HVAC’s IoT Transformation Is Just Beginning: AHR Expo 2018

ABI Research analysts recently attended the AHR Expo show in Chicago. The expo featured more than 2,000 exhibitors of air conditioning, heating, refrigeration, and ventilation products, from valve and sensor hardware to room-size dehumidification systems. Its relevance to the IoT is twofold. First, it is a market of hundreds of smaller companies that ultimately support a key IoT segment of building automation systems. Second, while its overall IoT maturity would be considered low, IoT value and investment cut across the maturity spectrum. This insight highlights the top four IoT activities demonstrated by suppliers at the show and what this means for the broader IoT market.

Four broad IoT themes became evident in discussions with AHR show exhibitors.

IoT for Field Service Value: Field service is an integral part of the building heating and cooling market and its most mature IoT suppliers have led by using IoT-ready machines and related services to improve field service operations. An example is Seresco, a dehumidifier supplier for indoor pool installations, which has been offering sensorized and connected dehumidification systems for more than 10 years. The impetus for Seresco’s early move into IoT technologies was the challenges in troubleshooting dehumidification systems, not only to solve a system issue, but also to answer the false-positive question that the dehumidification system is not the problem. Today, the IoT is so important to Seresco that its IoT service, WebSentry, is bundled with every new dehumidification system at no cost.

Sensor-as-a-Service Solutions: Home automation has already proven to be a sensor-driven market, and as demonstrated by suppliers at the show, commercial buildings are yet another opportunity to tap. Senseware is a startup with a sensor-as-a service solution. Besides standard sensors for temperature, humidity, CO2, etc., it also provides bridge hardware for BACnet, Modbus, and other legacy devices and systems. North Park Innovations also demonstrated its sensor-based IoT solutions targeting the commercial and residential HVAC space. Wireless sensor devices that are retrofit and integrate either directly with a building’s existing BAS controllers or at a platform level are increasingly gaining traction. According to ABI Research’s latest report on commercial building automation, https://www.abiresearch.com/market-research/product/1029593-commercial-building-automation/ shipments of wireless sensor devices such as occupancy, light, temperature, and humidity sensors will reach 28 million units annually by 2022.

Consumable Supplier IoT Solutions: AAF Flanders is a filter and filter container supplier which is taking its consumables business of filters to the next level with Sensor360. Sensor360 is an end-to-end IoT solution designed to help monitor both the filters and the air handling systems to maximize the TOCTCO. The solution includes the sensors, the 3G gateway, the cloud services, which includes a mobile app, and analytics. AAF Flanders sells Sensor360 by bundling the solution in a filter deliverables contract.

Ceding the IoT Opportunity to Partners: This was also a common theme, demonstrating both the complexity of an IoT solution and the desire by OEMs to stay focused on their core business. The IoT complexity challenge was demonstrated by Perfect Aire’s partnership with Cielo. Perfect Aire sells window and wall-mounted air conditioners for the home and commercial markets. Cielo offers an IoT solution enablement platform that includes a Wi-Fi controller, smartphone app, integration with both Alexa and Google Assistant, and cloud services/analytics. Cielo’s partnerships cover all the major air conditioner and heat pump brands, and as highlighted by the Alexa integration, it is doing all the messy communications protocol and cloud services integration that an OEM, particularly smaller OEMs, simply does not have the resources to invest. Another vendor that adamantly preferred to stay out of the IoT solution space was Sika, a measurement and sensor OEM that was displaying its HVAC flow sensors. It stated that for customers seeking a remote monitoring capability for a sensor, it will refer the customer to a partner.

The IoT activities demonstrated by suppliers at the show highlight some common trends, but also some new trends to watch.

Verticalization: In many different parts of the IoT supply chain, more vendors are verticalizing, i.e., creating both marketing and toolsets that are packaged and bundled for a particular vertical market. It is especially evident in the device-to-cloud space and Cielo is a perfect example of a company that offers an IoT platform, but is exclusively focused on the heating and cooling market. In fact, its solution includes its own controller, demonstrating a commitment to the space. Typically, when verticalization starts to occur, it means a market has a lot of upside.

Customer Experience: An important question as the IoT takes hold in the heating and cooling market is whether or not the customer experience can be maintained if the OEM cedes the IoT service design and implementation to a partner.  As noted above, some OEMs are taking a very hands-off approach to IoT solutions connecting their products which is quite frankly – risky!  Security issues should be the biggest concern for OEMs due to connectivity and how it can completely change the use and control of the product, as well as the customer perception of the product. OEMs need to balance security and business model challenges of connected products against the potential benefits with maintenance and field services as an important IoT beneficiary.

WAN Connectivity Is Not the Holy Grail: In the IoT world, particularly with the growing relevance of the cloud, there may be the expectation that all equipment will be WAN connected, either directly or via a gateway architecture. But WAN connectivity is not the holy grail for the heating and cooling market. In 2022, ABI Research estimates that wireless WAN in the commercial building automation market will account for only 4% in wireless device shipments, and only around 1% of total device shipments. One issue is simply the cost of cellular connections. Another issue is the physical complexity of getting a quality cellular connection or an Ethernet cable to the machine itself. But the more important reason, as shown in the heating and cooling market and one that can be a general trend in any maintenance-driven market, is that IoT solutions need to support field service technicians first which is facilitated with smartphone and tablet applications and a Bluetooth connection to a digitized equipment interface.  This approach avoids disintermediating the well-established OEM relationship with field service organizations whose value is not only as a service channel but also as a sales channel.  This approach also improves the customer experience for speed and quality of issue resolution.

IoT-Enhanced Warranties: Generally, in all machine-driven markets, the IoT will change warranty options and how they are written. Companies like Seresco have already assembled longer-life warranty plans for customers that use its remote monitoring service. However, warranty evolution will not be simple, because as the number of connected machines increases, OEM business models will need to change, which is a both a financial and an organizational challenge. Also, insurance firms are starting to invest in the IoT to offer their own warranty-related plans and services. The bottom line is that each OEM will have to approach warranty evolution differently to ensure that IoT-related activities are a net organizational benefit.

OEM Market Expansion into Facility Management: AAF Flanders recently acquired RIS Facility Management based in Germany. For a consumables supplier, this appears to be a savvy move, as it allows, to some extent, greater control of its filter business, but more importantly, experimentation with new services business models. AAF Flanders is in a great position to understand how its Sensor360 product can change the delivery of facility services, which is a market that leverages relationships with OEMs and consumable suppliers for machine repair, parts replacement, and consumables delivery. But do not expect a wave of OEM acquisitions of facility management suppliers. These relationships are complex and each OEM will have a different set of strategic levers to consider.

Overall, OEMs serving the heating and cooling market must recognize that they need to have an IoT strategy which considers how connected solutions will impact their legacy and new products even if they are not offering a connected solution themselves.  Key considerations are security both for potential loss of IP if an IoT solution reveals operating capabilities, and for controlling operational and customer experience risk.  Important commercial considerations are the impact of IoT to partners particularly field service organizations, and the revenue, ROI and ultimately competitive issues that result from IoT choices.

For IoT suppliers, the heating and cooling market is still a greenfield opportunity.  But OEM customers are all at different stages of maturity so a one size fits all supplier approach will not work.   Regardless of the position in the IoT value chain, IoT suppliers should consider their opportunities and choices from two perspectives:  brownfield and greenfield.  There is a lot of legacy equipment in the heating and cooling market so brownfield opportunities favor easily retrofittable “sensor-based” IoT solutions.  Greenfield opportunities where connectivity and IoT applications can be built into the equipment need to understand how these solutions can affect important field service and facility management partnerships.