Daikin
Corporate History & Strategy

In October 1924, Akira Yamada, who had served as plant manager at the Osaka Artillery Arsenal, resigned from government service at the age of 40 and established Osaka Kinzoku Kogyosho (Osaka Metalworks) as a limited partnership. His motivation for going independent was frustration with bureaucratic organizational management. The founding site was a former thermos factory located in Namba Shinkawa, Osaka, and the company started as a small enterprise with fewer than 15 employees. Initially, the company manufactured radiator tubes for aircraft, starting as a subcontractor in metalworking.

The following year, 1925, the company successfully won an order for 300,000 instantaneous detonators for Manchuria, demonstrating its metalworking capabilities externally. However, in its early days, Daikin aspired to manufacture aircraft parts, and military goods production was merely a secondary activity. But as the 1930s arrived and the Japanese government began establishing a wartime footing, demand for military goods rapidly expanded alongside the Army and Navy's arms buildup. This change in market conditions would fundamentally alter Yamada's business direction.

Yamada leveraged his experience and connections at the Osaka Artillery Arsenal to secure designated factory status from both the Navy and the Army. What prompted this shift in business direction was a request from a former superior during Yamada's time at the Osaka Artillery Arsenal. Having been directly asked to produce military goods, Yamada decided to shift from metalworking to military goods manufacturing. For a small enterprise with 15 employees, merely qualifying as a military supplier was no easy feat, but his credibility and personal network as a former Arsenal official served as the means to break through this entry barrier. This was a structure where accomplishments in government service guaranteed entry into a military market that would have been difficult to penetrate on technical merit alone.

In 1931, the company was certified as a designated factory by the Navy Ministry after delivering compressed processed products to the Navy. For a startup company barely 7 years old to receive designated factory certification was exceptional. Furthermore, in 1933, the company was also certified as a designated factory by the Army Ministry and began delivering cartridge cases and detonators. Having received certification from both the Navy and Army established a stable order base for military goods centered on artillery shells.

As a result of ramping up military goods production as a designated factory for both the Navy and Army, the ratio of military goods to total sales reached 74.5% by 1932. The small enterprise that had started as an aircraft parts subcontractor had essentially transformed into a military company in just over 8 years from its founding. The latter half of the 1930s coincided with a period of military expansion by both the Army and Navy in Japan, and the increase in order volumes provided a structural tailwind that boosted Daikin's revenue.

Thus, Daikin established its position as a leading military venture company in the Kansai region. This rapid growth was supported by the founder's connections and technical expertise cultivated at the Osaka Artillery Arsenal, combined with the expanding military market of that era. The manufacturing know-how and capital investment experience gained through mass production of military goods became the management foundation that would later enable the company's incorporation through a capital alliance with the Sumitomo zaibatsu and its entry into the air conditioning business, triggered by fluorocarbon development.

As of 1933, Daikin faced challenges in human resources and labor management. The company was troubled by employees starting competing businesses, poaching Daikin's engineers and technology, and stealing customers.

To modernize its organizational structure, Daikin decided to form a capital alliance with Sumitomo Shindojo (Sumitomo Copper Rolling) of the Sumitomo zaibatsu. Compared to Daikin's company size at the time, the Sumitomo zaibatsu was an incomparably large enterprise, making this an exceptional capital alliance.

Daikin procured materials such as copper and aluminum from Sumitomo, and both companies were headquartered in Osaka. The Sumitomo zaibatsu had high expectations for Daikin's technical capabilities.

However, regarding capital policy, Daikin took the stance of not ceding management control and presented conditions to the Sumitomo zaibatsu. Specifically, the conditions presented were: (1) the Sumitomo zaibatsu's shareholding must not exceed founder Akira Yamada's stake; (2) the Sumitomo zaibatsu must not dispatch a majority of directors to Daikin; and (3) the Sumitomo zaibatsu must not interfere with Daikin's management policies.

The Sumitomo zaibatsu accepted these conditions, and Daikin was incorporated through a capital alliance with the Sumitomo zaibatsu.

As of 1933, Daikin had approximately 300 employees, but by 1941 the workforce had surpassed 10,000—a roughly 30-fold surge in about 7 years.

The factors behind this were the rising demand for military goods and the ability to make large-scale capital investments through fundraising. The latter half of the 1930s was a period when Japan's Navy and Army were pursuing arms expansion, and Daikin rode this wave of the times.

In other words, the capital alliance with the Sumitomo zaibatsu was a critical decision in Daikin's transformation from a small-to-medium enterprise into a large corporation during the prewar period.

