Global leader doubles down on key market with energy-saving tech.

OSAKA — Daikin Industries is accelerating its efforts to become the leader in air conditioners in the U.S., tapping its expertise in energy-saving technology to boost profitability in the critical market.

In December, Daikin began producing machines called chillers at a new plant in the state of San Luis Potosi in Mexico. Chillers cool large amounts of water to around 7 C, which can then be pumped through large buildings to cool the space.

Such solutions, called applied air conditioning systems, are commonly used in the U.S., with American players like Trane Technologies and Johnson Controls long dominating the field. But Daikin has been expanding its presence since the mid-2000s through a series of acquisitions, and has recently won contracts for data centers, where energy efficiency is key.

The U.S. air conditioning market “is the most challenging,” said Yoshinao Ibara at Morgan Stanley MUFG Securities. While Daikin is the top seller of air conditioners worldwide, as well as in Japan and Europe, it is thought to rank second in the U.S. after Trane.

“We aren’t truly number one unless we are number one in the U.S.,” Daikin Chairman Noriyuki Inoue said previously. The company aims to take the top spot there in sales by fiscal 2025.

Boosting profitability is another challenge in the U.S.

Daikin’s air conditioning business earned 1.33 trillion yen (around $9.1 billion) in revenue in the Americas for the fiscal year ended March 2023, more than double as much as in Japan, China or Europe. But operating profit margin in the Americas is believed to have been in the 6% range, compared with 8.9% for the air conditioning business as a whole, due to the narrow margins of applied air conditioning systems.

Meanwhile, Trane logged an operating margin of around 15% in 2022. Daikin’s rivals in the U.S. are earning fat margins from servicing previously sold equipment.

The new Mexico plant is part of Daikin’s push to boost the profitability of its applied air conditioning systems. The company also aims to expand its residential air conditioning business, with a goal of a 10% profit margin in air conditioners in the Americas by fiscal 2025.

Daikin is now building a new wing at the Mexico facility dedicated to residential air conditioners, to supplement its production hub near Houston in Texas. With more consumers embracing inverters and other energy-saving technology where Daikin has an edge, Daikin’s profit margin for residential air conditioners in the U.S. has risen to around 9%.

The boost in the U.S. has helped lift Daikin’s earnings as a whole, offsetting the effects of an economic slowdown in China and weakening demand for heat pump systems in Europe. Group operating profit is expected to grow 6% to 400 billion yen and net profit by 2% to 264 billion yen for the year ending this March, both reaching new heights for the third year in a row.

Daikin does not break down profits from its air conditioning business by region. But it projects an overall operating profit of around 90 billion yen in the U.S. this fiscal year, approaching the roughly 100 billion yen forecast for China. U.S. profits had amounted to less than half of Chinese profits in fiscal 2018, before the global spread of COVID-19.

The company excels in its high-end offerings in China, enjoying an operating profit margin of over 20% in the market. But China’s sluggish real estate sector is expected to limit Daikin’s growth there in the near term, making the company’s success in the U.S. even more important.

Daikin’s stock price has fallen from a record high of 31,330 yen marked in July 2023. Market watchers expect slower growth in the company’s heat pump business, with natural gas prices settling in Europe and Italy adjusting its subsidy scheme.

The company’s stock gained 14% in 2023, compared with the 28% jump in the Nikkei Stock Average. Many investors are mindful that its operating profit margin has suffered in recent years, Ibara said.

Daikin President and CEO Masanori Togawa in November had hinted at a potential upgrade to the company’s fiscal 2023 forecast once October-December results were out — a sign of his confidence in U.S. operations. But with Daikin facing continued headwinds in China and Europe, the company is under pressure to chart its path for growth in fiscal 2024 and beyond.