidential inform ation 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 re quest 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

12-3manufacturers, niche players, or manufacture rs exhibiting a cost structure that differs largely from the industry average could be more ne gatively affected. Ideally, DOE would consider the impact on every firm individua lly; however, it typically uses the results of the industry characterization to group manufacture rs 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 ma nufacturers 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 wi ll 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 fixe d costs, and potential barriers to market entry ( e.g. , proprietary technologies). The competitive an alysis will also focus on assessing any differential impacts to smaller manufacturers.

12.2.3.5 Manufacturing Capacity Impact

One of the significant outc omes 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, spe cifically 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 requireme nts; the nature and va lue of stranded assets, if any; and estimates for any one-time re structuring 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 proc ess. To assess how domestic employment patterns might be affected, interviews ex plore current employment trends in the residential clothes dryer and room air condit ioner industries and solicit manufacturer views on changes in employment patterns that ma y result from increase d 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.

12-412.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to energy conservation standards and other regulatory actio ns 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 s tructure and manufacturing utili zation 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 utili zation and capitalization ra tes. 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 drye r 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 C lassification System (NAICS) code 335224 ( Household Laundry Equipment Manufacturing ). Besides covering clothes dryers, this

NAICS code also covers clothes wa shers, 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 residenti al laundry equipment manufacturing employment levels and earnings from 2003 to 200 6. The statistics illustrate that both the number of production workers and the overa ll 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 Dome stic 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 c osts of materials and industry payroll as a percentage of shipment value from 2003 to 2006. The cost of materials has increased slightly from

12-52003 to 2006. The cost of payroll for producti on 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/A 2 9.0 11.1

12.3.1.2 Inventory Levels and Capacit y 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 uti lization 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.censu s.gov/servlet/IBQTable?_b m=y&-ds_name=AM0631GS101

12-6Table 12.3.4 U.S. Census Data on Produc tion Capacity Utilization for Residential Laundry Equipment (NAICS Code 335224

– Household Laundry Equipment Manufacturing) 4

Year Household Laundry Eq uipment 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. DO E 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 informat ion 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 & Com mercial/Industrial Refrigeration Equipment Manufacturing ). Most room air conditioners are now manufactured outside the United States so the following data provides only a ro ugh 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 & Comm ercial/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 va lue from 2003 to 2006. The cost of materials has

12-7increased 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 Capacit y 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 capaci ty utilization rates from the CIR

, “ Survey of Plant Capacity ” from 2002 to 2006. Table 12.3.8 prese nts 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 Manufacturin g 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

12-8falls 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 conduc t as part of the NOPR phase.

12.4 PRELIMINARY MANUFACTUR ER 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 p roduct mix and profitability. In addition,

DOE researched the cumulative burden that industry may face from the overlapping effect of new or recent DOE energy conser vation standards or other regulatory action affecting the same product or industry.

In addition to researching publicly avai lable 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 primar y basis of the information in this chapter. To maintain confidentiality, DOE does not ide ntify the individual manufacturers that disclosed information. The evaluation only report s 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 conduct ing 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 manufacture r 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 standa rds 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 strand ed investments. Higher energy conservation standards may also result in higher per-unit c osts that could cause consumers to shift to less costly products.

12-9Conversion Costs

During the interviews, DOE asked manu facturers 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 modifyin g existing products. In other cases, the necessary changes may entail a complete rede sign 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 a mended energy conservation standards could be the obsolescence of existing manuf acturing assets, including equipment and tooling. The interview guide includes questi ons to identify impacts on manufacturing capacity. These questions were deve loped to understand the impact of potential amended energy conservation standards on:

� United States and North Ame rican manufacturing capacity;

� Capacity utilization and plant location d ecisions in the United States and North

America both with and without amende d energy conservation standards;

� The ability of manufacturers to cost-effecti vely 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 regardin g 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 ca n alter the competitive dynamics of the marketplace, prompting companies to enter th e 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).

12-10Anti-competitive effects of proposed ame nded 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 pe nalties for particular consumer or user subgroups. Manufacturers are also asked if amended energy conservation standards could result in products that will be more or le ss desirable to consumers due to changes in product functionality, utili ty, or other features.

Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of multiple pending re gulations may have serious consequences for individual manufacturers, groups of manufacturer s, 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 interv iews with residential clothes dryer manufacturers to assess their concerns about the potential impact of amended energy conservation standards. In general, manufacture rs 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 interna tional 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 expr essed concern regarding the proposed UL Safety Requirement - Fi re Containment/Burn Resistant Standard, which would increase material costs and require development expenditures. Additionally, current and new DOE energy conserva tion standards rulemakings for other related, regulated equipment ( e.g. , residential and commercial clothe s washers) were of concern to multiple manufacturers, as are potential Re duction of Hazardous Substances (RoHS) requirements.