In 1933, Tokuo Ota, a retired Navy rear admiral serving as Daikin's technical advisor, noticed a newspaper article reporting that the U.S. Navy had adopted Freon gas for its submarines. Freon gas was an essential refrigerant for air conditioning equipment, and Ota proposed to Daikin that the company undertake research and development of fluorocarbon. At the time, Daikin was primarily a military goods manufacturer centered on artillery shells, and was a metalworking company with no connection to chemical R&D. However, information gathering through Navy connections created the opportunity for entry into an entirely different field.

Daikin began researching fluorocarbon-based refrigeration systems in response to requests from Navy-related personnel, and after approximately 2 years of research, succeeded in producing Japan's first fluorocarbon at the end of 1935. The leap of a metalworking company specialized in shell manufacturing entering the chemical plant domain would not have been possible without the company's relationship with the Navy. The establishment of fluorocarbon production technology gave Daikin the capability to procure in-house the refrigerant needed for HVAC equipment.

Following fluorocarbon production, Daikin also ventured into manufacturing HVAC equipment itself. In 1936, the company delivered a railway car air conditioning unit called "Mifuji Reita" to Nankai Electric Railway, building a track record in the civilian field of railway vehicle air conditioning. In 1938, it supplied air conditioning equipment for Navy submarines, developing both military and civilian customers for HVAC equipment. A system where a single company produced both HVAC equipment and refrigerants was rare globally, positioning the company uniquely as one possessing both metalworking and chemical plant manufacturing capabilities.

During wartime, fluorocarbon production was primarily centered on supply for submarines, but the company struggled to establish mass production. Although full-scale fluorocarbon production began at the Yodogawa Works in 1941, it took time to achieve stable supply. It was not until 1943 that an annual production capacity of 300,000 tons was established, marking the transition to mass production. While the prewar air conditioning business was largely military in nature, the integrated production structure of refrigerants and HVAC equipment established during this period became the prototype that would form Daikin's postwar business foundation.

Following the outbreak of the Korean War in 1950, in 1951 the U.S. military decided to place artillery shell orders with Japanese companies. Around May 1952, Daikin announced its intention to accept an order for 620,000 81mm mortar shells worth a total of 2.2 billion yen.

However, Daikin needed 300 million yen for capital investment in shell manufacturing equipment. While the company secured a 50 million yen loan from Osaka Bank, fundraising from other banks proved extremely difficult as Daikin had fallen into financial distress (dividend suspension). Consequently, Daikin requested the U.S. military procurement headquarters to halve the shell order (to 310,000 rounds), changing to a split order shared equally between Daikin and Komatsu.

Daikin abandoned its attempt to raise funds through borrowing and decided on a capital alliance with Sumitomo Metal Industries. The partnership had been severed by postwar zaibatsu dissolution, but the company decided to revive the alliance. Through a threefold capital increase, approximately 90 million yen was raised, followed by a 200 million yen loan from Sumitomo Bank after the alliance was established. A total of 300 million yen was secured, providing the capital investment funds needed for shell manufacturing. This capital alliance diluted the Daikin founding family (Yamada family) stake and subsequently led to the departure from family-owned management.

From 1952 to 1956, Daikin also succeeded in winning additional shell orders. By July 1956, the cumulative order volume reached approximately 1.99 million rounds, with cumulative order value reaching approximately 6.8 billion yen. As a result, Daikin expanded its operations through shell orders during the first half of the 1950s.

Around 1956, shell orders tapered off. Daikin's revenue, which had been supported by the artillery shell procurement boom, declined. In response, Daikin pursued a business model transformation from shells to civilian demand by focusing on the production of refrigeration equipment and fluorocarbon.

In other words, Daikin used the revenue earned from shells to focus on the growing market for refrigeration equipment and fluorocarbon, attempting a business transformation. This shift led to Daikin becoming recognized as an HVAC manufacturer.

In November 1995, Daikin established a joint venture with a local Chinese sewing machine manufacturer to commence manufacturing and sales of HVAC equipment in China. Originally, Daikin had planned a joint venture with a local HVAC manufacturer, but U.S. Carrier had already secured a contract, leaving no room for latecomer Daikin. Consequently, a sewing machine manufacturer—unrelated to HVAC—was selected, and the company entered the Chinese HVAC market by leveraging the sewing machine maker's distribution channels.

To sell high-end air conditioners in China, Daikin concentrated on developing commercial HVAC customers requiring customization—such as government agencies and banks—rather than competing in the fiercely contested residential air conditioner market with 400 companies. In 1997, an office was newly established in Beijing, where government agencies are concentrated. The company aimed to build Daikin brand awareness through technical seminars, cold-call sales visits to develop dealers, establishing direct sales agents bypassing wholesalers, and individual proposals for HVAC systems.

