Daikin Industries Ltd. Annual Report 2021

Plain-text annual report

Integrated Report 2021 Fiscal Year Ended March 31, 2021 Offer new value for the environment and air to realize both contributions to a sustainable society and Group growth Founded in 1924, Daikin has continued to expand with a focus on its Air-Conditioning and ﬂ uo- rochemicals businesses. We are the world’s only general air-conditioning equipment manufacturer with in-house divisions covering both air conditioning and refrigerants. We have continued to grow and develop based on people-centered management, the pursuit of originality, and diversity management. Based on the enterprising spirit espoused in our core values, our employees have worked in unison to take on the challenge of achieving established goals. By demonstrating the ability to fully carry out our duties, we have successfully reﬁ ned our strengths in energy-saving and environmental as well as IAQ technologies, robust sales network, and local production for local consumption model. Under our ﬁ ve-year FUSION 20 strategic management plan that ended in ﬁ scal 2020, we had adopted the two pillars of thoroughly strengthening our core businesses—air conditioning, chemicals, and ﬁ l- ters—and expanding our business domains while transforming our business structure. As a result, we were able to steadily implement our key strategies while investing in growth for the future. We are currently experiencing a once-in-a-century pandemic, and the COVID-19 crisis is causing unprecedented environmental changes and a dramatic transformation of the consumer structure. We are also experiencing major structural changes in society, such as the promotion of carbon neutrality. As the world’s only manufacturer that develops and produces both air-conditioning equipment and refrigerants, we have been contributing to the environment by providing differentiated products and services that take advantage of our environmental and energy-saving technologies around the world. However, we believe that it is essential to achieve both business growth and the goal of achieving net zero greenhouse gas emissions by 2050. In formulating FUSION 25, the strategic management plan that we started in ﬁ scal 2021, we took into account the major changes in the structure of the economy, industry and society 10 to 20 years into the future, as well as the ideal state of the Daikin Group. Based on this back-casting approach, we have set speciﬁ c themes to be addressed during the ﬁ ve years of FUSION 25. While contributing to solving environmental and social issues, we will expand our business to achieve further growth and development. Our goal is to realize contributions to both a sustainable society and the growth of the Daikin Group. Our Core Values Absolute Credibility Enterprising Management Harmonious Personal Relations Our Group Philosophy 1. Create New Value by Anticipating the Future Needs of Customers 2. Contribute to Society with World-Leading Technologies 3. Realize Future Dreams by Maximizing Corporate Value 4. Think and Act Globally 5. Be a Flexible and Dynamic Group 1. Flexible Group Harmony 2. Build Friendly yet Competitive Relations with Our Business Partners to Achieve Mutual Beneﬁ t 6. Be a Company that Leads in Applying Environmentally Friendly Practices 7. With Our Relationship with Society in Mind, Take Action and Earn Society’s Trust 1. Be Open, Fair, and Known to Society 2. Make Contributions that Are Unique to Daikin to Local Communities 8. The Pride and Enthusiasm of Each Employee Are the Driving Forces of Our Group 1. The Cumulative Growth of All Group Members Serves as the Foundation for the Group’s Development 2. Pride and Loyalty 3. Passion and Perseverance 9. Be Recognized Worldwide by Optimally Managing the Organization and Its Human Resources, under Our Fast & Flat Management System 1. Participate, Understand, and Act 2. Offer Increased Opportunities to Those who Take on Challenges 3. Demonstrate Our Strength as a Team Composed of Diverse Professionals 10. An Atmosphere of Freedom, Boldness, and “Best Practice, Our Way” Integrated Report 2021 1 On Publishing the Integrated Report 2021 This is the ﬁ rst time we published an integrated report to inform our shareholders and investors of the Daikin Group’s efforts to enhance corporate value over the medium to long term. Through this report, we hope to convey the Group’s aspiration and endeavors to help realize a sustainable society by bal- ancing efforts to resolve environmental and social issues with the growth and development of its busi- ness while collaborating with customers, business partners, employees, local communities, and other stakeholders. In the “Process of Value Creation,” we have clearly outlined the relationship between the six types of capital and outcomes, as well as expressed our aim to achieve sustainable growth by working to solve social issues through the Group’s unique strengths and business model. In the “Risks and Opportunities That Affect Medium- to Long-Term Value Creation” section, we identiﬁ ed important social issues that could affect the Group’s medium- to long-term value creation in light of changes in the external envi- ronment, and identiﬁ ed related risks and opportunities. In the “Looking Back on Our Strategic Man- agement Plan “FUSION”” section, we summarized our efforts, achievements, and progress to date. In addition, the ““FUSION 25” Strategic Management Plan” section outlines the details of this strategic management plan that began in ﬁ scal 2021. Under FUSION 25, our goal is to “offer new value for the environment and air to realize both contributions to a sustainable society and Group growth” with the aim of continuing to grow and develop by expanding our business and strengthening proﬁ tability while contributing to the environment and society. We have also set our key strategic themes, including the challenge to achieve carbon neutrality. The report outlines the speciﬁ c measures, both ﬁ nancial and non-ﬁ nancial, that Daikin will take to realize its vision for ﬁ scal 2025, the ﬁ nal year of the plan. This report contains information that is of particular importance to enhancing the corporate value of the Daikin Group. For more detailed information, please refer to our website. Investor Relations https://www.daikin.com/investor/ Environment & CSR https://www.daikin.com/csr/ • Guidelines Used as Reference In compiling this report, we draw on such references as the International Integrated Reporting Council’s (IIRC) (reorganized as the Value Reporting Foundation in June 2021) “International Integrated Reporting Framework,” and the “Guidance for Col- laborative Value Creation” issued by Japan’s Ministry of Economy, Trade and Industry. 2 CONTENTS Our Core Values/Our Group Philosophy ...................... 1 Corporate Governance ................................................ 42 On Publishing the Integrated Report 2021 .................. 2 Message from the External Director .......................... 45 A Path to Unique Solutions ........................................... 4 Corporate Ofﬁ cers ....................................................... 46 Process of Value Creation .............................................. 6 Compliance/Risk Management ................................... 52 Financial/Non-Financial Highlights ............................... 8 Response to TCFD ........................................................ 53 At a Glance .................................................................. 10 Enhancing the Management Foundation Strengthening Technology Development Market Size and Positioning of Each Business .......... 11 Capabilities ................................................................. 54 Message from the CEO ................................................ 12 Looking Back on Our Strategic Management Plan “FUSION” .............................................................. 20 Establishing a Robust Supply Chain ............................. 56 Promoting Digital Transformation for Innovation .......... 56 Creating Market Value/Enhancing Advocacy Activities ..................................................................... 57 Improving HR Capabilities through Advanced Diversity Management ................................................. 57 Risks and Opportunities That Affect Medium- to Long-Term Value Creation ........................................... 22 Financial Section Strategic Management Plan “FUSION 25”.................. 24 Financial Strategy ........................................................ 30 Review of Operations Overview of Global Development ................................ 32 Air Conditioning .......................................................... 33 Chemicals .................................................................. 38 Oil Hydraulics .............................................................. 40 Defense ....................................................................... 41 Eleven-Year Financial Highlights ................................... 58 Financial Review .......................................................... 60 Consolidated Balance Sheet ........................................ 70 Consolidated Statement of Income .............................. 72 Consolidated Statement of Comprehensive Income ..... 73 Consolidated Statement of Changes in Equity ............. 74 Consolidated Statement of Cash Flows ........................ 76 Corporate Data ............................................................ 77 Fiscal year: In conjunction with the issue of the Company’s inaugural integrated report, Daikin has deﬁ ned the ﬁ scal year under review as ﬁ scal 2020, the ﬁ scal year ended March 31, 2021. Forward-Looking Statements This Integrated Report contains statements regarding the future plans and strategies of Daikin Industries, Ltd. (the Company), as well as the Company’s future performance. These statements are not statements of past facts but are based on judgments made by the Company on the basis of information known at the time. Therefore, readers should refrain from drawing conclusions based only on these statements regarding the future performance of the Company. The actual future performance of the Company may be inﬂ uenced by economic trends, strong compe- tition in the industrial sectors where it conducts its operations, foreign currency exchange rates, and changes in taxation and other systems. For these reasons, these forward-looking statements are subject to latent risk and uncertainty. Integrated Report 2021 3 A Path to Unique Solutions Founded in Osaka in 1924, Daikin operates in more than 160 countries worldwide, focusing on the Air Conditioning business. By providing solutions to the problems society and communities are facing while achieving business growth, Daikin supports healthy and comfortable lifestyles. As a global corporation creating new value in the air and environmental ﬁ elds, Daikin continu- ally meets the expectations and trust of people throughout the world. Three Core Technologies Daikin has developed three advanced air-conditioning technologies that form the basis for next-generation technology. Heat Pump Absorbs and transfers heat from the air Inverter Contributes to greater energy saving and comfort Refrigerant Control Efﬁ cient heat transmission Business Scale (at March 31, 2021) Net Sales (Fiscal 2020) Employees Group Companies Global Business Presence Worldwide Production Bases ¥2,493.4 billion 84,870 Consolidated Subsidiaries: 315 (Japan: 30, Overseas: 285) More than Countries: 160 More than Factories: 100 Business Results Net Sales Operating Income 538.8 42.0 FUSION 05 1924 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Ensuring a Competitive Edge through High Levels of Product Competitiveness and Production Technologies Business and Technology Development 1924 Founding of Osaka Kinzoku Kogyosho Limited Partnership 1982 Launch of Japan’s ﬁ rst multi-type air-conditioning system for buildings 1935 Development of ﬂ uorocarbon refrigerant 1937 Development of Japan’s ﬁ rst Freon-type refrigerator 1942 Freon production begins 1951 Launch of Japan’s ﬁ rst packaged air conditioner 1958 Entry into the room air-conditioning business 1975 Launch of “Hikari Kurieru” air puriﬁ er 1999 Launch of “Ururu Sarara” world’s ﬁ rst waterless humidifying room air conditioner 2002 Nationwide expansion of the ﬂ uorocarbon recovery and destruction business 2002 Launch of “ECOCUTE” heat-pump water heater 2004 World’s ﬁ rst successful application of streamer electric discharge technology Accelerating the Pace of Global Expansion while Expanding the Scale of Business during the 2000s Daikin’s Evolution and Strategies 2007 Acquisition of OLY Group, a major global air- conditioning manufacturer 2009 Acquisition of Japanese air ﬁ lter manufacturer NIPPON MUKI CO., LTD. 2008 Business alliance with Gree Electric Appliances, China’s top air-conditioning manufacturer 2011 Acquisition of Turkish air-conditioning manufacturer Airfel 2008 Acquisition of German heating manufacturer ROTEX 2012 Acquisition of U.S. residential air-conditioning manufacturer Goodman 4 FUSION 05 to 20 (Fiscal 2001 – Fiscal 2020) Details ▸ P.20 FUSION05 FUSION10 FUSION15 FUSION20 Securing our management foundation Become an attractive company that draws together people, capital, and information Management innovation Accelerate growth Become the global No. 1 AC business Become a truly global and excellent company Business domain expansion/ business structure conversion, and enhancement of existing businesses Co-create New Value in the Air and Environment Fields with Wisdom and Passion Global spread of COVID-19 Global spread of COVID-19 2,481.1 276.3 Operating income (¥ billion) 300 2,493.4 238.6 Net sales (¥ billion) 3,000 1,787.7 156.5 Acquisition of U.S. Acquisition of U.S. residential air-conditioning residential air-conditioning manufacturer Goodman manufacturer Goodman 2,000 1,291.1 128.1 OYL Group acquisition OYL Group acquisition Lehman Shock Lehman Shock 1,000 2013 – 2018 2013 – 2018 Achieved six consecutive years of record high sales Achieved six consecutive years of record high sales and operating income and operating income 14 consecutive years of 14 consecutive years of increased earnings starting in 1994 increased earnings starting in 1994 Achieved nine consecutive years of increases Achieved nine consecutive years of increases in net sales and operating income from 2010 in net sales and operating income from 2010 FUSION 10 FUSION 15 FUSION 20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (FY) 2005 Opening of China’s ﬁ rst dedicated showroom for large-scale air conditioners 2006 Launch in Europe of “Daikin Altherma” air-to-water heat pump system 2007 Launch of “DESICA” world’s ﬁ rst humidity control air conditioner without water drainage or supply pipes 2009 Establishment of the Daikin McQuay Applied Development Center in the U.S. 2010 Establishment of the Shanghai R&D Center 2011 Opening of the Solution Plaza Fuha Tokyo 2012 Launch of “Urusara 7” world’s ﬁ rst residential air conditioner using new R32 refrigerant 2013 Opening of the Solution Plaza Fuha Osaka 2014 Launch of cooling-only inverter air conditioners for developing countries 2015 Establishment of Technology Innovation Center 2017 Establishment of Daikin Texas Technology Park, a production and technology development base 2015 Granting of worldwide free access to basic patents for using R32 refrigerant 2015 Acquisition of the refrigerant business in Europe from major Belgian chemical group Solvay 2016 Acquisition of U.S. ﬁ lter manufacturer Flanders 2016 Acquisition of Italian refrigerator/freezer manufacturer Zanotti 2016 Acquisition of Scandinavian ﬁ lter manufacturer Dinair 2019 Acquisition of Austrian refrigerating and freezing showcases manufacturer AHT Integrated Report 2021 5 250 200 150 100 50 0 Process of Value Creation Through efforts to ﬁ nd solutions to social problems through our value, and aims for sustainable growth. Global society is continually changing, and directly faces many problems related to climate change and other issues. Through its business, Daikin Group provides society with new value, and by contributing to the realization of a sustainable society, seeks growth for itself as well. Changes in society INPUT Year ended March 31, 2021 Business Model Financial Capital • Stable and sound ﬁ nancial structure Total assets Total Shareholders’ Equity ¥3.24 trillion ¥1.67 trillion Interest-Bearing Liabilities ¥751.2 billion Cash and cash equivalents ¥736.1 billion Manufactured Capital • Market-localized production system over 100 manufacturing bases globally • Building of digital factories and an efﬁ cient production structure • Aggressive capital investments ¥137.0 billion Intellectual Capital • Three core technologies • Global research and development sites 39 sites • R&D Expenses ¥71.7 billion Human Capital • Diverse workforce 84,870 employees • Abundant global human resources • Embedded Group philosophy Social and Relationship Capital • Conducting business in more than 160 countries • Proactive collaboration with industry, government and academia • Relationships of trust with customers, communities, suppliers, dealerships, and dealers Natural Capital • Effective use of natural capital Energy consumption Material consumption Water intake 14,108TJ 1,060,000t 9,560,000m3 • Environmental conservation activities “Forests for the Air” Project Intensiﬁ cation of climate change Expansion and concentration of energy and power demand Increased interest in IAQ Occurrence of natural disasters Transition to a digital society Offer new value for the environment and air to realize and Group growth Manufacturing Multiproduct mixed production Reduce environmental loads “Vertically integrated production” based on in-house production of core parts Strategic Management Plan “FUSION 25” “Market-localized production” based on local production for local consumption Procurement Global bulk purchasing and local procurement Promote CSR procurement Development, Design Pursue comfort and environmental performance Product development to meet local needs Create new value Environmental Vision 2050 Details on the website https://www.daikin.com/csr/ company/vision.html CSR for Value Provision • Environment • New Value Creation • Customer Satisfaction • Human Resources Details on the website https://www.daikin.com/csr/ index.html 6 business, Daikin provides new Daikin's Contribution to Sustainable Development Goals (SDGs) (P.24~) OUTPUT OUTCOME Year ended March 31, 2021 Year ended March 31, 2021 both contributions to a sustainable society Net sales Sales, Transportation, Installation Proposal-type business for existing sales network developed globally Development of service personnel that have solid technical capabilities “Integrated product development” consisting of manufacturing, sales, research, and procurement Product use Provide comfortable air and spaces Reduce environmental loads “Robust sales network” consisting of a dealer network that expands globally After-sales Service, Recovery, Recycling Recovery and recycling of refrigerants Provide services based on the concept of continuous connection with customers and capture replacement demand CSR Management Fundamental CSR • Corporate Governance • Respect for Human Rights • Supply Chain Management • Stakeholder Engagement • Communities ¥2.49 trillion Operating income ¥238.6 billion Operating income margin 9.6% Major Products Room air-conditioning sys- tems, packaged air-condi- tioning systems, multiple air-conditioning systems for ofﬁ ce buildings, heat-pump hot-water-supply and room-heating systems, air puriﬁ ers, heat reclaim ventilation Air Conditioning (P.33~) 91% Defense (P.41) 1% Oil Hydraulics (P.40) 1% Ratio of net sales Chemicals (P.38~) 7% • Meetings with institutional investors/ analysts over 400 Events annually • 10-year TSR 839.9% (25.1% annually) • No. of patent applications (Fiscal 2019, Daikin Industries only) More than 1,540 • No. of female managers 71 • Ratio of overseas bases where local nationals are president 43% • Ratio of excellent or advanced skilled engineers in manufacturing 1 in 3.3 (Daikin Industries only) • IoT and AI human resource training centered on the Daikin Information and Communications Technology College • Shift to region-based procurement to achieve local production for local consumption • Customer Satisfaction Japan = 1.14 (when using Fiscal 2015 as 1.00) • Safe and secure air “Urusara X” room air-conditioning system with ventilation capabilities “Venti-air” Heat Reclaim Ventilator • Total unit sales of R32 air-conditioning systems More than 28 million units sold in over 100 countries worldwide (as of December 2020) • Through the adoption of environmentally conscious products, contribute to reducing greenhouse gas emissions 70 million tons- CO2 • Reduction ratio of greenhouse gas emissions from development and production 79% reduction (compared to Fiscal 2005) • Contribution to CO2 emission reductions through forest preservation 7 million tons-CO2 • Reductions in CO2 emissions due to adoption of heat pump space and water heaters • Reductions in CO2 emissions due to adoption of inverter units ▲ Capital icons: Financial Manufactured Intellectual Human Social and Relationship Natural Integrated Report 2021 7 Financial and Non-Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Net Sales/Operating Income, Operating Income Margin Net Sales Operating Income Operating Income Margin ROE/ROA ROE ROA (¥ billion) 3,000 2,000 1,000 0 (%) 15 2,493.4 9.6 10 2017 2018 2019 2020 2021 238.6 5 0 (%) 20 15 10 5 0 10.1 5.3 2017 2018 2019 2020 2021 Despite the ongoing impact of the COVID-19 pandemic, Daikin achieved results that The Air Conditioning business is looking to aggressively undertake R&D as well as capital, exceeded those of the action plan by ensuring short-term performance and promoting acquisition, and other strategic investments on the back of a forecast increase in demand enhancements to the management structure. going forward. By steadily reaping returns on the aforementioned investments, we will work to boost our performance on a continuous basis and improve ROE/ROA. Total Shareholders’ Equity/ Shareholders’ Equity Ratio Interest-Bearing Liabilities/ Liability with Interest Ratio Total Shareholders’ Equity Shareholders’ Equity Ratio Interest-Bearing Liabilities Liability with Interest Ratio (¥ billion) 1,800 1,200 600 0 1,665.7 51.4 2017 2018 2019 2020 2021 (%) 60 40 20 0 (¥ billion) 900 600 300 0 751.2 23.2 2017 2018 2019 2020 2021 (%) 30 20 10 0 Daikin’s shareholders’ equity ratio came in at 51.4% for the ﬁ scal year under review, We have continued to steadily reduce the balance of interest-bearing liabilities by gener- exceeding 50% for the fourth consecutive year. The Company is taking positive steps to ating free cash ﬂ ow and making effective use of Group funds. In preparation for contin- ensure its ﬁ nancial stability. gencies coinciding with the spread of the COVID-19 pandemic, during the ﬁ scal year under review, we reinforced cash and cash equivalents through long-term borrowings. Free Cash Flow Capital Investments/ Research and Development Expenses Capital Investments Research and Development Expenses (¥ billion) 300 200 100 0 215.0 2017 2018 2019 2020 2021 (¥ billion) 150 100 50 0 137.0 71.7 2017 2018 2019 2020 2021 In addition to increasing earnings and improving investment efﬁ ciency, efforts are also From a capital investment perspective, energies are being directed toward upgrading and being made to generate cash ﬂ ow from a working capital perspective. This includes thor- expanding sales networks and newly constructing plants while boosting production oughly reducing the balances of accounts receivable and inventory. capacity, focusing on emerging countries and key markets where there has been remark- able growth. As far as research and development expenses are concerned, Daikin recog- nizes that strengthening technological competitiveness is the lifeblood of a manufacturer. On this basis, the Company is coordinating with its eight development sites worldwide and the Technology and Innovation Center (TIC) that serves as the Group’s development control tower, and is accelerating the development of distinctive technologies and prod- ucts, including those for addressing global environmental problems. 8 Cash Dividends per Share/ DOE, Dividend Payout Ratio Cash Dividends per Share DOE Dividend Payout Ratio Number of Patent Applications Japan Overseas (¥) 200 150 100 50 0 (%) 40 160 30.0 30 2017 2018 2019 2020 2021 3.0 20 10 0 (Number) 1,200 900 600 300 0 1,076 467 2016 2017 2018 2019 2020* Together with making every effort to maintain a ratio of dividends to shareholder equity Daikin is working to stimulate employees’ motivation to invent, spur the creation of intel- (DOE) of 3.0% or higher based on the principle of always providing stable dividends to lectual property, increase the quality and quantity of patents in competitive ﬁ elds, and shareholders, we will continue striving in our mission to provide shareholders with even increase the number of overseas patents in key technological ﬁ elds in particular in emerg- greater return by aiming for an increasingly higher level of dividend payout ratio. ing countries. * The latest ﬁ gures for the ﬁ scal year ended March 31, 2020. Number and Percentage of Women in Management Positions Number and Percentage of Overseas Bases Where Local Nationals Are President or Executive Women in Management Positions Percentage President Executive President ratio Executive ratio 80 60 40 20 0 71 6.0 2017 2018 2019 2020 2021 (%) 8 6 4 2 0 120 80 40 0 48.2 42.9 68 30 2017 2018 2019 2020 2021 (%) 60 40 20 0 One of the Company’s most important policies revolves around the empowerment of As Daikin’s business globalizes, the Company is actively promoting more employees at women in its workforce. Daikin is implementing various measures to accelerate the devel- overseas bases to managerial positions. Daikin holds the Global Daikin Leadership opment of women in management and executive positions, change the mindset of men Development Program as a development measure to give locally hired managers the in management, and support the early return to work of its female employees after child- opportunity to run Daikin subsidiaries in their own countries. care leave. Contribute to Reducing Greenhouse Gas Emissions Greenhouse Gas Emissions (during development and production) (million tons-CO2) (million tons-CO2) 80 60 40 20 0 70 2017 2018 2019 2020 2021 2.0 1.5 1.0 0.5 0 1.08 2017 2018 2019 2020 2021 Daikin’s air conditioners, a mainstay product, emit particularly high levels of greenhouse Every effort is being made to minimize environmental impact through production activi- gas emissions when in use. Accordingly, the Company is focusing on promoting the use of inverters and air conditioners that use low-GWP refrigerants. Daikin reduced green- house gas emissions by 70 million tons-CO2, compared to its target of limiting green- house gas emissions to 60 million tons-CO2 by the ﬁ scal year ended March 31, 2021. ties. Daikin achieved a 79% reduction (to 1.08 million tons-CO2) in greenhouse gas emis- sions, compared to its target of a 70% reduction (to 1.58 million tons-CO2) from the ﬁ scal year ended March 2005 level in development and production greenhouse gas emissions for the Group as a whole in the ﬁ scal year ended March 2021. Integrated Report 2021 9 At a Glance Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Air Conditioning 91% Percentage of Net Sales Chemicals 7% Oil Hydraulics 1% Defense 1% Net Sales and Operating Income Major Products Description Air Conditioning • Room air-conditioning • Absorption refrigerators systems • Air puriﬁ ers • Heat-pump hot-water- supply and room-heating systems • Packaged air-conditioning systems • Multiple air-conditioning systems for ofﬁ ce buildings • Air-conditioning systems for facilities and plants • Freezers • Water chillers • Turbo refrigerator equipment • Air-handling units • Air ﬁ lters • Industrial dust collectors • Marine-type container refrigeration • Refrigerating and freezing showcases Since becoming the ﬁ rst in Japan to manufacture pack- aged air-conditioning systems in 1951, Daikin has supported comfortable living based on the strengths of technologies that it has itself nurtured as the world’s sole manufacturer to create a full line of prod- ucts from refrigerants to air conditioners. • Fluorocarbons • Fluoroplastics • Fluoroelastomers • Fluoropaints • Fluoro coating agents • Semiconductor-etching products • Water and oil repellent agents • Pharmaceuticals and intermediates • Dry air suppliers • Oil hydraulic pumps • Oil hydraulic valves • Cooling equipment and systems • Inverter controlled pump motors • Hydrostatic transmissions • Centralized lubrication units and systems • Warheads for Japan’s Ministry of Defense/ Warhead parts used in guided missiles for training purposes • Home-use oxygen therapy equipment In 1933, Daikin was the ﬁ rst in Japan to engage in research on ﬂ uorinated refrig- erants. Today, our activities range from research and development to commercial- ization, and we offer a lineup of 1,800 ﬂ uorine compounds including gas, resin and rubber. Daikin’s unique hydraulic technologies offer outstand- ing energy-conservation per- formance and are contributing to the develop- ment of industry by unleash- ing the potential of power control. Daikin’s superior machining and quality control technolo- gies are used in the produc- tion of defense-related products and other industries where high levels of reliability and performance are critical. 