Daikin Industries - Company History

A munitions venture founded by a man out of the artillery arsenal

Daikin Industries traces its origins to 1924[1], when Yamada Akira (山田晃), a former works manager at the Osaka Artillery Arsenal, left government service at the age of forty to strike out on his own[2] and founded the limited partnership Osaka Kinzoku Kogyosho at Namba Shinkawa in Osaka with fewer than fifteen employees[3]. Drawing on what he had accumulated during his arsenal years, he began with the manufacture of radiator tubes for aircraft[4], but the business did not expand as hoped and the early going remained hard. On the recommendation of a former superior from his arsenal days the firm obtained the status of an Army-designated plant, which opened the way to volume orders for artillery shells[5], and it took on the character of a munitions venture riding the pre-war wave of military expansion into rapid growth. The quality of its weapon components was recognised by the arsenal itself and the business widened into dealings with the Manchurian arsenal, until the company was described at the time as a pioneer of the Manchurian trade[6]. That initial base — shells and aircraft parts — grew in a form that embodied exactly the munitions dependence of the Japanese economy of the day.

In 1933 Ota Tomio (太田十男), a retired rear admiral whom the company had brought in as a technical adviser, seized on a newspaper report that the United States Navy had adopted a new refrigerant, Freon gas, aboard its submarines, and pressed the board hard to take up the study of fluorocarbons[7] — a decisive turning point that changed the character of the company at its root. A foothold in refrigeration already existed: before Freon the firm had put the methyl-chloride refrigeration machine, the parent of today’s Daikin refrigeration business, on the market under the Mifujilator trade mark[8]. For a metal-working shell maker to step into the wholly unknown field of chemical plant was a technically difficult leap, and the company had only a handful of chemical engineers and limited equipment, yet Yamada adopted Ota’s recommendation and put the Freon research on a serious footing[9], and in 1935 achieved the historic result of Japan’s first domestic production of fluorocarbons[10]. The fluorocarbon business became the chemical foundation of the later air-conditioning business, and the first seed of an escape from munitions dependence was sown at this point.

Sumitomo Metal Industries, which had been watching Osaka Kinzoku Kogyosho closely since its early days as a limited partnership, offered to invest and lend support, and Yamada — looking to future growth and to the standing that came with it — accepted, so that the firm entered the Sumitomo orbit and deepened its ties with Sumitomo Metal[11]. On 11 February 1934 the new joint-stock company Osaka Kinzoku Kogyo was established with capital of ¥1 million[12], completing the move from partnership to corporation. The company designated that day as its founding date, and it became Daikin’s second point of departure[13]. In 1938 Osaka Kinzoku Kogyo absorbed the limited partnership and raised its capital to ¥1.5 million[14], and in 1953, after the war, it moved its head office to the present site and restarted as a modern enterprise with capital of $750,000 (¥270m)[15]. This path of incorporation — drawing in zaibatsu capital without letting go of control of the business — provided the capital base that supported the turn from munitions to air conditioning.

The Korean War shell boom funds the move into air conditioning

Defeat in the war stripped Daikin of its munitions business[16], robbing it of its principal products and leaving it in a severe management crisis; struggling to convert to civilian demand during the reconstruction years, it fell into the harsh position of paying no dividend. The outbreak of the Korean War in 1950 brought a sudden opportunity in the form of orders from the United States forces for 81mm mortar shells[17], but inside the company there was deep-rooted caution about depending once again on wartime procurement. President Yamada issued the forceful order to overcome every obstacle and secure the order, moving decisively into the special-procurement business, and the company escaped the crisis of its dividend suspension within a short time. The management decision that determined the direction of post-war Daikin was that the precious funds obtained from the Korean War boom were not reinvested in shell production, but concentrated strategically on refrigeration machines, air conditioners and fluorocarbons — fields that would grow in peacetime.

Through the 1960s and into the 1970s Daikin put in place the structure of a full-line air-conditioning maker handling both commercial units and room air conditioners[18], completing the fundamental change in the character of the company from shell maker to air-conditioning maker. While developing its domestic production base around the Kanaoka plant and building out a domestic sales network step by step[19], it made a strategy of shifting the centre of gravity of the business from fluorocarbons to commercial and then household air conditioning, and in time established a distinctive position in the domestic market as a specialist air-conditioning manufacturer. It was precisely this chain of strategic turns — from founding as a munitions venture, through the Korean War boom, to conversion into an air-conditioning maker — that formed the historical foundation for the later leap into a global air-conditioning company.

As the 1960s opened, the room cooler became the product the electrical manufacturers expected to spread next after the refrigerator[20], and Osaka Kinzoku Kogyo held a leading position in that market with a share of close to thirty per cent[21]. While pursuing a plan to put $5.3M (¥2bn) into extending the Sakai works and building an integrated cooler plant there, the company chose to defer the capital spending intended for the summer of 1962 and wait instead for completion in the autumn of that year[22], widening its capacity while it took the measure of demand as it came up. Its record as the specialist maker that had been first in Japan to commercialise the fluorocarbon refrigeration machine told on the selling side as well, and it came to organise a national network of some 350 dealers able to carry out the installation work themselves[23]; by the term ended November 1961, heating and cooling accounted for $17.5M (¥6bn) of revenue of $29.2M (¥11bn), six-tenths of the whole, so that the make-up of the business had changed places[24]. As cooling spread through office buildings, newspapers began to warn against the ill health that came of over-cooling[25], and air conditioning was turning into a product that entered ordinary life.

