Can air conditioning cozy up to American consumers?

To the Carrier Corp. belongs the largest air conditioning business in the world. Back in May 1931, when FORTUNE first wrote about Carrier, it was a company sixteen years young, and though its sales had just slumped from a 1929 high of $8,000,000 down to $6,600,000 in 1930 and its net income from $672,500 down to a depression-struck deficit of $86,000, it was hopeful. Those hopes have since been realized. Carrier has grown.

Carrier’s sales (air conditioning and commercial refrigeration) sank to $6,000,000 in 1932, but then began a steady rise reaching $9,400,000 in 1935, $10,500,000 in 1936, and an all-time high in 1937 of $17,500,000 — of which $15,000,000 was in air conditioning. It made 15,000 installations last year out of a lifetime total of something more than 150,000. It trebled its manufacturing capacity by moving spectacularly from Newark, New Jersey, to a big new home in Syracuse, New York. It has put a business-wise salesman in control of an organization that used to be run by engineers. And with a new distribution system and a new manufacturing technique, it has branched out from the business of big tailor-made building installations into what is more nearly a true consumer market — the  manufacture and sale of self-contained units for homes and offices and small stores.

Carrier’s recent growth reflects the growth of the air conditi0ning industry. In 1931 the industry did a total business of only $1o,000,000 — and much of what was not handled by Carrier was done by Carrier’s biggest competitor, the York Ice Machinery Corp. For 1937 the industry’s gross has been estimated at $9o,000,000 — and industrial Goliaths like General Electric (GE), General Motors (Delco-Frigidaire) (GM), and Westinghouse Electric have invaded the field and are stepping on the heels of the two leaders. Air conditioning, which seven years ago was just about restricted to certain types of industrial plants and to movie theatres, is becoming a competitive necessity in summer wherever customers come to eat, drink, or buy. It has broken into office buildings, hotels, homes. It is almost taken for granted on Pullman cars. Ships, government buildings, hospitals have come to use it. “Air conditioning” has become a straphanger’s phrase.

In spite of all this, FORTUNE’S return to the air-conditioning industry is tinged with disappointment. For the industry has not made the progress that the public looked for. The public, led on by the exaggerated pipe dreams of Sunday supplement writers, looked for a huge and immediate mass market; it looked to air conditioning to stand with the automobile industry in leading the country out of depression; it looked, in the not too far future, toward a revolutionized indoor life on this planet in the manner of an H. G. Wells fantasy. Intrigued by summer-cool movie houses and Pullman cars, sold on the notion of being as comparatively comfortable between four walls in summer as in winter, the public held its breath. And not much happened. There has been no more of a meeting of minds  between the air-conditioning industry and the public than there was in 1931. The market spread out rather than up. With “every inclosed space” as its touted potential market, the industry reached into almost every type of inclosed space, and got no further. Out of 22,000,000 wired homes in the U.S. — and that is where real volume sales were expected to blossom — less than 0.25% can yet boast so much as an air-conditioned room.

Would you buy an air conditioner?

In the interest of tapping the nation’s buying desires, FORTUNE included in its Quarterly Survey this month the question: “If you could satisfactorily air condition your whole house for $1,200 or any one room for $200, would you do it?” The answer was an emphatic “No.” Two-thirds of the public would not install air conditioning in a house even if it could be done for $1,200, which is a good deal cheaper than the present average price, and would not buy a one-room conditioning unit at $200, which is just half the current price of the smallest portable cooler. And this percentage was virtually the same for all income groups. Which indicates at least two things: first, that the industry is way off base price-wise, if it hopes ever to develop a mass market; and, second, that the industry has conspicuously failed to convince the public of the desirability of air conditioning.

For this failure there are a great many explanations. Most of them can be summed up by the word confusion. Probably no industry in the nation is the prey of so many economic, engineering, and  merchandising forces within and without its own bailiwick. As a result there is confusion in the public mind as to what air conditioning is. Most people think of it as a fancy name for making rooms cooler in summer, although actually it involves the control, not only of air temperature, summer and winter, but of air humidity, air quality or cleanliness, and air circulation as well. There is confusion in the industry itself as to what air conditioning is. The $90,000,000 that the Air Conditioning Manufacturers’ Association attributes to the industry for 1937 is pooh-poohed by ACMA’s most important member, Carrier, which claims that no more than $60,000,000 of it is “orthodox” conditioning and dismisses the remainder as plumbing, steam fitting, and gadgetry. Whereas many fan and furnace manufacturers, anxious to list their own activities as a form of air conditioning, call the figure far too small.

There is confusion for the student as to whether air conditioning should be treated as a capital-goods industry or a consumer industry. Actually it is both and frequently it seems to be the result of miscegenation between the two. For the industry’s product may be a “central station” conditioning system for a whole building: which is something like a modern heating system; which includes massive machinery in the basement (or elsewhere), expensive duct work interlaced through the walls, and a separate outlet for every conditioned room; which must be so tailored a job that the accouterments and labor of installation alone may eat up as much as 80% of the cost; which may cost over $1,000,000 for a large plant or store, or as little as $1,500 for a small house; which was until recently the only type of air conditioning known and still accounts for perhaps 60% of the business. Or the product may be a newer “unitary system” with the bulk of the machinery in one spot but with separate little boxes, containing filters, fans, and the like in each room — a type of installation found in suites of offices, one-floor stores, etc., and now making up about 30% of the industry’s dollar volume. Or the product may be a self-contained unit, the industry’s newest device — generally built to take care of just one room, looking like an oversized kitchen cabinet or a big filing case or a radio console, needing only to be hooked up to an electric plug, a window, and a water pipe, usually limited in its function to summer cooling, and making up today about 10% of the industry’s sales.

