Integrated Report 2022 Fiscal Year Ended March 31, 2022 Offer new value for the environment and air to realize both contributions to a sustainable society and Group growth Founded in 1924, the Daikin Group has continued to expand with a focus on its air-conditioning and fluorochemicals businesses. We are the world’s only general air-conditioning equipment manufacturer with in-house divisions covering both air-conditioning and refrigerants. In keeping with our Core Values of Absolute Credibility, Enterprising Management, and Harmonious Personal Relations, and based on our very own approach to diversity management, we have continued to grow and develop as an organization by ambitiously pursuing our goals together as a Group and demonstrating the ability to fully carry out our duties. In light of the drastically changing business environment, the Daikin Group will work to refine its long-cultivated strengths to continue to create new value and, in turn, help resolve social and environmental issues while further growing and developing its businesses. 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 Benefit 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” 1 Integrated Report 2022 Contents 04 Introduction 04 History of the Daikin Group 08 Message from the CEO 16 Financial and Non-Financial Highlights 18 Strategies for Value Creation 18 Our Value Creation Process 20 Our Accumulated Strengths 22 Daikin’s Unique Business Model 24 Risks and Opportunities That Affect Medium- to Long-Term Value Creation 26 Daikin’s Aims For Value Creation 28 Strategic Management Plan FUSION 25 32 Special Features 32 Daikin’s Organizational Strengths That Have Manifested in the Midst of a Crisis 36 Air Conditioner (AC) Subscription Service: For the Betterment of Society, Today and Tomorrow 38 Foundation for Value Creation 38 Strengthening Our Human Resource Capabilities 40 Strengthening Technological Capabilities 42 Environmental Initiatives 44 Information Disclosure based on the TCFD Framework 45 Supply Chain Management 46 Safety-Related Measures 47 Financial Strategy Key External Recognition • Selected for inclusion in the MSCI ESG Leaders Indexes • Selected for inclusion in the MSCI Japan ESG Select Leaders Index • Selected for inclusion in the MSCI Japan Empowering • Selected for inclusion in the FTSE Blossom Japan Sector Women Index (WIN) Relative Index • Selected as a leading global company for climate change measures in CDP’s climate change A List, the program’s highest recognition • Awarded five stars, the highest rating, and the NIKKEI Smart Work Grand Prize 2022 in the Fifth NIKKEI Smart Work Management Survey, a program sponsored by Nikkei Inc., which assesses companies on the variation and flexibility of their work practices 2 Contents 50 A Governance System That Facilitates Value Creation 50 Corporate Governance 55 Messages from External Directors 56 Corporate Officers 60 Compliance and Risk Management 62 Business Strategies 62 Overview of Daikin’s Core Businesses and Global Network Review of Operations 64 Air Conditioning 70 Chemicals 72 Oil Hydraulics 73 Defense Systems 74 Financial Summary 74 Eleven-Year Financial Highlights 76 On Publishing the Integrated Report 2022 77 Company Overview / Investor Information Editorial Policy Period of Coverage In compiling this report, we referred to the International Integrated Reporting This report covers the period from Framework of the IFRS Foundation, the Guidance for Collaborative Value April 1, 2021 to March 31, 2022 (fiscal 2021) Creation issued by Japan’s Ministry of Economy, Trade and Industry, and other guidelines. We have published this report to provide all of our stake- Forward-Looking Statements holders with detailed information on the Daikin Group’s strengths and This report contains statements regarding the future plans and strategies business model, its unique corporate culture, and its growth strategies for of Daikin Industries, Ltd. (the Company), as well as the Company’s future realizing medium- to long-term growth and development. performance. These statements are not statements of historical facts and Scope of Coverage are based on judgments made by the Company on the basis of information known at the time. Readers should therefore refrain from drawing This report covers Daikin Industries, Ltd., and its consolidated subsidiaries. conclusions based only on these statements regarding the future Environmental performance data, however, covers four production bases of performance of the Company. The actual future performance of the Daikin Industries, Ltd., eight production subsidiaries in Japan, and 58 Company may be influenced by economic trends, strong competition in production subsidiaries overseas. the industrial sectors where it conducts its operations, foreign currency In this report, “the Group” refers to the Daikin Group overall, while “the exchange rates, and changes in taxation and other systems. For these Company” refers to Daikin Industries, Ltd. reasons, these forward-looking statements are subject to latent risk and uncertainty. 3 Integrated Report 2022 History of the Daikin Group Founder Akira Yamada Our Founding Akira Yamada, the founder of Daikin’s predecessor Osaka Kinzoku Kogyosho Limited Partnership, joined a private company as an engineer after working at the Osaka Artillery Arsenal. Despite a flood of orders for radiator tubes used on aircraft in 1923, the company’s management board at the time was reluctant to take on this business due to its poor financial situation. Nonetheless, convinced that the business would be a success, Yamada made it clear that he would take full responsibility for it and accepted orders for the radiator tubes on the condition that he would establish his own factory and assume production as a subcontractor. This factory laid the foundation for the establishment of Osaka Kinzoku Kogyosho. Despite being a company that specialized in metals, it funneled efforts into the research and development of chemicals thereafter, becoming the first to successfully produce freon in Japan. The development of our very own freon refrigeration technology and fluoropolymers paved the way for the establishment of the backbone of our core business today, the Air Conditioning Business. Aircraft radiator tubes manufactured at the time of the Group’s founding 1924 1935 1951 Founding of Osaka Kinzoku Kogyosho Limited Partnership Development of Japan’s first fluorocarbon refrigerant Launch of Japan’s first packaged air conditioner 1958 Entry into the room air-conditioning business The Foundation of a Sales Network That Has Overcome a Series of Hardships Over the first 50 years from our founding, we had to significantly reduce our workforce on three separate occasions as a result of recurring financial crises. Moreover, due to the effects of the first oil crisis, in 1975 we failed to turn a profit for the first time in a quarter century and were excessively overstaffed. It was in these circumstances that the then president Minoru Yamada put forth the Declaration for Avoiding Employee Layoffs and a large number of employees were reassigned from the manufacturing division to the sales division with a view to retaining personnel and ensuring business continuity. Through this collective effort, the employees who were reassigned to the sales division established the foundation for Daikin’s robust sales network in Japan. A Leading Air Conditioner Company Daikin has spearheaded the growth of the air conditioner industry through the introduction of innovative products and technologies including those that were firsts in Japan, including packaged air conditioners that operate at the touch of a button (released in 1951), and multi-split air-conditioning systems for buildings (released in 1982). Our greatest invention, however, is Ururu Sarara, Daikin’s flagship product. Released in 1999, this room air conditioner can control humidity levels without the need for a water tank by drawing in moisture from the outside air. By using a reheat dehumidification system it can also dehumidify room air without lowering the room temperature. As a global leader in the air conditioner market, Daikin draws on its one-of-a-kind technology to continue to develop environment-friendly products and is cherished by its customers in the over 170 countries in which it currently operates. 4 Ururu Sarara, the world’s first room air conditioner capable of humidifying the air while heating it without the need for a water tank Introduction Our Three-Pillar AC Business Plan and Global Expansion After the collapse of the bubble economy in the early 1990s, Daikin continued to report losses in the areas of residential air conditioners and central air-conditioning systems for factories and buildings. Moreover, the domestic market for air conditioners, including for commercial use, had already matured by that time. In light of this situation, the then chairman Noriyuki Inoue, who had been recently appointed president, set out to pursue the overseas market. With the exception of the United States, air conditioners were not commonly used outside of Japan at the time. Moreover, Daikin and one other company were the only suppliers in the world of air conditioners for residential, commercial, and factory and building use. Inoue believed that directing Daikin’s attention to factory and building, and residential use more than ever and uniting the strengths of its three business segments would clear the path to Daikin becoming the world’s leading comprehensive manufacturer of air conditioners. To that end, our Three-Pillar AC Business Plan was formulated with a view to harmoniously promoting the growth of our three business segments. In addition, to ensure the effectiveness of this plan, we made a series of major decisions that would turn out to be pivotal points in our history, including advancing into the Chinese market, expanding our European business, and conducting mergers and acquisitions (M&As) overseas, thereby establishing the platform for our growth into a global leader in the industry. 1982 1999 2007 Entry into the room air-conditioning business Launch of Japan’s first multi-split air-conditioning system for buildings Launch of Ururu Sarara, the world’s first waterless humidifying room air conditioner Acquisition of OYL Group, a major global air-conditioning manufacturer 2008 Business alliance with Gree Electric Appliances, China’s top air-conditioning manufacturer Our Ambitious Pursuit of the Chinese Market In 2008, inverters, one of our core technologies at the time, were a crucial element of our business strategy as the shift to more energy-efficient air conditioners played a major role in addressing the intensifying needs for more environmentally conscious products worldwide. This was also the case in China, a market that we could not avoid in our pursuit of becoming the top air conditioner manufacturer in the world. At the same time, we came to realize that gaining a foothold in China’s massive air conditioner market through our efforts alone would be a tall order. Therefore, we formed a business alliance with Gree Electric Appliances, the largest manufacturer of air conditioners in China, for the technology transfer of affordably priced inverter air conditioners. As a result, the use of inverter air conditioners, which offer exceptional environmental performance, caught on right away in China. Inverter Air Conditioners as a Percentage of China’s Residential Air Conditioner Market (Million units) 45 40 35 30 25 20 15 10 5 0 76% 7% 2009 2018 Non-inverter air conditioners Inverter air conditioners Reaching agreement with Gree Electric Appliances for outsourced production of inverter air conditioners 5 Integrated Report 2022 History of the Daikin Group Full-Fledged Entry into the U.S. Market With the aim of strengthening our North American business while sustaining our low-priced room air conditioner business and Applied Systems (large-scale central air-conditioning systems), which had been a weakness of ours, in 2007 we acquired O.Y.L. Industries Bhd, a global leader in the manufacture of air conditioners. With a price tag of approximately ¥243.8 billion, this was Daikin’s first large-scale acquisition. In 2010, this acquisition served as a springboard for becoming the world’s top-selling air-conditioning business. In North America, however, our presence was still minimal in the world’s largest market for air conditioners. Due to the substantial differences in the way air conditioners were designed and sold in this region compared with Japan, tapping into this market on our own was quite a challenge, and we were forced to pull out from both our attempts in 1981 and 1998. We encountered a turning point, however, when we acquired the