223.1 2,273.8 2,273.8 (¥ billion) 250 (¥ billion) 2,500 2,000 1,500 1,000 500 0 2017 2018 2019 2020 2021 11.411.4 164.2 164.2 Chemicals (¥ billion) 200 160 120 80 40 0 2017 2018 2019 2020 2021 2.0 (¥ billion) 32.932.9 Oil Hydraulics (¥ billion) 40 30 20 10 0 200 150 100 50 0 (¥ billion) 35 28 21 14 7 0 6.0 4.5 3.0 1.5 0 (¥ billion) 1.6 1.2 0.8 0.4 0 2017 2018 2019 2020 2021 1.21.2 18.018.0 Defense (¥ billion) 20 15 10 5 0 2017 2018 2019 2020 2021 10 Market Size and Positioning of Each Business Creating synergies by utilizing the afﬁ nity of the Air Conditioning, Chemicals, and Filter businesses Air Conditioning Refrigerants IAQ (Indoor Air Quality) of Three pillars of Th revenue Chemicals Filters* * * (Note: Filters are included in the Air Conditioning business segment) Filter Media (PTFE) Air Conditioning Business Chemicals Business Global HVAC&R* Market Scale (Daikin estimates) Global Fluorochemicals Market (Daikin estimates) 2020 Approx. ¥34 trillion 2025 Approx. ¥43 trillion 2020 Approx. ¥620 billion 2025 Approx. ¥800 billion (¥ billion) 20,000 15,000 10,000 5,000 0 Average annual growth 7% Average annual growth 4% Average annual growth 1% Average annual growth 2% Average annual growth 5% Average annual growth 3% '20 '25 Japan '25 '20 North America '25 '20 China '25 '20 Europe '20 '25 Asia/ Oceania '25 '20 Other * Heating, Ventilating, Air-conditioning and Refrigerating * Heating, Ventilating, Air-conditioning and Refrigerating Filter Business (¥ billion) 250 200 150 100 50 0 '20 '25 Japan '25 '20 Americas '25 '20 China '25 '20 Europe '20 '25 Asia/Developing countries Global Air Filter Market Scale (Daikin estimates) Global Power & Industrial (P&I) Market Scale (Daikin estimates) 2020 Approx. ¥510 billion 2025 Approx. ¥600 billion 2020 Approx. ¥470 billion 2025 Approx. ¥560 billion (¥ billion) 300 250 200 150 100 50 0 '20 '25 Japan '20 '25 North America '25 '20 Europe '20 '25 Asia (¥ billion) 600 500 400 300 200 100 0 '20 '25 * P&I: Acronym for “Power * P&I: Acronym for “Power & Industry;” in the P&I & Industry;” in the P&I domain Daikin provides a domain Daikin provides a dust collection system dust collection system surrounding gas turbines surrounding gas turbines and engages in the and engages in the removal of dust and removal of dust and gases generated by steel gases generated by steel and other plants and other plants Integrated Report 2021 11 Message from the CEO Through the key strategy themes adopted under “FUSION 25,” we aim to expand our business and further grow and develop while contributing to the solving of environmental and social issues The Company has been achieving sustain- able growth and development on the basis of its FUSION strategic management plans. Looking ahead to major changes in the structure of the economy, industry, and society, as well as the future ideal state of the Daikin Group, under “FUSION 25” we have identiﬁ ed issues to be resolved and set speciﬁ c themes to be addressed during the next ﬁ ve years. Through these efforts, we will contribute to a sustainable society and realize the further growth and devel- opment of the Group. Masanori Togawa President and CEO 12 Fiscal 2020 Results and FUSION 20 Overview Achieved performance exceeding announced values due to management approach in confronting COVID-19 crisis In ﬁ scal 2020, the ﬁ scal year ended March 31, 2021, amid the Looking back at FUSION 20 To date, the Company has been aiming for sustainable devel- opment through our unique FUSION management that encap- sulates the meanings of balancing short-term proﬁ tability and uncertainties in the outlook due to the spread of COVID-19, long-term growth potential, collaboration with global Group we took the management position of confronting the crisis companies and other companies and working together as one immediately. Having established themes for “defensive and on development, production, sales, and services. In particular, proactive measures” and “constitution strengthening and after showing where we were aiming to be in ﬁ ve years’ time, reform” as important issues to be tackled by the global Group we have produced results and have led to growth and develop- as a whole, I myself have been involved in enacting six emer- ment by clarifying the key strategies toward those goals and gency projects, efforts that led to the creation of results by the the quantitative targets and execution themes for the follow- entire Company. By carrying out ﬂ exible management in ing three years. response to the ever-changing situation, we were able to man- Under FUSION 20, which ran from ﬁ scal 2015 to ﬁ scal 2020, age and also to achieve results that exceeded the announced we worked on the thorough implementation of a twin- values. Sales for the year in full reached ¥2,493.4 billion, up pronged raft of measures, that is on the one hand strengthen- ¥33.4 billion against the announced forecast value but a 2.2% ing our core businesses—Air Conditioning, Chemicals, and decrease year on year. Operating proﬁ t came in at ¥238.6 bil- Filters—and on the other hand, the expansion of our business lion, up ¥6.6 billion against forecast but a 10.1% decrease year scope and the changing of our business structure, which were on year. adopted as priority themes. From the fourth quarter of ﬁ scal As a company that operates globally, the impact of the glob- 2019 onward, we have been greatly affected by the spread of al COVID-19 pandemic has been very signiﬁ cant, and we esti- the COVID-19 pandemic, but even amid a severe business envi- mate that it has had a negative impact of approximately ronment, we focused on achieving FUSION 20 and the Group ¥350.0 billion on net sales and ¥150.0 billion on operating as a whole tackled the difﬁ cult situation. I believe that we were proﬁ t. As a result, in ﬁ scal 2020, both sales and proﬁ ts able to secure both short-term proﬁ ts and medium- to long- decreased compared with previous year. However, I believe that term growth by steadily implementing our key strategies while we were able to not only secure short-term results, but also to investing in growth for the future. further strengthen our management structure for future In 2018, we formulated our Environmental Vision 2050, growth and development through the measures we took amid which has the goal of reducing greenhouse gas emissions to the COVID-19 crisis. almost zero toward 2050, and accelerated the development FUSION 20 Results FY2016 Actual FY2017 Actual FY2018 Actual FY2019 FY2020 Actual FUSION 20 Goals Actual 20,440 22,906 24,811 25,503 29,000 24,934 2,308 2,537 2,763 2,655 3,480 2,386 11.3 11.1 11.1 10.4 12.0 9.6 Net sales (100 million yen) Operating proﬁ t (100 million yen) Operating proﬁ t margin (%) Integrated Report 2021 13 Message from the CEO and adoption of products and services that contribute to the and continue to work toward the realization of a sustainable conservation of energy and the prevention of global warming. society by balancing the solving of environmental and social Under “FUSION 25”, we will further strengthen this initiative issues with business growth. Management Approach to Fiscal 2021 Compared with the past ﬁ scal year, the social situation has ly to the vagaries of the business environment. calmed down slightly in ﬁ scal 2021, but I feel that the uncer- The business environment factors surrounding the Company tainties about the future will continue for the time being with in the current ﬁ scal year include the uncertain impact from no clear idea of how the situation will change. Although there COVID-19, the signiﬁ cant negative impacts brought by raw are now the negative effects of lockdowns due to the reemer- material market conditions and sharp rises in logistics costs, gence of infections, there exists the possibility that the econo- concerns about a slowdown in the residential air-conditioning my will recover rapidly once the infection has been put under market and a delay in the recovery of the commercial air-condi- control by the widespread use of vaccines and the effects of tioning market, all of which are placing the Company in a difﬁ - large-scale economic measures taken by various countries. In cult situation. Even under these circumstances, based on what the current ﬁ scal year, I believe it to be of the utmost impor- we have been working on in ﬁ scal 2020, I would like us to tance that we take ﬂ exible measures to respond to these continue to adopt an aggressive stance and show a willingness changes in the situation according to the circumstances but to take on challenges toward the implementation of measures with even greater speed than before. I will thus steer the man- while aiming to accumulate results and achieve record-high agement in a ﬂ exible manner that enables us to respond quick- performance. Strategic Management Plan “FUSION 25” In the course of formulating Strategic Management Plan “FUSION 25” In formulating “FUSION 25,” we took into account the major changes in the structure of the economy, industry, and society, and looked at the changes in the world’s economy and society 10 to 20 years into the future, as well as the ideal state of the “promotion of Solutions business connected with customers,” and “creating value with air.” Changes in business environment surrounding the Company The ﬁ rst major change is the growing importance of environ- Daikin Group. Based on this back-casting approach, we have mental and social contributions. Among the efforts to tackle set speciﬁ c themes to be addressed during the ﬁ ve years of various social issues, in particular the corporate responsibility to “FUSION 25.” Unprecedented environmental changes and a reduce CO2 emissions and decarbonization has become a dramatic transformation of the consumer structure are being major issue. caused by the COVID-19 pandemic, which is said to be a once- As the world’s only manufacturer of both air-conditioning in-a-century event. In addition to geopolitical changes, we are equipment and refrigerants, we have been contributing to the also experiencing major structural changes in society, as the environment by providing differentiated products and services world moves toward a decarbonized society, or carbon neutral- that take advantage of our energy-saving technologies around ity. Companies are required to have a management stance and the world and by popularizing products equipped with low the business strategies to win out in the new normal era. global warming potential (GWP) refrigerants. In the years to Over the next ﬁ ve years, we will contribute to solving envi- come, however, I believe that it will be essential to achieve ronmental and social issues, while expanding our business and both business growth and the goal of achieving net zero continuing to achieve growth and development. Our goal this greenhouse gas emissions (carbon neutrality) by 2050. time is to realize both contributions to a sustainable society The second point is that the values and needs of customers and to the Group’s growth. We have set three themes for our are changing more rapidly than ever, from goods to experienc- growth strategy: “challenge to achieve carbon neutrality,” es and from ownership to use. I believe that the key to future 14 business expansion will be to create products that meet peo- and create new air value, in addition to selling products featur- ple’s new needs and to build Solutions business while aiming ing performance that utilizes our unique technologies, such as for qualitative growth. air puriﬁ cation and disinfection. The third point is the expanding market needs for indoor air The fourth point is the innovative advancement of technolo- quality (IAQ) and ventilation. While the impact of COVID-19 gies, such as AI, 5G, and robotics, and the emergence of busi- has reduced the movement of people and the opportunities for ness models that utilize these latest technologies. I think it is people to gather, new needs have emerged as people become no exaggeration to say that the outcome depends on how we more aware of safety and security as well as more concerned can take advantage of rapidly advancing digital technology to about health and comfort. As a manufacturer specializing in air transform our business activities as a whole. conditioning, I believe that one of our missions is to explore 9 Key Strategy Themes Challenge to achieve carbon neutrality Growth strategy Promotion of Solutions business connected with customers Creating value with air Businesses supporting our growth Focus region Air Conditioning business in North America Achieve the No. 1 in the AC market in North America, the largest market with great opportunities India Position India, with a population as large as China’s, as a major hub for the future Management foundation enhancement Strengthening technology development capabilities Establishing a robust supply chain Promoting digital transformation for innovation Creating market value/ enhancing advocacy activities Improving HR capabilities through advanced diversity management Integrated Report 2021 15 Message from the CEO Three Growth Strategy Themes Challenge to achieve carbon neutrality As a raft of measures toward achieving carbon neutrality, we will promote the expansion of our Heat Pump Space and Water Promotion of Solutions business connected with customers In the Air Conditioning Solutions business, we will establish a Heating business, the further expansion of sales of energy-sav- business model that provides customers with experiences ing devices equipped with inverters, the use of low-GWP while accelerating the expansion of the business. While rein- refrigerants, the establishment of the refrigerant eco-cycle forcing the service, engineering, and other business founda- (recovery, reclamation and destruction), and the reduction of tions we have built to date, we will work to provide new CO2 emissions during the manufacturing process. In the Heat value, such as the provision of individually optimized air-con- Pump Heating business, in particular, combustion-type and ditioned spaces and improvements in comfort and safety, by electric heaters are currently the mainstream in Europe and directly connecting with users by application and market, North America, and the ratio of heat pump space heating such as hospitals and factories, and combining the use of remains at around 10% of the market. By accelerating the shift equipment operation data, energy management, and IAQ to heat pump space and water heating systems in Europe and technology. In addition, we will provide competitive solutions North America, which are our top priority regions, we plan to to reduce the electric power load by utilizing data through double our Heat Pump Space and Water Heating business sales the promotion of connected devices that take advantage of by ﬁ scal 2025 compared with ﬁ scal 2020. our technological strength as an air-conditioning specialist to 16 save manpower and improve efﬁ ciency. Although M&A have not been factored into the quantitative In the refrigeration ﬁ eld, we are planning to establish a one- targets (for sales, operating proﬁ t, and investment plans) at stop Solutions business for stores that combines air condition- this time, we are actively promoting alliances, collaborations, ing and showcases to provide their customers with appropriate and M&A to increase the speed of our business expansion. In food temperature control and a safe and secure store environ- particular, the areas that we want to focus on are heating and ment. Furthermore, with regard to refrigeration, we would like refrigeration service companies in Europe, service and engi- to take on the challenges in building a highly proﬁ table busi- neering companies to expand our Solutions business in Asia ness model as well as in solving social issues, such as reducing and North America, and sales and wholesale companies to food loss, by connecting the cold chain from the production strengthen Goodman’s sales network. At this point, we are area to the consumption area. currently envisioning M&A totaling approximately ¥600 billion over the next three years. Creating value with air Seizing the opportunity presented by demand for IAQ and ven- tilation, which has been growing amid the COVID-19 crisis, we will create a market for air puriﬁ ers in each region of the world Efforts to improve proﬁ tability of mainstay businesses To invest in the growth strategy themes and thereby expand and take on the challenge of selling one million units per year our business, it is essential to further strengthen the proﬁ tabili- in each region. In addition to creating new products and ser- ty of our existing businesses. Above all else, we will promptly vices that enrich the healthcare ﬁ eld and daily life, we will pro- work to raise the proﬁ tability of the Air Conditioning business mote collaborative creation with external parties to tackle the in North America. business of pursuing new value with air. I believe that we have been able to increase the competitive- ness of our North American Air Conditioning business in terms Execution of growth investments To realize the “FUSION 25” growth strategies and take advan- of sales, production, and products through the aggressive investments we have made so far but, on the other hand, we tage of the changes of the times as opportunities to expand are still in the process of recovering our investments. Under our business, we will make aggressive investments. We are “FUSION 25,” we will strive to achieve an operating proﬁ t mar- planning to invest a cumulative total of ¥800 billion over the gin of 10% or higher in ﬁ scal 2025 while making further next three years (a ﬁ ve-year total of more than ¥1.3 trillion), investments in growth to become the number one air-condi- including capital investment and investments in R&D, digital tioner manufacturer in North America. technology, and human resources. On the one hand, a US-based competitor is accelerating its In addition to capital investment centered on increasing pro- business expansion by initiatives that include becoming a spe- duction capacity to support business expansion in each region cialized air-conditioning company. On the other hand, howev- of the world, we will concentrate our resources boldly on tech- er, it is expected that energy-saving regulations will become nological areas related to our growth strategy in R&D. In addi- more stringent and environmental policies will be strength- tion to strengthening our overseas R&D bases, by utilizing ened, and thus we will take the initiative in changing the mar- collaborative creation inside and outside the Company as well ket by converting to inverters, heat pumps, and low-GWP as by reforming our development process utilizing digital tech- refrigerants, which are our strengths. nology, we will advance environmental technologies, such as At Goodman, we are expanding our business in the residen- heat pumps and next-generation refrigerants, and create dif- tial market and promoting the conversion to inverters by ferentiated products one after another. I also believe that it increasing sales of premium products as well as increasing pro- will be essential to acquire and develop the talented human ductivity in Goodman’s factory. At Daikin Applied Americas resources who will provide the driving force behind these inno- Inc., we plan to expand earnings by fully developing our vations. Expanding our digital investments is not only designed Solutions business in the applied market. to accelerate business innovation, such as the promotion of In Japan, we will aim to become the top company in all our data-driven Solutions business and the creation of air areas in the residential, commercial, and IAQ and ventilation value. This time, they will also promote process innovation that businesses. At the same time, we will accelerate our growth by will lead to a shortening of development lead times, thereby utilizing data to expand the Solutions business. improving supply chain efﬁ ciency and to strengthen our man- In Europe, we will not only engage in equipment sales in all agement foundation. the ﬁ elds of air conditioning, space and water heating, applied, Integrated Report 2021 17 Message from the CEO and refrigeration and freezing, but also aim to become a solu- we will also aim for a state-of-the-art smart factory that utilizes tions provider that can meet customer needs in areas such as digital technology. IAQ and energy. Concerning the Air Conditioning business in Asia, which is In the China business, we will work to maintain high proﬁ t- expected to display the world’s greatest market growth, we ability. China is one of the most digitally advanced countries in would like to establish an overwhelming number one position the world, and we have been working to build a business there. In India in particular, we would like to expand our busi- model that includes sales and marketing activities that utilize ness in the future and make it a major base of operations. We digital technology. In addition to hybrid sales activities that will strengthen our local production system, sales network, and combine our unique strengths, such as ofﬂ ine sales via product development to expand sales of energy-efﬁ cient prod- PROSHOP and online sales activities, we will work to expand ucts and services while taking the lead in the market’s shift to sales by system proposals that, for example, bundle ventilation inverters and low-GWP refrigerants (R32). and air puriﬁ cation with IAQ sensors. In terms of production, Responses to Social Issues The last ﬁ ve years have also been a period of major changes in ate our efforts to reduce greenhouse gas emissions throughout the structure of the economy, industry, and society. Their pace the life cycle of our products, as efforts to realize a decarbon- having been faster and the extent of the shift greater than ized society are spreading worldwide. expected, those changes are exerting an inﬂ uence in a variety The global air-conditioning market is expected to triple in of ways, from the business activities of the Group to the way size in the 30-year period to 2050 in step with the economic we lead our own lives. Due to the increasing importance being development of emerging countries and other factors. In 2018, placed on environmental and social contributions, companies we declared in our Environmental Vision 2050 by which we are also required not only to pursue proﬁ ts but also to help aim to achieve net zero greenhouse gas emissions by 2050. solve social issues set by the Sustainable Development Goals Under “FUSION 25” we will further strengthen our efforts to (SDGs). not only fulﬁ ll our social responsibilities, but also to achieve We have set a quantitative target under “FUSION 25” business growth, making it sustainable. because we believe that it is our top priority to further acceler- Shareholder Returns As a company that is expanding its business on a global basis, V-shaped recovery in earnings that surpasses our pre-COVID ﬁ scal 2020 turned into a year in which Daikin was greatly performance. In ﬁ scal 2021, we are planning to pay an annual affected by the worldwide spread of the COVID-19 pandemic. dividend of ¥180 per share, comprising interim and year-end Although sales and proﬁ ts decreased compared with the previ- dividends both of ¥90. ous ﬁ scal year, as a result of the Group working together as On the basis of our implementing stable and continuous div- one to tackle important issues, we were able to achieve results idend payments, in the future as we have in the past we will that exceeded the announced values and thus paid a year-end strive to maintain a ratio of dividends to shareholder equity dividend of ¥160 per share, in line with what had been previ- (DOE) of 3% or higher and at the same time also aim for an ously announced. increasingly higher level of dividend payout ratio. In addition, Based on our nimble yet robust management structure culti- we will expand our business while making upfront investment vated in the ﬁ scal year under review, in ﬁ scal 2021 we will con- for further growth and development and strive to further tinue to implement measures while adopting an aggressive enhance shareholder returns by increasing corporate value and stance and showing a willingness to take on challenges to increasing market capitalization. secure double-digit sales and proﬁ t growth. We will aim for a 18 A Message to Our Stakeholders Due to the resurgence of COVID-19 infections, the severe busi- 25” we will lead the low carbonization of the air-conditioning ness environment is expected to continue. Even under these industry, provide new value for the environment and air, con- difﬁ cult circumstances, the Group will work together as one in tribute to a sustainable society, and realize the growth of the taking thorough measures while aiming to both secure short- Group. term earnings and achieve both medium- and long-term On this note, we thank you for your understanding and growth. In recent years, the increasing importance of environ- kindly ask for your continued support as we move forward. mental and social contributions, changes in customer needs with regard to air quality, and advances in digital technology have had a signiﬁ cant impact on business activities, and quick and ﬂ exible responses are demanded. “FUSION 25” was for- mulated as an execution-oriented management strategy with a vision looking 10 and 20 years into the future, and then with a view to realizing carbon neutrality in 2050. Through “FUSION Masanori Togawa President and CEO June 2021 Integrated Report 2021 19 Looking Back on Our Strategic Management Plan “FUSION” Over the past 20 years, we have achieved approximately a ﬁ ve-fold increase in both net sales and operating proﬁ t. Even in the face of the Lehman Shock and other severe conditions, we achieved growth by steadily executing the FUSION plan. Now with operations in over 160 countries and more than 80,000 Group employees, we have achieved a more robust global business foundation. Daikin’s Transformation of Growth FUSION 05 (FY2001-FY2005) FUSION 10 (FY2006-FY2010) FUSION 15 (FY2011-FY2015) FUSION 20 (FY2016-FY2020) Goals Securing our management foundation Become an attractive compa- Become an attractive compa- ny that draws together peo- ny that draws together peo- ple, capital, and information ple, capital, and information Management innovation Accelerate growth Become the global No. 1 AC business Become the global No. 1 AC business Become a truly global and excellent Become a truly global and excellent company company Daikin aims to be a world- class, truly top-tier company Maximization of corporate value to realize global excellence In light of the increasingly fast speed of change, Overview • Establish a robust proﬁ t structure and ﬁ nancial constitution • Attain the global No. 1 and No. 2 positions in main businesses (Air Conditioning and Chemicals ) • Conversion of business structure to achieve sustainable growth • Enhance technical capabilities Achievements Built a business foundation for future growth and development • Established the No. 2 position in the global market for our main businesses • Achieved market capitalization of ¥1 trillion • Ratio of overseas business grew by 15% over ﬁ ve years, expand- ing to 46% of all revenue • Dramatically enhanced Daikin’s technological capabilities • A world-leading, global No. 1 business • Unprecedented creativity and value genera- tion achieved through innovative technology • High capital efﬁ ciency with a robust proﬁ t capability and ﬁ nancial structure Setting environmental strategy themes and goals that contribute to the natural environment Additional and robust strategic themes to become the global No. 1 AC company Accelerated global development • Overseas business ratio expanded to 61% Expansion of environment-related business • Entered the heat pump space and water heating business • Market development through an open strat- egy for environmental technology Penetration of room air conditioners equipped with inverters in the world’s larg- est market by volume Strengthened proﬁ t structure • Generated ¥100 billion in free cash ﬂ ow by reducing inventory (cumulatively over years, from ﬁ scal 2008 to ﬁ scal 2010) • Improved break-even point ratio and inter- est-bearing liability ratio • Pursue both scale and proﬁ tability, growth and differentiation, sophistication of propri- etary technologies as well as the develop- ment of low-cost technology and quality suited to new markets • Move to be a company that leverages change and crises as springboards to pioneer new paths, and to continuously evolve. • Expanded sales through a fundamental strengthening of sales and marketing capa- bilities, and achieved a substantial increase in operating income margin by advancing total cost reductions • Full-ﬂ edged entry into emerging markets and volume zone products • Actively contributed to solutions to global warming and other societal issues The world’s ﬁ rst practical application of low global warming potential R32 refrigerant • Expanded sales in regions throughout the world based on sales of high-value-added products and dealer development Acquisition of Airfel (2011) Having acquired Airfel, with its broad product lineup and impressive sales network, we boosted the momentum of business development in the Middle East. Along with strengthening our position in the Applied Systems air-conditioning ﬁ eld, established a foundation for business in North America and Asia. Promoted prevalence of air conditioners equipped with high-environmental-perfor- mance inverters in China OYL Group acquisition (2007) Business alliance with Gree Electric Appliances (2008) Acquisition of Nippon Muki (2009) The acquisition of Nippon Muki, which boasts the top share of Japan’s air ﬁ lter market, accelerated development and sales of highly functional products. Acquisition of Goodman (2012) The acquisition of Goodman, which boasts a top share of the residential air-conditioning ﬁ eld, enabled Daikin’s full-ﬂ edged entry into the residential unitary market. This secured a robust sales network in North America. Business domain expansion/ business structure conversion, and enhancement of existing businesses Co-create New Value in the Air and Envi- Co-create New Value in the Air and Envi- ronment Fields with Wisdom and Passion ronment Fields with Wisdom and Passion Swiftly responding to changes in the business environment, we will focus on strengthening efforts toward energy ser- vice solutions, Indoor Air Quality (IAQ) and Air Environment (AE) engineering and increasing low-GWP refrigerants • Accelerate Air Conditioning Solutions busi- ness by leveraging IoT/AI technologies • Expand business domains • Take the initiative on environmental matters • Further strengthen existing businesses Business domain expansion/business structure conversion • Expanded Air Conditioning (AC) Solutions business (Energy Service Solutions business, Indoor Air Quality (IAQ) and Air Environment (AE) Engineering business) • Promoted leading initiatives for the environ- ment (accelerated uptake of R32 refrigerant and high-performance energy-saving equipment) • Strengthened Space and Water Heating busi- ness, Commercial Refrigeration business Enhancement of existing businesses (AC business in North America, AC business in Asia, Chemical Business, Filter business) Acquisition of Flanders (2016) Acquisition of Zanotti (2016) Acquisition of AHT (2019) The acquisition of this air ﬁ lter manufacturer, which holds the top share in the U.S., helped Daikin obtain a wide-ranging lineup, from business to residential equipment. Acquiring Zanotti, with its large lineup of refrigerator and freezer products in Europe, ranging from industrial equipment to transport and commercial equipment, enabled Daikin to build a business foundation that covers the entire length of the cold chain. AHT-manufactured showcases complimented Daikin’s product lineup, and brought business development that covered the entire cold chain. This accelerated one-stop solution development, from air conditioners to refrigeration and freezing equipment. Results through business alliances, partnerships, and M&A activities Results through business alliances, partnerships, and M&A activities Results through business alliances, partnerships, and M&A activities Assessment Achieved 12 consecutive years of revenue growth, and record-setting proﬁ t for six years in a row. While the plan’s ﬁ nal goals for DVA* and free cash ﬂ ow remained unattained, the Company substantially sur- passed goals for net sales, operat- ing income margin, ROE and ROA. In ﬁ scal 2007, interim goals were achieved a year ahead of schedule, and a new record level of proﬁ t was established. The Lehman Shock of ﬁ scal 2008, however, caused the Company to fall short of its ﬁ nal goals, but by making con- certed efforts to reform business structure and reinforcing ﬁ nancial structure, we were able to achieve a “V”-shaped recovery in ﬁ scal 2010. * DVA: Daikin economic value added (reference on page 30) While the Company was unable to reach the plan’s ﬁ nal goal in terms of net sales, the goal for operating income was met a year ahead of schedule, and the goal for operating income margin was also substantially surpassed. Progress was made in line with the schedule up until ﬁ scal 2018. From ﬁ scal 2019, the Compa- ny was hit by the impact of COVID-19, and the Company’s efforts for net sales and operating income fell short of the plan’s ﬁ nal goals. FY2005 FY2010 FY2015 FY2020 FUSION 05 Goals Over ¥750.0 billion Over ¥60.0 billion (Over 8.0%) Actual ¥792.9 billion FUSION 10 Goals ¥1,900.0 billion Actual ¥1,160.3 billion FUSION 15 Goals ¥2,050.0 billion Actual ¥2,043.7 billion FUSION 20 Goals ¥2,900.0 billion Actual ¥2,493.4 billion ¥67.1 billion (8.5%) ¥190.0 billion (10%) ¥75.5 billion (6.5%) ¥190.0 billion (9.3%) ¥217.9 billion (10.7%) ¥348.0 billion (12.0%) ¥238.6 billion (9.6%) 46% 99 61% 191 75% 213 77% 315 More than 30 factories More than 70 factories More than 80 factories More than 100 factories 21,747 ¥1,086.9 billion 41,569 ¥730.1 billion 60,805 ¥2,465.7 billion 84,870 ¥6,542.3 billion Net sales Operating income Overseas business ratio Consolidated subsidiaries Production bases Employees Market capitalization * Excluding net sales and operating income, amounts are stated as of the end of each ﬁ scal year. 20 300 250 200 150 100 50 0 Global spread of COVID-19 Global spread of COVID-19 2,481.1 276.3 Operating income (¥ billion) 2,493.4 238.6 Business Results Net sales (¥ billion) 3,000 2,000 1,000 538.8 42.0 Net sales Net sales Operating income Acquisition of U.S. residential Acquisition of U.S. residential air-conditioning manufacturer Goodman air-conditioning manufacturer Goodman 1,787.7 156.5 1,291.1 128.1 OYL Group acquisition OYL Group acquisition Lehman Shock Lehman Shock 2013 – 2018 2013 – 2018 Achieved six consecutive years of record high sales and operating income Achieved six consecutive years of record high sales and operating income 14 consecutive years of increased earnings starting in 1994 14 consecutive years of increased earnings starting in 1994 Achieved ten consecutive years of increases in net sales and operating income from 2010 Achieved ten consecutive years of increases in net sales and operating income from 2010 FUSION 05 0 FUSION 10 FUSION 15 FUSION 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (FY) Looking Back on FUSION 20 Daikin took action to achieve key strategies regarding business domain expansion/business structure conversion, and enhancement of existing businesses, leading to net sales and operat- ing income progress as planned up to ﬁ scal 2018. Buffeted severely by the impact of COVID-19 from the fourth quarter of ﬁ scal 2019, ﬁ scal 2020, the ﬁ nal year of FUSION 20, saw the Company miss its planned targets for the latter half of FUSION 20, in terms of both net sales and operating income. Nonetheless, even with the uncertain outlook due to the pandemic, Daikin put in place both proactive and defensive measures, preparing man- agement to be quick off the mark in recovering from the COVID-19 crisis and to strengthen busi- ness structure. As a result, Daikin substantially exceeded original forecasts for ﬁ scal 2020. Net sales Operating income Operating income margin FY2016 Actual ¥2,044.0 billion ¥230.8 billion FY2017 Actual ¥2,290.6 billion ¥253.7 billion FY2018 Actual ¥2,481.1 billion ¥276.3 billion FY2019 Actual ¥2,550.3 billion ¥265.5 billion FY2020 FUSION 20 Goals ¥2,900.0 billion ¥348.0 billion Actual ¥2,493.4 billion ¥238.6 billion 11.3% 11.1% 11.1% 10.4% 12.0% 9.6% Business domain expansion/business structure conversion Expansion of the Air Conditioning (AC) Solutions business Energy Service Solutions business Indoor Air Quality (IAQ) and Air Environment (AE) Engineering business Business foundation strengthened through investing in sales