The oil-shock crisis, and a differentiation strategy that worked in China

In 1975 the effects of the oil shock pushed Daikin into a serious management crisis, an ordinary loss of $7.7M (¥2bn), and the company was forced through the painful response of dismissing some 700 people in total and transferring surplus factory staff to its air conditioner sales companies. During this rebuilding phase it pressed ahead with active investment in technical development — including a new technical centre established within the Kanaoka plant in 1979 — and recovered its standing in the domestic market in both commercial air conditioning and household room air conditioners. In working its way out of the oil-shock crisis Daikin strengthened its constitution as a business and learned deeply, across the whole of the management organisation, how effective a strategy of product differentiation and market specialisation could be. That experience of hardship in the 1970s also influenced the strategic choices it made later in expanding overseas.

In 1995 Daikin entered China through a joint venture with a Shanghai sewing-machine maker, but joint ventures with local air-conditioning manufacturers had already been taken by Carrier of the United States, which had moved first, and Daikin had no choice but to set out on unfavourable terms, in partnership with a company unrelated to air conditioning. The market was a fiercely contested household air-conditioning battleground crowded with more than 400 firms, so Daikin avoided the competition on volume and adopted a differentiation strategy of specialising in commercial air conditioning for government offices and corporate offices — a choice that proved a strategic success. In the Chinese government and office market Daikin’s commercial air conditioning, offering an integrated service from design and installation through to maintenance, was highly regarded, and this model of market specialisation worked through the 2000s as a stable, high-margin source of earnings from the China business, and was drawn on as an important reference case when the strategy for entering Europe was put together.

A sales network in Europe built by acquiring local companies

Daikin had set up a local subsidiary in Belgium as early as 1973, but its full-scale European expansion began in 1998, and it applied to Europe the same basic idea it had already tested in China — specialisation in commercial air conditioning for the government-office market. Where China had been served by building its own directly managed dealer network, however, Europe presented conditions in which climate and commercial custom differed entirely from country to country, so Daikin adopted a distinctive strategy of buying up existing local distributors one after another to assemble its sales network. By carrying out acquisitions in succession in the main European markets — Germany, France, Italy, Spain, Belgium and the Netherlands — it put in place a sales network spanning the whole of Europe in a short space of time.

This strategy of acquiring local distributors in Europe had, by the middle of the 2000s, come to serve as an important overseas foundation for Daikin’s air-conditioning business and as the footing on which it built a firm base as a global air-conditioning maker. In the European market the tightening of fluorocarbon regulation was advancing by around 2005 and demand was rising for higher efficiency in commercial air conditioning, so a favourable market environment opened up in which Daikin could make the most of the advantage in inverter and refrigerant technology it had cultivated at home. This European success, in which the building of the sales network and technical product differentiation advanced in parallel, was rated highly inside the company as a valuable precedent for the merger-and-acquisition strategy used in the full-scale entry into the North American market from 2006.

A North American base built by the successive OYL and Goodman acquisitions

In 2006 Daikin bought OYL Industries, a major global air-conditioning maker based in Malaysia, for around $2.1B (¥246bn), achieving full-scale entry into the North American business through McQuay, an OYL subsidiary. Immediately after the acquisition, however, Daikin’s share of the North American market remained at a limited level, and it came to be understood within the company that McQuay, strong as it was in commercial air conditioning, could not on its own establish a foothold in the American residential air-conditioning market. On that understanding, in November 2012 Daikin took the strategic decision to acquire Goodman Global Group, holder of the top share of about 25 per cent in United States residential air conditioning, for around $3.7B (¥295bn) — committing a sum larger than the OYL purchase and thereby entering the North American consumer market in earnest.

The strategic significance of the Goodman acquisition lay in taking possession of an already established leading share in United States residential air conditioning, one of the largest markets in the world, and through it Daikin was for the first time able to build a structure covering both the commercial and residential fields in North America. Goodman was based in Houston, Texas, and operated a strong sales network centred on the southern United States, so a strategy took concrete shape of carrying the R32 refrigerant and inverter technology Daikin had cultivated at home out through Goodman’s distribution. As the 2020s began, Daikin Applied Americas took the central role in the North American applied business, strategic acquisitions of firms holding liquid-cooling technology for data centres accelerated, and Daikin positioned North America as the largest growth engine in its consolidated results.

R32 refrigerant and inverter technology in a bid to set the world standard

In November 2012 the company launched in Japan the Urusara 7 R series of room air conditioners using the new refrigerant R32, taking a distinctive stance at the head of the global move away from conventional fluorocarbons in the air-conditioning industry. R32 is an HFC refrigerant for which Daikin had completed a volume-production plant in 1993; it has an environmental advantage in a global warming potential (GWP) about one third that of the conventional R410A refrigerant, while also combining clear practical strengths in energy efficiency, compactness and the ease of installing small-bore piping. By taking the management decision to open part of its R32 patents to competitors free of charge, Daikin promoted the refrigerant’s spread across the whole industry, and consistently pursued the long-term strategy of pushing its own environmental technology and product portfolio into the position of the industry standard.

In 2011 Sogo Masanori (十河政則) became president and chief operating officer, standing alongside Inoue Noriyuki (井上礼之) as chairman and chief executive, and the shift to this two-man structure established a model of management in which the practical running of the global business and the setting of long-term strategy were divided between them. As the 2020s began, the company continuously implemented average price rises of 4 to 5 per cent — its strategic pricing policy — in response to worldwide inflation, absorbing currency swings and rising raw-material costs while maintaining a high-margin constitution. By 2023 Daikin had grown into a large enterprise on the scale of $28.5B (¥4tn) in consolidated revenue and $2.7B (¥380bn) in operating profit, raising its presence in global markets amid environmental regulation and rising energy costs, while new risks — the state of demand in North American residential air conditioning and United States tariff policy — were surfacing as the management issues of the era to come.