Goodman Global Group, Inc. in 2012. Through the participation of Goodman, which boasts the top share of the residential air-conditioning market in North America, the Daikin Group made a full-fledged entry into the residential unitary (central air-conditioning system) market and secured a business platform in North America. Signing ceremony with O.Y.L. Industries Bhd Press conference for the acquisition of Goodman Global Group, Inc. 2012 2013 2014 Acquisition of U.S. residential air-conditioning manufacturer Goodman Launch of Urusara 7, the world’s first residential air conditioner using new R32 refrigerant Launch in Japan of FIVE STAR ZEAS, R32 refrigerant air conditioners for stores and offices Launch of cooling-only inverter air conditioners for developing countries Change in Net Sales and Operating Profit Japan Overseas Operating profit Acquisition of OYL Group Development of strategy in line with Three-Pillar AC Business Plan 1992/3 1995/3 2007/3 6 Introduction Promoting the Use of R32 Refrigerants In Pursuit of Further Growth R32 refrigerants are conducive to environmental sustainability with a global warming potential (GWP)* equivalent to one-third the level of our previous refrigerant, R410A. Despite their low resistance to heat, tests have proven that there are no risks associated with the use of R32 refrigerants, as long as they are handled properly. In 1998, however, R32 was classified as flammable and treated in the same way as hydrogen and propane, according to standards and regulations that classified refrigerants as either flammable or nonflammable, thereby hampering its use in air-conditioning systems. With the aim of heightening awareness of the safe use of R32 refrigerants, Daikin has been holding conferences around the world on safety and environmental performance and in 2014, was granted approval for a new international standard. To enhance the profile of its environmental technology utilizing R32 refrigerants in Japan to the rest of the world and to promote refrigerant conversion worldwide, Daikin has granted free access to a total of 93 patents related to the manufacture of R32 air conditioning systems. In 2019, free access was granted globally for all of the patents that had been applied for since 2011. More than 33 million units of our R32 air conditioners have been sold to date in over 100 countries across the globe. Combined with those of other manufacturers, a total of over 160 million units of R32 air conditioners have been sold, contributing to an estimated reduction of approximately 260 million tons of CO2 emissions (based on calculations by Daikin as of June 2021). * A numerical value representing the potential global warming effect of a greenhouse gas Granting of worldwide free access to basic patents for using R32 refrigerant in comparison with CO2 2015 Established technology development base, Technology Innovation Center, and commenced new initiatives to create new value with air through collaboration with academic and research institutions Acquisition of Goodman Global Group, Inc. Fiscal 2021 Net Sales ¥3,109.1billion Operating Profit ¥316.4 billion According to the International Energy Agency (IEA), in 2050, air conditioner demand is projected to more than triple the current level due to the economic growth of emerging countries. The resulting increase in energy consumption and greenhouse gas (GHG) emissions is a major social issue that must be addressed. At Daikin, we have been pushing forward with a range of measures aimed at realizing carbon neutrality, such as raising the profile of our exceptionally energy-efficient products and promoting the conversion to refrigerants with low GWP. Going forward, as the world’s leading comprehensive manufacturer of air conditioners, we will stand at the forefront of today’s environmentally conscious society to help resolve its issues, while at the same time, setting our sights on continuing to expand our business and achieving further growth. Two Decades of Remarkable Strides Net Sales ¥538.8 billion ¥3,109.1billion FYE 03/2002 FYE 03/2022 Operating Profit ¥42.0 billion FYE 03/2002 Share Price ¥2,270 FYE 03/2002 ¥316.4 billion FYE 03/2022 ¥22,410 FYE 03/2022 Market Capitalization ¥598.9 billion ¥6,568.7billion FYE 03/2002 FYE 03/2022 Ratio of Overseas Sales 33% FYE 03/2002 Ratio of Overseas Employees 38% FYE 03/2002 79% FYE 03/2022 84% FYE 03/2022 2013/3 2022/3 7 Integrated Report 2022 Introduction Message from the CEO Masanori Togawa President and CEO We will step up the pace of FUSION 25 even further to realize both contributions to a sustainable society and Group growth. We have concluded the inaugural year of our FUSION 25 strategic management plan, achieving record-high performances in both operating profit and net sales, which surpassed three trillion yen for the first time in our history. While the future of our changing business environment remains uncertain, we will steadily seize the opportunities presented by these changes, and speed up the pace of measures to realize our goals for FUSION 25. 8 8 In fiscal 2021, we moved forward with a flexible management approach to ensure that we responded quickly to both upswings and downswings in our business environment in light of the uncertainties surrounding the COVID-19 pandemic. Throughout the year, our business activities were greatly influenced by the ongoing global shortage of semiconductors, inadequate supply of electronic components, and surging raw material prices and logistics costs. Under these circumstances, the Company established seven key themes, including strategic selling price measures, sales expansion and market share increases, variable cost reductions, and fixed cost reductions, and incorporated them into specific measures that were thoroughly implemented in a timely manner. Owing to these measures, we achieved record-high performances in both operating profit and net sales, which surpassed three trillion yen for the first time in our history. After Year One of FUSION 25 Our first FUSION strategic management plan was unveiled in set specific themes to be addressed over the five-year period of 1996. This series of execution-oriented management plans FUSION 25. At Daikin, we are committed to continuing to emphasize not only the achievement of qualitative goals but also expand our business and grow and develop as an organization the fulfillment of commitments to numerical results. The term while helping to resolve social and environmental issues over “FUSION” was adopted in reflection of our commitment to this five-year period. Based on this commitment, under FUSION realizing profits in the short term and growth and development 25, we have set the goal of realizing both contributions to a over the medium to long term, or, in other words, the fusion of sustainable society and Group growth and declared three these two timelines. While profits could be made in the short growth strategy themes: “Challenge to achieve carbon neutrality,” term simply by reducing investments, this would come at the “Promotion of Solutions Business connected with customers,” expense of our future growth. Our management must consider and “Creating value with air,” which I will briefly explain hereafter. the means by which we will balance the pursuit of short-term I would first like to talk about “Challenge to achieve carbon profits with medium- to long-term growth. neutrality.” With expectations on society in general to take Moreover, “FUSION” also refers to the consolidation of our measures toward decarbonization, we believe that we have Group companies. In general, as organizations get larger, a significant social responsibility to fulfill in resolving barriers begin to form within the organization. As of today, the environmental issues as the world’s only manufacturer of both Company consists of 322 consolidated subsidiaries, of which air conditioners and refrigerants. Our ultimate goal is to realize 292 companies (91%) are based overseas. It is imperative that net-zero GHG emissions. Prior to achieving this goal, we will we remove the barriers that exist within the Group, align the strive to realize the targets that have been laid out in FUSION 25 vectors of our organization, and enhance our ability to execute of reducing net GHG-emissions by 30% in 2025 and by 50% in through a collective Groupwide effort. 2030 as compared with emissions in the case of normal Even if we were to establish a plan for five years down the line business growth without implementing any countermeasures, when formulating our FUSION strategic management plan, our with 2019 as the baseline year. business environment would change constantly over time. While Our efforts will specifically center on continuing to expand setting aside our ultimate goal for five years forward, we establish sales of heat pump space and water heaters, inverters, and specific numerical targets and an action plan for the first three other energy-saving equipment, in order to reduce energy use years. Two years into this plan, we then establish a plan for the and contribute to reductions in GHG emissions. Furthermore, remaining three years, consisting of specific targets and an we are promoting the shift to refrigerants with low GWP and the action plan that we will work to achieve. This is the concept refrigerant eco-cycle of recovery, reclamation, and destruction, behind our FUSION strategic management plan. while proceeding with measures to reduce GHG emissions Over the years, our FUSION formulation process has centered throughout our manufacturing processes. on the direction that the Group must take for it to realize its vision five years into the future, starting from the present and taking into account potential changes in our market and customers and the trends of our competitors. In formulating FUSION 25, however, we looked ahead to how the world would change 10 to 20 years from now and where we wanted the organization to be at that time. By backcasting from this scenario, we considered the measures that we needed to take now and Environmental Initiatives Page 42 9 Integrated Report 2022 Message from the CEO Among our current lineup of business segments, the Heat Pump center, specific needs vary with each customer. In addition to Space and Water Heating Business in Europe has the greatest selling equipment to dealers, we must increase our points of influence on our challenge to achieve carbon neutrality. In contact with customers through our sales and service network. Europe, the introduction of the European Green Deal policy in Only then can we respond to diverse needs and propose 2019 has accelerated the movement toward decarbonization, solutions of high added value. For that reason, we are working despite the region’s widespread use of combustion heating, to acquire new sales and service companies and expedite the which generates high levels of CO2 emissions. Heat pump heaters reinforcement of our sales and service network. were used by approximately 10% of consumers at the start of In terms of the Air Conditioning Business in North America, FUSION 25. However, we are now seeing a rapid shift from the which we have identified as a focus region, the service solutions use of combustion heaters to heat pump space and water businesses of the three leading air conditioning manufacturers heaters, due in part to the granting of subsidies. With demand in the United States, which we regard as our competitors, expected to increase substantially over the next 10 years, we are account for 60% of their respective net sales, which is well in the process of expanding our supply system with a new above the 35% of net sales accounted for by our Solutions factory in Poland due to commence operations in 2024. Business. Going forward, we will enhance the growth of our With respect to our second growth strategy, the “Promotion of Solutions Business to expand our presence in the North Solutions Business connected with customers”, it is essential American market. that we continue to strengthen our approach to this growth I will now turn to our third growth strategy, “Creating value strategy. Because we are a manufacturer whose business with air.” When it comes to air quality, customers expect safety centers on air conditioners, equipment sales still remain the and reliability as well as comfort and health. The COVID-19 main source of our earnings. In order to expand our Solutions pandemic has reminded us that such values are simply Business, which centers on services and maintenance, we must irreplaceable. We will anticipate the changes in the value first increase sales of heat source equipment and solidify our expected by customers for air and devote our attention not only customer base. Whether it be a