North American HVAC Equipment Manufacturer

Supplier of Residential Heating and Cooling Equipment

Background

Our customer is a leading North American residential HVAC equipment supplier. This company manufactures and sells a broad line of furnaces, air conditioners and air handlers throughout the Americas and Europe. In previous years the customer’s practice was to sell brand labeled controls – such as thermostats – manufactured and sold by other suppliers. In some instances our customer would require slight product changes to be implemented by the supplier, such as the addition of a new control feature or placing the customer’s logo on the product case. Otherwise these products were the same as those already sold by the supplier. The advantages to our customer of brand labeling existing products included fast time-to-market, minimizing internal engineering resources required and minimizing development costs. The disadvantages of this approach included lack of controls differentiation, loss of controls sales (e.g. attachment rate) to competitor’s products and occasionally the unapproved proliferation of our customer’s proprietary technology. In the case of low attachment rate, our customer’s HVAC system sales often did not include their brand thermostats – the systems were sold with another manufacturer’s thermostat, typically the original supplier’s thermostat version that our customer brand labeled. The primary reason for this was that HVAC distributors preferred to minimize stock, and would place only the original supplier’s thermostat on shelves due to the broader customer base. These distributors knew the original supplier’s thermostat was basically the same as the customer’s branded model, and would tell their customers to purchase the stocked unit. This resulted in significant lost thermostat sales for our customer. In the case of proprietary technology proliferation, our customer often found that features/functions they added to a brand label thermostat showed up later in competitor’s thermostats. IP protection was weak within the industry.

Forced Air Furnace

Customer Challenges

Our customer desired to improve their market position with residential HVAC controls in general, and specifically with thermostats. They wanted to develop thermostats that achieved the following objectives:

1. Provided company differentiation through unique controls features, functions, look and feel.
2. Captured a higher rate of controls sales used with their HVAC systems (e.g. higher attachment rate).
3. Better protect their intellectual property.

Although our customer viewed the above goals as highly desirable, they lacked engineering capacity to internally develop the required products. Their engineering organization was largely allocated to product support and core HVAC related developments. They also did not have advanced electronics manufacturing capability that could be used for new controls. As a result, they decided to investigate external alternatives to obtain a new line of thermostats.

Thermostat

Customer ‘Must Haves’

Our customer’s expectations were to obtain controls unique to them, not offered by any other supplier in the industry. They also expected their intellectual property to be protected in order to preserve controls differentiation in the future. And, of course, they expected a high level of customer support and manufacturing quality from any selected supplier. To achieve these expectations they understood that a supplier partnership was needed that would meet the following criteria:

• Provide the ability to develop and manufacture a range of unique controls
• Provide the ability to create differentiating controls features, functions, look and feel
• Offer capacity to manufacture such advanced controls with the highest quality
• Ensure contractual restrictions blocking supplier sales of such controls to others
• Ensure contractual protection of their Intellectual Property

The above criteria were used by our customer in evaluating partnership alternatives. All criteria were important, with approximately equal evaluation weighting.

Why DENSO WAVE Was Selected

There were several fundamental reasons why DENSO WAVE was selected. These reasons included our business philosophy, our engineering capabilities and our manufacturing quality. Starting with philosophy, our business objective has consistently been to develop long term and broad reaching partnerships with a limited number of original equipment manufacturers (OEMs). To achieve this we offer development and manufacturing of products unique to each OEM customer, and sell these products only to that customer. We do not sell such products to other customers. In addition, it is required that we protect our customer’s intellectual property, preserving their market uniqueness. Any deviation from these practices – unique products sold only to the respective customer and protected customer IP – would undermine our business philosophy.

Relative to engineering experience, DENSO WAVE has roughly 30 years experience developing advanced micro-processor based controls, onboard firmware and associated software. Developed products span industrial controls, environmental controls, security controls, robotics and data capture systems.

In terms of manufacturing quality, DENSO (our parent) has been recognized worldwide as a leading quality supplier. Our quality processes have been driven by the stringent requirements of high volume automotive components, which has been DENSO’s primary market for over 60 years.

What We Did

Following selection to develop several thermostat products, DENSO WAVE helped the customer complete detailed functional specifications and user interface screens for the products. We then developed, tested and manufactured the thermostat products for our customer to sell. Our skilled engineers implemented product designs, formulated test plans and helped prepare manufacturing processes. During product developments we designed the required hardware, product software, mechanical packaging, labels, user manuals and cartons. We worked closely with the customer to qualify and test the developed products. And, as with all products we manufacture, we provided the customer with product support and life cycle continuation engineering. In all cases these products were unique to the customer, offering unique control algorithms, unique features, intuitive user interfaces, custom look and custom feel. These products were only sold to – and available from – our customer. The products were not sold to nor were they available from any other supplier.

The Result

The unique controls developed by DENSO WAVE helped position the customer much differently in their market. Our customer was now able to sell highly differentiated controls with features, look and feel that were much different from any other supplier. The first thermostat we developed enabled our customer to increase their controls attachment rate – the rate of customer controls sold with customer HVAC equipment – from approximately 15 to 25 percent. Subsequent thermostat products increased this attachment rate even more.

Thermostat and remote indoor sensor

Customer sales and distributor staff were – for the first time – able to sell differentiated controls with their HVAC equipment. It is important to note that their customers see and interface with the controls…the actual heating and cooling equipment is typically hidden from view in a basement or furnace closet. The ability to sell differentiated controls generated tremendous enthusiasm, engagement and market success within the customer’s sales channels. The result was increased customer market share during very difficult US economic conditions.