The recent heat wave has reminded me of a bunch of German Shepherds. I last met them in 1986, but I have not forgotten them. It was during a visit to the home of a newspaper editor in Madras (now Chennai). Chennai is a scorching coastal city in South India.
The dogs weighed 45kg and were athletic. They could leap over a 10- ft (3m) wall.
The dogs were memorable not for their size and athleticism. Their kennel was the only part of the house that was air-conditioned.
Air-conditioning was then an unimaginable luxury in India. An air-conditioned kennel for imported dogs was unique.
India was then an austere country. It was during the Licence Raj. Even imports of lipstick (let alone dogs) were rare.
The editor had an excellent read of animal behaviour. He explained that it kept the dogs passive. If not for the cool kennel, the dogs would run amuck.
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‘A most important invention’
His wisdom could inspire investors in 2023. A record heat wave is now sweeping the region. On May 13, the hottest temperature in the history of Singapore was recorded. The mercury hit 37 degrees in Ang Mo Kio. Frying pans were useless. One could fry an egg on the pavement.
Singapore owes its prosperity to the air-conditioners. Singapore’s founding Prime Minister Lee Kuan Yew said: “Air-conditioning was a most important invention for us, perhaps one of the signal inventions of history. It changed the nature of civilisation by making development possible in the tropics.”
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In the 1970s, most factory workers in Singapore were less comfortable than the German Shepherds in Madras. There was a stench of sweat hanging over the factories. Workers were unproductive. Foreign Investors were averse to investing in a 24-hour sauna.
Today, air-conditioning is universal in Singapore. Most homes and workplaces have it. There is even an air-conditioned street in Bugis Junction mall.
Many people are unaware that it took 50 years for air-conditioners to take off. Air-conditioners were invented by Wills Carrier, an American engineer, in 1902. It took half a century before households could afford it.
Until the 1950s, air-conditioners were so heavy that they could not fit into a home. They were larger than the average bedroom. The contraptions made a massive racket. The machines cooled the room, but drowned conversation.
Breakthrough for air-conditioners
The breakthrough for air-conditioner use was its compact design. It also became quieter. Units that fitted into a window to cool a single room were created, sparking huge demand. In 1948, about 74,000 air-conditioners were sold in the US. Only six years later, more than a million units flew off the shelves.
Air-conditioners’ penetration in the tropics is more recent, but equally spectacular. Today, more than 97% of Singapore homes have air-conditioners, which is four times the level in 1990.
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Today, use is still concentrated in the rich countries. The US uses more electricity for cooling than Africa uses in total. In emerging markets, most homes already have access to electricity. But, only a minority of them have air-conditioners.
In Indonesia, for instance, 75% of homes have electricity, but less than 15% have air-conditioners. The deterrent for the Indonesian households is the unit cost, as well as the maintenance expenses.
We may be on the cusp of another breakthrough. Samsung, Midea and Whirlpool have launched small air-conditioners costing less than US$80 ($127) each. These appliances can be purchased on a hire-purchase basis. A family with a monthly income of less than US$200 can pay just US$3 a month over two years.
The stock market has not warmed to the air-conditioning boom. Whirlpool India could be a beneficiary. One counter that is heavily exposed to the cooling boom is Whirlpool India. This is the Indian subsidiary of the US appliance giant. It has a vice-like grip on India’s air-conditioners’ market. Penetration in India is below 10%. This is one-ninth of the level in China.
Whirlpool India’s operating earnings have halved in the last three years. Covid’s ravages took their toll. But, the market expects its operating earnings to double in FY2023-25. Air-conditioners are in high demand as India’s consumption soars.
There are fine proxies for the industry’s growth in China. The top Chinese makers Midea and Gree have halved from a 2021 peak. Midea trades at 9x EV/Ebitda, less than half the levels three years ago.
The comfort that the German Shepherds enjoyed may become common. Air-conditioner stocks may be a cool way to invest.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