and service networks as well as developing technology for the Solutions business. Full-scale business development, pri- marily in North America, which is the largest market IAQ and AE business expanded in response to growing needs for safe and secure air and space. Aiming to provide air and space value, advance our technology through external collaborative creation such as technology development and demonstration tests. Leading initiatives for the environment Environmental Vision 2050 established in 2018 with the target of reducing greenhouse gas emissions to net zero by 2050. Widespread uptake of R32 refrigerant and high-performance energy-saving equipment. Development started for next-generation refrigerants and equipment. Support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) announced in 2019, and disclosure of ﬁ nancial information and ESG information including on climate change started. Expansion of business domains Space and Water Heating business No. 1 market share in heat pump units achieved in Europe, the largest market. Commercial Refrigeration business Foundation established for the Refrigeration Solutions business in Europe through acquisi- tion of Zanotti and AHT and other measures. Enhancement of existing businesses AC business in North America AC business in Asia Chemicals business Filter business Sales and market share expanded by increased sales of unitary, VRV, and Applied equipment. Initiatives promot- ed for transforming the business struc- ture into the Service Solutions business in addition to equipment sales. No. 1 position achieved in the resi- dential and commercial Direct Expan- sion business in many countries. Measures implemented to expand the Solutions business and become No. 1 in the Applied business. Record-high proﬁ t achieved in ﬁ scal 2018. Investment decisions made for future growth (establishing a 2nd plant in China, augmenting the U.S. plant, establishing the Innovation Cen- ter in Europe). Business expanded through applications development and polymer alloy/non-ﬂ uorine materials. Filter Division established and the North America, Europe, and Power & Industrial (P&I) businesses reformed. New product development started to respond to IAQ needs. Integrated Report 2021 21 Risks and Opportunities That Affect Medium- to Long-Term Value Creation Based on changes in the external environment, we identiﬁ ed the important social issues that affect the Daikin Group’s medium- to long-term value creation, and extracted the risks and opportunities related to them. To respond appropriately to these risks and to take advantage of any opportunities while working to resolve social issues, we will recognize the strategic themes adopted in our “FUSION 25” strategic management plan as management materiality and real- ize further value creation. Changes in society Issues Intensiﬁ cation of climate change ● Reduction of global warming Expansion and concentration of energy and power demand ● Reduction of energy/power consumption Increased interest in IAQ ● Preventing spread of infectious diseases ● Value with air Occurrence of natural disasters ● Responses to supply chain disruptions nss Transition to a digital society ● Building of a business model utilizing digital technology ● Increasing the efﬁ ciency of business processes 22 Risks Responses/Opportunities Management Materiality ● Stricter environmental regulations ● Tight supply and demand for electricity ● Stricter regulations on energy efﬁ ciency ● New regulations on existing air conditioners ● Suspension of plant operations ● Stagnation of raw material/ parts procurement ● Obsolescence of existing products ● Lack of human resources in digital ﬁ elds ● Development of products, services and technologies that comply with environmental regulations Three Growth Strategy Themes ● Development of energy management / sustainable urban development Details ▸ P.26~29, P.54~55 Response to TCFD ▸ P.53 ● Acceleration of conversion to inverters ● Product development and technological innovation excelling in environmental performance ● Strengthening proposals for replacing environmentally conscious products ● Strengthening of energy management Details ▸ P.26~29, P.54~55 ● Product development to provide a safe and secure atmosphere • Challenge to achieve carbon neutrality • Promotion of Solutions business connected with customers • Creating value with air One theme for focus regions • Air Conditioning business in North America Five themes to enhance the management foundation ● Creation of indoor air quality (IAQ)/air environment (AE) that enriches people’s lives • Strengthening technology development capabilities Details ▸ P.29 ● Stable supply through “market-localized production” on the basis of local production for local consumption Details ▸ P.54~56 ● Technological developments, development of products and services, strengthening of sales activities that utilize IoT/AI • Establishing a robust supply chain • Promoting digital transformation for innovation • Creating market value/ enhancing advocacy activities • Improving HR capabilities through advanced diversity management ● Providing solutions for efﬁ cient energy management, etc. Details ▸ P.24~ Details ▸ P.28~29, P.56 Strategic Management Plan “FUSION 25” Integrated Report 2021 23 Strategic Management Plan “FUSION 25” Formulating Strategic Management Plan “FUSION 25” Daikin formulated Strategic Management Plan “FUSION 25” for the period covering ﬁ scal 2021 to ﬁ scal 2025. The premises on which the Plan is formulated include changes in the external circumstances surrounding the Company and the unique strengths that we have acquired to date. Based on these premises, the Plan illustrates the strategies to be implemented over the next ﬁ ve years by back-casting from the changes in the world that will take place over the next ten to twenty years, and from the ideal state of the Group at this time. Our goal is to “offer new value for the environment and air to realize both contributions to a sustainable society and the Group’s growth.” Speciﬁ cally, we aim to expand the business and continue to achieve growth and development while contributing to Assumptions 9 key strategy themes Offer new value for the environment 3 growth strategy themes Details ▸ P.26~29 While contributing to the environment and society, expand business and improve proﬁ tability 1 2 3 Challenge to achieve carbon neutrality Promotion of Solutions business connected with customers Creating value with air Viewing external environmental changes as a great opportunity, capitalize on our strengths to achieve further growth and development Businesses Supporting Growth Air-conditioning (direct expansion, applied, and service businesses) Air-conditioning (direct expansion, applied, and service businesses) Establish a dominant position in existing regions and strengthen the foundation in emerging regions Japan Europe North America India ASEAN/ Oceania China Position India, with a population as large as China’s, as a major hub for 1 theme for focus regions Details ▸ P.17, P.34 4 Air Conditioning business in North America 5 themes to enhance the management foundation Strengthening Technology Development Capabilities Promoting digital transformation for innovation 6 8 Establishing Creating activities Improving HR capabilities through advanced 5 7 9 Changes in the external Circumstances Increased importance of environmental and social contributions Consumption shift from goods to experiences Increased needs for IAQ and ventilation Innovative advances in digital, AI, 5G, and other technologies Our strengths Energy-saving, environmental, IAQ technologies Globally expanding robust sales network Local production for local consumption model People-Centered Management, diversity management Our Group Philosophy 24 the solutions for environmental and social issues. The three growth strategy themes for this purpose are “Challenge to achieve carbon neutrality,” “Promotion of Solutions business connected with customers,” and “Creating value with air,” while the one focus region theme for strengthening the existing business is the “Air Conditioning business in North America.” In terms of India, a market for which signiﬁ cant market growth is anticipated, we aim to transform the country into a major base of operations through strengthened local production and business expansion. In addition, we set ﬁ ve themes to enhance the management foundation, namely “Strengthening technology development capabilities,” “Establishing a robust supply chain,” “Promoting digital transformation for innova- tion,” “Creating market value/enhancing advocacy activities,” and “Improving HR capabilities through advanced diversity management.” By implementing these nine key strategy themes, we aim to come out ahead in this age of a new normal and to create value. and air to realize both contributions to a sustainable society and Group growth Ideal value creation Economic value Environmental and social value (cid:129) Expand the heat-pump and hot water heater and inverter business (cid:129) Spread the use of highly energy efﬁ cient products such as those using inverters (cid:129) Promote the adoption of low-GWP refrigerants as well as the recovery and recycling of ﬂ uorocarbons (cid:129) Reduce CO2 emissions in manufacturing, etc. (cid:129) AC solutions (cid:129) Refrigeration solutions (cid:129) Establishing a large scale IAQ/Ventilation business (cid:129) Creation of IAQ/AE that enrich people’s lives Chemicals Filter Refrigeration Oil Hydraulics Defense Systems Latin America Africa Middle East the future Electronics Achieve the No. 1 in the AC market in North America, the largest market with great opportunities (cid:129) Expand the residential and light commercial businesses (cid:129) Expand the Solutions business (cid:129) Transform the market through environmental materials Details ▸ P.54~57 a robust supply chain market value/enhancing advocacy diversity management FY 2025 Group targets (Image) Sales 3.6 trillion yen Operating proﬁ t 430 billion yen Operating proﬁ t margin Approx.12% Net CO2 emissions reductions 2025 target (from BAU) 30%+ Free humankind from heat and cold Directly connect with customers and satisfy individual application needs Offer safe, reliable, comfortable IAQ/AE Contribute to reducing food loss Participate in international rule making Contribute to the growth of employees and local communities Integrated Report 2021 25 Air-conditioning (direct expansion, applied, and service businesses) Strategic Management Plan “FUSION 25” 9 key strategy themes 3 growth strategy themes In aims of expanding the business and continuing to achieve growth and development while we contribute to solutions for environmental and social issues, we set three growth strategy themes, namely “Challenge to achieve carbon neutrality,” “Promotion of Solutions business connected with customers,” and “Creating value with air.” 1 Challenge to achieve carbon neutrality Challenge to achieve carbon neutrality We formulated “Environmental Vision 2050” in aims of reduc- ing greenhouse gas emissions to net zero by 2050. With the base year set at 2019, our goals are to reduce net greenhouse gas emissions*1 by 30% or more in 2025 and 50% or more in 2030, compared with emissions without measures (business as usual (BAU)). Along with perfecting advanced environmental technologies and paving the way towards carbon neutrality to fulﬁ ll our social responsibility, we will work to reduce power consump- tion through the widespread use of heat pump space and water heaters, inverter units, and provision of other ener- gy-saving equipment. We will also work to transition to the use of low-GWP refrigerants and establish a refrigerant eco-cycle that includes recovery and reclamation aspects. The Heat Pump Space and Water Heating business positions Europe and North America, where combustion heaters are the main markets, as the most important regions. In these regions, we will leverage technologies cultivated in the Air Conditioning business to accelerate the shift from combustion heaters to heat pump space and water heaters. We will also undertake challenges such as participating in the Smart City Project, which is expect- ed to help expand markets and reduce CO2, as well as estab- lishing new environment-related businesses, including energy creation. *1 Net greenhouse gas emissions = Emissions - Contribution to emissions reductions Challenge to Achieve Carbon Neutrality Emissions increase as business expands with the BAU scenario Reduce by 50%+ Reduce by 30%+ Net emissions Net emissions (emission contribution) (emission contribution) Zero or below Zero or below 2019 (Base year) 2025 2030 2050 Emissions Contribution to emissions reductions*2 *2 Contribution to emissions reductions Efforts to reduce CO2 emissions that contribute to society, including promotion of Daikin equipment with lower CO2 emissions (replacing other companies’ equip- ment with higher CO2 emissions), energy creation, and forest conservation activities 26 1. CO2 reductions during manufacturing (development/production processes) Reduce emissions of energy induced CO2 and HFCs/PFCs in development and production processes • Make factories carbon neutral 2. Power consumption reductions during product use Global acceleration of conversion to inverter units to lead other companies with environmental products (energy-saving equipment) • Residential AC (RA) inverter ratio: 75% in 2019 • Develop elemental technology with high energy efﬁ ciency 98%+ in 2025 3. Heat Pump Space and Water Heating business Positioning Europe and North America as the priority regions to accelerate conversion of combustion heaters to heat pump space and water heaters Heat Pump Space and Water Heating business sales (¥ billion) 200 204.0 • Europe: Aim to achieve No. 1 share in major countries • North America: Accelerate sales of inverter heat pump unitary products 4. Refrigerant initiatives supporting the AC business Various measures connecting to refrigerant-induced CO2 emissions reductions to lead the environmentally conscious society and industry • Globally promote switching to R32. 150 100 50 0 130.6 FY2020 FY2023 – R32 ratio in the global residential AC market : 83% in 2019 95%+ in 2025 • Establish the refrigerant eco-cycle (recovery, reclamation, destruction) • Develop next-generation refrigerants/equipment 5. Challenge to create new environment-related business Initiatives toward market expansion and CO2 reduction contributions • Smart cities: Participate in projects around the world • Energy creation: Enhance product lineup of micro-hydroelectric power generation 6. Technology development to realize a carbon neutral society Research on leading-edge technologies on CO2 decomposition, recovery, and reuse Speciﬁ c measures to obtain those technologies • Explore technology for ambient temperature CO2 separation, direct recovery, and reuse (collaborative innovation with Doshisha University) • Establish a hypothesis for a net-zero CO2 emissions society (collaborative innovation with the University of Tokyo) Smart city project in Singapore Integrated Report 2021 27 Strategic Management Plan “FUSION 25” 2 Promotion of Solutions business connected with customers Promotion of Solutions business connected with customers In terms of air conditioning solutions, we will establish an experience-based sales business model that satisﬁ es a diverse range of customer needs by going beyond the provision of equipment to include a combination of control, engineering, and service. This effort will work to provide new value, such as the provision of individually optimized spaces and improve- ments in comfort and safety, by directly connecting with users by application and market, such as hospitals and factories, and by combining the use of equipment operation data, energy management, and IAQ technology. In terms of refrigeration solutions, we will repurpose the energy-saving and environmental technologies we have culti- vated in the Air Conditioning business. We will undertake the challenge of establishing a store Solutions business through the promotion of one-stop solutions that include everything from air-conditioning equipment, refrigeration equipment, store design, installation, service, and maintenance. We will also 1. AC solutions 1. AC solutions undertake the challenge of deploying a business that connects the entire cold chain from the place of production to the place of consumption. These efforts will contribute to reductions in food loss, ensuring food safety and security, and the solutions to other social issues. AC Solutions business sales (¥ billion) 600 560.0 431.9 400 200 0 FY2020 FY2023 Refrigeration Solutions business sales (¥ billion) 200 160.0 150 100 50 0 110.8 FY2020 FY2023 Three solutions for service/inspections, value added proposals during equipment operation, and retroﬁ ts/replace- ments to establish a business model that provides customers with experiences (1) Basic service solutions: Repair service, supply of parts and materials, customer support (2) Value added service solutions: Service, maintenance, IAQ diagnosis and improvements (3) Replacement/turnkey solutions: Total replacement solutions responding to customer needs such as engineering services combined with non-AC equipment and controls Experience-based sales business model Fusion 25 focus areas Development/ Promotion Facility design Equipment sales Instrumentation/ Engineering Installation Service/ Inspection Maintenance Operations management Retroﬁ t/ Replacement Design/ Installation Equipment Business (Products/system solutions) (1) Basic service solutions (2) Value-added service solutions (3) Replacement/ turnkey solutions Continue to stay connected with customers throughout the entire AC value chain Reinforcing proposal and response capabilities for each vertical market. Providing solutions menu satisfying diverse customer needs Ofﬁ ces Schools Hospitals Hotels Factories Comfort from airﬂ ow, even temperature distribution, ventilation, sound insulation Facility management and tech- nical support where there is no dedicated facility caretaker Prevent entry and spread of viruses/bacteria, reduce the risk of cluster infection Individual temperature con- trol and advanced operabili- ty, i.e., multilingual support Nonstop, highly reliable oper- ations/energy savings toward achieving net zero carbon 2. Refrigeration solutions Global business expansion by deploying energy saving and environmental technologies Daikin has cultivated in the AC domain (1) Store Solutions business in Europe (2) Store Solutions business in Asia/Oceania markets with growth potential (3) Entire Cold Chain business (from production to consumption) 28 Value offered through Daikin’s business entry Initiatives towards CO2 emissions reductions, food loss control/reduction throughout the entire supply chain Contributing to safe/secure food life Temperature/humidity Temperature/humidity, freshness control Temperature/humidity Temperature Production sites Transportation Transit points Consumption sites Consumers 3 Creating Value with Air Creating Value with Air We aim to establish a large-scale, global IAQ and ventilation business by creating new products and services that address the increasing demand for IAQ and ventilation. In addition to taking on the healthcare domain, for example supporting bet- ter health by accumulating and analyzing air conditioner data and vital data, we will engage in value creation through IAQ and AE that enriches people’s lives. 1. Establishing a large-scale IAQ/Ventilation business 1. Establishing a large-scale IAQ/Ventilation business Market creation from opportunities presented by growing IAQ/Ventilation demand Creation of new products and services to establish a large-scale IAQ/Ventilation business • Globally create a market for air puriﬁ ers, and sell 1 million units per year in each region • Proposal optimal ventilation systems for each vertical mar- ket to expand sales of Heat Reclaim Ventilation (HRV) • Launch a global base model for air puriﬁ ers, and comply with standards and regulations in each region Product portfolio for establishing a large scale IAQ/Ventilation business Air puriﬁ ers ventilation units Standard Commercial Standard HRV Disinfecting Air conditioners Rooftop Negative air pressure Filters Outside installation HRV Bio-antibody IAQ/Ventilation business sales (¥ billion) 300 290.0 197.7 200 100 0 FY2020 FY2023 Compact Air handling units Titanium apatite Anti-virus 2. Creation of IAQ/AE that enrich people’s lives 2. Creation of IAQ/AE that enrich people’s lives Accumulating and analyzing air-conditioning data and vital data to create value with IAQ/AE for people’s physical and mental well-being • Take on the challenge in the healthcare domain for people’s better health — Establish a business through collaboration with universities and startups to establish methods for analyzing and improving health from obtained vital data • Validate the value with air for each vertical market — Realization of air value for people to get better concentration, relaxation, and good sleep and PoC veriﬁ cation for commercialization • Pursue new value with air — Examine a social integration course on creating value with air with the University of Tokyo Integrated Report 2021 29 Financial Strategy Deepening and Promoting “Ratio Management” Company Wide Capital Cost-Oriented Financial Strategy Daikin undertakes “ratio management” focusing on capital costs to increase corporate value. The background behind introducing “ratio management” started with our intention to pivot away from emphasizing monetary amounts (i.e., net sales, operating proﬁ t) on P/L statements, aiming to become global No. 1 under “FUSION” launched in 1996. We then began “ratio management” to focus more on operating proﬁ t “margin,” proﬁ tability, and ﬁ nancial structure based on our aim to “become an attractive company that draws together people, capital, and information” under the revamped FUSION in 1999. “Ratio management” involves overseeing “proﬁ tability, cash, and ﬁ nancial structure” as a set using indicators such as free cash ﬂ ow and DVA*1 along with ROE and ROA. Regarding DVA, we have shifted to ROIC (return on invested capital) and free cash ﬂ ow as management indicators for each division in recent years, as all segments have reached the black. *1 DVA: Daikin economic value added We adopted DVA with the start of ratio management as an indicator that resonates easily by simplifying and fostering employee understanding of EVA (economic value added). Beyond simplifying the calculation formula, we focused on promoting DVA internally by explaining DVA to employees in terms of corporate value rising when proﬁ ts generated from business activities over an entire year exceed capital costs. Companywide ROIC Tree ROIC was introduced as an internal management indicator to monitor capital efﬁ ciency beginning with reducing inventories and to facilitate greater implementation among employees. More speciﬁ cally, we have positioned ROIC as an internal management indicator linked to Companywide ROE targets and then apply it to each business target as a means to speciﬁ - cally show how ROIC is connected to the duties of each employee. For example, during employee training we describe ROIC as a tree to explain concepts such as how inventory reduction improves ROIC and the relationship between selling prices and costs to increase proﬁ tability. In addition to staff in Japan, we use the “ROIC Tree” concept to explain to the employ- ees of overseas bases how ROIC is linked to their daily duties. We promoted 10 key Companywide themes essential for achieving FUSION 20 ﬁ nal year targets; 1-7 listed below show the connection between seven of those themes and the ROIC Tree. In addition, given the uncertain outlook from amid the COVID-19 pandemic of ﬁ scal 2020, we are undertaking ROIC Tree-linked measures, namely six emergency projects that address important management issues as well as strategic 7 themes to be raised for ﬁ scal 2021. ROIC Tree Proﬁ tability ROIC (Return on Invested Capital) Asset efﬁ ciency Net sales/operating proﬁ t margin Invested capital turnover rate Marginal proﬁ t ratio Fixed ratio (1) Maximize variable cost C/D (2) Implement selling price (4) Reduce ﬁ xed costs (5) Enhance product quality increase (3) Control logistics cost surge, implement C/D measures, revamp SCM No. of days working capital is held Fixed asset turnover rate (7) Accelerate investment returns No. of days inventory is held No. of days receivables are held (6) Reduce inventories Financial Analysis over the Past Decade Daikin achieved a V-shaped recovery amid major economic changes following the collapse of Lehman Brothers, achieving ten consecutive years of sales growth from ﬁ scal 2010 through ﬁ scal 2019 and nine consecutive years of operating proﬁ t for nine years straight through to ﬁ scal 2018. This breakthrough earnings growth reﬂ ects Daikin’s penetration of the North American air-conditioning market after acquiring major US air-conditioning manufacturer Goodman in 2012. In addition, we position operating proﬁ t margin as an indicator of proﬁ t- ability under Ratio Management and set a target of 12.0% as the target of FUSION 20. While the operating proﬁ t margin rose to 11.1% in ﬁ scal 2018, buffeted by the impact of COVID-19, actual results for ﬁ scal 2020 amounted to 9.6%. Under FUSION 25, the goal we have set for ourselves is to Management Indicators from Fiscal 2010 ROE ROA Operating proﬁ t margin (%) 18 15.7%15.7% 14.5%14.5% 13.9%13.9% 11.3%11.3% 11.1%11.1% 11.1%11.1% 12.0%12.0% 7.8%7.8% 7.3%7.3% 6.8%6.8% 10.1%10.1% 10.4%10.4% 6.4%6.4% 9.6%9.6% 5.3%5.3% 13.1%13.1% 13.1%13.1% 13.4%13.4% 10.7%10.7% 10.0%10.0% 6.1%6.1% 5.6%5.6% 8.3%8.3% 7.8%7.8% 8.8%8.8% 5.0%5.0% 6.7%6.7% 6.9%6.9% 3.6%3.6% 3.0%3.0% 6.5%6.5% 4.0%4.0% 1.7%1.7% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (FY) 15 12 9 6 3 0 30 reach an operating proﬁ t margin around the 12.0% level by 2025, and with our medium-term action plan for ﬁ scal 2023, an operating proﬁ t margin of 10.5%. For ROE, an indicator of asset efﬁ ciency, we are working toward the target of 11.0%. Daikin’s market capitalization has grown by around 33 times over the 26 years between the ﬁ scal year ended March 1995 and the ﬁ scal year ended March 2021, being ranked eighth*2 in market cap growth over the 30 years of the Heisei Era (1989 -2019 ). *2 For companies listed on Japanese stock exchanges. Comparisons between January 9, 1989 and April 26, 2019 (source: Nikkei). Investment & Shareholder Returns In ﬁ scal 2021, we plan to invest ¥150 billion in capital expenditures, record ¥115 billion in depreciation and amortiza- tion, and ¥80 billion in R&D. Further business growth in the Air Conditioning business will mean making investments to expand production capacity in our plants in Vietnam and India, as well as compliance with CARB*3 regulations in California, a leading U.S. state in terms of the environment, and boosting the capacity of plants in Applied Systems and other areas. In the Chemicals business, we intend to proactively invest in pro- duction capacity expansion in China and the U.S. to meet the increasing demand for semiconductors and batteries. However, due to the uncertain outlook caused by COVID-19, we will keep a closer eye on determining priorities, timing of imple- mentation, and amount of investments. Under FUSION 25, we will continue aggressive investments to realize our growth strategies and to leverage the changing times as opportunities for business growth. Covering capital investments, as well as investments into R&D, digital technolo- gy, and human resources, we plan to invest a cumulative total of ¥800 billion over the three-year period from ﬁ scal 2021 to ﬁ scal 2023 and a cumulative ¥1.3 trillion over the ﬁ ve-year period to ﬁ scal 2025. Moreover, we envision M&A activities cumulatively amounting to approximately ¥600 billion over three years. As for shareholder returns, by striving to maintain a consoli- dated ratio of dividend to net assets (Dividend on Equity, DOE) of 3.0% while at the same time aiming for an even higher con- solidated dividend payout ratio, we will introduce initiatives to further increase returns to our shareholders with the core goal of stable and continuous dividends. In ﬁ scal 2020, the annual dividend was set at ¥160. Internal reserves will be applied to strategic investments in order to expand business and increase competitiveness such as reinforcing management practices, promoting global businesses, and accelerating eco-conscious product development. *3 CARB: California Air Resources Board Total Shareholder Return (TSR) Daikin’s TSR outperformed TOPIX and TOPIX Machinery over a three-, ﬁ ve-, and ten-year period and TSR also surpassed cost of equity capital owing to stable shareholder returns and strong share price performance. Total shareholder return (TSR*4) Daikin TOPIX TOPIX Machinery TSR (Annualized) Holding period 1 year 3 years 5 years 10 years Cumulative Annualized Cumulative Annualized Cumulative Annualized Daikin TOPIX TOPIX Machinery 70.7% 42.1% 59.9% 94.3% 22.1% 23.8% 24.8% 174.3% 22.4% 839.9% 25.1% 6.9% 7.4% 62.3% 89.6% 10.2% 153.6% 9.8% 13.6% 195.3% 11.4% Note: Annualized rate is the geometric mean of cumulative returns. (Index) 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 2020/3 ■■ Trading Trading volume volume (thousand (thousand shares) shares) 72,000 60,000 48,000 36,000 24,000 12,000 0 2021/3 *4 TSR (Total Shareholder’s Return): Factors in capital gains and dividends when measuring the total return generated by a stock Notes: TSR is calculated by Daikin using cumulative dividends and share price ﬂ uctuations whereas TOPIX is calculated using share prices indices including dividends (formulated by the Company based mainly on Bloomberg data) Graph values are indexed market prices in terms of TSR, with March 31, 2011 closing price data set at 100 (holding period through end-March 2021) Integrated Report 2021 31 Review of Operations Overview of Global Development Conducting business in more than 160 countries and regions, Daikin has built more than 100 production bases underpinned by market-localized production methods. Employees: 84,870 Consolidated Subsidiaries: 315 Europe ¥417.2 billion 9,947 75 12 China ¥369.8 billion 19,360 33 8 Japan ¥585.6 billion 13,318 30 5 Other Regions (Latin America, Middle East, Africa, etc.) ¥128.4 billion 5,066 62 Asia/Oceania ¥351.0 billion 17,367 54 6 United States ¥641.3 billion 19,812 61 8 Sales Employees Consolidated Subsidiaries Global R&D Centers (Total of Air Conditioning, Chemicals, Filter business) Expansion of Global Business Foundation Japan Non-Japan Net Sales Subsidiaries Employees Note: Percentages in the center of each graph indicate the overseas ratio in domestic and overseas totals. 