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Behind Daikin Industries' remarkable turnaround in India : Business Today

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Behind Daikin Industries' remarkable

turnaround in India
Sunny Sen

December 6, 2013

Executive Summary: Japanese air-conditioner maker Daikin Industries fared poorly in the
highly competitive Indian market till 2009. But then the company rolled out a well-crafted
strategy to capture a larger size of the market. It succeeded in an incredibly short period of
three years. This case study takes a look at its remarkable turnaround story.
A dusty winding road, off the Delhi-Jaipur highway, leads to the sprawling 40-acre campus of
Japanese air-conditioner (AC) maker Daikin's India factory in Neemrana. The town is
known more for its six centuries old fort-palace, a weekend getaway for Delhiites.
For Daikin, Neemrana has its own importance. It is close to its component makers in the
Rajasthan State Industrial Development and Investment Corporation (RIICO) industrial belt.
Also, Delhi, one of Daikin's key markets, is just 120 km away.
The Neemrana plant makes 1,000 ACs every day for residential, commercial and industrial
use. In many ways, the hustle and bustle at the unit signals Daikin's growing footprint in India.
In 2009/10, Daikin sold 34,000 ACs in India, and ranked seventh among all AC makers. By
2012/13, this figure had grown a spectacular twelve times in volume to about 400,000. About
85 per cent of its sales are of residential ACs.
Daikin has also increased its revenues manifold - from Rs
440 crore in 2009/10 to Rs 1,800 crore in 2012/13. It is now
the second-largest AC maker in India after Voltas in terms
of revenue, according to Registrar of Companies data
available with the company. In 2013/14, the firm hopes to
clock sales of Rs 2,200 crore. The AC industry is estimated
to post a turnover of Rs 16,500 crore next year, according
to industry estimates, growing at 10 per cent annually.
The man who spearheaded Daikin's spectacular
turnaround is Managing Director Kanwal Jeet Jawa. He has
spent three decades in the AC business, and has been with
the company since April 2010. "We have a product range
no one can match - from 0.75 tonne to 2,700 tonne
chillers," he says. But building a diverse product portfolio is
only partly responsible for Daikin's success. The company
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has devised a five-point strategy which revolves not only around products, but also people,
service, systems and the brand.
The brand itself has undergone a metamorphosis. In 2000, when Daikin set up its operations
in India, it was a premium AC maker. Its product prices were beyond the reach of the
common man. Jawa realised this had to change if Daikin had to get a significant share of the
market. But it was a long haul. In 2004, Daikin bought out shares of the Siddharth Shriram
Group, which owns the Usha brand, to make the Indian unit a wholly-owned subsidiary. In
many ways this was the turning point and Daikin began to focus more on its Indian
operations. "It took them a lot of time to understand India," says Jawa.
Daikin, then, imported residential ACs from Japan and Thailand*. However, costly imports did
not allow them to scale up and become a mass market player.
In 2009, at Daikin's headquarters in Osaka, the senior leadership put together a 150-page
vision document, Fusion 2015, for the company in India. A new core team of 15, including
Jawa, was put in place for its Indian operations. The same year Daikin did a survey on brand
perception - 56 out of 100 people had not heard about the company. It started new
campaigns to boost brand visibility. But the new team went for the kill, when it slashed the
product prices by 40 per cent in 2009 and launched a series of products in the price range of
Rs 24,000. The strategy worked and in 2010/11 Daikin doubled its revenue to Rs 850 crore.
This phenomenon was new in the consumer durables space even though it had been seen
in other sectors. For instance, foreign shoe brands, including Adidas, Reebok and Nike, had
entered India at prices higher than domestic competition. They eventually rolled out products
at lower price points to boost sales, though still at a relative premium to local brands such as
Action and Tuffs. "Daikin has got the Indian ethos to AC making correct," says Harish Bijoor
of Harish Bijoor Consults, a consulting firm specialising in brand and business strategy. "In
India, the value for money connotation is very huge, and the opportunity is in the mid-level
market."
Jawa also realised that Daikin had to be present in many more towns and cities. In 2010, he
called a dealers' meet at the ITC Hotel in Agra. About 350 dealers were invited and given the
option to go to tier-II and tier-III cities by adding an additional dealership. "We were at that time
selling to only the super rich, which is a niche," says Jawa. Within a year's time the dealer
network doubled. At the end of the last fiscal, Daikin had 1,800 dealers. It expanded from four
regional offices in the metros to 11 offices around the country, and it also opened godowns
and smaller offices.
"We were an engineering company and now becoming a marketing company, but we had to