hospital, school, office, or data to sales of air conditioners but also the intrinsic value of air in 10 Introduction terms of temperature, humidity, air purification, and airflow. In organizations in the healthcare domain, we may be able to other words, we will funnel our efforts into both our manufacture provide air that caters specifically to the needs of each individual of products and our creation of experiences with air. to help ensure healthy lives and enhance sleep quality, learning The respective markets of our air purification and ventilation potential, and productivity. We will continue to pursue new sectors have flourished on the back of higher demand arising possibilities for creating value with air while working alongside from the COVID-19 pandemic, while the Company has also universities, research institutes, and other companies to take on benefited as a result, through brisk sales of its air purifiers. the challenge of creating new value that is essential to society. We believe that our air- and ventilation-related businesses can achieve tremendous growth over the medium term through the timely introduction of products that cater specifically to the needs and regulations of each country. Over the long run, the growth of our business will hinge on our ability to ensure health, comfort, and happiness for customers. For instance, by using our own air conditioning data in combination with biometric data acquired through a joint effort with other Strategic Management Plan FUSION 25 Page 28 Transforming Our Business Model through Digital Technology Under FUSION 25, we plan to invest ¥137.0 billion in digital who are well versed in digital technology is not as easy as it technology over a period of three years through to fiscal 2023. sounds. For this reason, in 2017 the Company established Digital technology will be utilized particularly for the two themes Daikin Information and Communications Technology College to put forth in FUSION 25—business innovation and process develop its own team of IoT and AI specialists who are familiar innovation. with air-conditioning technology. New employees who enroll in Under business innovation, we will look to create new the college fully devote their time to acquiring basic knowledge businesses and expand existing ones through the use of digital of AI and to understanding the use of AI technology over a technology. The world is undergoing rapid changes and so too is period of two years, without engaging in day-to-day business. the playing field for the Air Conditioning Business. For instance, As of March 2022, 300 employees have graduated from the due to the advancement of the Internet of Things (IoT) and program and are currently working in their respective departments. artificial intelligence (AI), we are already starting to see a future In addition to this program for new employees, we are developing in which people’s lives are being controlled by platform providers programs for general employees and management aimed at in a number of consumer electronics. So, what exactly is business accelerating the development of IoT and AI specialists at each innovation when it comes to air conditioning? Business level of the organization and developing 1,500 digital human innovation offers the possibility of performing our optimal energy resources* by the end of fiscal 2022. Graduates of the program management processes automatically, through the use of our are already thriving as the centerpieces of our process innovation abundant air conditioner operation data. This entails the in their respective departments. combining of our building, spatial, and various other kinds of Our challenge going forward is to develop employees who are data. We are also involved in joint projects with homebuilders well versed in digital technology and who also have an in-depth and it is critical that the data we accumulate is used effectively knowledge of our business. to transform our business going forward. As for process innovation, we will work to shorten development lead times and enhance supply chain efficiency with a view to further solidifying our management foundation. We will work to eliminate fixed ideas attached to each department and radically reform our production, development, and indirect operations. Our employees are the key to proceeding further ahead with digital transformation. No matter how great your strategy is, you will not get anywhere without the people who will implement it. However, the reality is that securing highly skilled individuals * Innovators in digital technology and AI with the ability to put their specialized knowledge into action and inspire others around them to do the same Strengthening Our Human Resource Capabilities Page 38 11 Integrated Report 2022 Message from the CEO Daikin’s Social Responsibilities In 2018, the Company introduced its Environmental Vision 2050 engaged in future-oriented research. Through a collaboration with the aim of realizing net-zero GHG emissions by 2050. The between industry, government, and academia, the Company is IEA expects a rapid increase in global air conditioning demand pushing forward with practical research and development (R&D) by 2050, particularly in markets such as China, India, and on environmental issues, such as the development of CO2 Africa, whereas global electricity demand arising from the needs capture, decomposition, and reuse technologies, magnetic for cooling is expected to triple from 2015 levels. The demand refrigeration systems, and next-generation refrigerants. for electricity will increase three-fold as long as the energy At Daikin, we believe that achieving sustainable growth as an efficiency of the air conditioners being used remains the same. organization is impossible without both the creation of profit and However, in order to help ensure a comfortable and financially contributions to society, including environmental initiatives. Our sound lifestyle for everyone while realizing a carbon-neutral greatest value comes from being able to grow our business while society, we must find a way to suppress this increasing demand helping resolve a range of social issues. for electricity. The degree to which companies contribute to resolving We will continue to evolve and promote the widespread use of environmental and social issues has recently become a major our exceptionally energy-efficient products and technologies to factor in students’ decisions on their place of employment. We address the increasing demand for air conditioning and contribute are seeing an increasing number of young people who give to reductions in GHG emissions. For instance, while almost all of serious consideration to how they can contribute to addressing the room air conditioners used in Japan and Europe are equipped social issues. I believe that extending the overlap between the with inverters, the more affordable but energy-inefficient dreams and aspirations of these individuals and the goals of the non-inverter air conditioners are widely used throughout the rest organization is also a major role of management. of the world. To turn this situation around and widen the use of inverter air conditioners, we are embracing the challenge of manufacturing such air conditioners at costs similar to their non-inverter counterparts by downsizing compressors and other components and using less raw materials. While these ongoing measures are expected to reduce GHG emissions to a certain degree, further innovation is needed to realize a carbon-neutral society. As a part of our mission as an air conditioning manufacturer, under FUSION 25, we are also Daikin’s Aims For Value Creation Page 26 Example Initiatives under FUSION 25 Three Growth Strategy Themes 1. Challenge to achieve carbon neutrality Daikin will aim to achieve carbon neutrality by 2050. We will contribute to solving environmental issues, while at the same time expanding our business, by converting combustion heating to heat pumps, switching to lower GWP refrigerants and working to recover, reclaim, and destroy refrigerants. 2. Promotion of Solutions Business connected with customers Daikin will expand the Solutions Business directly connected to customers with a focus on customer needs by application and market, and contribute to solutions to such issues as energy conservation and reducing food loss. 3. Creating value with air Daikin will utilize its proprietary air-related technologies and products to significantly grow the indoor air quality (IAQ) and ventilation businesses and address the growing need for safe and reliable air. 12 Introduction Necessities in Times of Change The world has encountered an unprecedented crisis in the form Just like the famous Japanese saying “a swift wind knows a of the COVID-19 pandemic, heralding the age of the “New strong grass,” a person’s determination and true value come to Normal.” In light of these circumstances, I constantly ask myself light in the face of difficulties and hardships and this is no different what I should do as the head of the Company. In order to in the case of the Company. We have framed the drastic changes sustainably grow our business in these times of change, we in our business environment brought about by the COVID-19 must determine which changes should and should not be made. pandemic as an opportunity to put Daikin’s true value to the test Our management philosophy and the culture we have cultivated and to reorganize its corporate structure. One of the areas in which over the years could very well be defined as the Company’s DNA we have made particular improvements through our experience and we must continue to refine them as a source of competitiveness. with the COVID-19 pandemic is our product development Meanwhile, it is critical that our strategies and organization capabilities. Our air conditioners with ventilation functions were evolve in tune with the changes around us. released to market ahead of our competitors during the pandemic, When adapting to change, the first thing we must do is and we were highly recognized for our proactive efforts to envision multiple scenarios. Even then, we must be prepared for address the latent need for ventilation. In a business environment the unexpected. We must boldly decide on a direction, take where it can be difficult to predict demand for products, this action, and adjust our course quickly in response to change. turned out to be a rare occasion where we were convinced that When explaining this to our employees, we use the phrase the product would definitely sell if we brought it to market. In “second-rate strategy with first-rate execution.” While a first-rate order to capitalize on this opportunity, we had to develop these strategy with first-rate execution is most certainly ideal, a strategy air conditioners as quickly as possible. While ventilation functions is meaningless unless it is executed successfully and generates had only been offered on Daikin’s high-end flagship models until results. We want our employees to understand that execution is that point, the Company immediately decided on a policy to our foremost priority, and that “second-rate strategy with first-rate develop and promote sales of mid- and low-end air conditioners execution” is preferable to a “first-rate strategy with second-rate with a ventilation function and proceeded with the development execution.” of these products. A process that would usually take 14 months To cite some specific examples, looking at the current external was completed in a mere four months, allowing us to release a business environment, the conflict between Russia and Ukraine series of products designed to address ventilation needs. has heightened uncertainty about our future. This conflict has had serious implications for the Company in the form of surging costs of raw materials and energy, economic downturn in major markets, and global economic slowdown. Resource prices, logistics costs, and labor costs have soared to unprecedented levels and they must be closely monitored going forward. Meanwhile, the surging cost of energy suggests a further increase in the need for energy conservation. As a manufacturer of energy-efficient products and services, these increasing needs mean greater opportunities for our business. The demand for heat pump space heaters and inverter air conditioners is projected to rise even further going forward, and we will respond to it in a timely manner. Daikin’s Organizational Strengths That Have Manifested in the Midst of a Crisis Page 32 13 Integrated Report 2022 Message from the CEO People Are the Source of Our Competitiveness I spoke earlier about distinguishing which changes should and industry–government–academia collaborations and partnerships