2001 33% 2020 77% 2001 40% 2020 90% 2001 38% 2020 84% 32 Air Conditioning Japan Business History In 1951, Daikin launched Japan’s ﬁ rst packaged air conditioner. Since then, we have pressed forward and diversiﬁ ed to provide air-conditioning systems that meet the needs of factories and ships, vehicles, buildings and residential housing. Daikin has Current status Market Environment The air-conditioning market in Japan is mature and anchored by replacement demand. In ﬁ scal 2020, economic activity stag- nated due to the spread of COVID-19 infections, and industry demand for commercial use fell. In contrast, demand for resi- dential products exceeded the previous year due to pent-up demand and special cash payments, as well as the boost to sales caused by the intense summer heat. Business Conditions In the residential-use market, we heightened the appeal of our unique ventilation function and Streamer technology. Sales of high value-added products such as “Urusara X” increased. In the case of industry-use air-conditioning systems, we strength- ened our system proposals, which combine air conditioners and ventilation products, and expanded our market share. For air puriﬁ ers, we expanded the product lineup, and sales grew signiﬁ cantly by capturing strong demand. Production and Development Sites In response to growing interest in indoor air quality (IAQ) and ventilation, we expanded our product lineup of room air condi- tioners, air puriﬁ ers, and heat reclaim ventilators. We also quickly boosted production capacity for air puriﬁ ers, for which demand has expanded rapidly. Outlook Strategies for Fiscal 2021 In the residential-use market, we will expand sales of high-val- ue-added products by strengthening promotion of ventilation and air puriﬁ cation functions within the reversal in demand. For cold regions, we will launch new products and attempt to further increase market share. For commercial-use products, we will expand sales based on a recovery in demand accompa- nying the resumption of economic activities. We intend to expand the lineup of heat reclaim ventilators and Streamer units, and increase sales. We will continue to expand sales of air puriﬁ ers for residential use and expand our lineup for com- mercial use as well. expanded its market share with a ﬁ ne-tuned sales network and the pursuit of a broad lineup of high-value-added products that offer energy conservation and comfort. Products and Services in Line with Needs • “Urusara X” and “Urusara mini” room air conditioners equipped with ventilation functions • The “Ururu Sarara Air Puriﬁ er” equipped with an antibacteri- al humidifying ﬁ lter* developed by utilizing the antibacterial technology of Kobayashi Pharmaceutical Co., Ltd. • Equipped with streamer technology, a UVC LED that irradi- ates deep ultraviolet rays and an antibacterial HEPA ﬁ lter, the “UV Streamer Air Puriﬁ er” features improved virus and bac- teria suppression performance • “Air Navigation” and “Consultation Services” that address questions and issues relating to ventilation and IAQ * Suppresses bacteria on the humidifying ﬁ lter. Not effective against all bac- teria. UV Streamer Air Puriﬁ er FUSION25 Strategies We will accelerate growth by building new sales models by uti- lizing digital technologies that capture changes in market condi- tions. We aim to establish a large-scale IAQ/ventilation business by, for example, launching new heat reclaim ventilator products suitable for renewal and retroﬁ tting as well as by heightening the appeal of our unique ventilation function and streamer tech- nology. In addition, we will enhance our solutions proposal capabilities by application and market, while developing solu- tions menus that meet diverse customer needs. Through such efforts, we aim to have the No. 1 share in all areas and markets. In addition, toward the realization of carbon neutrality, we will promote the switch of our “VRV” and chiller products to R32 refrigerant while aiming to build a scheme for the recovery, rec- lamation and destruction of refrigerants. Integrated Report 2021 33 Review of Operations Air Conditioning Business History Americas Daikin made its ﬁ rst attempt to enter the U.S., the world’s larg- est air-conditioning market, in the 1980s. However, given the well-entrenched culture of ducted air conditioning, market entry proved difﬁ cult and a withdrawal was unavoidable. We subsequently revisited the idea of establishing a U.S. presence during our advance to establish business globally, and in the 2000s, with the acquisition of the O.Y.L. Industries Bhd and Goodman Global Group, Inc., added ducted air-conditioning products to our lineup marking the start of full-ﬂ edged opera- tions in the U.S. Current status Market Environment The air-conditioning market in the U.S., having reached maturity, is based mainly on replacement demand. In ﬁ scal 2021, govern- ment economic measures and strong personal spending bolstered the economy, and demand was steady in the housing market. Business Conditions In ducted unitary for houses, supply tightened due to a suspen- sion of operations at the Goodman factory put in place in April to prevent the spread of COVID-19, and the subsequent impact of a shortage of manufacturing personnel. From the second half of the ﬁ scal year, sales expanded with a normaliza- tion in supply, although full-year sales fell below those of the previous ﬁ scal year. Ductless sales expanded in RA/SKY by cap- turing rising demand from the need for improvement in living spaces and higher demand due to favorable seasonal weather. For VRV systems, we strengthened our efforts at online sales activities, but were hit by lower demand from restaurants and other areas. In Applied Systems, we took advantage of ventila- tion needs and expanded our market share, primarily for air- handling units. Production and Development Sites We continue to strive to secure and stabilize manufacturing personnel at our Goodman factory, and our efforts to bolster production capacity and productivity remain ongoing. We are leveraging the latest production technology to bolster opera- Outlook Strategies for Fiscal 2021 In ducted unitary for houses, we will focus on sales utilizing online tools and improving upon production capacity. We will introduce new products equipped with inverters specialized for replacement and expand sales. In ductless products, we will strengthen our sales network for “VRV” systems centering on the northeastern region. Staying a step ahead of the competi- tion, in certain regions we will launch new room air conditioners that adopt R32 refrigerant, and pursue the market mainstream- ing of R32. In Applied Systems, we will respond to differing application needs, and strengthen circular-type solution propos- als, from sales and service of products to their replacement. 34 tions as a “digital factory,” and to roll this out to production sites in other regions. Moreover, we are also enhancing prod- uct development to meet regional needs. Products and Services in Line with Needs • “FIT” Middle-zone (SEER* 15-17) inverter unitary • “Daikin One” smart thermostat • IAQ products, including high-performance ﬁ lters, UV lighting, and ventilator equipment * SEER: An acronym describing the Seasonal Energy Efﬁ ciency Ratio for cool- ing performance. “FIT,” inverter unitary product for the middle zone FUSION25 Strategies Our goals for ﬁ scal 2025 are to grow revenue up to the one- trillion-yen level and to become the No. 1 player in the North American air-conditioning market. In the residential-use mar- ket, bolstering Goodman’s sales network will serve to expand our business in volume markets, and in tandem with this, will grow sales of premium residential-use products. In the light commercial domain as well, we will further strengthen sales of “VRV” and rooftop systems. In the Applied Systems market, we will bring together a team of specialists in key applications and market categories, and have full-scale development of the Solutions business. In addition, seizing upon environmental and energy efﬁ ciency regulations as a business chance, we will promote the spread of inverters, heat pumps and low-GWP refrigerants in the market. China Business History Daikin entered the China market in the mid-1990s when there were already numerous Japanese air conditioner manufacturers with a presence there. Daikin, the latecomer, differentiated itself by applying its energy on establishing an image as a high- end brand, and in building up its own dealer network. Moreover, we introduced ceiling-embedded indoor units and residential multi-split air conditioners in our efforts to create a new type of air-conditioning culture. Current status Market Environment In addition to heading toward an early return to normal follow- ing COVID-19, the economy in China showed a recovery trend because of government economic policies and monetary easing. Business Conditions In addition to strengthening our lineup of IAQ and ventilation products, the needs for which are increasing, we promoted sales through the utilization of online tools, and sales exceeded those of the previous year. High proﬁ tability was maintained by cost reductions, including productivity improvements through automation, and reduction of ﬁ xed costs. In the residential-use market, we focused on identifying new customers by online events and sales that used live broadcasts, and sales expanded for residential multi-split air conditioners. In the commercial market, we collaborated with major developers of large-scale projects and for stores and ofﬁ ces engaged in sales activities that promoted ventilation, cleaning, and disinfection. Production and Development Sites We are focusing efforts on deploying the latest technology and services, and putting the Internet to use, we are introducing services such as “Intelligent VRV,” a system that offers central- ized control of air conditioners, failure prediction and other ser- vices. We have also established a new Digital Innovation Center and are working on the development of web strategies, the construction of IT platforms, and big data analysis. Products and Services in Line with Needs • “New Life Multi” series for mid- to high-end residences allows simple selection and connectivity to not only air condi- tioners, but to ﬂ oor heaters, bathroom dryers and others • “Intelligent VRV” provides centralized control of air condi- tioners, failure prediction and other services via the Internet • Compact heat reclaim ventilators and heat reclaim ventilators that are synchronized with IAQ sensors for homes • AI utilized to analyze data collected by IAQ sensors to predict and notify CO2 concentration levels “New Life Multi” series for mid- to high-end residences Outlook Strategies for Fiscal 2021 Continuing to utilize online tools to promote sales, we will develop a web strategy to acquire customer information, such as building our own online site. Amid the growing interest in IAQ and energy management, we will also enhance our lineup of products and services. We will provide detailed solutions for each market and customer, including air conditioning, ventila- tion, and air quality improvement. In terms of production, we are promoting conversion to smart factories by building a sys- tem that can collect, store, and analyze a variety of data. We will work to improve productivity and quality. FUSION25 Strategies By combining ofﬂ ine activities, such as comprehensive custom- er centers and the New Life Station, with online sites and SNS, we will accelerate the shift to new business models. We will also integrate and analyze customer data by building our own IT platform and digitizing the content of contract negotiations to improve customer satisfaction and contract closing success rates. Furthermore, we will strengthen our proposals for air value centered on residential multi-split air conditioners and “VRV” while expanding our business in all markets. As the only global air-conditioning brand in China, we will create markets to achieve continuous growth. Integrated Report 2021 35 Review of Operations Air Conditioning Europe/The Middle East/Africa Business History Our presence in Europe started by establishing a production and sales base in Belgium in the early 1970s. We succeeded in bolstering sales in Italy, Spain, France, and other nations all across the EU, and the scale of our business grew rapidly. After Current status Market Environment In Europe, economic activities were stagnant due to lockdowns in countries across the region, but pent-up demand drove a return to brisk activity in the residential market. In addition, the Heating business beneﬁ ted from strong demand together with incentives that worked to promote replacements of combus- tion-type heaters with heat-pump-type heaters. Business Conditions In the residential-use market, Daikin captured the recovery in demand in places such as France and Spain due to stable sup- ply through localized production, and sales expanded. Widespread sales were even seen in Germany, the Netherlands, and Belgium. In the commercial-use market, system sales com- bining ventilation equipment such as heat reclaim ventilators strengthened, but a decline in demand at hotels, retail stores, and ofﬁ ces impacted results. In the Heating business, sales sub- stantially increased by utilizing a wide product lineup of heat- pump-type heaters. We expanded market share by capitalizing on favorable demand resulting from rising environmental awareness and incentives. Applied Systems experienced strong sales of R32 chillers with high environmental performance. Production and Development Sites In Europe, which is highly environmentally conscious, we are taking the initiative to enhance our lineup with R32 models and refrigerant-saving models, staying a step ahead of compet- itors. We are also working on making heat-pump-type hot Outlook Strategies for Fiscal 2021 In the residential use market, we will work to expand sales of high-value-added products by capturing the strong demand backed by continued investment for living environments. In the commercial-use market, we will strengthen sales to favorable areas such as IT infrastructure amid the slow recovery in demand. In the Heating business, we will strive to capture strong demand and increase market share by strengthening sales and marketing capabilities. In Applied Systems, we will enlarge the lineup of R32 chillers. In the Refrigerator and Freezer business, we intend to accelerate one-stop solution development to each market. We will enhance sales of envi- ronmentally conscious products using natural refrigerants such as CO2 and propane. 36 entering the 2000s, we also expanded into the Heating busi- ness and Refrigerator and Freezer business water heating systems highly efﬁ cient, as they have experi- enced growing demand in recent years. In the Refrigerator and Freezer business, we continue to develop and launch products that set themselves apart with CO2 refrigerant and other envi- ronmental measures. Products and Services in Line with Needs • R32 model lineup ahead of other companies via room air conditioners and “SkyAir” • Room air conditioners equipped with a ventilation function • “VRV L∞P” that uses recycled refrigerant • “Daikin Altherma” heat-pump-type hot water heating system that leads to the suppression of greenhouse gas emissions • One-stop system proposals that cover the entire cold chain, from food shipping to storage Environmentally conscious, highly efﬁ cient, high-performance heat-pump heating FUSION25 Strategies Daikin will strive to capture demand driven by raising environ- mental awareness and ongoing investments into living environ- ments, and will launch and expand sales of differentiated products. Backed by the fair winds of the European Green Deal, together with substantially expanding the Heat Pump Heating business, we will also work in the refrigeration domain to bolster the business for one-stop solutions in stores, includ- ing for air conditioning and ventilation. In all the HVAC&R mar- kets, we aim to be a solutions provider capable of responding with ﬂ exibility to customer needs as pertain to IAQ and energy. Moreover, we will also push forward on constructing a refriger- ant eco-cycle (recovery, reclamation, destruction) among other initiatives that take the lead in environmentally conscious soci- ety and industry issues. Asia/Oceania Business History Daikin began product exports and knockdown production from the 1960s, and from the 1990s, strengthened its sales network in countries around the region and advanced the introduction of energy-conserving and cooling-only models tailored to regional needs. From 2010 onward, air-conditioning demand soared in line with economic development, and Daikin rein- forced its production capabilities with the establishment of plants in Thailand, India, Malaysia and Vietnam. Current status Market Environment Asia is in the process of air-conditioning equipment adoption, making it a market for growth. However, the region took a substantial hit on the impact of falling demand and restrictions on activities on account of the spread of COVID-19. In Oceania, having succeeded in containing COVID-19 expansion, demand was brisk. Business Conditions As countries around the Asian region felt the effects of cur- tailed activities, we promoted dealer support by utilizing online tools. Inventories were strategically held, and sales signiﬁ cantly recovered from the second half, but the results could not com- pensate for the large decrease of the ﬁ rst half, and sales declined year on year. On another front, in Oceania, sales expanded based on strong demand, and sales exceeded the previous year. In the residential-use market, we promoted sales utilizing our own dealer sales channels, together with endeavoring to strengthen relationships with dealers using such activities as online training. In commercial use, we focused on sales for public facilities, but sales declined due to sluggish capital investment on account of the economic downturn, delays in start of construction work due to insufﬁ cient workers at con- struction sites, and postponement of construction. Outlook Strategies for Fiscal 2021 As the impact of the COVID-19 pandemic remains in Asia, we aim to improve the percentage of inverter use by strengthening development sales network in regional cities and sales activities utilizing online tools. In the residential-use market where signs of recovery in demand are being seen, we will expand sales of high-value-added products by promoting air quality improve- ment. In the commercial-use market, the focus is on sales for public facilities where demand is anticipated because of gov- ernment economic measures. In Applied Systems, we will aim to expand sales by improving the service network and strength- ening product capabilities. Production and Development Sites In addition to cooling-only inverter air conditioners, we actively develop products that meet the needs of particular regions, such as air conditioners that can stand up to the over-50-de- gree heat of India, and air conditioners that can cool multiple rooms with the limited power supplies of Indonesia. Products and Services in Line with Needs • Cooling-only inverter air conditioners that strengthen cost competitiveness • Air conditioners that can operate in oppressive outside tem- peratures and that can be transported over bad roads • Air conditioners that stand up to unstable power supply situations Dealer in India, where demand for air condi- tioning is growing FUSION25 Strategies Together with building out our sales network and product line- up in the Asian region, a market anticipated to experience fur- ther growth, we will work to boost cost competitiveness and to grow revenue streams. We also seek to increase sales of products with high environmental performance, and that lead the market in terms of adoption of inverters and R32 refriger- ant. In the future, we aim to establish India as a major base, while working to further fortify a top sales share and to realize the No. 1 share in room air conditioning. Moreover, we will strengthen ties between production sites, and in addition to optimizing production throughout the region, will commence production of air puriﬁ ers in the region while endeavoring at market creation. Integrated Report 2021 37 Review of Operations Chemicals Current status Although affected by reduced demand in the automotive market, there were increased sales of surface antifouling agents for tablet PCs due to the spread of remote working and of the repellent agents used in medical protective clothing. Market Environment Although we strengthened sales activities for semiconductors where the market is showing signs of a recovery as well as for surface anti-fouling coating agents and water and oil repellent agents, the impact of decreased demand due to COVID-19 was substantial. In the Chemicals segment overall net sales declined over the previous ﬁ scal year. Business Conditions In ﬁ scal 2020, amid the ongoing global spread of COVID-19 infections, Daikin was able to take thorough measures against infection and continue operations at all its production bases in Japan and overseas. We also worked to secure points of con- tact with our customers, for example by utilizing online tools to develop sales activities. By product, sales of ﬂ uorocarbon gas dropped worldwide due to a decrease in demand, causing sales to fall against the previous ﬁ scal year. Fluoropolymers showed an increase in sales for infrastructure in China, but in addition to a decrease in ﬁ rst-half demand for semiconductor and automotive markets, sales declined due in part to a drop in construction and aircraft-related demand in the United States. Fluoroelastomers saw sales expand to the automotive market in China, but other regions were signiﬁ - cantly affected by a decrease in demand, causing sales to fall against the previous ﬁ scal year. In ﬁ ne chemicals, sales of surface antifouling agents focused on tablet PCs, and sales expanded in China and Japan. Sales of water and oil repellent agents grew for medical-related and paper applications. Sales of etching gas expanded in China and Japan by capturing demand in the recovery for the semicon- ductor market. “OPTOOL” anti-smudge coating used for the surfaces of information devices “UNIDYNE” realizes non-woven fabrics with excellent water repellency and alcohol resistance 38 Outlook In addition to expanding sales to the semiconductor and automotive markets, Daikin will implement upfront investments, such as increasing production capacity in preparation for future increases in demand. Targets Daikin will strengthen the development of lithium-ion battery materials for next-generation automobiles, demand for which is expected to grow in the years to come, and applications in the information and communications ﬁ elds, while aiming to acceler- ate further sales expansion and measures designed to increase market share. We will also promote upfront investments to meet the increasing demand in the semiconductor market. Strategies for Fiscal 2021 In the semiconductor market, where demand is expected to recover, Daikin will work to expand sales and increase market share, and capture the movement toward domestic production in China. In the automotive market, we are expanding sales of environmentally conscious products such as rubber for high-ef- ﬁ ciency engines. In the information devices market, we will strengthen spec-in activities for repellents for tablet PCs. We will also strengthen spec-in activities for lithium-ion battery materials and accelerate the process for producing results from application developments. In Japan, Daikin established the Integrated Production Center at its Kashima Plant in April 2021, thereby bringing to fruition a high-quality, highly efﬁ cient production plant that utilizes IT. In preparation for future increases in semiconductor demand, we will also steadily implement upfront investments, such as expanding a ﬂ uoropolymer manufacturing plant in China. FUSION25 Strategies In addition to the accelerating movement toward the realiza- tion of a carbon-free society, such as the setting of penetration rate targets for EVs in each region of the world, the business environment is changing faster than expected, as evidenced by, for example, the movement of non-ﬂ uorination becoming apparent in food and apparel applications. Taking these chang- es as an opportunity to expand our business, we will imple- ment a variety of measures ahead of our competitors. In addition to accelerating the creation of results centered on four key markets (semiconductors, automotive, information com- munications, and information devices) in applications develop- ment, Daikin will also develop and expand sales of highly functional, non-ﬂ uorine materials for further business expan- sion. We will also aggressively implement upfront investments, such as increasing production capacity, in preparation for growth in demand in the coming years. Fluorine materials contribute to the higher performance of lithium-ion batteries The Integrated Production Center at the Company’s Kashima Plant aims to improve quality and productivity by integrating all of its people, organiza- tions, and information Integrated Report 2021 39 Review of Operations Oil Hydraulics Current status Signiﬁ cantly impacted by the spread of COVID-19, a harsh business environment Market Environment Demand for hydraulic equipment for industrial machinery declined as a result of stagnant capital investments. In hydrau- lic equipment for construction and vehicles, demand declined primarily in Japan, Europe, and the United States, triggered by the spread of COVID-19. Business Conditions The Oil Hydraulics business comprises a range of oil hydraulic equipment to facilitate the smooth movement of various types of machinery, contributing to energy efﬁ ciency. Amid the slow- down in capital investment caused by the spread of COVID-19, in ﬁ scal 2021 Daikin strengthened cooperation with its dealers in each market and worked to secure sales of oil hydraulic equipment for industrial machinery. In the Hydrostatic Transmissions (HST) business, we captured demand for agricul- tural machinery in China and strengthened proﬁ tability by reviewing procurement and improving productivity. Comprising a piston pump and motor developed for small vehicles, an integrated, medium-duty hydraulic transmission Outlook Expand sales of high-efﬁ ciency products by capturing growing momentum for energy saving toward the elimination of carbon emissions FUSION25 Strategies In response to the growing momentum for energy saving toward the elimination of carbon emissions, Daikin will expand its lineup of high-efﬁ ciency products that utilize the technolog- ical capabilities cultivated so far. For industrial machinery, we will expand our Solutions business in the United States and improve proﬁ tability in China and other Asian countries. In addition, we will make a full-scale entry into the European market centered on Germany and accelerate global business expansion. In the HST business, we will strengthen custom- er-oriented proposal sales in Japan and introduce highly efﬁ - cient and durable differentiated products for small construction machinery in the United States to increase our market share. Targets In its sales of oil hydraulic equipment for industrial machinery, Daikin will promote proposal sales by maintaining close con- tacts with its customers while aiming to increase its market share. We will make a full-scale entry into the European market and accelerate our global expansion. In the HST business, we will launch differentiated products mainly in the United States and China, and strengthen spec-in activities. Strategies for Fiscal 2021 In its sales of oil hydraulic equipment for industrial machinery, Daikin will promote the development of dealers toward its full- scale entry into the European market. In Japan, we will respond to growing remote monitoring needs brought by the spread of COVID-19 infections. We will introduce new products equipped with sensors and communication functions, and work to increase our market share. In the HST business, we will strengthen spec-in activities centered on small-sized construc- tion machinery in the United States and agricultural machinery in China, both markets where strong demand is expected. 40 Defense Current status Sales of oxygen concentrators and pulse oximeters were favorable In ﬁ scal 2020, Daikin captured the demand from the switch to home treatment for hospital inpatients and the demand for medical facilities for people infected with COVID-19, causing sales of oxygen concentrators to increase against the previous ﬁ scal year. Sales to the Ministry of Defense having decreased, as a result the Defense Systems business as a whole fell below the previous year’s level, but proﬁ ts increased. Market Environment To secure more hospital beds for patients infected with COVID- 19, the switch to home treatment for inpatients with respirato- ry diseases progressed, and demand for oxygen concentrators remained ﬁ rm. Also, there was an improved level of awareness toward pulse oximeters, which measure oxygen saturation in the blood without collecting blood. Business Conditions In the Defense Systems business, Daikin obtains orders from Japan’s Ministry of Defense based on the defense budget, while designing and manufacturing products. The products supplied include various types of ordnance used for drills, and aircraft parts. Daikin also manufactures and sells home-use oxygen ther- apy equipment. Daikin provides respiration synchronizers and oxygen concentrators, products that require the highest levels of reliability, performance, functionality, and quality. Pulse oximeters can easily measure cardiopulmonary function Outlook In addition to expanding sales of home-use oxygen therapy equipment, Daikin will take on the challenge of expanding its business into the healthcare domain Targets We aim to increase our market share by expanding sales of dif- ferentiated products for the home-use oxygen therapy equip- ment market. Strategies for Fiscal 2021 In the medical/healthcare domain, Daikin will work to expand sales of differentiated products that meet customer needs. We will strengthen our sales capabilities and expand sales by expanding the lineup and the durability as well as reliability of the items of equipment that represent our strengths. In China, we will widely promote our strengths and expand sales by uti- lizing e-commerce and other means. FUSION25 Strategies In the ﬁ eld of home-use oxygen therapy equipment, Daikin will introduce differentiated products mainly in Japan and China and work to increase its market share. In response to growing interest in preventive medicine, we will start full-scale business development in the healthcare domain. Utilizing the oxygen control technology cultivated in the development and produc- tion of our home-use oxygen therapy equipment, we will sell equipment for hypoxic training. Utilizing vital data acquired through devices, we also aim to develop new services that will lead to the promotion of health in our daily lives. Integrated Report 2021 41 Corporate Governance Basic Policy of Corporate Governance The Daikin Group strives to raise corporate value through corpo- rate governance. We carry out decision-making with foresight, as well as by executing business with greater speed, transparency, and soundness in response to challenges and changes in the business environment. We strive to improve our current integrated management frame- work, under which directors assume responsibility for both busi- ness execution and management. In this way, we fulﬁ ll our responsibility for management, making strategic decisions quickly and providing appropriate supervision. We also improve the moni- toring function conducted by third parties, including multiple external directors. We aim for management with greater speed, soundness, and transparency. We will continue to boost corporate value by seeking and implementing new ways to achieve optimal corporate gover- nance, pursuing best practices in all facets and at all levels of the Daikin Group. Regarding Japan’s Corporate Governance Code set by the Tokyo Stock Exchange, Daikin has already implemented all the principles contained in the revisions of June 1, 2018, including “enhancing information disclosure,” “maintaining the effectiveness of the Board of Directors and the Audit and Supervisory Board,” “deﬁ ning roles and responsibilities of independent external directors,” and “the pol- icy of having constructive dialogue with shareholders.” Going for- ward, Daikin will continue to enhance these initiatives. Management and Operational Execution System Rather than adopting a U.S.-style “committee system” that com- pletely separates decision making and business oversight from operational execution, the Daikin Group has adopted an “integrat- ed management system” in its aim to promote a higher level of management, in view of the special characteristics of the Group’s business and in judging that this is a more-effective means of accelerating decision making and operational execution. “Integrated management” means that the directors jointly take charge of both management responsibilities and business execu- tion responsibilities. Directors also bear responsibility for the execution and completion of their own decisions by carrying out their decision making, busi- ness execution, and supervision/guidance in an “integrated” man- ner. The multiple external directors provide monitoring of the status of business execution from an independent perspective and take responsibility to support “integrated management” from the stand- point of transparency and integrity by offering appropriate oversight and advice with regard to decision making. In addition, the Group has introduced an “executive ofﬁ cer system” to accelerate the speed of execution based on autonomous judgments and directions in units handling each region, division, and function. Appointments of executive ofﬁ cers are carried out by the Board of Directors. Appointment of Directors When appointing directors, the Daikin Group gives emphasis to factors ranging from the globalization of the Group’s businesses and the broadening of its business ﬁ elds to a diverse range of background factors, such as nationality, gender, and career history. As of the end of June 2021, there were 11 directors (including one female and one non-Japanese directors) who carry out expedi- tious and strategic decision making as well as sound oversight and guidance throughout the Group. Daikin’s Board of Directors includes four external directors (as of the end of June 2021), conditional upon them not having a con- ﬂ ict of interest with the Company. Daikin seeks external directors that can provide oversight and advice from a high-level perspective based on a wealth of experience and deep insight. Accordingly, Daikin appoints external directors with business experience, mainly as directors at listed companies, and that do not hold concurrent external director positions at ﬁ ve or more companies. 