keep the engineering DNA intact," says Jawa. Daikin then unveiled a product - R32
refrigerant - in 2012, which allowed Daikin to use a smaller compressor, coil and other
components, reducing the size of the AC by 30 per cent and offer it at only a 15 per cent
premium over what its South Korean rivals LG and Samsung did.
Meanwhile, the consumer durables industry was moving towards star rating, the standards
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set by the Bureau of Energy Efficiency. The more the number of stars (the maximum being
five), the lesser electricity would be consumed. Daikin then developed an energy-efficient
product which could sense the occupancy of the room, and regulate cooling and tonnage of
output accordingly. It was initially launched as a light commercial product, but it is now finding
a place in large apartments and villas. With lesser competition in this space - Mitsubishi and
Toshiba are its only competitors - Daikin has a fair chance to be a leader. In China, Daikin
has already cornered 45 per cent of the light commercial product AC market. In India, it
claims to have already got half of the market and is aiming at 57 per cent by 2015.
The turnaround in Daikin's fortunes in India is in large measure an outcome of higher
localisation. Till about two years back, Daikin was only making commercial ACs and chillers
in India, and was importing all its residential AC units from Taiwan and Japan. But Jawa
realised that to bring down price, it was important to rely on local component manufacturers.
Jawa had also learnt from experience. In 2010, a huge consignment of residential ACs got
stuck in customs and needed to be delivered urgently to its dealers. Daikin was in expansion
mode, and Jawa could not afford to lose time. The moment the consignment was cleared,
Jawa got it airlifted and transported to various locations in the country, spending a big amount
on transportation. The only way he could avoid such a situation in the future was by making
the ACs in India. He started procuring components locally, and finally by 2012 Daikin stopped
all imports and started manufacturing residential ACs at the Neemrana plant. Except the
compressor and the controller, everything else in Daikin ACs are made in India. This, Jawa
says, also has helped in reducing cost by about 45 per cent.
Daikin is now set to expand operations. It has already invested Rs 743 crore in the
Neemrana plant. The plant can manufacture up to five lakh ACs every year, but the current
capacity will be fully utilised by the end of this fiscal. Jawa has already anticipated demand
surpassing supply. He has got Rs 300 crore sanctioned from the parent to double the plant's
capacity to a million units and take on other expansion plans in the country**.
The company has also opened 100 exclusive Daikin stores, and there are a few more in the
pipeline. The company has demarcated five acres of land in the plant facility for a training
centre on soft skills and sales. For example, it is mandatory to pick up customer-care calls
within 11 seconds. "We have our own bible," says Jawa. Daikin employees call it the Blue
Book, and they abide by it.
The Daikin management in Japan is obsessive about tracking growth. Every quarter, Jawa
says, there is a review done by the Japanese parent. Every month there is a review by the
Indian management, and zonal offices do their weekly review.
Even though Daikin's growth is praised by some analysts, others look at it with scepticism.
"This category is fast moving towards commoditisation," says Arvind Singhal, Chairman of
the consultancy firm Technopak Advisors. "How much of that growth is sustainable is not
known." This is largely because the AC industry per se can go through little innovation, say
experts. It is also easy to replicate any innovation, which leaves little room for differentiation.
For example, energy-efficient inverter ACs are in the portfolio of every company now.
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There are other challenges before Daikin. The Korean consumer electronics majors, LG and
Samsung, have a larger distribution network and can reach out to many more people,
especially in rural India. Other Japanese makers, such as Panasonic, have also slashed
prices of products which might hit Daikin. Also, the three competitors mentioned above have
a wider range of products which can give them an edge over Daikin, says Singhal.
Jawa is unruffled. He has only one thing on his mind - meeting the goals outlined in Fusion
2015. The original plan, according to Fusion 2015, was to become the No.1 AC maker in
India, in terms of revenue, by 2015. But the Daikin India chief has a slightly different plan. He
wants to do it a year before target. "Given the current run rate, we will be there before 2015,"
says Jawa with a smile. And given his track record, it is difficult not to take him seriously.
{blurb}
*An earlier version of the story had mentioned that the company imported residential ACs
from Japan and Taiwan. It has now been corrected to Japan and Thailand.
** The sentence has been updated to reflect that the sum of Rs 300 crore will also be used
by the company to fund its other expansion plans.
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