Particular emphasis was placed on building the distribution network, and by 2007, the company had secured 32 sales offices, 9 production facilities, and 3 service centers. A distribution network was established covering not only China's coastal areas but also inland regions (Beijing, Xi'an, etc.).

Daikin's sales approach was partly driven by the circumstance that as a latecomer to the Chinese market, the only remaining untapped segment was the high-end market. These strategies were led by Ken Tayano (who became Daikin Vice President in 2014).

From 1999 to 2003, Daikin achieved a high-profit "operating profit margin exceeding 20%" in its China business. In terms of cash management, the company realized cash flow through advance payment rather than bill settlement. As of 2003, Daikin had secured a 60-70% share in commercial air conditioners in China, and the China business grew into a revenue source for Daikin. While Daikin does not disclose profits from its China business, disclosures from the holding company (through FY2015) showed that the company maintained high profitability exceeding a 10% ordinary profit margin on revenue.

Daikin had established a local subsidiary in Belgium in 1973, creating a foothold in Europe, but had not pursued full-scale business operations for many years. In the late 1990s, as part of its global strategy, Daikin set strengthening European market sales as a management priority and began full-scale investment from 1998. While in the Chinese market the company had entered from 1995 by building its own direct sales agent network, a different approach was required in Europe.

The European market's distinctive characteristic was that climate conditions and business customs differed significantly from country to country. While cooling demand was high in southern Europe along the Mediterranean coast, heat pump heating demand was expected in northern Europe—a market structure where a uniform sales strategy would not work. Additionally, since architectural styles and distribution practices also varied by country, accumulating sales know-how from scratch would require considerable time. To avoid this time cost, Daikin chose the approach of acquiring existing local sales companies.

Starting with Germany in 1998, Daikin expanded operations across Europe by acquiring local sales companies in each country. Spain in 2000, Poland in 2001, Italy in 2002, Greece and the UK in 2003, and Portugal in 2004—establishing sales offices in 7 countries over 6 years. The aim was to compress the time needed to build distribution networks by acquiring existing agents that possessed knowledge of each country's climate and market needs.

The rollout was conducted with a policy of prioritizing southern Europe. Given the structural dependence of HVAC demand on temperature, the warmer Mediterranean markets were a rational target for initial investment. Additionally, rising temperatures due to global warming provided a structural tailwind that boosted cooling demand across Europe. In 2003, a manufacturing facility was constructed in the Czech Republic to commence local production in Europe, building a European business foundation encompassing not just sales but also manufacturing.

Daikin began considering the acquisition of Goodman, which held the top share (approximately 25% by unit volume) in residential HVAC in North America. Acquisition negotiations with Goodman's major shareholder, private equity fund Hellman & Friedman, began around 2011. Initially, in January 2011, Daikin announced its acquisition plan, with the acquisition scale rumored to be around $4.2 billion.

However, to focus on responding to the Great East Japan Earthquake in March 2010, Daikin temporarily suspended the Goodman acquisition negotiations. Subsequently, negotiations resumed from 2012 at Goodman's request, but as this involved restarting once-interrupted negotiations, trust reportedly had to be rebuilt.

In August 2012, Daikin finalized the acquisition of U.S. Goodman. The business impact of the Goodman acquisition was revenue of 159.5 billion yen and operating profit of 21.2 billion yen, indicating a highly profitable company. The acquisition price was $3.7 billion (296 billion yen), making it the largest acquisition Daikin had ever undertaken. The investment payback period was set at 8 years.

Daikin's aim was to secure air conditioner market share in the North American market. Through the 1990s, Daikin had attempted to enter North America but withdrew after struggling to build distribution channels. This was because HVAC systems in the North American market use a "duct system," and Daikin was unable to secure distribution channels for residential equipment. Through the 2006 acquisition of OYL, Daikin operated its North American business through McQuay, but with revenue of only approximately 70 billion yen and limited share.

Therefore, by acquiring Goodman, a leading North American manufacturer, Daikin aimed to secure market share by gaining control of Goodman's 60,000 dealers across the United States.

Goodman's post-acquisition management under Daikin struggled. The company fell into operating losses for 4 consecutive periods from FY2015 to FY2018, entering a state of low profitability.

As of FY2020, approximately 8 years after the acquisition, Goodman had revenue of 446.5 billion yen with an operating loss of 6.1 billion yen—achieving revenue growth but leaving profitability challenges unresolved. Consequently, recovering the approximately 300 billion yen acquisition investment is presumed to be extremely difficult.