should not be made, and one of the things we must not change as well as M&As with venture companies and other organizations is our fast and flat organizational culture. The Company’s Fast & and acquire time and human resources so that we continue to Flat Management system is a flexible organizational management create innovation and expedite our business growth. In such approach that draws on the advantages of both top-down and cases, our underlying philosophy on human resources and bottom-up approaches to management. Top-down decisions are organization management remains unchanged. made quickly but they do not necessarily have the support of We take the time to ensure that a relationship of trust is built employees. Conversely, bottom-up decisions are made by the with each company that becomes a part of the Group. When it higher ranks of the organization after considering the views of the comes to acquisitions in particular, in addition to taking business frontline employees who may therefore be more likely to buy into strategies and synergies into account, we must carefully assess them. Such decisions, however, take time to make. whether Daikin and the company we intend to acquire respect Sharing valuable information with all employees on a daily and accept each other’s corporate philosophy and culture. Once basis is key to making timely decisions and ensuring that the acquisition is made, we do not assign a large number of our employees buy into them. At Daikin, the key details of employees right away, interfere in the management and deliberations at management meetings, including those of the organizational operations, or impose the Daikin Way on the Board of Directors, are shared with all employees whenever newly acquired company. Instead, we entrust local management possible. Members of senior management and executive officers to the management team of the acquired company and actively also ensure that the views of each employee are always heard support the direction they wish to take toward further growth. In and taken into consideration, facilitating the immediate so doing, I believe we will be able to complement each other communication of information about changes in the business and unite. For instance, when we acquired the OYL Group in environment from the front lines of our operations. Discussions 2006, a joint meeting involving the management of both are held based on the information from the front lines and companies was held not in our respective countries of Malaysia any matters that arise are resolved by those in charge of or Japan, but rather in Hawaii. There, we held candid decision-making. Once a matter has been discussed and discussions on the actual state of both companies and the resolved by everyone, the only thing left is to take action. challenges they faced, as well as our expectations for each I believe this organizational management approach has become other. This allowed management from both sides to open up to one of our strengths, and spurred a sense of unity between each other, and agree to pursue the goal of establishing a new management and employees. business together. I believe that the value we have placed on The people in our organization are the source of our building relationships of trust is the reason behind the competitiveness. Strategies can be executed and changes made successful globalization of our business and the expansion of only by them. To enable each employee, who we were fortunate our overseas network. to welcome into our organization, to realize, if not the only, then Furthermore, we have also valued the importance of both the greatest fulfillment in life, we worked to create a rewarding cohesiveness and independence in our organizational workplace environment where they can demonstrate their full potential by providing opportunities for growth and facilitating management. Our overseas business has rapidly expanded through our proactive delegation of authority, enabling the their development. At Daikin, we believe that the sum of the acceptance of local cultures and the development of regionally growth of our employees represents the very foundation of the rooted businesses. While our goal has been to strengthen the Group’s development. independence of our regional businesses through localization The Group consists of more than 88,000 employees, over and speed up the expansion of our overseas business, there has 80% of whom are based overseas. The global expansion of our always been the concern that the Group might fall apart if business has increased the diversity of our employees and everything were to be entrusted to our local operations. For this values. The Company has a unique diversity management reason, to ensure that our local operations do not lose sight of system that enables the creation of innovation and the our direction, the head office shares strategies and information strengthening of Group competitiveness by bringing together with them and has taken the leading role in managing these employees from various cultures, ethnicities, generations, and companies by demonstrating cohesiveness as a Group, with the lifestyles throughout the world and by drawing on their aim of optimizing our entire global operations. individualities and respective strengths. In an age where Our management team holds manager meetings each year in companies are expected to adapt to change, it will our respective regions of operation, providing a venue for become increasingly important to actively engage in establishing direct communication with local executives. At these 14 Introduction meetings, discussions are held on local business strategies and the potential of its employees, respecting their individualities, the challenges associated with their execution, and sometimes and enhancing their respective abilities is something that is the heads of management make decisions on the spot. Even in appreciated worldwide regardless of differences in language or these types of settings, we convey Daikin’s corporate culture, lifestyle. Through our organizational management that draws on organizational DNA, tacit knowledge, and other views on cohesiveness and independence, we will bring out the full organizational management. While the meetings have been held potential of each employee and work collectively toward the online in recent years due to the COVID-19 pandemic, we have further growth and development of the Group. continued to provide opportunities for direct communication between our management team and local executives. Corporate management is, in essence, the management of people. We believe that the Company’s approach of believing in Our Accumulated Strengths Page 20 Management’s Perspective When I became president and CEO, Chairman Inoue said that it My goal is to ensure that Daikin remains an attractive was the responsibility of the head of the Company to provide organization that people want to work for, do business with, and answers to questions where there simply were no answers. Since invest in. While it may sound abstract, achieving this aim will then, I have constantly reminded myself of these words. entail constantly putting into practice the approaches I have We have continued to grow over the years by anticipating the outlined above. Moving ahead, we remain firmly committed to changes in our business environment and remaining one step increasing our corporate value by ambitiously pursuing and ahead of our competitors. Having a broad perspective is implementing growth strategies. essential to doing so and this depends on our ability to confront We look forward to your continued understanding and adversity. We must stand at the forefront of our industry and support of our business going forward. constantly keep track of market trends. In times of drastic change, we must ask ourselves what are the questions that need to be answered and strive to find these answers. This process must be repeated again and again. Whenever there are three possible solutions, A, B, or C, it is important, without a doubt, that these choices are fully examined and discussed. However, if we select A, we must commit to ensuring that A succeeds. Otherwise, we will not achieve any results. Masanori Togawa President and CEO August 2022 15 Integrated Report 2022 Introduction Financial and Non-Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries / For theYears Ended March 31 Net Sales / Operating Profit / Operating Profit Margin ROE / ROA (Billions of yen) 3,200 2,400 1,600 800 0 3,109.1 10.2 316.4 (%) 20 15 10 5 0 (%) 20 16 12 8 4 0 12.0 6.2 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 Net sales (left) Operating profit (left) Operating profit margin (right) ROE ROA In light of our uncertain business environment, we quickly established seven key themes for fiscal 2021 and committed to following through on these themes throughout the year to ensure that we achieved the best results possible. In the process, we were able not only to offset the impacts of cost increases but also to proceed with the enhancement of our management structure with a view to realizing further growth and development. With the expectation that demand will continue to increase going forward in the Air Conditioning Business, we will look to aggressively engage in R&D and capital investments, acquisitions, and other strategic investments. Through the steady flow of returns from these investments, we will aim to continue to enhance our business results and our ROE/ROA. Total Shareholders’ Equity / Shareholders’ Equity Ratio Interest-Bearing Liabilities / Liability with Interest Ratio (Billions of yen) 2,000 1,500 1,000 500 0 1,969.7 51.5 (%) 80 60 40 20 0 (Billions of yen) 900 750 600 450 300 150 0 824.9 21.6 (%) 30 25 20 15 10 5 0 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 Total shareholders’ equity (left) Shareholders’ equity ratio (right) Interest-bearing liabilities (left) Liability with interest ratio (right) Daikin’s shareholders’ equity ratio came in at 51.5% for fiscal 2021, exceeding 50% for the fifth consecutive year. The Company is taking positive steps to ensure its financial stability. We are working to reduce the balance of interest-bearing liabilities by generating free cash flow and making effective use of Group funds. In preparation for contingencies coinciding with the COVID-19 pandemic, we have been reinforcing cash and cash equivalents through long-term borrowings since fiscal 2020. Free Cash Flow (Billions of yen) Capital Investments / R&D Expenses (Billions of yen) 250 200 150 100 50 0 160 120 80 40 0 64.3 156.3 81.5 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 In addition to increasing earnings and improving investment efficiency, efforts are also being made to generate cash flow from a working capital perspective. This includes thoroughly reducing the balances of accounts receivable and inventory. Capital investments R&D expenses From a capital investment perspective, energies are being directed toward upgrading and expanding sales networks and constructing new plants and enhancing existing ones. We are also boosting production capacity, focusing on emerging countries and key markets where there has been remarkable growth. As far as R&D expenses are concerned, Daikin recognizes that strengthening technological competitiveness is the lifeblood of a manufacturer. On this basis, the Company is coordinating with its eight development bases 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 products, including those for addressing global environmental problems. 