The merchandising of air conditioning is confused by the two distinct uses to which it is put: “comfort conditioning” for human beings, and “industrial conditioning” for materials or goods, such as, say, chewing gum, which cannot be manufactured if the air is so warm and moist that the slabs of gum cannot be cut into sticks, or so cold and dry that the sticks, turned brittle, will shatter. That comfort conditioning may be intended for commercial purposes or as a pure luxury adds further to the confusion. As does the still unanswered question of whether air conditioning is good for health — and if so, how much is how good.

There is confusion about marketing and distribution. A big tailor-made installation needs expert fitting and must be handled by engineers. Even a portable room cooler requires more skill to install than does a radio. How big a job, then, can be entrusted to a local contractor rather than demanding specially skilled men from the home office? And is it likely that capable contractors, who might take care of a house or store installation, would be interested in pushing the little portables? And is it not certain that a dealer trained in the art of pressure salesmanship would be unable to direct, advise, or manage a building installation?

There is confusion too about air conditioning’s immediate future, and this affects the industry’s production policies. Should plants be geared to a rapid increase in big industrial and commercial comfort installations? Or to the outfitting of homes, with the emphasis on heating instead of cooling (for nine out of every 10 home installations to date have been “winter conditioners” — i.e., warm-air heating systems with a filter and humidifier thrown in)? Or are quantity sales of packaged store and room coolers suddenly going to open up — and should manufacturers therefore hop the mass-production band wagon and prepare to turn out air conditioners in the manner and on the scale of electric refrigerators?

An unconditioned public

With such questions in the air, it is little wonder that the public remains uneducated about air conditioning. And the industry has done little to clear up or finesse the confusion. It has not, for  instance, tried to sell air conditioners to the American male as gadgets. And as the industry might have learned from toy trains, from automobile dashboards, from radios, from a thousand and one mechanical and electrical devices, there is no better way to channel the spending habits of the American male than through gadget appeal. Moreover, as a gadget, the home air conditioner is potentially fascinating, with the humidity and temperature combinations varying every day and with automatic or hand-adjusted controls resolving complicated formulas into effective regulation of indoor air.

Unquestionably another factor blocking a big market for air conditioning is the popular assumption that lower prices are just around the corner. The bulk of the industry, anxious to sell its present products, of course denies this. Even mass production, argue the manufacturers, cannot bring prices down far. Because (1) labor costs account for only about 30% of the factory price, which in turn makes up only 20 to 50% of the final sales price; and because (2) the parts of each unit — fans, coils, compressors, etc. — were separately perfected long before they were put together for air conditioning and are already mass produced for other products, such as electric refrigerators.

In derogation of these arguments, let it be noted that the industry clings to high prices chiefly because it clings to the refrigeration principle for summer cooling and refrigeration is expensive. The smallest room cooler made must have refrigerating powers five or six times as great as an ordinary kitchen refrigerator, and the expensive part of the apparatus is the combination of coils and compressors necessary for refrigeration. So perhaps the industry is putting itself away on ice. There are, as will later appear, possibilities other than refrigeration for summer air conditioning; and it may be that their development will provide the impetus that this sprawling and uncertain industry needs if it is really to grow up.

To spotlight the industry’s past and its probable future, one turns naturally back to Carrier. Carrier was the industry’s pioneer. Willis H. Carrier, the company’s chairman, whose publicized name and fame are probably its greatest single asset, has been known as the “father of air conditioning” ever since his Rational Psychrometric Formulae (see appendix below) took the industry out of its hit-or-miss infancy back in 1911 and put its work on a scientific basis. And the Carrier company has been the industry’s biggest factor ever since 1915, when eight engineers, headed by Willis Carrier, set themselves up as journeymen contractors and shipped themselves out from their little shop in Newark to install man-made weather in those few industrial plants that found it a help or a necessity in the manufacture of their wares.

Today, sharing the industry’s growing pains and hemmed in by eager competitors, Carrier remains the pioneer. To GE, Frigidaire, Westinghouse, Nash-Kelvinator, and Chrysler (Airtemp) air conditioning is still a sideline; B. F. Sturtevant, Carrier’s oldest competitor, sticks primarily to its fans; York, Carrier’s big rival, does more commercial refrigeration work than air conditioning; American Radiator sells air conditioning with one hand and steam heating with the other. Carrier alone, despite its small and new interest in straight refrigeration, has in effect bet on air conditioning on the nose.

Moreover Carrier, along with York, has set out to spread-eagle the whole amorphous and slippery air-conditioning field — a venture that none other of its competitors has yet dared or cared to undertake. Carrier has traced the industry’s trend toward mass production by shifting its emphasis toward straight manufacture, as more and more local contractors and independent engineers have learned to handle air-conditioning installation. At the same time, Carrier is trying to hang on to its share of the big tailor-made market, where precise installation still demands that the manufacturer follow the job through. It is somehow fitting that the industry’s pioneer should have most at stake on the industry’s future and should be gambling, almost alone, on every angle of that future. Yet as Carrier plots its uncertain course toward a broad and shifting horizon, perhaps (although all Carrier’s officials deny it) it looks back longingly on the good old days when there was nothing but industrial conditioning to do and when there was almost nobody to do it but Carrier.