42 To ensure that the external directors can effectively contribute to Daikin’s corporate governance system, assistants to the external directors are assigned in the Company. They strive to provide the external directors with information, early notice of Board of Directors meetings, and prior notice of Board of Directors meeting agenda items, as well as implementing prior explanations of partic- ularly important agenda items. In addition, when external directors are unable to attend a Board of Directors meeting, the assistants provide them with related materials and subsequent explanations of meeting proceedings. Audit System Daikin employs an Audit and Supervisory Board System and has established the Audit and Supervisory Board. As of the end of June 2021, Daikin’s four Audit and Supervisory Board members included two external Audit and Supervisory Board members. The principal nomination criteria for external Audit and Supervisory Board mem- bers are the same as those for external directors and include inde- pendence from the Company in terms of not having a conﬂ ict of interest with the Company. Audit and Supervisory Board members attend meetings of the Board of Directors, as well as other important meetings, and receive reports. In addition, they can express diverse opinions. To ensure effective audit functions, the Audit and Supervisory Board receives reports on important issues related to management and performance when necessary and also investigates relevant units, conﬁ rms approval of documents, and regularly exchanges opinions with representative directors, executive ofﬁ cers, and the accounting auditors. In addition, the Audit and Supervisory Board Member Ofﬁ ce has been established, and the staff perform their duties under the orders and direction of Audit and Supervisory Board members. The opinions of the Audit and Supervisory Board are respected on matters related to personnel transfers, work eval- uations, and other matters pertaining to Audit and Supervisory Board Member Ofﬁ ce staff. Corporate Governance Structure (as of the end of June 2021) Shareholders’ Meeting Appointment, dismissal Appointment, dismissal Appointment, dismissal Board of Directors HRM Advisory Committee Compensation Advisory Committee Group Steering Meeting Group Management Meeting Accounting Auditor Audit & Supervisory Board Audit Group Auditors Meeting Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, CSR Committee Appointment, supervision Executive Officers Meeting (The rest is abbreviated) Agile Management Support System Daikin’s three main management bodies are the Board of Directors, the Group Steering Meeting, and the Executive Ofﬁ cers Meeting and by keeping the number of directors at a minimum they secure expeditious decision making based on substantial discussion. The Board of Directors, along with providing healthy business execution and appropriate supervision and guidance, is the deci- sion-making institution for all matters related to the Group as a whole, as stipulated by laws and regulations as well as the Company’s Articles of Incorporation, and for other important man- agement matters. In ﬁ scal 2020, the Board of Directors met 15 times, and the average attendance rates of external directors and external Audit and Supervisory Board members at those meetings were 91% and 100%, respectively. The top deliberative unit in the Group’s management system is the Group Steering Meeting. This unit determines the direction for important management guidelines and management strategies in a rapid and timely manner thereby accelerating the pace at which issues are resolved. In ﬁ scal 2020, the Group Steering Meeting was held six times. The Executive Ofﬁ cers Meeting was established as a place where we can expedite thorough deliberations and prompt implementation of important management issues, and it met 20 times in ﬁ scal 2020. In addition, to respect and protect the interests of diverse stake- holders other than stockholders, Daikin has, based on the Board of Directors, established its Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, and CSR Committee. Evaluation of the Effectiveness of the Board of Directors Daikin analyzes the effectiveness and appropriateness of the Board of Directors and the corporate governance system through interviews with the directors and Audit and Supervisory Board members and deliberations by the Board of Directors. The Board of Directors of the Company is assessed as “making appropriate decisions through open and active discussions, and playing an effective role in enhancing corporate value over the medium to long term.” We will continue to improve Board effectiveness, as well as engage in other initiatives, including discussions of cross-Group strategies and issues and enhanced reports of the status of business execution. Corporate Ofﬁ cer Remuneration To ensure the transparent management of its corporate ofﬁ cer per- sonnel and remuneration processes, Daikin has established the HRM Advisory Committee and the Compensation Advisory Committee. These committees engage in discussions and delibera- tions regarding issues including corporate ofﬁ cer nomination crite- ria, candidates, and remuneration. As of July 2021, both committees comprised six members, including four external direc- tors, one in-house director, and one executive ofﬁ cer in charge of personnel, with the committee chairman being chosen from the external directors. The Compensation Advisory Committee reports its opinion to the Chairman of the Board of Directors within the maximum limit authorized at the Annual General Meeting of Shareholders, and the Chairman of the Board of Directors determines the remuneration of directors after receiving approval to reappointment from the Board of Directors. Remuneration for Audit and Supervisory Board mem- bers is determined through discussions among Audit and Supervisory Board members within the maximum limit determined by a resolution at the Annual General Meeting of Shareholders. In response to the expectations of shareholders and in accor- dance with management policy, ofﬁ cer compensation is structured to motivate ofﬁ cers to continuously improve their performance over the medium to long term, and to contribute to increasing the value of the entire Group. Compensation for directors, excluding external directors, consists of ﬁ xed compensation, performance-linked remuneration that reﬂ ects short-term Group performance and the performance of the division in which a director is in charge, and stock compensation-type stock options that reﬂ ect medium- to long-term performance. In addition, the performance-linked ratio is set higher than the market rate to ensure sufﬁ cient incentives for performance improvement. External directors and Audit and Supervisory Board members receive ﬁ xed compensation only. Daikin determines compensation levels based on the relative position of its performance and remuneration levels compared to other leading manufacturing companies in Japan after reviewing objective data from a specialized external institution on the remu- neration of corporate ofﬁ cers active in approximately 300 Japanese companies listed on the First Section of the Tokyo Stock Exchange. In speciﬁ c terms, the three indices used by the Company are the sales growth rate, operating income margin and ROE, as well as the medium-to-long term increase in corporate value. Regarding performance-linked compensation for directors other than external directors, three performance-linked indicators by which to assess Companywide performance: net sales, operating income margin, and operating income have been selected. These indicators have a clear and mutual relation to Daikin Industries’ numerical management targets. Further, these indicators facilitate comparison with the performance of other companies in the indus- try. Net sales and operating income margin are calculated according to single-year performance versus budget. Operating income is cal- culated according to growth linked to medium- and long-term management plans. Performance-linked compensation for the chairman and presi- dent uses a performance-linked coefﬁ cient derived from Companywide performance-linked indicators. Performance-linked compensation for directors other than the chairman or president is determined using a performance-linked coefﬁ cient derived from Companywide performance-linked indicators, adjusted by sin- gle-year performance versus budget for net sales and operating income for their respective divisions (serving as indicators that rep- resent the targets of the work that each division carries out daily) and individual priority initiatives carried out over the short, medium, and long term. The number of compensatory stock options paid to directors excluding external directors is determined each ﬁ scal year by divid- ing a sum determined by taking into account the status and results of each individual’s efforts on short-term, medium- and long-term priority issues in the previous ﬁ scal year and that is based upon the standard for each position, by the average closing price of the most recent share price. These are exercisable from three to 12 years after the date of grant. Total Compensation for Directors and Audit and Supervisory Board Members (Fiscal 2020) Position Total Compensation (Millions of yen) Total of different types of compensation (Millions of yen) Fixed compensation Stock Options Persons paid Performance- linked compensation Directors (excluding external directors) Audit and Supervisory Board Members (excluding external Audit & Supervisory Board members) External Corporate Ofﬁ cers 1,217 518 178 520 70 92 70 92 — — — — 8 2 6 Accounting Auditor Compensation (Fiscal 2020) Auditing expenses 250 million yen Group-Wide Governance To meet governance needs on a Groupwide basis, including com- panies acquired through M&A, Daikin holds meetings of the Group Steering Meeting to ensure the thorough sharing of important management policies and basic strategies. Moreover, Daikin aims for corporate action based on uniﬁ ed Group objectives by promot- ing and strengthening support for the resolution of challenges of Group companies. In addition, to strengthen Group-based auditing and supervisory functions, Daikin is working to enhance its man- agement at the Group Auditors Meetings, which comprise audit managers from major Group companies. From the perspective of further strengthening corporate governance and Group manage- ment as a multinational company, Daikin has appointed a Chief Global Group Ofﬁ cer, who works to further improve the Group’s cohesiveness. Integrated Report 2021 43 Corporate Governance External Director/Audit and Supervisory Board Members’ Principal Activities Name Position Principal Activities Chiyono Terada External Director Ms. Terada attended 14 of the 15 Board of Directors meetings held during ﬁ scal 2020. Based on her abun- Tatsuo Kawada Akiji Makino Shingo Torii Ryu Yano Toru Nagashima dant experience in management and high-level insight, she can provide appropriate supervision of the Com- pany’s management from an independent perspective; provides management with the consumers’ point of view, including the importance of the Company’s corporate brand; and makes proactive proposals for mea- sures to further promote achievements of female employees. Mr. Kawada attended 13 of the 15 Board of Directors meetings held during ﬁ scal 2020. Based on his abun- dant experience in management and high-level insight, he can provide appropriate supervision of the Com- pany’s management from an independent perspective and actively provides suggestions from his broad and sophisticated perspective regarding changes in business models, innovation, and other matters. Mr. Makino attended 14 of the 15 Board of Directors meetings held during ﬁ scal 2020. Based on his abundant experience in management and high-level insight, he can provide appropriate supervision of the Company’s management from an independent perspective and actively provides suggestions from his broad and sophisti- cated perspective regarding matters in the ﬁ elds of energy, environment, and service businesses. Mr. Torii attended 12 of the 13 Board of Directors meetings (held since appointment) during ﬁ scal 2020. Based on his abundant experience in management and high-level insight, he can provide appropriate supervi- sion of the Company’s management from an independent perspective and actively provides suggestions from his broad and sophisticated perspective, including views on corporate management for proactively capturing customer needs and enhancement of corporate value through ESG activities. External Audit and Supervisory Board Member Mr. Yano attended 15 of the 15 Board of Directors meetings held and 15 of the 15 Board of Auditors meet- ings held during ﬁ scal 2020. Based on his abundant experience in management and high-level insight, particularly from his broad and sophisticated perspective developed over many years of experience in business overseas, he provides the necessary input in a timely fashion. Mr. Nagashima attended 15 of the 15 Board of Directors meetings held and 15 of the 15 Board of Auditors meetings held during ﬁ scal 2020. Based on his abundant experience in management and high-level insight, he provides the necessary input in a timely fashion based especially on his broad and sophisticated perspec- tive developed through experience in the management of global companies and manufacturing enterprises. Reasons for Election as External Director/Audit and Supervisory Board Member Name Position Reasons for Election Tatsuo Kawada External Director Mr. Kawada has served as Chairman and CEO of Seiren Co., Ltd., and has abundant experience and high-lev- Akiji Makino Shingo Torii Yuko Arai Ryu Yano Toru Nagashima el insight as a corporate manager. Mr. Kawada was elected as external director to make use of this experi- ence and to provide appropriate supervision of the conduct of management from an independent perspective, and, by offering proposals in relation to the overall management of the Company from his broad and sophisticated perspective, including views related to changing business models and innovation creation, to contribute to increasing Daikin’s corporate value. Mr. Makino has served as Chairman and CEO of Iwatani Corporation and has abundant experience and deep insight as a corporate manager. Mr. Makino was elected as external director to draw on this background and experience to provide appropriate supervision of the conduct of management from an independent point of view, and, by offering proposals regarding management from his broad and sophisticated perspective, includ- ing views related to the ﬁ elds of energy and environment as well as the services business, to contribute to increasing Daikin’s corporate value. Mr. Torii has served as Representative Director and Vice Chairman of the Board of Suntory Holdings Limited and has abundant experience and deep insight as a corporate manager, Mr. Torii was elected as external director to draw on this background and experience to provide appropriate supervision of the conduct of management from an independent point of view, and, by offering proposals regarding management from his broad and sophisticated perspective, including views regarding corporate management that anticipates customer needs and improving corporate value through ESG activities, to contribute to increasing Daikin’s corporate value. Ms. Arai has served as Director and Senior Vice President of ANA Akindo Co., Ltd., and has abundant experi- ence and deep insight as a corporate manager. Ms. Arai was elected as external director to apply her experi- ence to provide appropriate supervision of the conduct of management from an independent standpoint, and, by offering proposals regarding overall management from her broad and sophisticated perspective, including views on corporate management from customers’ perspectives and promotion of further participa- tion by female employees, to contribute to increasing Daikin’s corporate value. External Audit and Supervisory Board Member Mr. Yano has served as Chief Advisor (former Representative Director) at Sumitomo Forestry Co., Ltd., and has abundant experience and deep insight as a corporate manager. Mr. Yano carries out his duties from a broad and sophisticated perspective cultivated, in particular, from his wealth of overseas business experience. Mr. Yano was elected as external auditor to draw on his experience to supervise overall management at Dai- kin and to signiﬁ cantly upgrade the appropriateness of the audit function. Mr. Nagashima has served as Honorary Advisor (former Representative Director) at Teijin Limited, and has abundant experience and high-level insight as a corporate manager, particularly in the ﬁ eld of implementing paradigm shifts from manufacturing products to creating services. Mr. Nagashima was elected as external auditor to draw on his experience to supervise overall management at Daikin and to signiﬁ cantly upgrade the appropriateness of the audit function. Note: All of the Company’s external directors and external auditors meet the qualiﬁ cations for independence established by the Tokyo Stock Exchange 44 Message from the External Director The Daikin Group strives to raise corporate value through corporate governance. We carry out decision-making with foresight, as well as by executing business with greater speed, transparen- cy, and soundness in response to challenges and changes in the business environment. This year we spoke with Tatsuo Kawada, one of the Group’s external directors, about his thoughts on the characteristics of Daikin’s Board of Directors and his expectations for the strate- gic management plan “FUSION 25.” Open and Active Discussions Unique to Daikin Tatsuo Kawada External Director Tatsuo Kawada is the Chairman of Seiren Co., Ltd. During his many years as manager of this comprehensive textile manufacturer, he has succeeded in changing the company’s business model, creating innovation, and transforming the corporate culture. He has abun- dant experience and a high level of insight as a corporate manager. He has served as an external director of the Group since 2016. Characteristics and Effectiveness of the Board of Directors I feel that the Group’s Board of Directors is committed to appropriate decision-making through open and active discussions based on the concept of “integrated management.” Under this concept, the Board members assume responsibility for both business execution and management, where they fulﬁ ll these responsibilities by coordinating on all aspects of management through rapid strategic decision-making and through sound, appropriate supervision. My most important mission as an external director is to verify and ensure that decisions made by the Board of Directors are without question appropriate and relevant. In addition to sharing an outline of the agenda with the external directors prior to each Board meeting, the Group provides explanations on particularly important items ahead of time, which allows me to further deepen my understanding of these issues. Moreover, I feel that the meetings are extremely open because the Board’s chairper- son directs the proceedings in a manner that always provides an opportunity for participants to comment. As a global corporation, the way in which the Group broadcasts its environmental initiatives will also become extremely important in the future. Although the Board of Directors has already decided to endorse the TCFD and is investigating speciﬁ c measures to reduce greenhouse gas emissions in each business, I believe the Board of Directors will become more effective as it continues to discuss CSR and SDGs activities in a manner that includes goals. And as a Global Excellent Company, I look forward to the Board of Directors becoming increasingly engaged through more expan- sive deliberations on cross-Group strategies and issues, as well as through more detailed reports on addressing risk, for example. Strategic Management Plan “FUSION 25” “FUSION 25” illustrates the Group’s growth strategies in terms of both ﬁ nancial and non-ﬁ nancial aspects, including “Challenge to Achieve Carbon Neutrality,” “Promotion of Solutions Business Connected with Customers,” and “Creating Value with Air.” I also believe the Plan is extremely clear in conveying its intent to solve social problems in light of the COVID-19 pandemic while growing the business, and therefore expect to see the Group achieve sustained growth and development into the future. In contrast to Japan with its declining population, developing countries in Southeast Asia and other regions, as well as Africa, are likely to see further growth in the air-conditioning market. However, I felt, and therefore pointed out, that the Plan con- tained too few descriptions of speciﬁ c initiatives regarding the strategy for developing countries and Africa during the formula- tion and review stages. Ultimately, in addition to covering the establishment of a dominant position in regions with existing business operations, the Plan mentioned strengthening the foundation in developing countries and Africa, so I expect to see speciﬁ c developments here. Along with the recent manifestation of industrial competition and trade competition between nations, I have also come to recognize the importance of increasing the Group’s risk sensitivity as a global company and of reﬂ ecting this in medium-term planning, so I intend to monitor future developments in this area. Integrated Report 2021 45 Corporate Officers As of end of June 2021 Directors Date of Birth March 17, 1935 Number of the Company shares owned 67,700 Signiﬁ cant Concurrent Posts External Director of Hankyu Hanshin Holdings, Inc. Chairman of The Daikin Foundation for Contemporary Arts Chairman of Speciﬁ ed Nonproﬁ t Corporation of Kansai Philharmonic Orchestra March 1957 Entered the Company February 1979 Director of the Company February 1985 Managing Director of the Company June June 1989 Senior Managing Director of the Company 1994 President, Representative Director of the Company May 1995 Chairman of the Board and President, Representative Director of the Company 1996 President, Representative Director of the June Company June 2002 Representative Director, Chairman of the Board and CEO of the Company June 2014 Chairman of the Board and Chief Global Group Ofﬁ cer of the Company (Current position) Date of Birth January 11, 1949 July 2016 Chairman of the Internal Control Committee of the Company (Current position) Number of the Company shares owned 10,300 Responsibilities and Assigned Items Chairman of the Internal Control Committee April June June July 1973 Entered the Company 2002 Director of the Company 2004 Director and Senior Executive Ofﬁ cer of the Company 2006 Member of the HRM Advisory Committee of the Company (Current position), Member of the Compensation Advisory Committee of the Company (Current position) June 2007 Director and Senior Executive Ofﬁ cer of the Company June 2011 Representative Director, President and COO of the Company June 2014 Representative Director, President and CEO of the Company (Current position) Noriyuki Inoue Chairman of the Board and Chief Global Group Ofﬁ cer Masanori Togawa Representative Director, President and CEO Date of Birth January 27, 1940 July March 1962 Entered Fukui Seiren Kako Co., Ltd. (Currently, 2016 Member of the HRM Advisory Committee of the Company (Current position), Member of the Compensation Advisory Committee of the Company (Current position) Seiren Co., Ltd.) August 1981 Director of the above company August 1985 Managing Director of the above company August 1987 President of the above company June October 2005 President, CEO and COO of the above company June 2011 Chairman, President, CEO and COO of the 2003 President and COO of the above company above company June 2014 Chairman and CEO of the above company (Current position) June 2016 Director of the Company (Current position) Tatsuo Kawada Member of the Board (External) Number of the Company shares owned — Signiﬁ cant Concurrent Posts Chairman and CEO of Seiren Co., Ltd. External Director of Hokuriku Electric Power Company External Director of FUJIFILM Holdings Corporation Date of Birth September 14, 1941 April 2019 Chairman and CEO of Iwatani Corporation March 1965 Entered Iwatani Corporation June June June June April June 1988 Director of the above company 1990 Executive Director of the above company 1994 Senior Executive Director of the above company 1998 Executive Vice President of the above company 2000 President of the above company 2004 President and Executive Ofﬁ cer of the above company June 2012 Chairman, CEO and Executive Ofﬁ cer of the above company June July 2016 Director of the Company (Current position) 2016 Member of the HRM Advisory Committee of the Company (Current position), Member of the Compensation Advisory Committee of the Company (Current position) (Current position) Number of the Company shares owned 2,000 Signiﬁ cant Concurrent Posts Chairman and CEO of Iwatani Corporation Chairman of the Board of Iwatani Industrial Gases Corporation Representative Director and Chairman of the Board of Central Sekiyu Gas Corporation Limited Akiji Makino Member of the Board (External) 46 Date of Birth January 18, 1953 July April June 1980 Entered ITOCHU Corporation 1983 Entered Suntory Limited (Currently, Suntory Holdings Limited) March 1992 Director of the above company March 1999 Managing Director of the above company March 2001 Representative Director and Senior Managing Executive Ofﬁ cer of the above company March 2003 Representative Director and Executive Vice President of the above company October 2014 Representative Director and Vice Chairman of the Board of the above company (Current position) June 2020 Director of the Company (Current position) Shingo Torii Member of the Board (External) 2020 Member of the HRM Advisory Committee of the Company (Current position), Member of the Compensation Advisory Committee of the Company (Current position) Number of the Company shares owned 1,000 Signiﬁ cant Concurrent Posts Representative Director and Vice Chairman of the Board of Suntory Holdings Limited External Director of ROHTO Pharmaceutical Co., Ltd. Outside Director of Zojirushi Corporation Date of Birth January 27, 1961 Number of the Company shares owned — April April 1979 Entered ALL NIPPON AIRWAYS CO., LTD. 2014 Corporate Executive Ofﬁ cer of the above company April 2016 Senior Executive Ofﬁ cer of the above company Director and Senior Vice President of ANA Sales Co., Ltd. (Currently, ANA Akindo Co., Ltd.) 2021 Director and Senior Vice President of ANA Akindo Co., Ltd. (Current Position) April June 2021 Director of the Company (Current position) Signiﬁ cant Concurrent Posts Director and Senior Vice President of ANA Akindo Co., Ltd. Outside Director of Aichi Steel Corporation Date of Birth January 12, 1947 December 2014 Chairman of the Board of Daikin Fluorochemicals April June June June 1970 Entered the Company 2000 Associate Ofﬁ cer of the Company 2002 Senior Associate Ofﬁ cer of the Company 2004 Senior Executive Ofﬁ cer of the Company, Representative of China business of the Company (Current position), Member of Global Air-Conditioning Committee of the Company May 2009 Chairman of the Board and President of Daikin (China) Investment Co., Ltd. June 2011 Director and Senior Executive Ofﬁ cer of the Company June 2013 In charge of air conditioning business in Japan of the Company (Current position) June 2014 Representative Director and Senior Executive Ofﬁ cer of the Company (Current position) Date of Birth July 9, 1953 October 1983 Entered the Company July June 2005 Director and President of Daikin Europe N.V. 2007 Associate Ofﬁ cer of the Company, Member of Global Air-Conditioning Committee of the Company June June June 2008 Executive Ofﬁ cer of the Company 2010 Senior Executive Ofﬁ cer of the Company 2011 Director and Senior Executive Ofﬁ cer (Current position), Representative of air conditioning in Europe, the Middle East and Africa of the Company June 2018 Representative of Air Conditioning in Europe, the Middle East and Africa (excluding East Africa) of the Company (China) Co., Ltd. June 2021 Chairman of the Board of Daikin (China) Investment Co., Ltd. (Current position) Number of the Company shares owned 5,300 Responsibilities and Assigned Items Responsible for Air Conditioning Business in Japan, Representative of China Business, Chairman of the Board and President of Daikin (China) Investment Co., Ltd., June 2021 Representative of Europe, the Middle East and Africa of the Company (Current position), Chairman of the Board of Daikin Europe N.V. (Current position) Number of the Company shares owned 10,100 Responsibilities and Assigned Items Representative of Europe, the Middle East and Africa of the Company Chairman of the Board of Daikin Europe N.V. Yuko Arai Member of the Board (External) Ken Tayano Representative Director, Senior Executive Ofﬁ cer Masatsugu Minaka Member of the Board, Senior Executive Ofﬁ cer Integrated Report 2021 47 Corporate Officers Takashi Matsuzaki Member of the Board, Senior Executive Ofﬁ cer Yoshihiro Mineno Member of the Board, Senior Executive Ofﬁ cer Date of Birth December 23, 1958 June April June June June June 1982 Entered the Company 2004 Executive Ofﬁ cer of the Company 2008 Director and Senior Executive Ofﬁ cer of the Company 2010 Senior Executive Ofﬁ cer of the Company 2012 Director and Senior Executive Ofﬁ cer of the Company June 2015 In charge of R&D in North America (including June applied solutions, commercial & industrial refrigeration, ﬁ lter and dust collection) of the Company 2017 In charge of R&D in North America of the Company (Current position), in charge of Applied R&D Center of the Company (Current position), General Manager of Silicon Valley Technology Ofﬁ ce of the Company 2018 Senior Executive Ofﬁ cer of the Company, in charge of Applied Solution Business of the Company (Current position), in charge of Daikin Open Innovation Lab Silicon Valley of the Company (Current position) June June 2019 Senior Executive Ofﬁ cer of the Company 2020 Director and Senior Executive Ofﬁ cer of the Company (Current position) Number of the Company shares owned 8,000 Responsibilities and Assigned Items Responsible for Applied Solution Business, R&D in North America, Applied R&D Center, Daikin Open Innovation Lab Silicon Valley Date of Birth May 14, 1953 Number of the Company shares owned 6,500 Responsibilities and Assigned Items Responsible for Global Operations Division, ﬁ lter business, training, Director of Goodman Global Group, Inc. (non-resident), Director of Daikin Holdings (Houston), Inc. (non-resident) September 1978 Entered the Company May 2010 General Manager of Global Operations Division of the Company June June 2012 Executive Ofﬁ cer of the Company 2016 Senior Executive Ofﬁ cer of the Company, Director of Goodman Global Group, Inc. (Current position), Director of Daikin Holdings (Houston), Inc. (Current position) June 2019 Senior Executive Ofﬁ cer of the Company, in charge of ﬁ lter business of the Company (Current position), in charge of training of the Company (Current position) June 2021 Director and Senior Executive Ofﬁ cer (Current position), in charge of Global Operations Division of the Company (Current position) Date of Birth November 10, 1959 1997 Regional Director (Asia Paciﬁ c) of Carrier Aircon Limited June 2019 Member of the Board and Senior Associate Ofﬁ cer of the Company (Current position) 2001 Regional Vice President (North&East) of Voltas Number of the Company shares owned — Limited 2005 Senior Vice President of the above company 2006 Managing Director of Uniﬂ air India Pvt. Ltd. 2010 Deputy Managing Director & COO of Daikin May Airconditioning India Pvt. Ltd. September 2010 Managing Director & COO of the above company 2017 Managing Director & CEO of the above company July (Current position) June 2018 Member of the Board and Associate Ofﬁ cer of the Company, Regional General Manager of Air- Conditioning Business in India/East Africa of Global Operations Division of the Company (Current position) Kanwal Jeet Jawa Member of the Board and Senior Associate Ofﬁ cer Responsibilities and Assigned Items Regional General Manager of Air-Conditioning Business in India/ East Africa of Global Operations Division of the Company, Managing Director & CEO of Daikin Airconditioning India Pvt. Ltd. 48 Audit & Supervisory Board Members Date of Birth April 21, 1940 June 2020 Chief Advisor of the above company (Current 1963 Entered Sumitomo Forestry Co., Ltd. April December 1988 Director of the above company June June 1992 Managing Director of the above company 1995 Representative Director and Senior Managing Director of the above company April 1999 Representative Director and President of the above company June 2002 Representative Director and Executive Ofﬁ cer of the above company April 2010 Representative Director and Chairman of the Board of the above company June 2013 Audit & Supervisory Board member of the Company (Current position) April 2020 Director and Corporate Advisor of Sumitomo Forestry Co., Ltd. Ryu Yano Audit & Supervisory Board Member (External) position) Number of the Company shares owned — Signiﬁ cant Concurrent Posts Chief Advisor of Sumitomo Forestry Co., Ltd. Date of Birth January 2, 1943 Number of the Company shares owned — Signiﬁ cant Concurrent Posts Honorary Advisor of Teijin Limited 1965 Entered Teijin Limited 2000 Director of the above company 2001 Managing Director of the above company April June June November 2001 President & Representative Director COO of the above company June 2002 President & Representative Director CEO of the above company June April June June 2008 Chairman of the Board of the above company 2013 Director & Advisor of