16 Cash Dividends per Share / DOE / Dividend Payout Ratio Number of Patent Applications (Yen) 200 150 100 50 0 200 26.9 3.2 (%) 40 30 20 10 0 (No. of patent applications) 1,200 900 600 300 0 1,045 587 2018/3 2019/3 2020/3 2021/3 2022/3 2017/3 2018/3 2019/3 2020/3 2021/3 Cash dividends per share (left) DOE (right) Dividend payout ratio (right) Japan Overseas In addition to making every effort to maintain a ratio of dividends to shareholder equity (DOE) of 3.0% or higher based on the principle of always providing stable dividends to shareholders, we will continue striving in our mission to provide shareholders with even greater return by aiming for an increasingly higher level of dividend payout ratio. Daikin is working to stimulate employees’ motivation to invent, spur the creation of intellectual property, increase the quality and quantity of patents in competitive fields, and increase the number of overseas patents in key technological fields, in particular in emerging countries. Note: The latest figures are for the fiscal year ended March 31, 2021. Number and Percentage of Female Managers Number and Percentage of Presidents and Executives of Overseas Bases Who Are Local Nationals (Persons) (%) (Persons) 80 60 40 20 0 68 5.7 8 6 4 2 0 80 60 40 20 0 63 45.0 44.0 32 (%) 80 60 40 20 0 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 No. of female managers (left) Percentage of female managers (right) One of the Company’s most important policies revolves around the empowerment of women in its workforce. Daikin is implementing various measures to accelerate the development of women in management and executive positions, change the mindset of men in management, and support the early return to work of its female employees after childcare leave. President (left) Percentage of presidents (right) Executive (left) Percentage of executives (right) As Daikin’s business globalizes, the Company is actively promoting more employees at overseas bases to managerial positions. Among the initiatives we have implemented is the Next-Generation Executive Development Program, which aims to continuously develop global business leaders. GHG Emissions (From Development and Production Processes) Environmentally Conscious Products* as a Percentage of Sales Volume (Residential-Use Air Conditioners) (Million tons-CO2) 1.6 1.2 0.8 0.4 0 1.16 (%) 100 75 50 25 0 1 28 71 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 Aiming to lower GHG emissions from our manufacturing processes (development and production) to 1.2 million tons-CO2 by fiscal 2025, we were able to reduce GHG emissions to 1.16 million tons-CO2 (a 36% reduction from fiscal 2015 levels) in fiscal 2021. Super Green Products Green Products Other products * Environmentally conscious products: A generic term that covers Super Green Products and Green Products. Products that satisfy all of the conditions below qualify as Super Green Products while products that meet at least one of these conditions classify as Green Products: • Reduction in electricity use by at least 30% compared with conventional products Example: Inverter air conditioners • Use of refrigerants with less than one-third the GWP of conventional refrigerants Example: Air conditioners using low-GWP R32 refrigerant 17 Integrated Report 2022 Our Value Creation Process Drawing on its accumulated strengths and unique business model, the Daikin Group is striving to resolve environmental and social issues through its business activities. We are aware that the key themes declared in Strategic Management Plan FUSION 25 are priorities for management. Accordingly, we will address these themes over a period of five years, providing new value that contributes to the realization of a sustainable society and the continuous growth of our business. Manufacturing Vertically integrated production based on in-house production of core parts Sales, Transportation, and Installation Integrated product development consisting of manufacturing, sales, research, and procurement Development and Design Business Model Please refer to page 22 for details. Product Use Market-localized production based on local production for local consumption Procurement Robust sales network based on our globally expanding dealer network After-Sales Service, Recovery, and Recycling The Foundation of Our Business Activities in Pursuit of Sustainable Growth Environmental Vision 2050 Please refer to page 42 for details. Key Sustainability Themes • Response to climate change • Co-creation of innovation • Provision of safe and reliable air • Quality and customer satisfaction environments • Increase of the value-added nature of air • Human resource development • Diversity management Our Accumulated Strengths 1 People-Centered Management 2 Distinctive Technological Capabilities 3 Globally Expanding Robust Sales Network Please refer to page 20 for details. 18 Strategies for Value Creation FUSION 05 Securing of our management foundation FUSION 10 Management innovation FUSION 15 Acceleration of growth FUSION 20 Business domain expansion / business structure conversion, and enhancement of existing businesses FUSION 25 Offer new value for the environment and air to realize both contributions to a sustainable society and Group growth Based on a backcasting approach that uncovers solutions and issues with the ideal state of the Daikin Group as the starting point, we established specific themes to address over the five-year period of FUSION 25. Three Growth Strategy Themes One Theme for Focus Regions Five Themes to Enhance the Management Foundation Daikin’s Aims for Value Creation We will provide new value in the form of healthy and comfortable lifestyles and spaces while helping realize a better environment. Please refer to page 26 for details. Please refer to page 28 for details. 19 Integrated Report 20225Strengthening technology development capabilities 6Establishing a robust supply chain 7Promoting digital transformation (DX) for innovation 8Creating market value/ enhancing advocacy activities 9Improving human resource capabilities through advanced diversity management4Air Conditioning Business in North America3Creating value with air 1Challenge to achieve carbon neutrality2Promotion of Solutions Business connected with customers Our Accumulated Strengths The unique strengths that are an integral part of Daikin today have been accumulated through its years of experience in air-conditioning and other businesses since the Company’s founding in Osaka in 1924. These strengths are our very DNA and have been passed down and evolved to this day, as our business continues to expand across the globe. 1 People-Centered Management A Corporate Culture That Has Stood the Test of Time, After Years in Business People-Centered Management can be regarded as the tacit potential and individualities of the people who take actions as well knowledge, or even the corporate culture, that has been nurtured as the awareness with which they act. At the same time, people through our years in business since our founding. It is deeply rejoice when they are happy, cry when they are sad, trust people at ingrained in all of our ideals, including our Core Values, Group times, and distrust them at other times. While upholding enthusiasm Philosophy, and Annual Group Policy. and ambition to grow and succeed, people sometimes fear failure People-Centered Management is based on belief in the and flinch at taking on a challenge in a new realm. These feelings unlimited potential of people, that the source of a company’s and emotions are common to all people, regardless of nationality, competitiveness is its people, and that the cumulative growth of race, or gender, and transcend differences in culture, customs, each individual is the foundation of a company’s growth. It is a line and history. of thinking that draws out the enthusiasm and understanding of There is not a company in the world that would not say that it the people who work in an organization, and that strengthens and values its people. Through genuine efforts to this end, we would raises the capabilities of the organization by having all members like to make People-Centered Management one of the sources of further refine their own individuality, achieve growth, and competitive advantage of the Daikin Group. demonstrate their full potential. This capitalizing on the diversity in the characteristics and abilities of each and every member as the strength of the organization is precisely the definition of diversity management. As long as management is a human activity, a company cannot be managed unless emphasis is placed on how to enhance the enthusiasm and understanding of the people who work there. People-Centered Management is the tacit knowledge that our Group has nurtured since its foundation through making serious efforts to prioritize its people. Every business activity—including strategy execution, various reforms, R&D, production, and sales—is carried out by people who work within the company. Business management depends on the Embracing the Strengths of Our Employees through Annual Manager Meetings Across the Globe The Daikin Group’s workforce comprises over 88,000 employees, more than 80% of whom are based overseas. At the root of our continuous growth as a global company are our employees, who are full of passion and vitality. Unlocking the potential of our overseas employees and using it as a strategy is essential to our business and, as a part of our efforts to that end, we hold manager meetings each year at our business sites across the globe. At these manager meetings, the senior management and executives of Daikin headquarters in Japan visit our overseas bases to engage in intensive face-to-face discussions with local executives over the course of one or two days. These discussions cover an array of topics that include the perceptions of overseas executives on matters concerning Daikin headquarters and the subtle needs of overseas subsidiaries that are not reflected in their regular business reports. Matters that need to be resolved are addressed during these discussions after listening diligently to the reports of our overseas executives. In addition to such meetings during the day, receptions are held afterwards, where managers and executives can meet informally in a relaxed setting, converse more freely, and get to know each other better. These management meetings have been held online in recent years due to the effects of the COVID-19 pandemic. While our means of communication has changed, however, the essence remains the same. The accumulation of such efforts leads to the timely development of new products and consistent improvements to our product quality. 20 Strategies for Value Creation 2 Distinctive Technological Capabilities A Trio of Advanced Core Air Conditioning Technologies Uniquely Developed by Daikin Heat-Pump Inverter Refrigerant Control Highly promising and energy-efficient technology for absorbing and transferring heat from the air Providing even more energy-efficient and comfortable solutions through highly precise control of motors Controlling the refrigerants that circulate and transfer heat between indoor and outdoor units Using minimal amounts of electrical Inverter air conditioners control their energy, heat-pump technology is designed motor rotation speed according to load, to absorb heat from the air and convert it enabling optimal control of their heating into large amounts of thermal energy for and cooling capacity. They reduce energy transfer to areas where it is needed. use by 58% compared with non-inverter air Heat-pump air conditioners produce six conditioners. Our refrigerant control technology, which is designed to efficiently transfer heat, is the key to our air conditioners’ energy-efficient capabilities. Daikin is the first company in the world to establish a technology that controls refrigerants for each indoor unit. times as much thermal energy as the electrical energy they consume. 3 Globally Expanding Robust Sales Network Expanding Our Business and Developing Our Sales Network in Over 170 Countries Worldwide With a global network of more than 100 production bases in over rather than relying on outside distributors. Climate and lifestyles 170 countries, the Daikin Group’s overseas sales account for 79% differ by country and region and so does the need for air conditioners. of its overall net sales. Behind its ability to maintain a high market Daikin’s sales network is an integral part of our global development share across the globe is Daikin’s sales network that has been because it allows us to engage with customers directly and provide developed over many years in each region. products that cater to their diverse needs in a timely manner. Unlike other home appliances, after-sales services, including Going forward, we will continue to monitor the conditions in installation and maintenance, are essential for the use of air each market and look to strategically acquire more dealerships conditioners. At Daikin, we value the importance of selling while reinforcing our sales network. products directly to consumers through our own sales network 21 Integrated Report 2022 Daikin’s Unique Business Model The Daikin Group operates its business, which encompasses R&D, manufacturing, and sales and services, in all corners of the globe, with its Air Conditioning Business at the core. By drawing on our accumulated strengths and forging our unique business model, we continue to provide comfortable air to people around the world. Overview of Business Activities Daikin is the only comprehensive air-conditioning manufacturer in the world that specializes both in air-conditioners and refrigerants. Procurement Development and Design Manufacturing Process-Based Measures • Global bulk purchasing and local • Pursuit of comfort and environmental procurement performance • Multiproduct mixed production • Promotion of socially responsible • Product development to meet local needs • Reduction of environmental loads procurement • Creation of new value Integrated product development encompassing manufacturing, sales, research, and procurement functions Vertically integrated production based on in-house production of core parts At Daikin, we draw on the R&D capabilities of our major production The core components of Daikin’s air conditioners, including bases around the world as well as our integrated product development compressors, motors, and printed circuit boards, are all developed system, comprising our regional sales and procurement functions, and manufactured in-house. This allows us not only to develop to develop and manufacture products that cater to the diverse elemental technologies but also to build up our bank of technical needs of each region. Our various divisions that contribute along know-how used in our manufacturing processes. This, by extension, the process from production through to sales work closely together has enabled us to develop and manufacture products in accordance to consistently monitor the inventory of products and materials. with changes in product standards required by the regulations of The status of this inventory is reflected in our plans for procurement each market, the climate and lifestyles of each region, and other and production in a timely manner. We work to ensure that customer needs as quickly as possible. In addition, by integrating opportunities do not go to waste and that our products are our in-house production, we have eliminated the possibility of delivered to our customers as efficiently and swiftly as possible. component shortages and excess inventory, thereby working collectively as an organization to efficiently address the highly volatile demand for air conditioners stemming from changing climate conditions. 