The roots of an air conditioning pioneer

Carrier Corp. is the precocious stepchild of Buffalo Forge Co., heating and ventilating manufacturer since 1878. It was to Buffalo Forge that a farm-boy mathematician, fresh from Cornell, went looking for a job, just at the turn of the century. He hopped a Buffalo streetcar and asked the young man sitting next to him how far it was to Mortimer Street. The young man replied that he was going to Mortimer Street, to Buffalo Forge where he worked. Was his companion headed there too? He was — and they started talking. The job seeker was Willis H. Carrier — inventor, scientific plugger, idea man for engineers — whose common sense application of physics to the problems of practical air conditioning was to become largely responsible for his company’s success and prestige. The other young man was J. Irvine Lyle, who has been associated with Willis Carrier ever since, and who is president of Carrier Corp. today.

With Lyle’s help, Carrier got his job — doing engineering research. In 1902 a lithographing shop asked Buffalo Forge if it could devise some sort of atmospheric control so that the paper would not shrink or swell with every change in humidity — and as a result of Carrier’s ingenuity, Judge magazine and others were soon being printed better and faster. In the same year, a glue manufacturer ordered drier air so that the glue could be handled more easily, and Carrier did the job. Four years later, Buffalo Forge installed its first scientifically controlled air-conditioning job, in a silk mill at Wayland, New York, and Carrier had become its chief engineer. (It was in this year that Stuart W. Cramer thought up the term “air conditioning” for the humidity control he, like Carrier, was applying to textile manufacture.) Inasmuch as the textile industry was destined to become, almost immediately, one of air conditioning’s chief financial props — and to remain so until well into the 1920s, when more than 200 industries were using air conditioning — big-time industrial conditioning had started to move.

Recognizing this fact, Buffalo Forge formed a subsidiary called the Carrier Air Conditioning Co. of America — and thus headed the Carrier name toward prestige and publicity value. (Though entirely inactive now, this company still exists — and there is always the fanciful possibility that Buffalo Forge might try to revive it and compete with Carrier Corp. under a strikingly similar name.)

In 1911 Willis Carrier presented his famous Rational Psychrometric Formulae and his almost equally significant paper “Air-Conditioning Apparatus” to the American Society of Mechanical Engineers. In 1911, too, came the first big tobacco job, for American Tobacco Co. (The installation is still working today.) Then came the first rayon job (practically all rayon mills are now conditioned), for the American Viscose plant at Marcus Hook, Pennsylvania. And conditioning orders for the manufacture of shell fuses, which were to increase tremendously with the War; for the susceptibility of powder to different humidities makes humidity control during manufacture indispensable to the exact timing of most explosives.

It was in 1915 that Carrier and Lyle, after some futile fretting at Buffalo Forge’s rather timid management policies, decided to go into the conditioning business for themselves. Taking six of Buffalo’s engineers with them they set up the Carrier Engineering Corp. in Newark with Carrier as president and Lyle as general manager. They could not afford a factory; they bought their parts and their machinery wherever they could get them made to order. In their first year they not only grossed half a million dollars, but netted $50,000. They plowed back almost all the earnings and continued to do so. Thus they achieved on an original investment of $35,000 total assets of exactly a hundred times that figure and an earned surplus of close to $900,000 by 1927, when they first went to the public for money.

In 1916 came a $600,000 order from Atlas Powder for its plant in Perryville, Maryland. Other big orders followed. By 1918, Carrier had rented a factory, still in Newark, and four years later it owned its own plant and was manufacturing much of its own conditioning apparatus. Then, in quick succession, came three developments that were to mean plenty to Carrier — though only one bears Willis Carrier’s name. The first was the Carrier centrifugal compressor, which, when used with a new refrigerant named Carrene, made big refrigerating jobs, especially for air conditioning, far safer, cheaper, and more efficient. The second one was Aerofin, a heating or cooling surface made of copper instead of the old bulky, heavy cast iron — and it opened the way to more compact and efficient conditioning units. The third was the “bypass” device — and it helped open the way to practical, large-scale conditioning for comfort.

The new light copper finned piping christened Aerofin was designed in 1922 by an engineer named Lawrence C. Soule who was working for the American Radiator Co. But American Radiator was not interested. It was wedded to cast iron through its foundries, and its foundries were making money. So Soule took his Aerofin to Carrier, and sold both it and himself.

Carrier could make Aerofin, and could use some for its own conditioning apparatus. But general manager Lyle thought Aerofin should have a wide market in the heating field — and he found that he could not effectively sell that market. The outlet to that market was composed of about 12 manufacturers of fans for heating systems, and all of them, long committed to cast iron, were unwilling to gamble on Aerofin and take the risk of losing some of their cast-iron connections for nothing. For Aerofin, if it sold, would obviously be competing with cast iron.

So Carrier picked out three of the biggest fan companies — B. F. Sturtevant, American Blower, and its own stepfather, Buffalo Forge — and offered each of them a 25% interest in the new Aerofin Corp. in return for the exclusive right to manufacture the piping for the new company. All three accepted and Aerofin immediately began to find its market. How much Carrier makes out of Aerofin is kept scrupulously secret, but it is a safe bet that Aerofin Corp.’s 1937 gross was at least $3,000,000. Moreover, it is rumored that Aerofin saved Carrier from depression bankruptcy, and that Carrier’s double take from Aerofin — 100% of manufacturing profit and 33% of the sales profit (ever since American Blower merged with American Radiator and sold out its quarter interest) — is a big slice of Carrier’s net today.