the above company 2013 Senior Advisor of the above company 2016 Audit & Supervisory Board member of the Company (Current position) April 2018 Honorary Advisor of Teijin Limited (Current position) Date of Birth January 21, 1952 Number of the Company shares owned 8,000 February 1982 Entered the Company June 2002 Director, General Manager of Global Operations Division of the Company, General Manager of DT Alliance Promotion Secretariat of the same division of the Company June 2004 Executive Ofﬁ cer, Member of Global Air- Conditioning Committee of the Company September 2004 Chairman and Member of the Board of Daikin U.S. Corporation June 2007 Senior Executive Ofﬁ cer of the Company, General Manager of New York Ofﬁ ce of the Company, President and Member of the Board of Daikin Holdings (USA), Inc., President and Member of the Board of Daikin U.S. Corporation June 2015 Audit & Supervisory Board member of the Company (Current position) Date of Birth July 31, 1960 Number of the Company shares owned 1,000 August 1989 Entered the Company July 2011 Department Manager of Accounting Group of Finance and Accounting Division of the Company, Director and President of Daikin Accounting Solutions Co., Ltd. June June 2016 Associate Ofﬁ cer of the Company 2019 Audit & Supervisory Board member of the Company (Current position) Toru Nagashima Audit & Supervisory Board Member (External) Kosei Uematsu Audit & Supervisory Board member (Standing) Hisao Tamori Audit & Supervisory Board member (Standing) Integrated Report 2021 49 Corporate Officers Executive Ofﬁ cers Position Name Responsibilities and Assigned Items Senior Executive Ofﬁ cer Koichi Takahashi Responsible for Finance, Accounting/Budget Operations, Promoting Operational Efﬁ - ciency, General Manager of Finance and Accounting Division Senior Executive Ofﬁ cer Masayuki Moriyama Responsible for Applied Solution Business in China Region, Refrigeration Business, Director of Daikin (China) Investment, COO of McQuay China Senior Executive Ofﬁ cer Satoshi Funada Responsible for Service Operations, General Manager of Air Conditioning Sales Division Senior Executive Ofﬁ cer Naofumi Takenaka Responsible for Human Resources, General Affairs Senior Executive Ofﬁ cer Yoshikazu Tayama Department Manager of Budget and Administration Group in Finance and Account- ing Division Senior Executive Ofﬁ cer Katsuyuki Sawai Responsible for CSR, Global Environment Affairs, Public Relations, General Manager of Tokyo Ofﬁ ce, Manager of Public Relations Department in Tokyo Ofﬁ ce, Chairman of CSR Committee Senior Executive Ofﬁ cer Tsutomu Morimoto Responsible for Goodman Group Business, Executive Secretarial Department, Coop- eration within North America Senior Executive Ofﬁ cer Yuji Yoneda Responsible for Air-Conditioning Product Development (including Applied Solution and Refrigeration), General Manager of Technology and Innovation Center Senior Executive Ofﬁ cer Masaki Saji General Manager of Human Resources Division, Department Manager of Diversity Promotion Group in Human Resources Division Senior Executive Ofﬁ cer Toshio Ashida Responsible for Corporate Planning, Electronics Business, Technology Innovation Strategy Ofﬁ ce in Technology and Innovation Center Senior Executive Ofﬁ cer Yasushi Yamada Responsible for Safety Executive Ofﬁ cer Hitoshi Jinno General Manager of Filter Division Executive Ofﬁ cer Kota Miyazumi Responsible for Marketing, Corporate Communication, General Manager of Mar- keting Research Division, Department Manager of Planning Group in Marketing Research Division, Chairman of Information Disclosure Committee Executive Ofﬁ cer Masafumi Yamamoto Responsible for Corporate Ethics, Compliance, Legal Affairs, Information Security, General Manager of the Legal Affairs, Compliance and Intellectual Property Center, Chairman of Corporate Ethics and Risk Management Committee 50 Position Name Responsibilities and Assigned Items Executive Ofﬁ cer Akira Murai Responsible for Defense Systems Business, SCM, Logistics, Co-Creation Projects mem- ber of Technology and Innovation Center, General Manager of Yodogawa Plant Executive Ofﬁ cer Makio Takeuchi Responsible for Global Procurement Executive Ofﬁ cer Yoshiyuki Hiraga Responsible for Chemicals Business, Chemical Environment/Safety Executive Ofﬁ cer Hideki Maruoka Responsible for Oil Hydraulics Business Executive Ofﬁ cer Shigeki Morita Responsible for PL/Quality (Air Conditioning/Applied/Refrigeration), Alliance Promo- tion with Gree Electric Appliances Inc., PD Afﬁ liation Alliance Promotion, Concur- rent Development Promotion, General Manager of Air-Conditioning Manufacturing Division, General Manager of Sakai Plant Executive Ofﬁ cer Katsumi Kawahara Deputy General Manager of Technology and Innovation Center (Responsible for Promoting Industry, Government and Academia Collaboration) Executive Ofﬁ cer Shoji Uehara General Manager of Global Operations Division Executive Ofﬁ cer Hiroaki Ueda Responsible for DX Strategy Promotion, General Manager of Corporate Planning Department Executive Ofﬁ cer Katsuya Miura General Manager of Chemicals Division, Manager of Planning Department in Chemicals Division Executive Ofﬁ cer Kenji Matsuba Deputy General Manager of Air-Conditioning Manufacturing Division (Responsible for Business Strategy), Manager of Planning Department in Air-Conditioning Manufacturing Division Executive Ofﬁ cer Kimikazu Hatou Deputy General Manager of Air-Conditioning Manufacturing Division (Responsible for Product Development), Manager Responsible for Product Development in Refrig- eration Division, General Manager of Shiga Plant Executive Ofﬁ cer Tomohiro Mizuguchi Responsible for IT Promotion, Manager of General Affairs Department, Manager of General Affairs Group in General Affairs Department Executive Ofﬁ cer Keiko Mori Responsible for Human Resource Development and Maximizing the Talents of Women, Department Manager Responsible for Executive Secretarial in Executive Secretarial Department Integrated Report 2021 51 Compliance/Risk Management Taking an Integrated Approach to Promoting Compliance and Risk Management Identiﬁ cation of Important Risks and Planning and Implementation of Countermeasures At Daikin, the Internal Control Committee, chaired by the President, checks and conﬁ rms that internal controls, including risk management, are functioning properly throughout the Group. On top of this, the Corporate Ethics and Risk Management Committee promotes the manage- ment of operational risk and thorough compliance. Chaired by the ofﬁ cer in charge of corporate ethics and compliance, the Corporate Ethics and Risk Management Committee is comprised of each department head and the presidents of major Group companies in Japan. In principle, the Committee meets twice a year to identify issues that need to be strengthened and promote their resolution, and to report on the status of initiatives at overseas Group companies. Steps are also taken to formulate and develop compre- hensive common rules to tackle compliance and risk man- agement for overseas Group companies. The Daikin Group established its Group Conduct Guidelines that clearly outline required conduct for individ- ual ofﬁcers and employees and appointed a Compliance and Risk Management Leader (CRL) for each division and each of the main Group companies in Japan and overseas to ensure thorough compliance. By regularly checking the status of compliance and risk management, sharing infor- mation, and disseminating these Guidelines, every effort is being made to foster “culture free of compliance viola- tions” and to elevate “mechanisms to ensure that there are no compliance violations.” In ﬁ scal 2020, compliance meetings were held in Asia, Oceania, Europe, and China to share information on self-assessment as well as on education and training initiatives. Self Assessment System to Check the Status of Conduct Guidelines Compliance Once a year, Daikin uses its unique self assessment system to ensure that the Group is in thorough compliance with the Group Conduct Guidelines. Using self assessments, employees check their own actions based on the Group Conduct Guidelines. Drawing on the results, employees identify issues for the organization and put in place countermeasures. The issues identiﬁ ed and countermea- sures are reported to and shared with the Corporate Ethics and Risk Management Committee. With the rapid expansion of the Group’s business, the Daikin Group has introduced risk management across the Group to gain an overall picture of risks from a global per- spective in an accurate and prompt manner and to reduce risks. Every year, each division and main Group companies overseas and in Japan identify critical risks through risk assessments. Based on the ﬁ ndings, each Group company puts forward and implements countermeasures and works diligently to reduce these risks. The status of each compa- ny’s risk reduction measures is shared with and reported to the Corporate Ethics and Risk Management Committee. For example, in ﬁ scal 2020, Daikin Industries made efforts toward key themes such as “Information management risk,” “Economic security risk,” “Quality risk,” “Natural disaster risk,” “Strengthening overseas crisis management functions,” and “Harassment prevention.” Corporate Ethics and Risk Management Board of Directors Corporate Ethics and Risk Management Committee Organization body for promoting corporate ethics and risk management activities for the entire Group Officer in Charge of Compliance and Corporate Ethics Persons in charge of promoting corporate ethics and risk management activities for the entire Group Officer in Charge Divisions and Group Companies Legal Affairs, Compliance and Intellectual Property Center Staff division of the director in charge of corporate ethics and compliance P r o m o t i o n E x e c u t i o n Persons in Charge of Corporate Ethics and Risk Management Persons responsible for taking action on corporate ethics and risk management Compliance and Risk Management Leaders Meeting Compliance and Risk Management Leaders Persons in charge of promoting corporate ethics and risk management 52 Response to TCFD For Daikin, climate change represents one important issue affecting its business continuity. Daikin endorses the recommendation of the Task Force on Climate-Related Financial Disclosures (TCFD)* intended to mitigate the risk of instability in ﬁ nancial markets attributed to climate change. We are now working to analyze and reﬂ ect the risks and opportunities of climate change as they as related to our business operations into our management strategies and risk management. We will disclose the progress of such appropriately as we aim for further growth while contributing to a decarbonized society. * TCFD was established in 2015 by the Financial Stability Board. It recommends that companies disclose information about the ﬁ nancial impacts of climate change after evaluating related business risks and opportunities. Daikin’s Response to TCFD’s Recommended Disclosures Governance The organization’s governance around climate-related risks and opportunities • Establish climate-related issues as important CSR issues of Daikin and manage them at the executive man- agement level through the CSR Committee, chaired by the ofﬁ cer in charge of CSR • The CSR Committee discusses Daikin’s initiatives, targets, risks and opportunities concerning climate change, follows up on results, and reports to the Board of Directors Strategy The actual and potential impacts of climate-related risks and opportuni- ties on the organization’s business, strategy and ﬁ nancial planning Risk Management Process for identifying, assessing and managing climate-related risks • Analyze the climate scenarios based on The Future of Cooling by the International Energy Agency (IEA) • Demand for air conditioning is expected to more than triple current levels by 2050. While there is the risk of stricter energy regulations for air conditioning and tighter regulations on refrigerants with a high global warming potential, this will also be an opportunity for Daikin to expand its strengths of highly environmen- tally conscious products and services • Environmental Vision 2050 calls for net zero greenhouse gas emissions by 2050; and we have incorporated greenhouse gas reduction targets and main measures into the FUSION 25 Strategic Management Plan • Gather information on climate risks from business bases around the world based on scenario analysis, evalu- ate priorities, and specify climate risks that should be reﬂ ected in strategy • Recognize climate risks as risks that signiﬁ cantly impact Daikin’s business strategy, and integrate them into the company-wide risk management process • Check the status of company-wide risk management by the Internal Control Committee chaired by the President and CEO, and report to the Board of Directors Metrics and Targets The metrics and targets used to assess and manage relevant climate- related risks and opportunities • Under Environmental Vision 2050, aim to reduce greenhouse gas emissions to net zero by 2050 • Under the FUSION 25 Strategic Management Plan, set targets to reduce greenhouse gas emissions from our own business operations (30% or more by 2025 and 50% or more by 2030 compared to BAU with 2019 as the base year) Climate Related Risks and Opportunities and Potential Impacts Category Impact on Daikin’s business Transition Risks Stricter regulations on refrigerants If regulations on refrigerants become too strict, there is a possibility that existing air conditioners no longer compliant with these regulations will become obsolete. Tight supply and demand for electricity There is a possibility that the spread of air conditioners in emerging countries will increase electricity usage and make it difﬁ cult to increase sales of air con- ditioners due to electricity shortages. Probability of occurrence Potential ﬁ nancial impacts High Large High Large Physical Damage to production bases There is a possibility that ﬂ ooding caused by typhoons could cause our plants to shut down or stop the supply of parts due to the shutdown of suppliers. Medium Medium Opportunities Transition Stricter regulations on refrigerants Companies without technologies compliant with regulations on refrigerants will be weeded out, resulting in increased sales of air conditioners using refrigerants with lower global warming potential, which is our strength. Stricter regulations on energy efﬁ ciency Companies without technologies compliant with stricter regulations on ener- gy efﬁ ciency will be weeded out, resulting in increased sales of air condition- ers with high energy efﬁ ciency, which is our strength. Stricter regulations on the use of fossil fuels Regulations on the use of fossil fuels continue to become stricter, and since combustion heaters will be subject to them, there will be an increase in sales on growing demand for heat pump heaters, which is our strength. High Large High Large High Large Integrated Report 2021 53 Enhancing the Management Foundation As part of “FUSION 25,” Daikin raised ﬁ ve themes to enhance the management foundation: “Strengthening Technology Development Capabilities,” “Establishing a Robust Supply Chain,” “Promoting Digital Transformation for Innovation,” “Creating Market Value/Enhancing Advocacy Activities,” and “Improving HR Capabilities Through Advanced Diversity Management.” Strengthening Technology Development Capabilities We believe that technological development capability is the lifeline of a manufacturer. Amid rapidly changing external con- ditions, we will accelerate the development of distinctive tech- nologies and products, and their contribution to business expansion, by promoting both internal and external co-creation that includes collaboration among industry and academia. We will focus on allocating resources with the establishment of four key domains (three growth strategy domains + one domain with future themes). ● Key domains and themes Target business contributions in FUSION 25 (3 growth strategy domains) Future themes (1) Challenge to achieve carbon neutrality Enhanced heat pumps Next-generation refrigerants New environment- related business Energy creation Chemicals’ environmental technology (2) Promotion of Solutions business AC Solutions Refrigeration Solutions (3) Creating value with air Safe and reliable IAQ/AE Data utilization (4) Development and research on advanced technologies for the future Effective use of resources/energy Alternative technologies for vapor compression Technologies for sustainable business growth while resolving social issues P r o m o t e t h r o u g h c o l l a b o r a t i v e i n n o v a t i o n p r o j e c t s ● Core/fundamental technology themes in existing businesses AC core Chemicals core Analysis/evaluation Design Digital technology utilization for enhanced technology development capabilities 54 R&D Bases Enhanced overseas R&D bases as well as recruitment and development of human resources to promote innovation to accelerate business contributions globally Europe Heat pump space and Heat pump space and water heaters water heaters USA Applied Solutions Applied Solutions Japan TIC Control tower Control tower •• Technology strategy formulation Technology strategy formulation •• Core product development Core product development •• AI/IoT technologies AI/IoT technologies China IAQIAQ India Cooling only inverter Cooling only inverter For high ambient For high ambient temperature zone temperature zone Asia We will pursue technology development through internal and external collaborative innovation projects centering on the Technology and Innovation Center —the technology control tower of Daikin Group—to accelerate the creation of results. In order to promote key domains and strategic themes globally, we will strengthen development capabilities and collaboration among our overseas development sites while working to recruit and train personnel. Aiming to Implement New Technologies in Society by Promoting Industry-Academia Collaboration In partnership with professors from the University of Tokyo and related venture com- panies, we are working on creating and deploying in society future technologies and business models in pursuit of “new value with air.” In February 2021, we invested in Fairy Devices Inc., a University of Tokyo-based start-up. We will expand the supply system in Japan and overseas for THINKLET®—a smart wearable device we are jointly developing that constitutes a remote work support solution for training air-condi- tioning service engineers—and accelerate the strengthening of our global service business and the transmission of expertise. With Kyoto University, we reviewed joint R&D themes in terms of healthcare, the environment, energy, and air-conditioning culture in Asia and Africa, with a view to a new normal era. We have established ﬁ ve co-creation programs and will pursue them based on an integrated approach to the arts and sciences. In addition, we will partner with the information science depart- ments at Osaka University to create safe and reliable IAQ/AE and realize next-gener- ation smart buildings using the new campus (at Minoh, Japan). Service engineers wearing THINKLET® are support- ed by skilled personnel from remote locations Integrated Report 2021 55 Enhancing the Management Foundation Establishing a Robust Supply Chain We are working to further solidifying our supply system while uncertainties such as global supply chain disruptions and increasing decoupling on a global scale are rapidly growing. To that end, we are taking steps to shift to region-based pro- curement to achieve local production for local consumption and establish concurrent production and backup systems to avoid risks. In addition, we aim to centralize supply chain infor- mation utilizing digital tools to realize optimized SCM. The introduction and use of simulation tools will enable us to respond to demand ﬂ uctuations, make more sophisticated decisions in the event of abnormalities, and achieve overall optimal planning. Making practical use of solutions that support the planning and execution of optimal production and sales plans that respond immediately to changes in demand As part of IoT-based collaboration with Hitachi, Ltd., Daikin has applied Hitachi Group’s SCM optimization simulation technology*1 in the Company’s Chemicals business to put into prac- tical use solutions that support the planning and implementation of optimal production and sales plans that respond immediately to demand ﬂ uctuations. Until now, manufacturing and sales measures—such as which products to produce, how much and at which locations, and where to sell them—had to be formulated manually by those in charge, making the process very time-consuming. Based on the supply-demand balance of multiple manufacturing and sales bases, this solution can automatically present manufacturing/sales measures and pro- duction plans that are optimized to maximize key performance indicators (KPIs) including for sales and proﬁ ts. We have conﬁ rmed that it is possible to create about 60 times as many patterns in a short period of time as conventional methods, and that the time required for decision making can be reduced by about 95% since consensus can be formed quickly based on quantitative simulation results*2. Going forward, we will continue to use digital technology to enhance the sophistication of ECM and SCM. Substitutable manufacturing, bottleneck elimination Supporting the planning and execution of produc- tion and sales plans by connecting global manu- facturing and sales bases Spare capacity utilization, increased production of highly proﬁ table products *1 Technology that simulates optimal production bases, production volume, sales volume, and total costs, etc., using mathematical optimization methods developed by Hitachi Solutions, Ltd. *2 Survey examples during the Daikin and Hitachi demonstration. The number of patterns created per unit of time, and the time to determine whether pro- duction is possible after demand is known. Promoting Digital Transformation for Innovation We will work to create new products, services, and business models and fundamental business process innovations with signiﬁ cantly enlarged digital investments. We will build a platform for linking and analyzing data to expand the Solutions business as well as a system to manage customer information and utilize it to offer value throughout the AC equipment lifecycle. In addition, we will increase con- nected equipment to obtain equipment data as well as obtain data on people, buildings, and others that lead to future busi- ness development through external collaboration. Furthermore, we will reform processes for ECM, SCM, and development, construct systems for upgrading the management foundation, and increase the efﬁ ciency of indirect operations using robotic process automation and AI. To promote such digital transformation, we will pursue the development of 1,500 human resources in digital ﬁ elds through the Daikin Information and Communications Technology College and other initiatives. Selected for “DX Stocks 2020” The Company was selected as one of the “Digital Transformation Stocks (DX Stocks) 2020” by the Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange. The “DX Stocks” category selects companies that are actively engaged in “DX” activi- ties, such as using data and digital technologies to transform their products, services and business models, as well as radically reforming their business processes. We are actively pursuing the use of AI/IoT technology to provide high-value-added air-conditioning to society. For example, we launched the spatial data co-creation plat- form “CRESNECT” with partner companies. As its ﬁ rst project, we opened the co-work- ing space “point 0 Marunouchi” in 2019. Combining the Company’s cutting-edge technology, data, and expertise, we are conducting ﬁ eld tests aimed at creating “ofﬁ ce spaces of the future” that will improve productivity and maintain health. Looking ahead, we will continue to create innovations that help solve social issues by steadily advancing DX through collaborative creation both internally and externally. Lecture at the Daikin Information and Communi- cations Technology College 56 Creating Market Value/Enhancing Advocacy Activities As a driving force in the industry, we will participate in the cre- ation of common global rules and the formation of interna- tional public opinion. We will continue to increase our market value by gaining the understanding of a wide range of stake- holders regarding our technologies and products that lead to the resolution of social issues, such as realizing carbon neutrali- ty and helping to improve air quality. To mitigate global warming, we will work to expand the use of R32, inverter units, and heat pump space and water heaters, while promoting the recovery and recycling of refrigerants. To create new value for air, we will engage with universities, research institutes, and industry in an effort to create new safe- ty and security standards. Selected among “Clarivate Top 100 Global Innovators 2021” Daikin was selected among “Clarivate Top 100 Global Innovators 2021,” a list of the world’s most innovative companies and institutions based on analysis of patent data by global information services company Clarivate Plc. This year marks the eighth time over- all and the seventh consecutive year that Daikin has been selected. As an air-conditioning manufacturer with global business operations, Daikin allows the use of some of its patents by other companies in order to contribute to the reduc- tion of greenhouse gases for the industry overall. For example, Daikin granted free access worldwide to 93 patents related to air-conditioning equipment utilizing R32, a refrigerant with low global warming potential (GWP). Since 2019, Daikin has expanded the scope of patents and pledged the non-assertion of those patents to support conver- sion to refrigerants with high energy savings and low GWP. In recognition of these efforts, Daikin was awarded the “Minister of Economy, Trade and Industry Award” at the Intellectual Property Achievement Awards for ﬁ scal 2020 conducted by the Ministry of Economy, Trade and Industry and the Japan Patent Ofﬁ ce. Daikin will continue to work on R&D activities for creating innovation that provides new value to society as it further strengthens the intellectual property activities that support them. Improving HR Capabilities through Advanced Diversity Management Responding to the changing times, we will further reﬁ ne our corporate culture and organizational DNA based on “peo- ple-centered management”—which is the foundation of our growth and development—and will work to ensure that such initiatives are thoroughly implemented and take hold Groupwide. We will develop human resource measures that enable all employees around the world to maximize their diverse individuality and unlimited potential for growth. As the impact of COVID-19 changes the way we work and live, we will ﬂ exibly respond to the “new normal” in order to create new value and achieve further growth and development. Granted “Nadeshiko Brand” Designation in Fiscal 2020 for the Eighth Time over Seven Consecutive Years The Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange (TSE) jointly selects and publicizes TSE-listed enterprises that are outstanding in terms of maximizing the talents of women in the workplace under the “Nadeshiko Brand.” Daikin was granted the Nadeshiko Brand designation in ﬁ scal 2020, marking the eighth time over seven consecutive years. Daikin considers diversity management to be a pillar of its management approach. In partic- ular, we have been working on maximizing the talents of women under a project directly con- trolled by top management that was launched in 2011. In ﬁ scal 2020, the number of female managers and the ratio of female employees increased, as did the number of candidates for management positions. We have been steadily expanding the scope of our activities through a series of concrete measures. The proactive nature of these efforts was evaluated highly, and we believe that this led to the Company being granted the “Nadeshiko Brand” designation. We have also formulated an action plan for maximizing the talents of women toward the end of ﬁ scal 2025, setting quantitative goals such as increasing the number of female executives appointed internally to at least one position and the number of female managers to 120, as well as maintaining a parental leave utilization rate of at least 90% for both men and women. Going forward, we will accelerate our efforts to promote diversity management with the aim of creating an environment where every employee can demonstrate their full potential. Integrated Report 2021 57 Eleven-Year Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 2011 2011 2012 2012 2013 2013 2014 2014 2015 2016 2017 2018 2019 2020 2021 Operating Results (for the year): Net sales Gross proﬁ t Selling, general and administrative expenses Research and development expenses (Note 1) Operating income EBITDA (Note 2) Net income attributable to owners of the parent Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash ﬂ ow (Note 3) Net cash provided by (used in) ﬁ nancing activities Financial Position (at year-end): Total assets Total interest-bearing liabilities Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Free cash ﬂ ow Cash dividends Ratios (%): Gross proﬁ t margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio ¥1,160,331 ¥1,218,701 ¥1,290,903 ¥1,787,679 361,665 286,210 30,771 75,455 127,168 19,873 ¥78,411 (23,306) 55,105 (37,623) 371,902 290,709 32,987 81,193 131,719 41,172 ¥44,967 (62,955) (17,988) (1,113) 388,046 299,419 33,569 88,627 140,151 43,585 ¥103,161 (218,386) (115,225) 143,520 568,323 411,786 40,177 156,537 235,439 92,787 ¥179,713 (80,835) 98,878 (38,249) ¥1,132,507 ¥1,160,564 ¥1,735,836 ¥2,011,870 372,481 487,876 389,891 502,309 705,871 618,118 693,944 801,854 ¥ 68.14 ¥ 141.37 ¥ 149.73 ¥ 318.33 1,672.74 1,725.64 2,123.10 2,748.08 189 36.00 (62) 36.00 (396) 36.00 339 50.00 31.17% 30.52% 30.06% 31.79% 6.50 10.96 4.04 43.08 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 8.76 13.17 13.07 39.86 Notes: 1. R&D expenses are included within general and administrative expenses and manufacturing expenses. 2. EBITDA = Operating income + depreciation and amortization. 3. Free cash ﬂ ow = Net cash provided by operating activities + net cash used in investing activities. 4. Accompanying a change in accounting policy, effective from April 1, 2014, the consolidated ﬁ nancial statements for the ﬁ scal year ended March 31, 2014 and subsequent years have been revised. 