22 Strategies for Value Creation As a manufacturer that engages in the production and sales both of air conditioners and refrigerants, we constantly strive to improve the energy-efficiency of our air conditioners and reduce their environmental impact through the development of new refrigerants and the provision of high-value-added solutions. Moreover, through comprehensive measures such as converting to new refrigerants as well as reducing the charge amount, minimizing leaks, and promoting recovery and recycling methods, we will help resolve social issues through a united Groupwide effort. Sales, Transportation, and Installation Product Use After-Sales Service, Recovery, and Recycling • Global development of proposal-type business for existing sales network • Promotion of resource-saving measures and logistics processes underpinning stable product supply • Development of technically skilled sales engineers • Provision of comfortable air and spaces • Reduction of environmental loads • Recovery and recycling of refrigerants • Provision of services based on the concept of continuous connection with customers and capture of replacement demand Market-localized production based on local production for local consumption Robust sales network based on our globally expanding dealer network Rather than focusing production specifically in one region, we have Daikin’s network of dealers who engage directly with the users of established a system in five key regions globally whereby Daikin’s our products play an integral role in addressing the various needs procurement, development, and production processes are all of each region in line with the different climates and lifestyles. conducted in close proximity to our sales markets, allowing us to Based on a direct-sales strategy that relies on its own sales address the needs of each region. This system has served as a network, the Group provides dealers with detailed information catalyst for the timely supply of products and the adoption of a on the features and added value of products generated by sales strategy for swiftly addressing changes in regional demand market-localized production, as well as with training on installation stemming from climate and economic conditions. Moreover, by and maintenance services. These efforts have led to the using the same basic components throughout our global network establishment of a sales system that extends seamlessly to the and centrally managing the entire Group’s inventory of products provision of installation and maintenance services and to a solid and components, we have been able to minimize the drawbacks relationship of trust with our dealers. that come with the geographic dispersal of production bases, such as by providing products to regions that experience sudden one-off increases in demand and capitalizing on the versatility of our supply of components from production bases. 23 Integrated Report 2022 Risks and Opportunities That Affect Medium- to Long-Term Value Creation Based on changes in the external environment, we have identified the important social issues that affect the creation of medium- to long-term value throughout the Daikin Group’s value chain, and extracted the risks and opportunities related to each of them. In order to respond appropriately to the risks and to take advantage of the opportunities as we work to resolve these social issues, we will recognize the strategic themes adopted in our FUSION 25 strategic management plan as management materiality and realize further value creation. Changes in Society Intensification of climate change Expansion and concentration of energy and power demand Increased interest in IAQ Occurrence of natural disasters Transition to a digital society Risks Responses / Opportunities Issues Related to Social Change Reducing global warming • Stricter environmental regulations • Development of products, services, and technologies that comply with • Tight supply and demand for electricity environmental regulations • Development of energy management/sustainable urban development Reducing energy/power consumption • Stricter regulations on energy efficiency • Acceleration of conversion to inverters • Product development and technological innovation excelling in environmental performance • Strengthening proposals for environmentally conscious products • Strengthening of energy management Preventing the spread of infectious diseases and creating value with air • New regulations on existing air conditioners • Development of products that provide safe and secure air quality • Creation of IAQ/air environments (AE) that enrich people’s lives Responding to supply chain disruptions • Suspension of plant operations • Stable supply through market-localized production based on local production • Stagnation of raw material/parts procurement for local consumption Building a business model utilizing digital technology and increasing the efficiency of business processes • Obsolescence of existing products • Technological developments, development of products and services, • Lack of human resources with digital expertise strengthening of sales activities that utilize the IoT/AI • Providing solutions for efficient energy management 24 Strategies for Value Creation Identifying Key Sustainability Themes and Incorporating Them into Management Materiality We assessed the impact of our business activities on society purification that has arisen as a result of the COVID-19 pandemic. throughout the value chain and identified seven themes that are On the other hand, the use of air conditioners also involves certain particularly important both to Daikin and society as key risks such as GHG emissions generated through the use of energy, sustainability themes. These themes have also been incorporated and the continuing growth in demand for air conditioners is likely into our FUSION 25 strategic management plan as core to have even bigger consequences going forward. management materiality themes. At the Daikin Group, we see it as our mission to address the Of these themes, we are monitoring responses to climate air-related needs of society while contributing to the realization of a change in particular. The surging demand for air conditioners, carbon-free society. We have adopted the achievement of net-zero primarily in developing countries, represents a significant GHG emissions as part of our long-term vision and have also opportunity for a company like Daikin whose business centers on incorporated this goal as a core theme in our FUSION 25 strategic air-conditioning systems. The use of air conditioners helps address management plan. both the issue of climate change and the increasing need for air 1 Understanding stakeholder interests and impacts 2 Assessing the impact of our business on society throughout the value chain 3 Identifying sustainability themes material both to Daikin and society We compiled a list of the key factors affecting our We analyzed Daikin’s business characteristics and risks and After assessing the impact of our business on business based on social issues (global risks), opportunities by comprehensively considering the impact of society and determining our priority initiatives, the international frameworks, various external our business on society throughout the value chain, the CSR Committee identified sustainability themes evaluations, and dialogue with stakeholders. expectations of Daikin, and our priority initiatives. that were of the highest significance both to Daikin and society, which were then deliberated by the Board of Directors. Key Sustainability Themes • Response to climate change • Quality and customer satisfaction • Provision of safe and reliable air environments • Human resource development • Increase of the value-added nature of air • Diversity management • Co-creation of innovation In our FUSION 25 strategic management plan, we established nine key strategy themes, such as “challenge to achieve carbon neutrality,” based on the changes to our external business landscape, our strengths as an organization, and our key sustainability themes. Through the execution of this management plan, we aim to help build a better society while ensuring the continuous growth of the Daikin Group. FUSION 25 Offer new value for the environment and air to realize both contributions to a sustainable society and Group growth Three Growth Strategy Themes Five Themes to Enhance the Management Foundation One Theme for Focus Regions 25 Integrated Report 20223Creating value with air1Challenge to achieve carbon neutrality 2Promotion of Solutions Business connected with customers 4Air Conditioning Business in North America5Strengthening technology development capabilities6Establishing a robust supply chain 7Promoting DX for innovation 8Creating market value/ enhancing advocacy activities 9Improving HR capabilities through advanced diversity management Daikin’s Aims For Value Creation At Daikin, our goal is to contribute to a greener environment and a society that helps realize healthy and comfortable lifestyles for everyone. Air conditioners, Daikin’s flagship product, originated in the early 20th century and revolutionized lifestyles and work settings around the world. The use of air conditioners, however, has spurred increases in the use of electricity and environmental impacts, particularly climate change. For these reasons, Daikin will continue to strive to provide new value through solutions for the air and environment and thereby resolve these global issues. We will provide new value in the form of healthy and comfortable lifestyles and spaces while helping realize a better environment. Value Creation for the Earth Value Creation for Cities Value Creation for People Helping mitigate climate change by reducing environmental impact through business activities • Further raise the environmental performance of our products • Protect forests and help sustain their inherent functions Contributing to the creation of sustainable cities by solving energy-related issues arising from urbanization • Use energy effectively throughout buildings and cities • Build systems for recycling-based societies • Create new types of energy Contributing to healthy and comfortable lifestyles by expanding the possibilities of air • Provide safe and reliable air environments • Improve indoor environments to support people’s healthy and comfortable lifestyles • Raise productivity to contribute to economic advancement A Growth Strategy That Anticipates the Future of Air Conditioners and Contributes to a Greener Environment IEA Forecast: The Future of Cooling In May 2018, the IEA released The Future of Cooling, a report that looks at air conditioning and how the rise in its use is driving global energy demand. According to The Future of Cooling, it is estimated that demand for air conditioning will rise rapidly and energy demand for space cooling