Consumer air conditioning’s Hollywood roots

Twenty years ago, air conditioning for human comfort was — except for fans and furnaces — all but unknown. Inventor Walter Fleisher — who is said to have as many air-conditioning patents to his name as anyone in the industry — had cooled the New York Folies Bergères for Jesse Lasky in 1911. There had been other rough and sporadic attempts to make theatres comfortable in summer. But Carrier’s first comfort job came in 1921, for Sid Grauman’s Metropolitan Theatre in Los Angeles. Then a couple of Chicago movie houses ordered air conditioning, and found that it paid. It paid because it turned an investment with a nine-month profit into an investment with a 12-month profit. Moving-picture houses, especially in cities, were at that time so stuffy in summer that they made a habit of closing until fall, just to save operating expenses. The first big commercial comfort market was there, all right, waiting to be exploited.

It was the bypass, the centrifugal compressor, and Carrene that made it possible. Carrene took the place of dangerous refrigerants. The centrifugal compressor took the place of the old bulky, less efficient reciprocating compressor. And the bypass enabled precise control of an auditorium full of air through the cooling and drying of only a fraction of that air, and then mixing it with the unconditioned air. The two most important bypass patents, held by Carrier’s Logan Lewis and by Walter Fleisher, were pooled in the newly formed Auditorium Conditioning Corp. (which now holds, licenses out, and defends against infringements [for] most of the important air conditioning patents) — and comfort conditioning for commercial purposes was under way.

Competition heats up as the market cools down

Most of the new comfort business, like the old industrial business, went to Carrier. Among its first big comfort installations were those for New York’s Rivoli Theatre and for J. L. Hudson’s department store in Detroit, both in 1925. Starting from a $112,700 profit on $2,350,000 worth of business in 1925, it more than tripled its gross and sextupled its net in four years. With competition still pretty piddling, Carrier had to sell the product but not the brand.

Canny York, however, read the signs on the wall and the black figures on the Carrier account sheets. With years of commercial refrigeration work as a background, it began in 1928 to turn its attention more and more to air conditioning. It had handled occasional jobs before then, including an installation for Carnegie Steel as far back as 1903 — but not enough to bother Carrier. Now, the bother was brewing. And on top of competition came depression.

Depression almost ruined Carrier. It did not matter that the conditioning of the dining salon on the M.S. Victoria in 1931 opened up a small but profitable new field. It did not matter that the first conditioning of a complete passenger train, for the B. & O., with York equipment, in 1931 opened up a larger new field — for that field did not prove so profitable. It did not matter that the invention of Freon (see FORTUNE’S story on the chemical industry, December, 1937) made the use of refrigerating compressors practical for much smaller conditioning units. It did not even matter that Carrier’s long-term debt amounted to only $500,000 in 1931 and decreased steadily from then on. Nor did it matter — except perhaps in the wrong direction — that Carrier, late in 1930, expanded the scope of its activities through a merger with the Brunswick-Kroeschell Co., which made small commercial refrigerators, and with the York Heating & Ventilating Corp. (no kin to Carrier’s big rival), which made unit heaters.

The important fact was that the big industrial and commercial orders fell off just as aggressive competition hit Carrier for the first time. The small unit market had not yet been cracked open. Carrier operating losses, beginning with $514,000 in 1931 and topped by a red figure of $674,000 in 1933, mounted to a total of almost $2,400,000 by the end of 1935. Total assets shrank from $10,000,000 to $5,800,000. The preferred stockholders went dividendless from 1932 on. York was taking business away from Carrier. Frigidaire, GE, Westinghouse, and others were invading the conditioning field. Between depression losses and unwonted competition, it looked as though Carrier was just about on the rocks.

Then, hand in hand, came recovery and a new general manager named Lemuel R. Boulware, who holds the reins of Carrier Corp. today.

Carrier gets new leadership and new town

Boulware, like Willis Carrier, was a farm boy — from the pennyroyal part of Kentucky, as opposed to the more aristocratic bluegrass section where president Lyle grew up and from which he picked, through the years, many of Carrier’s engineers. At Wisconsin, where Boulware went to college, a professor named Gilman gave him a blueprint on how to get to the top of a manufacturing business. Boulware never forgot it. Start in the finance department, said Gilman; so Boulware spent five years in accounting and finance. Then production; and Boulware’s next five years were devoted to purchasing and production in a midwestern plant. Finally, marketing, went the advice; so Boulware spent 10 years as sales manager of the Easy Washing Machine Corp. But when his big chance to button all three together, for Carrier, came along, Boulware hesitated. Carrier Corp. was a very sick cow, with scarcely cash enough to meet its payroll — and Lyle, who offered him the job, admitted it.

Boulware, who combines in rare harmony the traits of joviality and shrewdness, finally accepted the general managership, but only on condition that he be given an absolutely free hand. Almost  immediately he proved that he meant what he said when, by weeding out unnecessary personnel and by other economy measures, he cut overhead $277,000 in his first year. The engineers, though, came to regard Boulware slightly askance because one of his first impressions of the company was that too many of them held management jobs.