5. Effective from April 1, 2018, the consolidated ﬁ nancial statements for the ﬁ scal year ended March 31, 2018 have been revised in accordance with a change in accounting policy. Net Sales Operating Income (¥ billion) 2,500 2,000 1,500 1,000 500 0 (¥ billion) 300 250 200 150 100 50 0 11 12 13 14 15 16 17 18 19 20 21 11 12 13 14 15 16 17 18 19 20 21 58 Net Income Attributable to Owners of the Parent (¥ billion) 200 150 100 50 0 11 12 13 14 15 16 17 18 19 20 21 2011 2012 2013 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 Millions of Yen 2021 2021 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 ¥2,481,109 ¥2,550,305 ¥2,493,387 649,902 459,314 42,892 190,588 268,354 119,675 711,576 493,704 46,138 217,872 302,075 136,987 730,935 500,166 53,870 230,769 315,798 153,939 798,829 545,089 62,051 253,740 348,574 189,052 868,923 592,668 65,216 276,255 375,570 189,049 884,898 619,385 67,968 265,513 393,999 170,731 ¥160,423 ¥226,186 ¥267,663 ¥223,740 ¥250,009 ¥302,167 (77,331) 83,092 (83,073) (105,493) (128,823) (127,459) (165,773) (156,187) 120,693 (85,422) 138,840 (73,544) 96,281 (93,955) 84,236 (68,721) 145,980 (169,934) 864,136 625,513 71,738 238,623 372,217 156,250 ¥374,691 (159,667) 215,024 98,942 ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,475,708 ¥2,700,891 ¥2,667,513 ¥3,239,663 662,413 608,981 609,430 554,371 585,642 553,807 1,024,725 1,014,409 1,111,636 1,296,553 1,416,075 1,434,968 ¥ 410.19 ¥ 469.23 ¥ 526.81 ¥ 646.53 ¥ 646.39 ¥ 583.61 3,511.34 3,473.54 3,802.10 4,433.62 4,841.15 4,904.46 285 100.00 413 120.00 475 130.00 329 140.00 288 160.00 499 160.00 751,213 1,665,689 ¥ 533.97 5,691.85 735 160.00 33.94% 34.82% 35.76% 34.87% 35.02% 34.70% 34.66% 9.95 14.01 13.10 45.26 10.66 14.78 13.44 46.30 11.29 15.45 14.48 47.18 11.08 15.22 15.70 52.37 11.13 15.14 13.94 52.43 10.41 15.45 11.98 53.79 9.57 14.93 10.08 51.42 Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 75 60 45 30 15 0 11 12 13 14 15 16 17 18 19 20 21 (¥ billion) 1,800 1,500 1,200 900 600 300 0 11 12 13 14 15 16 17 18 19 20 21 (¥ billion) 3,500 2,800 2,100 1,400 700 0 11 12 13 14 15 16 17 18 19 20 21 Integrated Report 2021 59 Financial Review Summary of the Period During the ﬁ scal year ended March 31, 2021, the overall world economy slowed signiﬁ cantly as economic activity stagnated due to the global spread of the coronavirus (COVID-19). While some countries saw a recovery, there were also regions where the infection spread again, prolonging the impact of the dis- ease. Although the U.S. economy slowed due to a decline in personal consumption in the ﬁ rst half of the period, there were signs of a recovery from the second half as government eco- nomic measures and strong online sales laid the groundwork for increased consumption. The European economy was sup- ported by a recovery in exports, despite the continued slow- down in personal consumption attributable to prolonged restrictions on activities. In the economies of Asia and emerg- ing countries, domestic demand was sluggish due to restric- tions on activities, but there were signs of economic recovery, helped by gains in exports and government spending. The Chinese economy continued a recovery trend buoyed by the quick resumption of economic activities and increases in exports and government infrastructure investment in the infor- mation and telecommunication as well as energy sectors. Despite export gains to China and a recovery in production activities, sluggish personal consumption placed downward pressure on the Japanese economy. Amid this environment, the Daikin Group launched cross-di- visional projects, and focused on dealing with the COVID-19 pandemic in terms of business operations, including produc- tion, procurement, and sales. In particular, the Group worked to develop and launch new products related to air quality, such as air puriﬁ ers and ventilation products, by capitalizing on the growing awareness for the safety and assurance of indoor air quality and air environments. In addition, while procurement from sales networks, production sites, and suppliers was affect- ed in each country, the Group worked to maintain its product supply system. Although market environments vary according to country and region, sales are returning to a recovery trend, particularly in residential air-conditioning equipment. In addition, the Daikin Group set “Accelerating Our 3 Structures of Collaborative Innovation, Let Us Win in this Era of Change” (3 Structures of Collaborative Innovation: Collaborative Innovation with Customers, Collaborative Innovation with External Bodies, and Collaborative Innovation within the Group) as the slogan for its Annual Group Policy for 2020. The Group made efforts to strengthen sales and market- ing capabilities; foster new product development; build ﬂ exible production and procurement systems; improve quality; enhance human resources capabilities; and reduce both ﬁ xed and variable costs in each region around the world. In the ﬁ scal year under review, the Daikin Group’s net sales fell to ¥2,493.4 billion (a year-on-year decrease of 2.2%). As for proﬁ ts, consolidated operating income dropped to ¥238.6 billion (a decline of 10.1% from the previous ﬁ scal year). Net income attributable to owners of the parent decreased 8.5%, to ¥156.3 billion. Performance by Business Segment Air-Conditioning and Refrigeration Equipment Total sales of the Air-Conditioning and Refrigeration Equipment segment decreased 1.5% from the previous ﬁ scal year, to ¥2,273.8 billion. Operating income declined 5.5% year on year, to ¥223.1 billion. • Japan In the Japanese commercial air-conditioning equipment mar- ket, industry demand declined, particularly in the market for stores, due to the spread of COVID-19. As air quality needs rose for ventilation and disinfection, the Daikin Group expand- ed its proposals for air environments using systems that com- bine air-conditioning equipment and ventilation equipment. This includes the launch of new products in the “Heat Reclaim Ventilator” lineup, high-performance ventilation equipment that can ventilate a room without affecting the room’s tem- perature. The Group strengthened its efforts to convey its value to the market in order to meet expectations as an air-condi- tioner manufacturer, such as by developing “untact” sales uti- lizing online activities, stimulating demand through advertising focused on ventilation and disinfection, and opening an “Air Consultation Service” to directly answer customer concerns. However, net sales of commercial air-conditioning systems were lower year on year due to factors including reduced demand. Domestic and Overseas Sales Operating Income and Operating Income Margin Net Income Attributable to Owners of the Parent (¥ billion) 2,500 2,000 1,500 1,000 500 0 2017 2018 2019 2020 2021 (¥ billion) 280 (%) 12 (¥ billion) 200 210 140 70 0 2017 2018 2019 2020 2021 2021 9 6 3 0 150 100 50 0 2017 2018 2019 2020 2021 Domestic Overseas sales Operating income Operating income margin 60 In the Japanese residential air-conditioning equipment mar- ket, industry demand for both room air conditioners and air puriﬁ ers exceeded the previous ﬁ scal year because of demand for additional purchases of air-conditioning equipment due to changes in residential applications including remote work, as well as growth in demand for home appliances due to people spending more time at home. The Group responded to market needs by launching a series of high value-added products uti- lizing proprietary technologies, such as the Streamer disinfec- tion unit, waterless humidiﬁ cation, and room air conditioner air supply ventilation, including the room air conditioners “Urusara X” and “Ururu Sarara Air Puriﬁ er.” Additionally, despite disrup- tions to its supply chain caused by COVID-19, the Group worked to maintain a stable supply system and increased sales. Through these efforts, the Group’s net sales of residential air-conditioning systems increased year on year. • Americas Region In the Americas, net sales decreased year on year as a whole due to the impact of COVID-19. Residential air-conditioning system demand was positively affected by people spending more time at home, increased adoption of remote work, and favorable weather conditions. However, net sales declined year on year as the pandemic took hold throughout the United States, which contributed to tight supply as a result of the tem- porary closure of factories. Net sales of commercial air-condi- tioning systems also declined year on year due to the review and suspension of projects in the retail and restaurant as well as certain other industries. In the market for large buildings (Applied Systems), the Group worked to strengthen its sales network and expand sales of ventilation products, particularly of rooftop units and air-handling units (large commercial air-conditioning systems that meet a wide variety of air-condi- tioning needs depending on the type of business and room application). Despite these endeavors, net sales fell below the level of the previous ﬁ scal year due to a slowdown in the mar- ket caused by the spread of infection. • China In China, the Group strengthened its lineup of air and ventila- tion products to meet the changes in the market and expand- ed online sales. In April and May, there was some impact from sales activities restrictions, but sales recovered from July onwards, and annual net sales exceeded the previous ﬁ scal year. The Group maintained a high level of proﬁ ts by reducing ﬁ xed costs and promoting cost reductions. Recovery was rapid for residential air-conditioning systems, and the Group expand- ed sales by developing sales that combined the Internet with its “PROSHOP” specialty shops, and simultaneously strengthening online sales in order to capture new customers and demand for replacements. In the commercial retail market where recovery in demand was slow for stores and ofﬁ ces, the Group expand- ed customer contact points by leveraging ventilation and clean- ing and captured replacement as well as additional demand. In the large-scale projects market, the Group promoted collabora- tion with major developers in order to secure net sales. In the Applied Systems air-conditioning equipment market, the Group strengthened sales in growth ﬁ elds, such as infrastructure, data centers and other information-related businesses, as well as in repair and maintenance. • Asia/Oceania Region In Asia and Oceania, sales dropped signiﬁ cantly due to the sus- pension of business activities in many countries in April because of governmental decrees in response to the spread of COVID-19. However, the Group exploited growing demand from the relaxation of restrictions by strengthening sales from May onwards, and sales for the fourth quarter (January to March) recovered to nearly the same level year on year. As restrictions were eased in residential air-conditioning systems, the Group captured demand, despite the remaining restrictions in place on business activities, as people spent more time at home and from a rebound in the decline in demand when business activities were suspended. In addition, the Group pro- moted sales through its own dealer channels as shopping malls leasing space to home electronics retailers were closed in many countries due to restrictions on business activities. In commer- cial air-conditioning systems, a difﬁ cult situation continued as the spread of infection caused delays in construction starts and construction schedules across the market due to a shortage of workers and mandatory COVID-19 testing at construction sites. For the full ﬁ scal year, net sales decreased year on year as a whole due to the signiﬁ cant impact of the spread of infection in the ﬁ rst quarter (April to June), which is the peak season for air-conditioning use in Asia. Selling, General and Administrative Expenses (¥ billion) 640 480 320 160 0 2017 2018 2019 2020 2021 Sales by Segment Segment Proﬁ t (¥ billion) 2,500 2,000 1,500 1,000 500 0 2017 2018 2019 2020 2021 (¥ billion) 300 200 100 0 2017 2018 2019 2020 20212021 Air conditioning Chemicals Other Air conditioning Chemicals Other Integrated Report 2021 61 Financial Review • Europe/The Middle and Near East/Africa In Europe, the impact of strict lockdowns in response to the spread of COVID-19 in various countries forced the Group to start in a harsh business environment. However, the Group established a stable intra-regional production and supply sys- tem even while having to perform sales and promotional activi- ties online and ensure social distancing. In addition, the Group improved business performance by capturing new needs that arose due to the COVID-19 pandemic, such as demand from remote work and staying at home, and increased awareness of air quality such as ventilation and disinfection. As a result, overall net sales were higher year over year. Demand for resi- dential air-conditioning systems rapidly increased due to intense heat waves in France, Spain, and other countries, as well as demand from staying at home. The Group capitalized on this demand by taking full advantage of its nearest factories in the Czech Republic and Turkey to provide supply. In addition, the Group strengthened its sales network by developing new dealers and expanded sales of residential heat pump hot water heating systems, aided by new and greater subsidies under the European Green Deal, an economic stimulus measure for European nations aimed at achieving greenhouse gas reduction targets for 2030. In particular, sales increased signiﬁ cantly in Germany and Italy thanks to the effects of introducing new models and strengthening marketing capabilities. As a result of these factors, overall net sales of residential air-conditioning systems increased year over year. As for commercial air-condi- tioning systems, demand from ofﬁ ces, hotels, restaurants, and stores, which are major applications, declined due to the repeatedly imposed lockdowns in various countries. Even at food retailers with strong performance, new store construction and renovation projects were cancelled or postponed. Although sales were maximized through the use of propos- al-based sales effectively leveraging online tools amid this difﬁ - cult market environment and the restrictions placed on sales activities such as visits to customers and worksites, net sales of commercial air-conditioning systems decreased year over year. In the Middle and Near East/Africa, sales of residential air-conditioning systems increased year over year. However, overall net sales decreased year over year because sales of commercial air-conditioning systems were sluggish due to a decrease in the number of projects caused by low crude oil prices. In Turkey, net sales in the local currency increased year over year, driven by sales of residential air-conditioning systems and heating systems, but yen-equivalent net sales remained at the same level year over year due to the impact of the sharp depreciation of the Turkish lira. In the ﬁ lter business, while the global commercial market declined due to the spread of COVID-19, the Group expanded sales of high value-added products that contribute to higher air quality and launched infection control products ahead of com- petitors. Sales of high-performance ﬁ lters mainly for residential use were strong in the United States, and sales of negative pressure units and air puriﬁ ers grew in Japan thanks to subsi- dies. In Europe, however, there was a severe impact from lock- downs because sales mainly consist of end users for commercial applications, and there was also customer restraint on investments in commercial dust collection systems for gas turbines, large plants, and similar facilities. As a result, overall net sales in the ﬁ lter business remained at the same level year over year. In the marine vessels business, net sales increased year over year due to an increase in unit sales of marine container refrig- eration units. Chemicals Overall sales of the Chemicals segment decreased by 8.7% year over year to ¥164.2 billion. Operating income decreased by 52.2% to ¥11.4 billion. The general condition regarding overall sales of ﬂ uorochemi- cal products was harsh due to a decline in demand affected by the spread of COVID-19 in a wide range of ﬁ elds, including semiconductors and automobiles, and a decline in demand in the European gas market. Net sales of ﬂ uoropolymers decreased year over year due to the major drop during the ﬁ rst half of the period, as well as a decline in demand for construction and aircraft in the United States, despite the recovery trend of global demand for semi- conductor and automotive-related applications especially in the Chinese market. Net sales of ﬂ uoroelastomers also decreased year over year, despite a recovery in demand in the automotive ﬁ eld centering on the Chinese market. Among specialty chemicals, net sales of anti-fouling surface coating agents increased year over year as a result of strong sales in China. In addition, net sales of semiconductor etching agents increased year over year due to sales expansion to meet Cash Dividends per Share Total Assets Working Capital and Current Ratio (¥ billion) 3,200 2,400 1,600 800 0 2017 2018 2019 2020 2021 2021 (¥ billion) 1,000 750 500 250 0 2017 2018 2019 2020 2021 (%) 280 210 140 70 0 Working capital Current ratio 2017 2018 2019 2020 2021 (¥) 200 150 100 50 0 62 recovering demand. However, due in part to the general decline in demand from the impact of COVID-19, overall net sales of specialty chemicals remained at the same level year over year. As for ﬂ uorocarbon gas, the impact of the decline in global sales was signiﬁ cant, and as a result, overall sales of gas decreased substantially year over year. Other Operations Overall sales of the “Others” segment decreased by 9.6% year over year to ¥55.4 billion. Operating income decreased by 25.5% to ¥4.1 billion. In oil hydraulic equipment, net sales of oil hydraulic equip- ment for industrial machinery declined year over year as a result of a decline in capital investment in Japan and declining demand in Asian, European, and U.S. markets triggered by the spread of COVID-19. In addition, net sales of oil hydraulic equipment for construction machinery and vehicles declined year over year due to the impact of decreased demand in the Japanese, European, and U.S. markets resulting from the spread of infection. In defense systems-related products, net sales decreased year over year as a result of a reduction in sales of ammunition to the Ministry of Defense, despite an increase of sales of home oxygen equipment due to robust sales of oxygen concentrators as well as the capture of demand for pulse oximeters (medical devices that can easily measure blood oxygen saturation with- out blood collection) in response to the spread of COVID-19. In the electronics business, net sales decreased year over year due to a decline in sales of “SpaceFinder,” a database system for design and development sectors that is sold mainly to man- ufacturers, which suffered from a decline in investment associ- ated with the spread of COVID-19. Current Exchange Rates In foreign currency markets, the yen’s average annual exchange rate was ¥3 stronger against the U.S. dollar and ¥3 weaker against the euro compared to the previous ﬁ scal year. The aver- age rates for the ﬁ scal year under review were US$1=¥106 and €1=¥124. Fluctuations in currency exchange rates resulted in a decrease of ¥22.5 billion in sales and ¥5.0 billion in operating income below what they would have been in the absence of ﬂ uctuations. Yen-U.S. dollar rate Yen-euro rate 2020 ¥109 ¥121 2021 ¥106 ¥124 SG&A Expenses and Operating Income SG&A expenses rose 1.0% over the previous ﬁ scal year, to ¥625.5 billion mainly as a result of increases in personnel costs. Consolidated operating income declined 10.1% year on year, to ¥238.6 billion, while the operating income margin came in at 9.6%. Assets, Liabilities, and Total Equity Assets Total assets increased by ¥572.2 billion from the end of the previous ﬁ scal year to ¥3,239.7 billion. Current assets increased by ¥428.9 billion from the end of the previous ﬁ scal year to ¥1,733.4 billion, mainly due to an increase in cash and deposits. Non-current assets increased by ¥143.2 billion from the end of the previous ﬁ scal year to ¥1,506.3 billion, primarily due to an increase in investment securities resulting from market value ﬂ uctuation. Liabilities and Net Assets Liabilities increased by ¥336.2 billion from the end of the previ- ous ﬁ scal year to ¥1,541.2 billion, mainly due to an increase in long-term borrowings. Net assets increased by ¥235.9 billion from the end of the previous ﬁ scal year to ¥1,698.5 billion, primarily due to an increase caused by posting of net income attributable to own- ers of parent. As a result of the aforementioned, the shareholders’ equity ratio declined from 53.8% as of the end of the previous ﬁ scal year, to 51.4%. Net assets per share improved to ¥5,691.85 Total Share holders’ Equity and Shareholders’ Equity Ratio Free Cash Flow Capital Investment and Depreciation and Amortization (¥ billion) 1,800 1,200 600 0 (%) 60 (¥ billion) 210 (¥ billion) 150 40 140 20 70 0 0 0 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 100 50 0 2017 2018 2019 2020 2021 Shareholders’ equity Shareholders’ equity ratio Capital investment Depreciation and amortization (excluding amortization of goodwill) Integrated Report 2021 63 Financial Review from ¥4,904.46 for the previous ﬁ scal year. Total interest-bearing liabilities stood at ¥751.2 billion as of March 31, 2021, up ¥197.5 billion compared to the end of the previous ﬁ scal year. This mainly reﬂ ected the increase in long- term borrowings and other factors. The interest-bearing liability ratio (interest bearing liabilities / total assets) increased from 20.8% to 23.2%. Cash Flows During the ﬁ scal year under review, net cash provided by oper- ating activities was ¥374.7 billion, an increase of ¥72.5 billion from the previous ﬁ scal year, principally due to an increase in trade payables. Net cash used in investing activities was ¥159.7 billion, an increase of ¥3.5 billion from the previous ﬁ scal year, primarily due to a decrease in proceeds from sales of invest- ment securities. Net cash provided by ﬁ nancing activities was ¥98.9 billion, an increase of ¥268.9 billion from the previous ﬁ scal year, mainly due to an increase in proceeds from long- term borrowings. After including the effect of foreign exchange rate change to these results, net increase in cash and cash equivalents for the ﬁ scal year under review, amounted to ¥341.2 billion, an increase of ¥387.2 billion from the previous ﬁ scal year. Capital Investment Considering investment as the foundation of growth, the Daikin Group will strive to expand its business through invest- ment, as well as to strengthen its ﬁ nancial position, further increase its corporate value, and improve shareholder returns. Speciﬁ cally, in addition to capital investments for new products and investments to improve productivity and expand produc- tion capacity, the Group will implement each strategic invest- ment to expand its business globally and strengthen its competitiveness. The funds required for these investments will be procured by borrowing mainly from ﬁ nancial institutions and bonds as necessary, in addition to the Group’s own funds based on the accumulation of internal reserves. During the ﬁ s- cal year under review, net cash provided by operating activities was ¥374.7 billion, exceeding net cash used in investment activities of ¥159.7 billion. R&D Expenses In view of the rising concern about global warming on a world- wide scale and issues related to energy, the Daikin Group working mainly through its Technology and Innovation Center (TIC) engages in leading-edge technology research and devel- opment programs designed to proactively contribute to the resolution of global environmental issues, while also expanding the Group’s business operations. In addition to upgrading of its core proprietary technologies, the Daikin Group is taking steps to acquire technology in coop- eration with outside parties. In ﬁ scal 2019, Daikin established the Technology and Innovation Center CVC Ofﬁ ce to play a role in all corporate venture capital activities related to investment in and support for start-up companies around the world. In ﬁ scal 2020, the Group entered into a comprehensive col- laborative cooperation with Doshisha University in Kyoto. Based on this, both parties worked on the practical application of CO2 capture, decomposition, and reuse technologies, and further increasing the efﬁ ciency of air conditioners in order to reduce greenhouse gas emissions. In addition, in response to the increasing global demand for air quality, we have devel- oped a “moisture-permeable membrane total heat exchanger element” for ventilation equipment and “low-pressure loss air ﬁ lter material” for large air conditioners in cooperation with Daicel Corporation. We will work to innovate through collaborative creation, solve environmental and social issues, and expand our business by promoting industry-government-academia collaboration, including with the University of Tokyo, China’s Tsinghua University, and start-up companies, with which we already formed partnerships. Through these efforts utilizing our global R&D infrastructure, we will work to greatly improve the efﬁ ciency and speed of R&D to create differentiated products in each region of the world. In ﬁ scal 2020, R&D expenses included in the Groupwide Research and Development Expenses (¥ billion) 80 60 40 20 00 0 64 2017 2018 2019 2020 2021 ROE (%) 16 12 8 4 0 2017 2018 2019 2020 2021 ROA (%) 8 6 4 2 0 2017 2018 2019 2020 2021 SG&A and manufacturing costs totaled ¥71.7 billion, and the main initiatives, results, and R&D expenses by business seg- ment for the ﬁ scal year under review are as follows. Air-Conditioning and Refrigeration Equipment R&D expenses for air-conditioning and refrigeration operations totaled ¥63.1 billion. In the domestic air-conditioning business, people’s aware- ness of air quality is increasing due to COVID-19, while in the residential market we have applied our proprietary “waterless humidifying” technology to the “Urusara X,” a room air condi- tioner that can ventilate while cooling and heating that was launched in November 2019. Subsequently, we expanded our lineup of “air conditioners with ventilation” in order to support “ventilation,” which has become the norm in homes, sequen- tially launching the “Urusara X,” “Urusara mini,” “V Series,” “Ururu Sarara Ceiling Mounted Cassette-Shape Single Flow Type,” and “Ururu Sarara Floor Mounted Type” from November 2020. In facilities used by an unspeciﬁ ed large number of people— such as restaurants, stores, and ofﬁ ces—“ventilation” and “virus suppression” are urgently needed. Accordingly, in May 2020 we released “titanium apatite ﬁ lters” that absorb bacte- ria and viruses for use in commercial air conditioners. Moreover, in September 2020 we launched “Venti-air,” an exposed installation total heat exchanger unit that can be ret- roﬁ tted. The “Venti-air” system not only eliminates the need to replace ceilings when installing additional equipment in exist- ing buildings, but also can be installed in a variety of ways, including on the ceiling, interior walls, and under the eaves, making it easier to install ventilation equipment. We have also developed three new products that are set to be released sometime from May 2021: the industry’s ﬁ rst “outdoor installa- tion type” that can be installed outside; a “ceiling-suspension type” suitable for retroﬁ tting in schools and other facilities where there is no ceiling space; and an “exposed installation type (150 m3/h type)” that can be used in small spaces. Furthermore, we plan to release from April 2021 the “UV Streamer Air Puriﬁ er,” which quickly and effectively suppress- ing viruses in spaces that are difﬁ cult to ventilate, such as small windowless spaces and conference rooms that are constant use. Developed in cooperation with Asahi Kasei Corporation, this air puriﬁ er is the industry’s ﬁ rst to use UVC LEDs, which emit deep UV rays with a wavelength of 265nm that are highly effective in inhibiting viruses and bacteria. The “UV Streamer Air Puriﬁ er” irradiates viruses and bacteria captured by the “Antibacterial HEPA Filter—a dust collection ﬁ lter with an antibacterial agent attached to conventional elec- trostatic HEPA ﬁ lters—using our unique powerful decomposing “streamer” and 265nm deep UV rays, which are highly effec- tive in inhibiting viruses and bacteria. This product suppresses viruses by more than 99% in 30 minutes and bacteria by about 10 times faster than conventional streamer air puriﬁ ers. We will establish a supply system based on domestic production in order to respond to ﬂ uctuations in demand and rapidly supply this product. We will continue to develop devices useful for “ventilation” and “virus control” by utilizing air puriﬁ cation technology that combines “streamer technology” and “UVC LED,” as well as expand our product lineups in order to help further improve air quality. In the residential market, there is a growing demand for new air conditioners to be installed in rooms not equipped with air conditioners in light of more time being spent at home work- ing or studying. In order to meet this demand, we launched a new series of products in March 2021: “risora” a wall-mount- ed type room air conditioner that features a design that blends in with the room based on its thinness and texture; and the “Cocotas,” a small space multi-cassette type for small private rooms, corridors, washrooms and other non-residential rooms. The “risora” has a new look, featuring two types of front panels for indoor units. The “natural wood” panel, with its soft color and wood texture, blends into the room with a relaxing look amid people spending more time at home. The other new panel, “aluminum silver” is designed to appear different depending on the viewing angle and lighting. “Cocotas” was previously designed as a multi-type air condi- tioner in which two or more indoor units were connected to one outdoor unit. In order to meet the increasing demand for air conditioning in small spaces, however, we have developed a pair-type air conditioner that connect one indoor unit to one outdoor unit, making installation easier. In the commercial market, we launched the waterless humidiﬁ cation unit “Ururu Unit” in June 2020 for store users who require humidiﬁ cation such as clinics, cram schools and nursery schools. Applying waterless humidiﬁ cation technology cultivated in room air conditioners enables humidiﬁ cation along with ventilation, resulting in improved room air quality. In February 2021, we released an outdoor installation-compati- ble version of our “beltless type” air conditioner for facilities. Indoor facility space can be effectively utilized by installing the indoor unit outdoors. In addition, during installation, mainte- nance and servicing, work can be done without entering the room, thus reducing the impact on factory operating hours. The “outdoor air control mode” is used to increase the amount of ventilation in order to meet growing ventilation needs with- out creating new installation space in rooms. In Applied Systems, we released a new dedicated outside air treatment system (DOAS) model in July 2020 in North America, featuring improved operating efﬁ ciency that reduces energy consumption for outdoor air intake. We also released the industry’s smallest indoor air handling unit in October 2020. This new unit uses a compact design featuring signiﬁ cant installation freedom, while also realizing the same functionality and performance as larger models. In addition, it uses high-performance air ﬁ lters and an anti-contamination design to provide better indoor air quality. In Europe, we launched in September 2020 a water-cooled screw heat pump chiller that uses the low-GWP refrigerant R1234ze. In combination with our air-cooled heat pump chiller already on the market, this product can be used not only for air conditioning but also for supplying hot water. In China, we launched a modular magnetic bearing turbo chiller in April 2020, featuring a never-seen-before compact and lightweight design, and it can be transported by forklift or passenger elevator. In addition, units can be connected (cool- ing capacity expansion) through simple on-site installation to meet the demand for partial upgrades, expansion and split investment of existing properties. In March 2021, we released a modular scroll chiller equipped with a free-cooling function that can signiﬁ cantly improve server cooling efﬁ ciency for small and medium-sized data centers. Integrated Report 2021 65 Financial Review Chemicals R&D expenses for Chemicals operations totaled ¥6.7 billion. Daikin conducts R&D for new products and new applications based on its rich experience in ﬂ uorine products and ﬂ uo- rochemical technology. In the ﬂ uoropolymer resin and ﬂ uoro- elastomer ﬁ elds, ﬂ uorochemicals exhibit good heat resistance, low drug reactivity, and dielectric properties. Using these prop- erties, Daikin is developing new differentiated products for automotive, semiconductor, wire and cable (IT ﬁ eld), and other applications. Daikin also develops coatings based on the non-adhesive and chemical resistant properties of ﬂ uo- ride-based substances, and develops textile treatment materials and carpet treatment materials based on the water and oil repellent properties. In addition, Daikin engages in a wide range of ﬂ uoride-related R&D, including the development of telecommunication and information terminal materials based on the functionality of ﬂ uorine containing compounds and the provision of contracted synthesis research for pharmaceutical intermediates. In addition to these developments, as part of R&D in periph- eral areas aimed at developing new techniques and applica- tions, Daikin is working on the development of ﬁ lm process products and multilayered materials and conducts advanced materials research related to the medical, optical, environmen- tal, electric power battery, and energy areas. Through these ini- tiatives, Daikin is endeavoring to further secure the global No. 1 position and become the sole provider of ﬂ uorochemical solutions. Especially, in the automotive battery ﬁ eld, Daikin is making concerted efforts to grow its ties globally and further expand its markets. In addition, we are pursuing the develop- ment of various environmentally friendly products from an SDGs perspective. By furthering and accelerating its R&D, the TIC, which has the mission of new product development in Daikin’s Chemicals business, is seeking to develop technologies that will lead on next-generation themes. Other Operations R&D expenses for the Other operations totaled ¥2.0 billion. In oil hydraulics, Daikin is drawing on the special features of its hybrid oil hydraulic systems technology, which combines oil hydraulic technology and inverter technology to realize energy conservation and high functionality that could not be realized with previously existing hydraulic systems. In addition, besides the medium- to low- and small-volume markets, where Daikin is working to expand the adoption in Japan and overseas, the Group is also developing units for high-pressure and high-vol- ume applications. In the industrial press and other industrial machinery applica- tions, Daikin’s “Super Unit” has won high acclaim for its low electric power consumption. It also contributes to improvement in the workplace environment and reduction in environmental impact because of its lower noise, reduced heat emission, and smaller tank size. Moreover, Daikin has launched a large-scale extruder system that equals electric power as a motive force for its responsive- ness and energy conservation. By expanding