will triple by 2050. This expected surge in demand presents significant opportunities for a company like Daikin whose business centers on air-conditioning systems. On the other hand, climate change has become a global issue and, in a society where we are urged to seek solutions toward decarbonization, the fact that the use of air conditioners contributes to increases in energy consumption and GHG emissions poses immense risks to the sustainability of our air-conditioning business. In view of these matters, Daikin is working to reduce the environmental impact of its business activities through measures such as minimizing electricity use to the extent possible and preventing refrigerant leakage. We are also developing and promoting the use of air conditioners with higher energy efficiency and refrigerants with a low global warming potential (GWP), and pursuing new environmental solutions, such as through joint efforts with property developers to make more efficient use of energy. Through these and other measures, we will help address climate change and a range of other social issues while continuing to expand our business. Worldwide Air Conditioner Stock (Number of Units) and Electricity Demand (100 million units) 2050: 6,200TWh Other Brazil China Middle East Indonesia United States Mexico India Energy demand for space cooling to triple by 2050 2015: 2,020TWh 60 50 40 30 20 10 0 (TWh) 6,000 4,000 2,000 0 1990 2000 2010 2020 2030 2040 2050 (Year) Note: Graph figures compiled by Daikin based on The Future of Cooling (IEA, 2018) 26 Strategies for Value Creation Measures in Pursuit of Carbon Neutrality Reducing Electricity Use through Adoption of Inverter Products The Daikin Group has remained committed to promoting the use of inverter products over the years due to the fact that inverter air conditioners consume roughly 50% less energy compared with non-inverter types. Inverter products are an effective means of reducing energy consumption, particularly in developing countries, where energy-related issues are escalating alongside the growth of their economies. In 2008, Daikin formed a business alliance with Gree Electric Appliances Inc., the leading manufacturer of air conditioners in China, facilitating the production of low-cost, highly efficient inverter units, which has helped drive the market share of inverter air conditioners upward. Following a series of advocacy activities conducted by Daikin, CSPF,*1 an industry standard for the assessment of energy-saving performance, was introduced in each country of the ASEAN region. We will continue to proceed with these activities toward the implementation of a regionally unified system. In India, we urged the introduction of evaluation criteria and an energy labeling system. The market share of inverter air conditioners expanded from almost zero in fiscal 2010 to 55% in fiscal 2020, and is expected to grow to 80% in 2024.*2 In Brazil, the energy efficiency standards for air conditioners were revised in 2020. The Daikin Group offers professional information and technical support and has formed global partnerships with the Japan International Cooperative Agency (JICA), universities, and other organizations. In these ways, we are helping to build a foundation for facilitating consumer access to energy-saving products. Moving onward, we will continue to strive to increase the adoption of inverter products across the globe, reduce energy use throughout our operations, and drive the industry forward by virtue of our environmentally conscious products. *1 Cooling Seasonal Performance Factor: A measure of energy efficiency during cooling periods *2 Source: World Air Conditioning Overview 2022 (BSRIA Limited) The Daikin Group will continue to propose new solutions in regions where half times higher than in fiscal 2014, which attests to the efforts of our finely tuned installation and maintenance services. Contributing to Decarbonization through the Growth of Our Heat Pump Space and Water Heating Businesses Looking at the global heating market in terms of heat source, the market for heat pumps is a mere ¥0.8 trillion*3 in comparison with the ¥3.3-trillion market for combustion heaters, such as gas boilers, that generate heat by burning fossil fuels. This data indicates that consumers are still opting for the more affordable and quicker solution to heating in the form of combustion heaters despite the large amounts of CO2 emissions they generate. Meanwhile, in Europe, a region where particularly large amounts of energy are consumed, we have seen significant strides made toward decarbonization as a result of the European Green Deal policy put forth in 2019. The heat pump market in Europe continues to thrive thanks to a series of subsidy programs and tax refunds that have been put in place. Moreover, according to the IEA,*4 conversion to heat pumps is the key to reforming social systems from the standpoints of achieving decarbonization and securing stable amounts of energy, given the soaring prices and unstable supply of fossil fuels arising from political instability in recent years. combustion heaters are the main source of heat. Among them is the strengthening of measures in North America, a region that has gathered momentum as a result of changing environmental policies. In our mainstay, ducted unitary for houses, we will expedite the sales of the Daikin Fit Heat Pump, a line of differentiated products that was developed through the combination of our core technologies for inverter units and heat pumps. In addition, we will promote the adoption of heat pumps and help realize decarbonization by riding the tailwind of regulations implemented in certain U.S. states that are bolstering their environmental measures. provided by the Berkeley Research Group (BRG) and data on Japan provided by the Fuji Keizai Group *3 Based on calculations by Daikin, citing data on North America, Europe, and China In view of this, in 2006, we launched our Daikin Altherma heat-pump *4 Source: 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural space and water heater to the European market. We have continued to gradually expand these product lineups in accordance with the climate conditions and needs of each country. Sales of Daikin Altherma are four and a Gas, International Energy Agency (IEA, 2022) Reducing CO2 Emissions through the Transition to Low-GWP Refrigerants and the Establishment of a Refrigerant Eco-Cycle CO2 emissions from the use of air conditioners can be traced not only to energy consumption but also to the fluorocarbons contained in refrigerants. We are therefore working to reduce the impact of refrigerants on the environment. Transitioning to the Use of Low-GWP Refrigerants When deciding on the development of next-generation refrigerants, we must not only assess their overall performance from an environmental, safety, and cost-efficiency point of view but also ensure that they are put to the best possible use in air conditioners, water heaters, freezers, and other applications. Through a process of in-house assessments that were held based on international debate, the Daikin Group determined that R32 refrigerants were ideal for use in residential- and commercial-use air conditioners, due to the fact that their GWP is equivalent to roughly one-third of the GWP of conventional refrigerants. Accordingly, we have been promoting the adoption of R32 refrigerants worldwide. Moreover, in 2011, Daikin began granting free access to multiple patents related to the manufacture and sales of air conditioners utilizing R32 refrigerants. By ensuring that R32 air conditioners can be produced by manufacturers all over the world, we will help mitigate global warming. Establishing an Effective Recovery and Reclamation Cycle for Used Refrigerants Nowadays, used refrigerants are mostly destroyed when disposing of air conditioners to prevent refrigerant leaks into the atmosphere. From a circular economy perspective, companies are being urged to do more to recover and recycle used refrigerants. In fiscal 2019, the Group commenced sales of air conditioners utilizing recycled refrigerants in Europe, more than 40,000 units of which have been sold as of the end of fiscal 2021. Going forward, we will work together with government agencies and other companies to commercialize the recovery and recycling of refrigerants, which have been destroyed until now, and aim to improve the recycling rate of refrigerants, which still remains at a low level. We will continue to proceed with a host of measures that include promoting the use of R32 refrigerants, establishing a refrigerant eco-cycle (recovery, reclamation, and destruction), and developing next-generation refrigerants, in a bid to reduce the level of CO2 emissions generated by refrigerants. 27 Integrated Report 2022 Strategic Management Plan FUSION 25 Please refer to our corporate website for details on FUSION 25. In fiscal 2020, Daikin formulated Strategic Management Plan FUSION 25 for the period covering fiscal 2021 to fiscal 2025. By taking into account the changes in our external business environment and our unique strengths cultivated to date, the Plan illustrates the strategies to be implemented over the five-year period by backcasting from the changes in the world that will take place over the next ten to twenty years, and from the ideal state of the Daikin Group. Our Goal Offer new value for the environment and air to realize both contributions to a sustainable society and Group growth Our Aims for Value Creation Economic Value Environmental and Social Value Fiscal 2023 Quantitative Group Targets Net sales Operating profit ¥3.1trillion ¥325.0 billion Operating profit margin 10.5% Fiscal 2025 Quantitative Group Targets (Forecast) Net sales Operating profit Operating profit margin ¥3.6 trillion ¥430 billion Approx.12% Nine Key Strategy Themes (Management Priorities) Net CO2 emissions reductions 2025 target (from BAU) 30% or more Offer safe, reliable, comfortable IAQ/AE Contribute to reducing food loss Free humankind from heat and cold Participate in international rule-making Directly connect with customers and address specific needs Contribute to the growth of employees and local communities Three Growth Strategy Themes Five Themes to Enhance the Management Foundation One Theme for Focus Regions Viewing external environmental changes as a great opportunity, capitalize on our unique strengths to achieve further growth and development Assumptions Changes in Our External Circumstances Our Strengths • 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 • Energy saving, environmental, IAQ technologies • Globally expanding robust sales network • Local production for local consumption model • People-Centered Management, diversity management Our Group Philosophy 28 Strategies for Value Creation3Creating value with air 1Challenge to achieve carbon neutrality2Promotion of Solutions Business connected with customers 4Air Conditioning Business in North America5Strengthening technology development capabilities6Establishing a robust supply chain 7Promoting DX for innovation 8Creating market value/ enhancing advocacy activities 9Improving HR capabilities through advanced diversity management Fiscal 2021 Results Net sales Operating profit Operating profit margin ¥3,109.1billion ¥316.4 billion 10.2% (25% increase yoy) (33% increase yoy) ( 0.6 percentage point increase yoy) In fiscal 2021, the inaugural year of Strategic Management Plan FUSION 25, we achieved our net sales target for fiscal 2023 two years in advance while surpassing our initially set yearly target for operating profit. Both net sales and operating profit were our highest results on record. Progress of Three Growth Strategy Themes and the Theme for Focus Regions Challenge to Achieve Carbon Neutrality We will help realize a greener environment and an enriched society while working to continue to expand our business and earnings. Staying true to its goal of realizing net-zero GHG emissions by 2050, the Daikin Group will work to achieve its interim targets of lowering net GHG emissions*1 by 30% or more in 2025 and by 50% or more in 2030 compared with a Business as usual (BAU)*2 emissions scenario using fiscal 2019 as the baseline year. In fiscal 2021, we lowered emissions by 10% owing to higher sales of energy-efficient products. *1 Net GHG emissions = GHG emissions – contributions to emissions reductions *2 An emissions scenario whereby emissions reduction measures are not implemented Progress of Key Initiatives in Year One To expand the use of heat pump heaters and water heating systems, local governments, particularly in Europe, have been granting subsidies to those using heat pumps and enforcing stricter regulations on combustion heaters. Riding the