The plumbing and heating contractors, who acted as Carrier dealers on small jobs and who were formerly extended rather loose credit arrangements, Boulware put on a sight-draft basis. That brought in cash faster when it was badly needed. And he forced on Carrier’s own engineer salesmen, who sometimes used to shade their prices to land contracts and commissions, a uniform price level for the bigger tailor-made installations. Previously, according to Boulware, “the more some of them sold, the more money Carrier lost.”

With an anxious eye on GE, Frigidaire, and the other big newcomers, and on the home-and-office volume market, Boulware ordered a few small packaged room conditioners immediately added to the Carrier line. The haste with which they were devised is indicated by the fact that the first batch developed a distressing tendency to leak on ladies’ rugs — so that the narrow margin of profit was largely eaten up by returns and servicing costs. The engineers clucked at Boulware’s impatience — and remedied the defect in the next model.

But Boulware’s most spectacular achievement was his transfer of the company from its Newark headquarters to Syracuse last fall. With expansion in his mind, he looked at his five plants and saw they were scattered and small. Then his eye fell on the factory in which ill-fated Franklin Motors, Inc. used to build air-cooled engines into lizard-nosed automobiles. The city of Syracuse had taken it over for taxes. It lay empty as a big barn.

So Boulware, who had lived in Syracuse for 10 years and had many friends there, began talking. Soon a movement to bring Carrier to Syracuse had taken on the combined aspects of a Liberty Loan drive and a civic campaign. A businessmen’s group, out to present the company with a nest egg, assigned quotas to every merchant in town and collected $250,000 as a gift to Carrier. By the time the city itself put the Franklin plant, valued at $4,000,000, up for sale at a public auction to satisfy its $500,000 claim for unpaid taxes, anyone who had upped the Carrier token bid of $1,000 would probably have been tarred and feathered.

Carrier took the $250,000 — and the plant — and moved to Syracuse last fall with 240 freight cars of machinery and with 2,000 new citizens. The city was ransacked to find homes for 600-odd families and Boulware himself went so far as to get coal for them at summer prices. Moreover, the 300-odd factory hands who were brought along were guaranteed 50 weeks of work in the first year in Syracuse at the average weekly wage each was then earning, the lowest being $23 a week. (Carrier to date has never had any serious labor trouble and has granted about 85% of the demands made by its plant union.)

Despite Syracuse’s wise generosity in literally buying for itself a new industry and new purchasing power (the company spends $100,000 a week in Syracuse), this ambitious move was a strain on the Carrier finances. The actual moving, renovation of the plant, and installation of new machinery cost $1,400,000, of which only $875,000 was capitalized and the remaining $530,000 charged against current earnings. Slowed-up operations during the move with no cut in office or research staffs piled up an unabsorbed overhead of $481,000. The $1,000,000 profit estimated for the first six months of 1937 was cut, thereby, to a mere $200,000, (all 1937 figures are Carrier’s own preliminary estimates) for the year. The company’s cash position sank to a slim $550,000, from over $1,200,000 at the end of 1936. Boulware was forced by December to go to the banks for $500,000 — on top of $750,000 still outstanding on a previous $1,000,000 loan. Moreover, the ratio between current assets and current liabilities went down to two to one — almost dangerously low for a manufacturing enterprise.

On the brighter side, so far as the immediate future is concerned, is the fact that Carrier has no long-term debt and no preferred stock to worry about — Boulware having liquidated what was left of the former and induced the preferred stockholders to trade for common at one for five in 1936. (There are now 391,000 shares of common outstanding.) Of the five old Carrier plants, the two in Newark have already been sold for $275,000, and sale of the other three is not unlikely. Boulware foresees no trouble ahead if additional funds should be needed; for the fact that Carrier is the nearest thing to a straight air-conditioning investment and thus has speculative appeal should make new financing fairly easy.

The migration to Syracuse was partly a gamble on the hope of future expansion. Perhaps it will prove to have been a wise one. Certainly last year’s 67% jump in volume of business over 1936’s $10,500,000 gross (as compared to the industry’s 63% increase) was to Carrier an encouraging sign. The $17,500,000 figure was, furthermore, 200% bigger than 1932’s depression gross of $6,000,000. And it turned over Carrier’s $7,750,000 assets almost two and a half times — by contrast to York’s $17,500,000 gross (for air conditioning plus refrigeration) on $18,300,000 assets. Moreover, manufacturing operations in February were only 20% below last year’s all-time high for the same month. All of which points toward a probable easing up of Carrier’s tight financial position in the near future — if the trend continues.

In guessing whether the trend will continue, the biggest question mark is the air conditioning market itself. And here the burden is on Carrier to play its hand right. Actually engaged in two businesses, straight manufacture and installation contracting, with its air-conditioning gross (over $15,000,000 last year) split about 50-50 between them, Carrier must decide which leg to lean on harder, or  whether to keep on depending equally on both. For several years there has been a relative shift away from installation, which once supported most of Carrier’s weight, and Carrier has been making more and more units and machinery for others to install — in contrast to York, which still installs about 90% of the air conditioning equipment it turns out.

This policy fits with Carrier’s hope to find a bigger market for its self-contained conditioners. But it also accentuates Carrier’s distribution problem. On one hand are contractors who can install but can’t sell, and on the other, volume-trained dealers who can sell but can’t install. Carrier is now attacking the problem on both flanks. It is trying to interest in small-unit volume sales many plumbing and heating contractors, well aware that local contractors’ associations — and through them the close-knit building trades — can be either costly enemies or useful friends. It also operates a training school in its plant for young engineers, who are sent into the field to help and instruct able merchandisers in the installation of air-conditioning equipment.