the lineup of units in this series to meet the special needs of countries in Asia and other regions for handling multiple voltages and other fea- tures, Daikin will promote the adoption of this system for presses and other machines and move forward with sales 66 expansion globally. Also, Daikin is proceeding with the development of an ener- gy conservation system for use on special vehicles. One of these units, a hydraulic hybrid system for use on vehicles, has already been adopted. In addition to conventional hydraulic systems, Daikin is proceeding with the development of advanced environmentally responsive products and technology that go beyond existing frameworks and will ﬁ nd applications globally. In defense systems, Daikin mainly conducts R&D related to artillery shell and guided missiles components, for Japan’s Ministry of Defense, as well as equipment used in home oxy- gen therapy. Dividend Policy and Dividends Applicable to the Fiscal Year The Company will continue to focus on expanding its business- es while investing its assets strategically and improving its ﬁ nancial structure by such means as proceeding with the reduction of overall costs and enhancing its ﬁ nancial position. Through these initiatives, we are committed to being a truly global and excellent company while at the same time further improving our corporate value and enhancing proﬁ t returns to our shareholders. Speciﬁ cally, by striving to maintain a consolidated ratio of dividend to net assets (Dividend on Equity, DOE) of 3.0% while at the same time aiming for an even higher consolidated divi- dend payout ratio, we will introduce initiatives to further increase returns to our shareholders with the core goal of sta- ble and continuous dividends. In addition, internal reserves will be applied to strategic investments to expand business and increase competitiveness such as reinforcing the structure of management, promoting global businesses, and accelerating eco-conscious product development. For the ﬁ scal year ended March 31, 2021, the Company has proposed an annual cash dividend of ¥160 (¥80 for the interim dividend and ¥80 for the year-end dividend). For the ﬁ scal year ending March 31, 2022, the Company plans an annual cash dividend of ¥180 (¥90 for the interim dividend and ¥90 for the year-end dividend). Outlook for Fiscal 2021 Going forward, the global economy is expected to start expanding due to the widespread use of COVID-19 vaccines and economic measures taken by various countries. China and the U.S. continue to engage in major ﬁ scal spending and thus are expected to lead the economic expansion, while Europe and Japan are also expected to see a gradual economic recov- ery, albeit later on. Against this backdrop, we adhere to under the Group’s slogan for its Annual Group Policy for 2021, “Taking ‘Overwhelming Changes’ as Opportunity, Let’s Challenge New Initiatives.” Accordingly, we will take the fol- lowing initiatives. We will strengthen our Solutions business, which is not limited to the sale of single units; further increase sales of heat-pump heaters and hot-water units; build a low-temperature business that links the cold chain from pro- duction sites to consumption areas; provide products and ser- vices that address growing needs for air and ventilation, and solutions to global environmental and climate change issues; strengthen our sales and marketing capabilities by utilizing dig- ital technologies; engage in ﬂ exible production and procure- ment; improve quality; enhance human resources; and reduce ﬁ xed and variable costs. As for technological development, we will also strive to acquire differentiated technologies by collab- orating with venture companies and academic institutions. In addition, the International Energy Agency (IEA) foresees demand for air conditioning more than tripling by 2050, from today’s levels, in line with the development of emerging coun- tries. While this represents a huge opportunity for the Daikin Group with its main business in air conditioning, there is the worldwide issue of climate change. Amidst growing demand for decarbonization, there are issues such as curbing energy consumption associated with air conditioning, lowering the use of fossil fuels, and preventing leaks of refrigerants that cause greenhouse effects. Unless we make a concerted effort to con- trol greenhouse gas emissions, these could become a risk for the Group. The Daikin Group aims to respond to these risks by reducing its environmental impact by, for example, developing and spreading the use of refrigerants with lower global warm- ing potential, developing and spreading the use of high-efﬁ - ciency air conditioners, and creating solutions for buildings that utilize energy efﬁ ciently throughout the entire facility. In 2018, the Daikin Group formulated its “Environmental Vision 2050” to aim for zero greenhouse gas emissions in 2050, while offer- ing a safe and healthy air environment. Daikin announced its support and agreement with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in May 2019. An important issue is the impact climate change will exert on business continuity, and as such, Daikin analyzes the risks and opportunities it will have on business, and together with reﬂ ecting that to management strategy, the Group con- tributes to solutions to climate change and other social prob- lems while also aiming for further growth. For the ﬁ scal year ending March 31, 2022, Daikin forecasts a 10.3% increase in consolidated net sales, to ¥2,750.0 billion, with operating income expected to rise 13.1% year on year, to ¥270.0 billion, and net income attributable to owners of the parent expanding 13.3%, to ¥177.0 billion. The estimated exchange rates for the ﬁ scal year are ¥105 to the US dollar and ¥125 to the euro. Principal Risks Associated with the Daikin Group’s Operations Management recognizes the following principal risks that may inﬂ uence decisions made by investors given their signiﬁ cant impact on business conditions as stated in the securities report, and among matters pertaining to accounting status, consoli- dated companies’ ﬁ nancial status and business performance, as well as cash ﬂ ows. The following have been determined as of the end of the consolidated ﬁ scal year under review. (1) Risks related to the market environment (cid:2) Risks related to changes in the market environment The Group develops, procures, manufactures, and sells goods and services in each of its business domains, chieﬂ y air condi- tioning, as it grows its business globally. The Group strives to raise market share by strengthening its sales network, offering competitive products and services, and cutting ﬁ xed costs in order to expand its business and enhance proﬁ tability. Nonetheless, in the event that market conditions deteriorate in countries and regions in which the Group has operations, due to, for example, rising instability in the political and diplo- matic situation, trade friction, economic contraction, extreme weather, and outbreak of a pandemic, such as COVID-19, there is a possibility that business expansion and increases in proﬁ tability will not progress as planned. As a result, there is a possibility of an impact on the Group’s ﬁ nancial situation and management performance. (cid:3) Risks related to ﬂ uctuations in currency exchange rates and funds procurement environment Overseas sales accounted for a high ratio of the Daikin Group’s consolidated net sales in ﬁ scal 2020. The acceleration of global business development going forward is expected to further ele- vate this overseas sales ratio. Consolidated ﬁ nancial statements are prepared by translating local currency-denominated items for Group operations in each global region, including sales, expenses, and assets. Accordingly, depending on currency exchange rates at the time of the currency translation, there may be an impact on yen translation values even when there has been no change in local currency-denominated ﬁ gures. In addition, because the Group engages in foreign currency-de- nominated transactions in raw materials and parts procure- ment and in the sale of goods and services, there is a possibility that ﬂ uctuations in currency exchange rates could impact man- ufacturing costs and sales performance. To avoid such currency exchange rate-related risks, the Group undertakes short-term risk hedging via forward exchange contracts and similar instru- ments. Daikin also undertakes medium- to long-term measures to continuously adjust procurement and manufacturing opera- tions and optimize them for changing currency exchange rate trends, and to balance imports and exports in each currency. Through this, the Group works to realize a business structure that is not greatly impacted by ﬂ uctuations in currency exchange rates. In addition, the Daikin Group procures funds necessary for its business activities through loans from ﬁ nancial institutions, or by using commercial paper or bonds. When the economic environment ﬂ uctuates, the lending posture of ﬁ nancial institu- tions and the situation in funds procurement markets will change, and there is the risk that necessary funds cannot be procured, or that the funding rate will rise. In response to such risks, we set commitment lines, and use interest swaps and other measures to ﬁ x the interest rate, among other efforts. However, there is a possibility that fund procurement costs will rise, and that there will be an impact on the Group’s ﬁ nancial situation and management performance. (cid:4) Risk related to ﬂ uctuation in market value of securities The Daikin Group takes a strategic approach to holding corpo- rate stock that can be anticipated to enhance Company value. However, stock market trends could cause a decline in the value of these stocks, and potentially impact the Group’s ﬁ nan- cial situation and management performance. Integrated Report 2021 67 Financial Review (2) Risks related to business activities (cid:2) Risks related to technology, products, and services The Daikin Group aims to generate customer value and social value, and makes concerted efforts to develop the technology, products, and services that will consistently lead to customer satisfaction. However, the emergence of new technology, prod- ucts or services that differ from those anticipated by the Group, or abrupt changes to the market such as rapidly esca- lating competition, including from new market entrants, may lead to the necessity to amend or transform technology or product strategy. In that event, delays in bringing about new products or ser- vices, or launching new businesses, will cause the Group to lose its advantageous position against competitors or new mar- ket entrants. As a result, this may impact the Group’s ﬁ nancial situation and management performance. (cid:3) Risks related to acquisitions and alliances with other companies The Daikin Group has in the past utilized corporate acquisi- tions, in addition to organic growth leveraging existing man- agement resources in order to grow its business globally and to strengthen its product lineup and sales structure. Going for- ward, to expand its business domains and accelerate the trans- formation of its business structure, it will aggressively undertake alliances, collaboration, and M&A activities. In the project evaluation stage, the Group not only assessed strategy toward business expansion but also considered the risk in terms of business operation, and following project execution, will strive to ensure that business integration occurs smoothly. Nonetheless, after a project is executed, there is a possibility that integration will not proceed according to plan due to a deteriorating market environment, the inability to fully utilize the management resources of the target company, and the lack of smooth cooperation with the target company, or other reason. As a result, there is a possibility that there will be an impact on the Group’s ﬁ nancial situation and management performance. (cid:4) Product and service quality and responsibility The Daikin Group operates in over 160 countries worldwide, and endeavors to provide products and services that are in tune with local needs. In addition, it undertakes strict design overviews and quality audits for each respective region, and does its utmost to assure quality and safety. However, by any chance that a problem with regard to safety arises, it gives ﬁ rst consideration to the safety of the customer. To prevent reoc- currence or expansion of the accident, the Group will repair or exchange, and will through newspapers or other means notify and disclose information to sales vendors and other relevant third parties, fulﬁ lling its responsibilities based on the Product Liability Law. As these countermeasures may incur large expense, we have enrolled in product liability insurance, however, in the event that expenses exceed the limit of compensation or if sales decline as a result of a deteriorated brand image, there is a possibility of an adverse impact on the Group’s ﬁ nancial situa- tion and management performance. (cid:5) Risks related to procurement In the event management conditions at suppliers deteriorates, 68 or if natural disasters or accidents occur, the Daikin Group makes efforts to ensure that raw materials, parts, and other items are supplied in a stable and timely manner, and at rea- sonable prices. This can be achieved by diversifying its suppliers and transitioning to domestic and local procurement, as well as by creating parts commonalities and standardization, among other efforts. However, in the short term, it may be difﬁ cult to take the measures described above, and in the event of an unforeseen situation, such as the spread of a global pandemic or large-scale disaster, the Group could experience shortages of raw materials and parts, delays in delivery, and other problems. In this case, there is a possibility that this may have an impact on the Group’s business. In addition, the Daikin Group and its suppliers set prices of raw materials and parts in accordance with a contract. The Group strives to enable procurement at stable prices through long-term contracts and other means, although abrupt chang- es in the supply and demand environment or ﬂ uctuations in exchange rates may make sharp rises in procurement prices unavoidable. In such an event, there is a possibility that there will be an impact on the Group’s ﬁ nancial situation and management performance. (cid:6) Legal regulations The Daikin Group, which operates in over 160 countries world- wide, is subject to laws and regulations covering competition, the prevention of bribery, human rights, labor and safety, the environment, and other areas in all nations and regions around the world. In each country the introduction of ever more severe laws and regulations and changes in the legal interpretations and operating guidelines of local authorities may lead to limita- tions of the Group’s business activities. The Group conducts an array of training sessions with the aim of thorough compliance, along with the introduction of an annual “self-check” to con- ﬁ rm whether or not daily business is being performed in adher- ence to laws and regulations. Together with raising a consciousness of compliance, the Group conducts audits and conﬁ rms the status of adherence. Nonetheless, in the event that violations of the law occur, there is a possibility that the Group will face administrative action for the payment of monetary penalties. In addition, a decline in brand image has the potential to impact the Group’s ﬁ nancial situation and management performance. (cid:7) Information security In the course of carrying out its business, the Daikin Group obtains conﬁ dential information from third parties and person- al information from customers, in addition, the Group also handles its own proprietary conﬁ dential information. For that reason, there is a possibility of unauthorized access by hackers or being the subject of a cyber-attack that causes external leaks of personal or conﬁ dential information, which could halt pro- duction lines at each location or logistics systems, and exert a serious impact on business. To prevent any of these situations from arising, the Group is putting into place countermeasures that include strengthening information security systems, thoroughly controlling conﬁ den- tial notiﬁ cations, restricting external access, maintaining inter- nal regulations, and conducting education and training. However, in the event such situations were to occur, there may service bases around the world. In recent years, Japan has experienced earthquakes, tsunamis, typhoons, torrential rain, and other natural disasters. In preparation for such natural disasters, the Company takes measures to reinforce each busi- ness site against earthquakes, and also acts to put in place countermeasures against tsunamis, signiﬁ cant rainfall, ﬂ ood- ing, and other disasters. In addition, it also formulates disaster prevention regulations pertaining to natural disasters, and peri- odically conducts disaster prevention training in efforts to mini- mize the impact of natural disasters. Nonetheless, there is a possibility that a major natural disaster will signiﬁ cantly impact business activities, and that harm will come to the Group’s employees, production facilities, systems, and other assets. At overseas locations as well, in addition to various types of natu- ral disasters, terrorism, riots, wars, and other incidents could conceivably cause harm not only to the Group’s business bases, but also to supply chains and customers. This holds a possibility of hindering the Group’s business activities and causing delays. Furthermore, the spread of contagious diseases has become a risk for the Daikin Group’s business. In response to the spread of COVID-19, the Group has made securing the health and safety of its employees the top priority in exerting every effort to prevent the spread of infection. The Group has also engaged in addressing important management issues, such as strengthening procurement, manufacturing, inventory, and logistics globally; promoting online sales that address declines in demand and changes in consumer purchasing behavior; expanding sales of ventilation products that seize upon the greater awareness of air quality and ventilation; and develop- ing products that stand out. At the same time, vaccination is also progressing in countries around the world. However, given that it is difﬁ cult to foresee when the COVID-19 pandemic will come to an end due to factors such as the spread of variants, there is a possibility of an impact on the Group’s ﬁ nancial situa- tion or management performance. be requirements to pay large-scale damages or ﬁ nes. Moreover, the payment of enormous countermeasure costs has the potential to impact the Group’s ﬁ nancial situation and man- agement performance. (3) Risks related to climate change and other environmental issues Climate change is one of the social problems that the Group must tackle on a global basis. Based on the Group Philosophy to “Be a Company that Leads in Applying Environmentally Friendly Practices,” the Daikin Group therefore develops and spreads energy-conserving, high-efﬁ ciency air conditioners and refrigerants with lower global warming potential, and gener- ates solutions for the efﬁ cient use of energy throughout entire buildings. In this way it is taking aggressive action to curb greenhouse gas (CO2, ﬂ uorocarbons) emissions, and to miti- gate climate change. However, in the event that regulations covering use and emissions of greenhouse effect-causing refrigerant gas, and regulations pertaining to energy conserva- tion become more stringent as the shift to a low-carbon soci- ety progresses, there is a possibility of increased costs necessary to adhere to such regulations. In addition, in the event that taking a sufﬁ cient response to these regulations is difﬁ cult and delays occur, product sales may be hindered, and there may be an impact on smooth business operations. One of the physical risks here is damage to the Group’s employees, manufacturing facilities, systems, and supply chains in the event of a large- scale disaster associated with abnormal weather, which pres- ents the potential for signiﬁ cant impact on business activities. In addition, The Daikin Group takes every possible measure to prevent environmental pollution from our business activities, including not only compliance with regulations but also the establishment of even stricter voluntary standards. However, in the event that chemical substances released by the Group effectively give rise to environmental problems, it will be neces- sary to respond by undertaking puriﬁ cation treatment, paying damages, and other measures, and it is possible that costs will be incurred to address such situations. The emergence of such risks entails a possibility of an impact on the Group’s ﬁ nancial situation and management perfor- mance. (4) Others (cid:2) Impairment of long-lived assets The Daikin Group records various tangible and intangible long- lived assets, including assets used in operations and goodwill arising from acquisitions. These assets are assessed for any indication of impairment loss. If an indication of impairment is identiﬁ ed, steps are taken to estimate the total amount of future cash ﬂ ows to determine the existence of loss. The future cash ﬂ ows required to make these determinations are based on management plans and are estimated after factoring in future uncertainties. If an impairment loss is recognized in the future due to ﬂ uctuations in business performance or other factors, the ﬁ nancial position and results of operations of the Group may be affected. Meanwhile, the Group monitors its perfor- mance on an ongoing basis and strives to take action before it becomes difﬁ cult to recover investments. (cid:3) Natural disasters, etc. The Daikin Group possesses R&D, manufacturing, sales, and Integrated Report 2021 69 Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries Consolidated Balance Sheet March 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents Short-term investments Trade receivables : Notes Accounts Allowance for doubtful receivables Inventories Prepaid expenses and other current assets Millions of Yen 2021 2020 ¥ 662,267 73,831 ¥ 321,152 49,641 59,954 408,377 (13,074 ) 469,398 72,608 48,613 392,142 (10,562 ) 433,783 69,658 Total current assets 1,733,361 1,304,427 PROPERTY, PLANT AND EQUIPMENT: Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets Construction in progress Total Accumulated depreciation 61,429 493,194 691,285 214,586 3,955 68,857 1,533,306 (885,895 ) 56,891 444,781 631,138 193,840 3,614 46,120 1,376,384 (796,403 ) Net property, plant and equipment 647,411 579,981 INVESTMENTS AND OTHER ASSETS: Investment securities Investments in and advances to unconsolidated subsidiaries and associated 206,377 157,329 companies Goodwill Customer relationships Other intangible assets Deferred tax assets Assets for retirement benefits Other assets 24,277 268,684 177,968 96,110 31,692 19,960 33,823 17,439 281,969 169,766 90,921 26,794 12,885 26,002 Total investments and other assets 858,891 783,105 TOTAL ¥ 3,239,663 ¥ 2,667,513 70 LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings Current portion of long-term debt Current portion of long-term lease obligations Trade payables : Notes 　Accounts Income taxes payable Provision for product warranties Accrued expenses Other current liabilities Millions of Yen 2021 2020 ¥ 40,755 76,279 20,639 11,914 217,832 20,757 62,255 154,214 161,340 ¥ 48,938 105,900 17,301 10,007 179,837 19,894 52,850 142,069 117,162 Total current liabilities 765,985 693,958 LONG-TERM LIABILITIES: Long-term debt Long-term lease obligations Liabilities for retirement benefits Deferred tax liabilities Other long-term liabilities 548,803 64,737 14,540 118,606 28,497 323,185 58,483 13,219 90,087 25,990 Total long-term liabilities 775,183 510,964 COMMITMENTS AND CONTINGENT LIABILITIES EQUITY : Common stock - authorized 500,000,000 shares; issued 293,113,973 shares Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 469,595 shares in 2021 and 529,837 shares in 2020 Accumulated other comprehensive income (loss): Unrealized gains on available-for-sale securities Deferred gain (loss) on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Subtotal Noncontrolling interests Total equity 85,032 84,215 2,019 1,363,505 (2,013 ) 68,700 1,293 69,470 (4,513 ) 1,667,708 30,787 1,698,495 85,032 83,899 1,887 1,254,073 (2,265 ) 29,765 (2,797 ) (5,052 ) (7,687 ) 1,436,855 25,736 1,462,591 TOTAL ¥ 3,239,663 ¥ 2,667,513 Integrated Report 2021 71 Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Consolidated Statement of Income Year Ended March 31, 2021 NET SALES COST OF SALES Gross profit Millions of Yen 2021 2020 ¥ 2,493,387 ¥ 2,550,305 1,629,251 1,665,407 864,136 884,898 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 625,513 619,385 Operating income 238,623 265,513 OTHER (EXPENSES) INCOME: Interest and dividend income Interest expense Equity in earnings of associated companies Exchange gains Subsidy income Gain on sales of land Losses on disposals of property, plant and equipment and other intangible assets Loss on sales of land Losses on impairment of long-lived assets Gains on sales of investment securities Impairment losses on investment securities Gains on reversal of stock acquisition rights Gain on insurance claims Gain on liquidation of a subsidiary Loss on liquidation of an unconsolidated subsidiary Other – net Other expenses – net 10,696 (8,791 ) 7 547 1,393 (1,208 ) (115 ) (225 ) 313 (472 ) 8 1 (5) (2,228 ) (79) 13,114 (11,008 ) 166 461 3,239 658 (454 ) (23,555 ) 10,810 (579 ) 25 255 (2,465 ) (9,333 ) INCOME BEFORE INCOME TAXES 238,544 256,180(cid:3) INCOME TAXES : Current Deferred Total income taxes NET INCOME NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 72,055 3,743 75,798 81,132 (2,150 ) 78,982 162,746 177,198 (6,496 ) (6,467 ) NET INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT ¥ 156,250 ¥ 170,731 AMOUNTS PER COMMON SHARE : Basic net income Diluted net income Cash dividends applicable to the year Yen ¥533.97 533.66 160.00 ¥583.61 583.22 160.00 72 Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Consolidated Statement of Comprehensive Income Year Ended March 31, 2021 NET INCOME OTHER COMPREHENSIVE INCOME (LOSS) : Millions of Yen 2021 2020 ¥ 162,746 ¥ 177,198 Unrealized gain (loss) on available-for-sale securities Deferred gain (loss) on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Share of other comprehensive income (loss) in affiliates accounted for using the equity method Total other comprehensive income (loss) 38,934 4,090 75,637 3,184 (27,921 ) (3,416 ) (69,587 ) (2,457 ) 260 122,105 (495 ) (103,876 ) COMPREHENSIVE INCOME ¥ 284,851 ¥ 73,322 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the parent Noncontrolling interests ¥276,969 7,882 ¥68,079 5,243 Integrated Report 2021 73 Consolidated Statement of Changes in Equity Daikin Industries, Ltd. and Consolidated Subsidiaries Consolidated Statement of Changes in Equity Year Ended March 31, 2021 Outstanding Number of Common Shares Issued Common Stock Capital Surplus Stock Acquisition Rights Retained Earnings Treasury Stock BALANCE, APRIL 1, 2019 292,508,233 ¥ 85,032 ¥ 83,650 ¥ 1,721 ¥ 1,133,101 ¥ (2,589 ) Net income Cash dividends, ¥160 per share Effect of change of the fiscal year-end of a certain consolidated subsidiary Repurchase of treasury stock Disposal of treasury stock Change in parent's ownership interest due to transactions with noncontrolling interests Net change in the year (97 ) 76,000 170,731 (49,731 ) (28 ) (2 ) 326 287 (38 ) 166 BALANCE, MARCH 31, 2020 292,584,136 85,032 83,899 1,887 1,254,073 (2,265 ) Net income Cash dividends, ¥160 per share Effect of change of the fiscal year-end of a certain consolidated subsidiary Repurchase of treasury stock Disposal of treasury stock Change in parent's ownership interest due to transactions with noncontrolling interests Net change in the year 156,250 (46,818 ) (458 ) 60,700 316 (9 ) 261 132 BALANCE, MARCH 31, 2021 292,644,378 ¥ 85,032 ¥ 84,215 ¥ 2,019 ¥ 1,363,505 ¥ (2,013 ) 74 Millions of Yen Accumulated Other Comprehensive Income (Loss) Unrealized Gains on Available-for- Sale Securities Deferred Gain (Loss) on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Remeasurements of Defined Benefit Plans Total Noncontrolling Interests Total Equity ¥ 57,686 ¥ 619 ¥ 63,808 ¥ (5,232 ) ¥ 1,417,796 ¥ 29,054 ¥ 1,446,850 170,731 (49,731 ) (28 ) (2 ) 613 170,731 (49,731 ) (28 ) (2 ) 613 (27,921 ) (3,416 ) (68,860 ) (2,455 ) (38 ) (102,486 ) (3,318 ) (38 ) (105,804 ) 29,765 (2,797 ) (5,052 ) (7,687 ) 1,436,855 25,736 1,462,591 156,250 (46,818 ) (9 ) 577 156,250 (46,818 ) (9 ) 577 38,935 4,090 74,522 3,174 120,853 5,051 125,904 ¥ 68,700 ¥ 1,293 ¥ 69,470 ¥ (4,513 ) ¥ 1,667,708 ¥ 30,787 ¥ 1,698,495 Integrated Report 2021 75 Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Year Ended March 31, 2021 OPERATING ACTIVITIES: Income before income taxes Adjustments for: Income taxes – paid Depreciation and amortization Losses on impairment of long-lived assets Gains on sales of investment securities Impairment losses on investment securities Losses on disposals of property, plant and equipment and other intangible assets Equity in earnings of associated companies Changes in assets and liabilities, net of effects of the purchase of subsidiaries: Trade notes and accounts receivable Inventories Other current assets Assets for retirement benefits Trade notes and accounts payable Accrued expenses Other current liabilities Liabilities for retirement benefits Other – net Total adjustments Net cash provided by operating activities INVESTING ACTIVITIES: Millions of Yen 2021 2020 ¥ 238,544 ¥ 256,180 (67,588 ) 133,594 225 (313 ) 472 1,208 (7 ) 511 (7,748 ) (4,026 ) (7,064 ) 25,037 5,702 43,375 469 12,300 136,147 374,691 (87,360 ) 128,486 23,555 (10,810 ) 579 454 (166 ) 591 (14,315 ) (1,624 ) 1,695 (6,365 ) 11,347 6,223 2,606 (8,909 ) 45,987 302,167 Payments for purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Payments for acquisition of newly consolidated subsidiaries, net of cash and cash equivalents acquired Decrease (increase) in investments in and advances to an unconsolidated subsidiary and associated companies Payment for transfer of business Payments for acquisition of investment securities Proceeds from sales of investment securities Net increase in time deposits Other – net (104,971 ) 4,724 (98,095 ) 3,963 (28,571 ) (13,190 ) 55 (346 ) (1,829 ) 607 (17,957 ) (11,379 ) (99 ) (1,595 ) 22,585 (52,908 ) (16,848 ) Net cash used in investing activities (159,667 ) (156,187 ) FINANCING ACTIVITIES: Net decrease in short-term borrowings Proceeds from long-term debt Repayments of long-term debt Cash dividends paid to owners of the parent Cash dividends paid to noncontrolling interests Repayments of lease obligations Other – net Net cash provided by (used in) financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR DECREASE IN CASH AND CASH EQUIVALENTS RESULTING FROM EXCLUSION OF SUBSIDIARIES FROM CONSOLIDATION (9,253 ) 293,218 (105,904 ) (46,721 ) (4,357 ) (28,085 ) 44 98,942 27,207 (93,943 ) 102,562 (98,196 ) (49,731 ) (9,859 ) (20,919 ) 152 (169,934 ) (22,029 ) 341,173 (45,983 ) 321,152 367,189 (47 ) (7) EFFECT OF CHANGE OF THE FISCAL YEAR-END OF CONSOLIDATED SUBSIDIARIES (58) CASH AND CASH EQUIVALENTS, END OF YEAR ¥ 662,267 ¥ 321,152 76 Corporate Data (As of March 31, 2021) Company Name Daikin Industries, Ltd. Head Ofﬁ ce Tokyo Ofﬁ ce Umeda Center Bldg., 2-4-12, Nakazaki-Nishi, Kita-ku, Osaka 530-8323, Japan Phone: 81-6-6373-4312 URL: https://www.daikin.com/ JR Shinagawa East Bldg., 2-18-1, Konan, Minato-ku, Tokyo 108-0075, Japan Phone: 81-3-6716-0111 Fiscal Year-End Date March 31 Date of Founding October 25, 1924 Date of Establishment February 11, 1934 Paid-in Capital ¥85,032 million Number of Shares of Common Stock Issued 293,113 thousand Number of Shareholders 25,559 Major Shareholders • The Master Trust Bank of Japan, Ltd. (Trust Account) • Custody Bank of Japan, Ltd. (Trust Account) • Sumitomo Mitsui Banking Corporation • Custody Bank of Japan, Ltd. (Trust Account 7) • Custody Bank of Japan, Ltd. Retirement Beneﬁ t Trust Account for The Norinchukin Bank • MUFG Bank, Ltd. • Custody Bank of Japan, Ltd. (Trust Account 4) • Government of Norway • SSBTC CLIENT OMNIBUS ACCOUNT • Custody Bank of Japan, Ltd. (Trust Account 5) Number of Subsidiaries and Afﬁ liated Companies Subsidiaries: 315 Afﬁ liates: 18 Number of Employees 84,870 (Consolidated) Stock Exchange Listing Tokyo Advertising Method The Company uses the electronic advertising method, posting advertisements on its website (https://www. daikin.co.jp/e-koukoku/). However, when electronic advertising is not possible due to technical problems or other circumstances, the Company will post advertisements in the Nikkei Shimbun. Shareholder Register Administrator Mitsubishi UFJ Trust and Banking Corporation 3-6-3, Fushimicho, Chuo-ku, Osaka 541-8502, Japan Ordinary General Meeting of Shareholders June Auditor Deloitte Touche Tohmatsu LLC Integrated Report 2021 77 https://www.daikin.com

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