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Electronics

How Daikin bested South Korea's LG in its Indian stronghold

Japanese air conditioner maker's success rests on three key pillars

TOKYO -- Japan's home appliance industry has struggled in recent years in the face of a strong challenge from South Korean and Chinese manufacturers. But air conditioner maker Daikin Industries is an exception.

Its solid position comes from years of effort by employees to build on the company's strengths in design and development, production and sales under the leadership of Chairman Noriyuki Inoue.

In India, Daikin has beaten out LG Electronics for top share in the home-use air conditioner market.

Daikin's strategy rests on three pillars. The first is not to shun high-volume segments of the market.

South Korean and Chinese manufacturers' advantage typically lies in their cost competitiveness. They use their lower labor costs and maximize economies of scale by concentrating production in one location. This allows them to focus on high-volume market segments.

Their Japanese competitors typically respond by moving upmarket, but they often fail to sharpen their competitiveness and their scale frequently remains relatively small. The high-end strategy offers only a temporary respite: South Korean and Chinese companies, backed by their success in high-volume segments, eventually improve their technology and product quality enough to attack Japanese manufacturers, even at the high-end of the market.

To avoid a similar fate, Daikin rethought the development of its base models, using modular designs for its home air conditioners. The company began by collecting market data from Japan, Europe and Asia. Then it developed a single base model for all the markets it operates in worldwide. This "platform" approach is common among big automakers.

Because it uses the same base model in all markets, Daikin does not need to design new products from the ground up for different markets. This allows it to raise production volume and lower unit costs. It also helps with overall cost competitiveness by minimizing the time spent procuring parts and gearing up for production.

This rethink has paid off in spades. Daikin's South Korean rivals entered the lower end of the home air conditioner market by leaving out a device called an inverter that continuously regulates a room's temperature. At the time, prices for Daikin's inverter-equipped home air conditioners were up to 30% higher than those without. But by introducing common base models, the Japanese company cut the cost of its inverter-equipped products to near that of models without this energy-saving feature.

A woman considers her air conditioner options in the south-central Indian city of Hyderabad. Daikin has overtaken South Korean rivals to become India's top seller of home-use air conditioners.   © AP

But customer needs vary from market to market, which is where the second pillar of Daikin's business strategy comes in: localized product design. It has opened 10 overseas product development centers in Europe, China and other parts of Asia, and the U.S., hiring local engineers to meet these differing needs.

The engineers do more than put the nuts and bolts together; they are deeply involved in the marketing side as well, making sure that the products they make reflect local customer needs -- and are technically feasible.

The third pillar of Daikin's business strategy is an aggressive approach to design that actively targets the shortcomings of rival products. Daikin identifies the strengths and weaknesses of devices made by South Korean and Chinese manufacturers, and seeks to come up with better ones. This involves taking apart rivals' machines to see how they work.

In India, for example, Daikin chose LG air conditioners, which once had the top market share, as its benchmark. It dismantled the South Korean company's devices at its local development center and analyzed them. If LG launches a low-priced product that grabs a big piece of the market, Daikin tries to understand the key to its low price.

Daikin discovered that LG used an aluminum alloy as much as possible in the piping of the heat exchanger, rather than costlier copper. And it had a single-row design.

At first glance, it appears to be an excellent low-cost design. But Daikin engineers faulted it for its susceptibility to corrosion from salt and pollution, which is a problem in India. They determined that the low-priced LG product could not withstand a highly corrosive environment.

The Japanese company believes LG eventually spotted this flaw, because it drastically changed the design of the heat exchanger after only six months or so. But the tweaks pushed up the cost of the LG unit. So while the original design seemed excellent at first, in practice it was not cost-effective.

Understanding the weaknesses of rival devices helps Daikin with the design and development of its own products, improving their functionality, performance and durability in ways that competitors cannot match.

Daikin's Indian development center has testing rooms to assess the reliability, performance and noise levels of its air conditioners. It can also test their resistance to salt damage and see how well they stand up to impacts. The testing rooms help Daikin make sturdier, more reliable products that can hold up in India's harsh operating environment, giving it an edge over competing products.

Daikin takes one additional step. It strives to combine its thorough analysis of rival products, its careful appraisal and the heavy involvement of engineers in marketing to create products tailored to local market needs, based on a cost-competitive basic design.

This approach allows Daikin to design and manufacture products that customers appreciate for their functionality, performance and quality -- at competitive prices. This, in turn, has put the Japanese manufacturer on top in India, where it has overtaken LG by market share in home-use air conditioners. It is also No. 1 by sales in the air conditioning business overall, including industrial air conditioners.

Daikin has left LG and other South Korean manufacturers "unable to compete in Asia," said Masanori Togawa, Daikin's president and CEO. Togawa's bold statement reflects his confidence in the company's aggressive tactics. "We are ready to take on Chinese makers," he said. If Daikin's track record so far is anything to go on, this appears more than bravado.

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