Carrier’s present attempt to blanket the whole conditioning field from top to bottom (by reaching for volume sales of package units) has other pros and cons. On the pro side there is the fact that Carrier prestige is bound to bring Carrier, almost automatically, a chunk of the new home, shop, and office market — for a while at least. There is the fact that the big commercial and industrial installations, unless done on a cost-plus basis, can entail considerable risk, a 3 or 4% error in the delicate business of estimating cost beforehand turning big profit into big loss — and Carrier admits that it has built many “monuments.”

There is also the fact of formidable competition in the large-installation field, especially from York, and the corollary fact that the expense of designing, estimating, and bidding on a big job, and then losing it, can add considerably to overhead.

Finally, there is the risk that if Carrier sits on the sidelines while Goliaths like GE, Frigidaire, and Westinghouse invade and develop the home and shop markets, these companies may gradually reach up for the big industrial and commercial installations and shove Carrier completely out of the picture. And there is the chance to balance the extreme ups and downs of a capital-goods industry — brought home to Carrier by the depression — with the steadier flow of income from a consumer-goods industry that may yet reach tremendous proportions.

The challenges of selling air conditioning to the masses

On the other side, however, Carrier’s recent venture into the portable-unit field has its dangers and its difficulties. If Carrier’s prestige now stands high, that prestige might well be sullied by volume production of more standardized units, which Carrier could not undertake to install. For faulty results, even though due to inept or slipshod installation, would nevertheless reflect on the Carrier name.

Self-contained unit sales did not contribute much toward Carrier’s climb out of the red. To such sales less than 10% of the 1937 gross is attributed, and the percentage reflected in earnings is undoubtedly much smaller. It is also noteworthy that Carrier, except during the depression, used to make proportionately more money out of less business before it went into the small-equipment market — though other factors of course enter into this equation.

Yet another hazard to Carrier’s invasion of the portable field is the imposing presence of GE, Frigidaire, et al., in the air-conditioning market. When, if ever, it comes to real volume sales of low-priced units, Carrier may find it hard to compete with these companies on equal terms. With their sales organizations greased and ready to go, they have the jump on Carrier from the start. With their greater resources, they can afford, for a time, to sell conditioning just about at cost. In courting rivals of their stature, Carrier would seem, at the least, to be taking considerable stock in the tale of David and Goliath.

But the highest obstacle in Carrier’s path concerns the public, and it applies not only to Carrier but to the bulk of the industry. For, as previously stated, air conditioning is still far too expensive to find a wide popular market. So long as it costs at least $1,500 to install year-round air conditioning in a $10,000 to $15,000 house as opposed to around $700 for plain heating, the man who builds such a house is going to get along without the air conditioning. So long as it costs $400 or more to buy a portable cooler for one room, most people are going to trade in their old cars for new ones instead. No amount of salesmanship can sell the public something it wants only occasionally at a price it definitely does not want to pay.

Even more significant is the industry’s claim that mass production would not bring the price of its present products down very far. And inasmuch as just about the whole industry is today tied up in some degree to the manufacture of refrigerating machinery and that machinery makes up most of the cost of manufacturing the small conditioning units, it is perhaps not too unreasonable to ask whether refrigeration is necessary — and if so, how necessary — for comfort conditioning.

New advances in “man-made indoor weather”

Air conditioning was born of, and grew up on, engineering skill. Man-made indoor weather, carried to a point of painstaking precision, is strictly a twentieth-century accomplishment — and the engineers did it. Since the first crude installations, barely more than thirty years ago, scientific improvements in the art have steadily continued. Yet when the industry asserts that the cost of comfort conditioning cannot be cut much below its present high level, it is in effect saying that the day of important scientific advances in the art is dead. And it is implying further that refrigerating apparatus will always be an essential part of most summer air conditioners.

The engineers, however, continue to work out and perfect new devices. One that has tremendous possibilities is the use of a moisture absorbing (Or adsorbing. Technically, adsorption means the soaking up at moisture by any substance that holds that moisture as does a sponge. Absorption means the soaking up at moisture by a substance that, in taking on water, undergoes a chemical or physical change. Far the lay reader, absorption should convey the notion of either.) substance to dehumidify air. One such substance is silica gel — not a jelly, but a sandlike substance made up of small porous crystals. Only within the last year has Carrier been marketing central-station systems that make use of silica gel, often in place of refrigeration. The principle involved is a complete reversal of the old refrigeration process by which muggy air is chilled far below the desired temperature merely to squeeze out moisture (for the colder air is, the less moisture it can hold) and is then reheated back to a comfortable point. For the silica gel absorbs moisture out of the air in the form of water. The turning of vapor into water releases heat (just as the turning of water into vapor uses up heat) — and as a result the air becomes hotter. It must then be cooled back to the desired temperature. But this cooling can usually be accomplished without refrigeration through the use of well water or city water, since really low temperatures are never required. Wherever moderately cool water is cheap and plentiful, central-station conditioning can be achieved as much as 25% cheaper than by the old refrigeration and reheating method.

Silica gel itself is not adaptable to little portable units. But the adaptation to such units of other types of absorbing solids or liquids is highly likely in the near future. And if so, the price of these units may be cut considerably, for all the claims of the refrigerating manufacturers. Moreover the moisture-absorbing process has another big advantage. This advantage has to do with the attitude of the utility companies.

