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Daikin beats China slowdown with high-end air conditioners

Chinese sales up 2% but US market remains a challenge

Customers look at air conditioners at a Daikin store in China.

OSAKA -- Even as businesses that rely on China are hit by the slowdown in the world's second-largest economy, Daikin Industries is doing impressively well with its secret weapon: lucrative air conditioners for upscale homes.

The Osaka-based company is poised to earn a record group net profit of 195 billion yen ($1.78 billion) for the year ending in March, up 3% from the previous year.

"Conditions remain challenging in China, but we are flexibly responding to changes to increase sales as much as we can," President Masanori Togawa said.

China's air conditioner market is seen shrinking about 3% in fiscal 2019, as the trade war with the U.S. weighs on the economy. Beijing's restrictions on real estate investments have cooled home-buying activities in coastal cities and elsewhere. As a result, industrywide inventories have swollen to 40 million to 50 million air conditioners, mostly held by local appliance makers, says one industry insider.

Yet Daikin managed to lift Chinese sales in its air conditioner business by 2% on a yuan basis for the six months through September. Its full-year operating margin in China is expected to reach somewhere between 25% and 26%, up just a tad from 25% for last fiscal year. That figure exceeds forecasts elsewhere, such as around 7% to 8% for Japan, 6% to 7% for the Americas, 10% to 11% for Europe and 13% to 14% in Asia. In fact, China will generate about 30% of the company's operating profit.

Such strength is a product of Daikin's strategy of focusing on upmarket air conditioners. When it was entering China, the company set up a chain of dedicated stores as part of a marketing campaign aimed at affluent households. Maintenance services are offered promptly upon request.

Daikin's ability to offer comprehensive design proposals to real estate developers also helps in China, where new condominiums, particularly pricey ones, increasingly come move-in ready.

Local rivals such as Gree Electric Appliances and Midea Group are seeking to expand their specialties beyond lower-priced products. But Daikin distinguishes itself with in-house production of parts such as compressors, as well as highly energy efficient features and a broad product lineup. Gree's operating margin came to 17% for the January-September period.

To cope with weakening demand in Shanghai and elsewhere on the coast, Daikin is expanding its sales network to inland cities such as Chongqing and Wuhan, resulting in a double-digit jump in April-September inland sales. The Japanese company is also picking up market share in India, Southeast Asia and other emerging markets.

One negative is that "the margin in the Americas is not improving," said Tsubasa Sasaki at Mitsubishi UFJ Morgan Stanley Securities.

Major U.S. players such as Carrier, a group member of United Technologies, boast robust sales and service networks. Their business model of providing maintenance and security services in addition to air conditioner sales allows them to keep customers over the long term. Carrier recorded an operating margin of 16% for the first nine months of 2019, compared with Daikin's 6% for the Americas last fiscal year.

To catch up with rivals in the U.S., the world's biggest economy, Daikin is boosting productivity by consolidating plants that had been spread across the country into a single facility in Texas. It is also pursuing the American business model of generating income through maintenance services.

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