The Rising Cool Quotient

In many ways, the success of Daikin in India has a lot to do with the disciplined Japanese way of functioning. A stable management team at the top, a dedicated workforce, a steady growth in the dealer and distributor network, and a greater emphasis on local research and development (R&D) to better cater to local demands. Result: a six-fold increase in turnover over the past seven years — from Rs 440 crore in 2009-10 to Rs 2,750 crore in 2015-16; around 60 per cent market share in variable refrigerant volume (VRV) system, or simply commercial AC segment; and over 12 per cent share of the lucrative home AC business.

Of course, Daikin India has a long way to go before it catches up with market leader Voltas and South Korean rivals LG and Samsung. But it’s on track, says Kanwal Jeet Jawa, the managing director of Daikin India and a veteran in the air conditioning business.

In 2000, when Daikin Industries, a 92-year-old Japanese multinational air conditioner manufacturing company headquartered in Osaka, Japan, entered India via a joint venture with Usha Shriram Group, it gave the mandate to expand its India market to Jawa, who has been at the helm since the early days of Daikin India. And Jawa has not disappointed the management. In the last six years, Daikin India has pumped in over Rs 1,600 crore for establishing not only its manufacturing facility at Neemrana, Rajasthan but a fully-operational R&D centre as well. It has 40 acres of prime land in the Japanese zone in Neemrana.

The company is now in advanced stages of procuring land in south India too. “India is among the top focus markets for the company globally. If we want to sustain our leadership position globally, we need to focus on having a strong position in emerging markets like India,” says Jawa. This is because of a spurt in the commercial, residential and retail spaces across the country, and thus an evidently huge opportunity.

Among airports, Daikin’s ACs are cooling Hyderabad, Mangalore, Madurai, Trivandrum, Jammu, Pune, Aurangabad, Ahemdabad, Indore, Bhopal, and Varanasi airports. Among the metro projects, Daikin ACs are used in Jaipur, Mumbai and Chennai metro depots and the Delhi metro stations. Even the Rashtrapati Bhavan uses Daikin’s VRV solutions.

Daikin India has lined up another Rs 600 crore worth of investment plans to be executed in the next 24-36 months and is strongly competing with rivals such as Hitachi, Carrier, Blue Star in the commercial or what it calls the VRV segment, and with Voltas, LG, Samsung, and the rest in the residential AC segment.

Betting Big
According to Toshio Nakano, chairman of Daikin Industries (Thailand), “India is a critical market for Daikin and the rationale behind setting up its new R&D centre is to invest in technologies that suit Indian weather conditions and build products in line with the requirement of Indian consumers.”

Speaking about why India has become crucial for Daikin and what the new R&D centre will actually deliver, Jawa says: “India is a diverse country when it comes to weather conditions. Daikin aims to offer the best customised products at appropriate costs to customers. The customised products will be based on factors such as temperature, humidity and voltage fluctuations.” He says the R&D centre will also help in designing and developing products for markets such as West Asia, East Africa and Sri Lanka.

Yoshihiro Mineno, the head of global operation division at Daikin Industries (Japan), further expands on the importance of India business. “Daikin plans to double its air conditioner production capacity in India and may build a whole new factory there to cement its foothold in the growing market,” he says.

According to Mineno, Daikin is considered one of the industry’s best heating, ventilating, and air conditioning (HVAC) company and ranks first in air conditioner sales in terms of value worldwide. He says, “Growth in Europe and China propelled it to these heights. But with demand slowing down in China and other markets, Daikin will concentrate its investments in Southeast Asia and India, as well as the US, for the time being. The extra capacity will allow Daikin to broaden its lineup of air conditioners for India, with an ability to operate dependably in ambient temperatures of 45 degree celsius and higher.” And that is the reason the new R&D centre will be leveraged to design and develop products for overseas markets as well, adds Jawa.

The company already has a strong position in the variable refrigerant volume or the commercial AC segment in India. Daikin India has aggressive plans to expand the capacity of its existing Neemrana plant to produce 10 lakh units of AC by the end of 2017. It also has plans to set up a third plant between 2018 and 2020.

According to experts, the Indian AC market is expected to grow to about 7 million units per year over the next four years from the current 4 million units annually and growing at 15 per cent. But Jawa believes that Daikin India will grow at 25-30 per cent in 2016-17 and may close the financial year with a turnover exceeding Rs 3,500 crore.

Distribution Is Key
According to a recent Motilal Oswal report on the AC sector, margins play a key role in the growth of AC brands in India. Various AC manufacturing companies tend to offer dealers a margin anywhere between 45-55 per cent. But Daikin has a slow and steady strategy for growing its distribution network.

“We are not in a hurry to grow our distribution network. But there is a structured approach for growth. Currently, our products are available at 4,000 touch points, which we expect to ramp up to 7,000 touch points by 2017,” says Jawa.

But the company’s real focus is on growing exclusive Daikin stores. Currently, there are 300-odd Daikin brand stores which the company is looking to double over the next several months. Reacting to the poor air-quality debate in India, Daikin has also brought its air-purifiers, a product that sells like hot cake in the markets of Japan, China and European countries. In the next few months, Daikin plans to introduce a whole range of air purifiers and ACs with unique features suitable to local weather conditions.

Growth Drivers
Government policies on refrigerant use, stricter eco-friendly norms and safety pre-requisites, efficient use of products, services and technical usage have made the players in the market retag their strategies that have played a great role in creating a pertinent demand in the industry, says Jawa.

There is also a clear shift towards five-star and inverter ACs that comprise 20 per cent and 10 per cent, respectively, of the overall industry volumes. Consumers are increasingly considering the lifecycle cost of a product than just the initial capital cost.

The Bureau of Energy Efficiency (BEE) has mandated compulsory rating of inverter ACs from 2018; thus, the ratings of fixed and variable compressors will be merged — a four- or five-star rated AC would be primarily considered an inverter, while a current five-star rated AC would be graded as three-star, says Jawa.

The split AC market is expected to move towards split inverter ACs over the next few years; inverters are projected to reach 30 per cent of the market by FY18 and 50 per cent by FY20. But it won’t be a cakewalk for Daikin as players such as Voltas, Blue Star, Videocon, Godrej, LG, Hitachi and Samsung among others are also in the race to offer room ACs at competitive price points. May the coolest brand win!

ashish.sinha@businessworld.in; @ashish_BW