For, contrary to what might be expected, the electric utilities are not always too friendly toward comfort air conditioning. Wherever it is used at all extensively, as in Washington with its many conditioned government buildings, it tends to create a peak load well in excess of the old winter peak. This peak lasts for only three months, and most of the current used falls into the low rate range. The return is accordingly small, and may be more than wiped out by the necessity of increasing productive capacity to meet the load. Conditioning systems that store up refrigeration during the night for daytime use, thus leveling out the day-to-day summer load; have not yet helped the situation to any great extent, though they do show promise.

But while refrigerative conditioning takes best to electricity, conditioning by moisture absorption takes best to gas, or even steam. This is so because much of the expense of running an absorption unit is devoted to “reactivating” the absorbing substance — which means heating it to dry it again after it has been filled with water. And the gas utilities are anxious to balance their winter heating load with a big summer conditioning load. Thus both the reluctance of the electric utilities and the eagerness of the gas utilities tend toward cheaper and wider use of the absorption process.

Making summer comfortable at cost

Just as this process may come to replace refrigeration, at least in many localities, so the perfected use of air movement for comfort cooling may eventually become the key to volume sales of small  conditioning units. It was, remember, industrial conditioning that gave the industry its start. And in industrial conditioning, temperature and humidity — and their precise control — were and are just about all-important. By a natural carry-over, temperature and humidity have been assumed to be just about all-important in the newer field of comfort conditioning as well. No one supposes that their control need be nearly so accurate in this field. Yet the industry has lent its comfort work the appearance of scientific accuracy, within plausible limits, by the charting of summer and winter “comfort zones.” And these zones, worked out by the strictly noncommercial American Society of Heating and Ventilating Engineers, are plotted almost entirely in terms of temperature and humidity.

The point is that the  possibilities of air movement for summer comfort, along with or even in place of temperature and humidity control, have been pretty well neglected by the bulk of the industry. And since comfort conditioning depends for its appeal only on how comfortable you can make people feel, those possibilities may be considerable. For one very good reason.

The reason is that more effective use of air movement could make comfort conditioning immeasurably cheaper. For control and refinement of the breeze principle — so that steady air movement would create relief from mugginess without reaching the proportions of a draft — might well make refrigeration unnecessary for year-round comfort conditioning. No refrigeration is required to heat or humidify winter air. Hot dry air in summer can be cooled without refrigeration. So if hot wet air can be made comfortable without refrigeration, conditioning costs for small units can probably be halved. And there is competent engineering opinion that holds this possibility highly plausible.

In parts of the South, for instance, the installation in the attic of a giant fan that sucks the air up through the house to an outlet in the roof at night has proved a hot-weather godsend — and at a fraction of  the installation and operation cost of a “genuine” air conditioning unit. Moreover, there is on the market today at least one portable room conditioner, made by the little U.S. Air Conditioning Corp., which filters the air, humidifies in winter, cools the air (without refrigeration) on hot dry days, and stirs it slightly on muggy days — and which sells for as little as $195. By contrast to the refrigerating portables, which cost twice as much to buy and operate and are of real use for only three months out of the year, the $195 investment, even though least effective when most needed, might strike the public as better value for the money. And certainly if the one defect can be remedied to produce muggy-day comfort by greater air circulation — and if the refrigerating units, as their manufacturers now assert, cannot be made considerably cheaper — the latter are likely to be left far behind in the race for a volume market.

Improved control of air movement might also lead to cheaper year-round conditioning of whole houses, or small stores. If doors and walls and stairways could be utilized in place of expensive ducts to carry conditioned air through a building, the cost of central installations might be halved. Year-round air conditioning, now pretty well limited to houses under construction, might be made equally feasible for houses now standing. And experiments along this line are already being tried.

It is of course possible that pressure salesmanship by Carrier and York and GE and Frigidaire and Westinghouse and Chrysler and Nash-Kelvinator can induce the public to buy, in quantity, home units for $1,500 and up and room coolers for $400. But it is also possible that all these companies, in their race with each other, are a step ahead of themselves.

For comfort conditioning, to gain a mass market, may demand an entirely different engineering technique than that which has proved — and is still proving — so successful in the big commercial and industrial field. The time, and the product, may not yet be ripe for a shift of the industry’s emphasis away from engineering, toward high-pressure salesmanship. And Carrier, in particular, may be flirting with mass production too soon.

Indeed none is more aware of this fact than Carrier itself. The layman’s criticism of the air-conditioning industry, as outlined in the beginning of this article, is that it has lagged far behind the pace that he had expected. As applied against Carrier, a corporation in business to make a profit, the lay criticism may not be entirely fair. If he has closely followed the various problems that this article has outlined, the reader may be more inclined to commend Carrier than to condemn it. For not only did Carrier weather the depression, but it tripled its gross sales in the last five years. And if it has not succeeded in invading the office and the home on a grand scale, it nevertheless has succeeded in educating the public to commercial air conditioning in restaurants and shops and theatres.