Impact on Product Mix

According to manufacturers, amended ener gy conservation standards could result in longer drying times for clothes dryers, especially at higher efficiency levels. Multiple

12-11manufacturers 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 ef ficiency research. Consumers are becoming more educated on clothes dryers and would like to see them foll ow 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 bene fits 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 expresse d 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, ha s reduced the resources manufacturers have to devote to new product de velopment. Additionally, for sma ll 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 personne l 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 ma nufacturers do not expect these conditions to change for years. According to multiple manufacturers, high-end product customers are only buying clothes dryers as necessary, low er-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 desc ribed a shift from high-end to middle-end products. All manufacturers be lieve 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. P rofit margins would most likely be affected if

12-12new or more costly known technologies mus t be introduced into the market to meet amended energy conservation standards. For some manufacturers, especially those with low market share, strict standards could reduce the ir profit margin to a point where the

U.S. market is no longer attractive. Severa l manufacturers also mentioned that if they were forced to redesign products due to a mended 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. Hi gh standards could also change the balance point between purchase and repair.

Product Conversion Costs

Product conversion costs are expected to va ry 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 the ir 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 ar e 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 an y 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 exacerbati ng pressure on their a lready 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 require ments 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 exp ected to be impacted the most, and may no longer able to purchase a clothes dryer du e to increased material, labor, and overhead costs being passed on in the market price.

Multiple manufacturers also expressed c oncern over how the implementation of new design changes for clothes dryers w ould 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.

12-13Product Innovation

Manufacturers expressed concern over the impact amended energy conservation standards would have on product innovation. S ome manufacturers indicated that the implementation of amended standa rds could force a choice of technologies too quickly to meet a standard rather than allowing manufa cturers 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 standar ds. 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 intervie ws with manufacturers to assess their concerns about the potential impact of amended energy conservation standards on room air conditioner manufacturers. In general, manufacture rs 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 interna tional regulatory programs that affect

the markets for room air conditioner s. The market and tec hnology assessment (chapter 3 in this preliminary TSD) discusses in detail some of the notable initiatives that characterize recent developments in the room a ir conditioner market. See chapter 3 for a list and description of the regulatory requirements identified by DOE.

All manufacturers reported chal lenges 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 refrigera nts at the time of the interviews, product development for most manufact urers 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 a nd performance of R-410A c ompressors, 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. P otential changes to electrical codes for fire safety could add further costs and manufac turing 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 pr oduct safety registration payments as additional regulatory burdens.

12-14Impact on Product Mix/ENERGY STAR Program

Multiple manufacturers reported lower ef ficiency 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 en ergy 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, multi ple 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 const raints of existing box dimensions.

Manufacturers stated that unit size limitations are especially relevant for the through-the-wall market, due to the c ost of modifying building envelopes and the need for standardized wall penetrations. For manu facturers 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 ma y need to reduce cooling capacity. This

could force consumers to bu y under-sized units, leading to performance issues during periods of peak usage.

Manufacturers also indicated that possibl e 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 effic iency 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 si des). 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 thr ough-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 re asonable cost, manufacturers expect to make room air conditioners at multiple efficiency levels.

12-15Industry Consolidation

Whenever new standards come int o effect, resultant market disruptions can accelerate the pace of consolidation among manuf acturers, factories, and distributors. Multiple manufacturers stated that the number of f actories 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. Amende d standards could accelerate the consolidation trend which has already greatly im pacted the industry in the last few years. No major domestic manufacturing facilit ies 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 wo uld experience a reduction in ENERGY STAR-qualified product sales with chan ges in efficiency standards due to the price

sensitive nature of room air cond itioner units being bought by lower-income consumers. Profit margins in the room air conditioner busine ss have continually de creased and could continue to decrease with amended energy cons ervation 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 user s 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 signific antly, many price sensitive c onsumers 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 expenditur es 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 siz es need to be increased, manufacturers

estimate the associated fina ncial 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 a djustments 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 standa rds could exacerbate some manufacturer s’ 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 conditioner s. 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.

12-16Product Innovation

Manufacturers also expressed concern ov er the impact amended energy conservation standards would have on product innovation. Some manufactures believe that product innovation would be stymied. Resou rces would be focused on redesigning for efficiency improvement rather than on the development of new products. In contrast other manufacturers believe product innovation w ould 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 ar e 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 ma y 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 fatali ties in summer heat waves indicates room air conditioners serve a purpose be yond just comfort for many people.

12-17REFERENCES

1 U.S. Census Bureau. 2005 Annual Survey of Manufactures : Table 2

– Statistics for Industry Groups and Industries: 2005 and Ea rlier 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.censu s.gov/servlet/IBQTable?_b m=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 Fabr ication for Industry Groups and Industries: Beginning and End of Year. November, 200 6. 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.censu s.gov/servlet/IBQTable?_b m=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

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