As enunciated by general manager Boulware, the Carrier policy is not to force the air-conditioning market but rather to bend to that market as, when, and where it develops. He and Carrier Corp. are acutely conscious that the Syracuse factory is haunted by the ghost of the Franklin car, and aware of a ghostly warning that goes: don’t try to sell the public a product, no matter how good it is, which the public is in no mood to buy. Yet, up in that spacious factory, the officers and workers seem imbued with a new spirit of big-time enterprise, of being somehow on the march toward industrial importance. Up in that factory the easy air of unregimented fellowship gives way gradually to an almost martial excitement. And who can blame Carrier if it builds its castles in Spain — all of them air conditioned?

Appendix: The physics of air conditioning

To the average man, a room has only one temperature — the one he reads on his thermometer. But to the physicist, a room has three temperatures. The one on the regular thermometer is the “dry bulb” temperature and it measures the “sensible” or feelable heat of the room. But there are also a “wet bulb” temperature and a “dew point” temperature and they both have to do with the moisture content of the room.

Wrap a wet rag around the bulb of a thermometer and whirl the thermometer violently in a circle. The recorded temperature will go down, maybe one degree, maybe 10 or more. It will go down (1)  because the air around the thermometer absorbs water from the rag in the form of vapor, (2) because it requires heat to turn water into vapor, and (3) because the heat necessary to do the trick was taken from the sensible heat of the surrounding air. This sensible heat did not completely vanish. It turned into what the physicist calls “latent,” or hidden, heat, and it is still lurking in the water vapor in the air, ready to be turned back into sensible heat whenever the vapor is condensed back into water. Thus, the wet-bulb temperature — for that is what you have taken — is the dry-bulb or regular temperature lowered by evaporation or by turning the air’s sensible heat into latent heat.

Now air, at any given dry-bulb temperature, can hold only so much moisture; and the lower the temperature, the less moisture it can hold. The quantitative measure of moisture in the air is called the air’s “absolute” humidity. And the relation (expressed in percentages) between the amount of moisture in the air and the amount which air of that temperature can hold is called the air’s “relative”  humidity — the kind of humidity people talk about. One-hundred percent relative humidity means that the air is as full of moisture as it can get; 50% means that the air can hold twice as much moisture as it now has. But because the air’s capacity to hold moisture decreases as its temperature decreases, 50% humidity at, say, 90 degrees will become 100% humidity if the same air is cooled to 68.9 degrees. And this without any change at all in the absolute humidity — that is, in the actual amount of moisture in the air.

If air chilled to 100% humidity is cooled still further, some of the moisture, unable to stay in the air as vapor, will condense out as drops of water. Hence the term “dew point.” For the dew-point temperature is the temperature to which air must be cooled in order to give it 100% humidity.

Now when air is relatively dry, its three temperatures are far apart. It has considerable capacity to soak up moisture in the form of water vapor and so its wet bulb is many degrees below its dry bulb. But to get it to its dew point without adding moisture would mean cooling it much further, since its dew point is way below its wet bulb. The interesting fact is that as moisture is taken into the air the dry-bulb temperature goes down (sensible heat turns into latent heat) and the dew point comes up (the more moisture there is in the air, the less you have to cool it to get it “filled” with moisture) until dry bulb and dew point meet. And they meet at the wet-bulb temperature, when the air has attained 100% humidity. It is this fundamental act that has served as one of the chief calculation bases for most air conditioning.

It was Willis Carrier who started it all with his Rational Psychrometric Formulae, on which his air-conditioning fame is largely based. These formulae molded the physical facts outlined above into an exact method of calculating both the wet-bulb temperature and the dew point of air having any given dry-bulb temperature and any given humidity. And they thus opened the way to exact and simultaneous control of dry-bulb temperature and humidity. By a sort of reverse English.

For, just as air can be cooled to its wet-bulb temperature (by adding moisture) or to its dew point (by straight cooling without adding moisture), so either process can be worked backward. Thus, air of 100% humidity can be heated, either by taking away moisture or by straight heating, up to a predictable dry-bulb-and-humidity combination. Given any starting point, any desired combination of dry-bulb temperature and humidity can be produced. For instance.

Suppose you have air of 80 degrees dry-bulb temperature and 70% relative humidity, and you want — for industrial or comfort purposes — to cool it to 70 degrees and to bring it to 40% humidity. Merely cooling it won’t work at all, because cooling makes the relative humidity go up, and by the time you get your air down to 70 degrees it will be over 95% humid. Cooling the air by adding moisture to it obviously won’t work either; actually, the air would have more moisture than it could hold before it got down as far as 70 degrees. But if you cool the air, by either method, down to 100% humidity and then keep on cooling it — moisture will be squeezed out of the air, because the air can no longer hold that much. Now, reference to a chart based on the Carrier formulae will show you that 70 degrees, 40% humid air — the combination you want — has a dew point of around 44 degrees. So if you cool your original air down to 44 degrees (squeezing out moisture meanwhile and yet leaving the relative humidity 100%) — and then heat it back to 70 degrees — you will have, at the time the air reaches 70 degrees, the exact 40% relative humidity you started out to get.

Willis Carrier did not have to invent, although he has helped to refine and improve, the machinery by which these physical principles are harnessed to practical use. As a matter of fact, other physicists  before him had arrived at practically the same formulae, although he perfected them. But it was his particular genius (he himself says he “stumbled on the obvious”) to recognize the value of applying these formulae to air conditioning.

Also from Fortune Classic:
• To Heaven by Subway (Fortune, 1938)
• The Lifestyle of Rich, the Infamous (Fortune, 1986)
• Today’s GOP: The Party’s Over for Big Business (Fortune, 1995)