tailwind of these government actions, we have been shifting our focus to heat pump space and water heating systems, which has led to a substantial improvement in sales. Sales for the Heat Pump Space and Water Heating Business for the Group as a whole came to approximately ¥190.0 billion in fiscal 2021. Having fallen just short of reaching our fiscal 2023 target of ¥204.0 billion, the achievement of this target is well within our sights for fiscal 2022, a year ahead of our goal. With respect to increasing the use of inverter units, we have established the goal of installing them in over 98% of all room air conditioners sold globally by the end of fiscal 2025, compared with 75% as of the end of fiscal 2019. With the percentage of air conditioners with inverter units climbing to 79% as of the end of fiscal 2021, we are making steady progress toward achieving our goal. In terms of the shift to low-GWP refrigerants, we are promoting the widespread use of R32 low-GWP refrigerants and have set the goal of installing them in over 95% of room air conditioners available to the global market by the end of fiscal 2025, compared with 83% as of the end of fiscal 2019. As indicated by the increasing percentage of air conditioners with R32 refrigerants, which accounted for 91% of all air conditioners as of the end of fiscal 2021, the transition to R32 refrigerants is progressing at a steady pace. Even in North America, we released our first R32-equipped room air conditioner in December 2021, despite the sluggish growth in the use of R32 refrigerants in this region. We have also set the goal of reducing GHG emissions from our development and production processes to 1.2 million tons-CO2 (a 34% reduction from fiscal 2015) by fiscal 2025. In fiscal 2021, despite our higher production volume stemming from the increasing demand for air conditioners, we reduced the GHG emissions from our development and production processes to 1.16 million tons-CO2 (a 36% decline from fiscal 2015), achieving our fiscal 2025 target well ahead of schedule. Going forward, we will continue to forge ahead with these initiatives in pursuit of our FUSION 25 objectives of reducing net CO2 emissions by 30% in fiscal 2025 and by 50% in fiscal 2030. As for realizing net-zero CO2 emissions by 2050, we see the need for the development of new technologies and the creation of new themes in which to engage from a business perspective, and we will steadily move forward in addressing them. 29 Integrated Report 20221 Strategies for Value Creation Strategic Management Plan FUSION 25 Promotion of Solutions Business Connected with Customers In light of the rapidly changing values and needs of our customers, we will accommodate these new needs through the creation of new experiences, the establishment of our Solutions Business, and the realization of qualitative growth. Air Conditioning (AC) Solutions Business We will offer a solution lineup by identifying the various needs of customers in each vertical market, including offices, schools, hospitals, hotels, and factories. For instance, we aim to create new value by optimizing air conditioning for each user through the man- agement and analysis of customer information and equipment operation data; creating safe environments by ensuring the visibility of air quality and using ventilation, disinfection, and other IAQ technologies; and managing energy use throughout our facilities. Progress of Key Initiatives in Year One In the first year of FUSION 25, we worked to develop a solution lineup and strengthen our human resources in each region toward the creation of our experience-based sales business model. In North America, a region of focus under FUSION 25, we acquired instrumentation and engineering companies as well as retailers boasting strong customer ties and solutions capabilities in order to strengthen the platform for the future of our Solutions Business. We are also in the process of developing products and solutions for energy management in each vertical market. In addition, our DK-CONNECT cloud-based air conditioning management service was introduced to the Japanese market in June 2021. This service is designed to address the installation, operation, maintenance, and renewal needs of each customer for commercial-use air conditioning in buildings, commercial establishments, hospitals, and other facilities by providing greater comfort, improving energy efficiency, and reducing management workloads. With the aim of providing new value based on air conditioning, we are developing a solution lineup for each vertical market that utilizes our DK-CONNECT service. We are also shoring up the foundation for addressing customer needs through measures that include honing our service structure in Europe and Asia and creating value using digital technology in China. By virtue of these initiatives, sales by the AC Solutions Business have been progressing as planned, with the business posting sales of approximately ¥500.0 billion in fiscal 2021 and on course to achieving its fiscal 2023 target of ¥560.0 billion. Overview of DK-CONNECT Cloud-Based Air Conditioning Management Service The DK-CONNECT cloud-based air conditioning management service enables customers to monitor and control their air conditioner, other devices, and sensors by means of their computer, smartphone, or tablet device through an exclusive network terminal called DK-CONNECT edge. Customers’ computer, smartphone, or tablet device (local procurement) DK-CONNECT edge Consists of a series of devices Refrigeration Solutions Business We will expand our global network for the Refrigeration Solutions Business by deploying the energy-saving and environmental technologies that have been cultivated to date in the Air Conditioning Business to the refrigeration domain. In Europe, we will look to establish the Store Solutions Business to enable the appropriate management of food temperatures, provide safe and secure store environments, facilitate remote monitoring of products for food retailers, and enhance management of energy use. By establishing this new business, we intend to expand the Refrigeration Solutions Business to other markets, including Asia and Oceania. In addition, we will help reduce food loss, ensure the supply of safe and reliable food, and resolve other social issues by connecting the entire cold chain, from producers to consumers. We will also set our sights on establishing a highly profitable business model. Progress of Key Initiatives in Year One The Marine Container Business experienced substantial growth in fiscal 2021 on the strength of particularly solid demand. With an eye to establishing our Store Solutions Business, we are in the process of reinforcing our business foundation and expanding our Cold Chain Business. Owing to these measures, we are proceeding ahead of schedule with sales for the Refrigeration Solutions Business, which amounted to approximately ¥150.0 billion in fiscal 2021, on pace to achieve our target of ¥160.0 billion in fiscal 2023. 30 2 Creating Value with Air We will look to fulfill the growing needs for IAQ and ventilation by exploring and creating new value with air. Establishing a large-scale IAQ/ Ventilation Business We will strive to establish a large-scale IAQ/Ventilation Business by seizing the opportunity presented by the growing needs for IAQ and ventilation, establishing new markets across the globe through a Groupwide effort, and developing new products and services. Progress of Key Initiatives in Year One Sales of air purifiers, heat reclaim ventilators, and filters flourished in the first year of FUSION 25 as the ongoing impact of the COVID-19 pandemic spurred demand for safe and secure air. Sales of commercial-use heat reclaim ventilators fared particularly well, led by our Venti-air system, a total heat exchanger unit with an exposed installation design that can be retrofitted relatively easily on the interior walls, ceilings, and under the eaves of buildings. We have also been working alongside the University of Tokyo to create a reference manual to mitigate the risk of respiratory infections and to educate students within a classroom setting on the effective means and precautions for the use of heat reclaim ventilators and air purifiers. These efforts have contributed to a steady progress in our sales for the IAQ/Ventilation Business, which amounted to approximately ¥230.0 billion in fiscal 2021 and are on course to achieve our target of ¥290.0 billion in fiscal 2023. With the expectation that demand in the ventilation market will continue to increase going forward, we will work to expand sales of heat reclaim ventilators for residential use, in addition to those for commercial use, while introducing new air purifiers that employ ultraviolet (UV) disinfection technology for commercial application. Through such initiatives, we will differentiate ourselves from the competition and continue to expand our business in the process. Venti-air exposed installation-type heat reclaim ventilator Creation of IAQ/AE that enrich people’s lives In the healthcare domain, we will work to develop a business that utilizes air conditioning and biometric data to enhance people’s physical and mental well-being. We will also look to create new value with air through solutions that facilitate improvements in concentration, relaxation, and sleep. These initiatives will be implemented as a part of the ongoing Smart City Project in Japan and the resulting findings and outcomes will be used to forge a range of solutions and to establish a business model geared to creating value with IAQ/AE that enhance people’s physical and mental well-being. Progress of Key Initiatives in Year One In the first year of FUSION 25, we conducted demonstration experiments on the impact on human health of doing brief workouts in low-oxygen settings, as a part of our efforts in the healthcare domain to ensure better health for people. The insight and know-how gained as a result of this experiment will be deployed in a range of social settings, including offices, schools, and government agencies. To address the growing needs for IAQ, we have also teamed up with a startup company that has a competitive advantage in the real-time detection of allergens, such as pollen, ticks, and mold. Going forward, we will accelerate the growth of our AC Solutions Business to be fully capable of continuing to provide safe and secure IAQ/AE. Also, in collaboration with the University of Electro-Communications in Tokyo, Daikin conducted research on the impact on naps of maintaining an optimal thermal environment. Through this research, we aim to create new value with air by helping people to improve their concentration through better naps. Our next step in this research is to test our findings within an actual office setting. Air Conditioning Business in North America We will pursue the leading position in North America, the world’s largest market, which boasts tremendous potential. The ongoing changes in energy-saving and environmental regulations in North America are, we believe, an opportunity for us to transform the market and expand our business in this region by capitalizing on our strengths in inverters, heat pumps, and low-GWP refrigerants. We will aim to elevate our regional sales in North America for the Air Conditioning Business from fourth highest in this segment in fiscal 2020 to the top position in fiscal 2025. Progress of Key Initiatives in Year One In our first year, we tapped into the robust demand for the residential-use market by honing our supply and sales capabilities and introducing new energy-efficient products. In particular, we saw significant improvements in the market awareness and yearly sales of FIT inverter units. FIT inverters are a line of environment-friendly strategic products that enhance the energy-efficiency of ducted residential air conditioners, which are commonly used in the United States, by combining them with our inverter technology. Meanwhile, in the commercial-use market, where demand has yet to get back on track, VRV systems captured the leading share of the light commercial market in North America for the first time. In the Applied and Solutions businesses, we expanded the scope of each segment and secured additional human resources and know-how through the acquisition of new businesses. Owing to these initiatives, sales for the Air Conditioning Business in North America reached a record-high of approximately ¥790.0 billion in fiscal 2021, surpassing our target for the year and on track to achieve our fiscal 2023 target of ¥800.0 billion. North America sprung up from fourth to second highest in regional sales as a result, gaining tremendous momentum toward becoming our leading air-conditioning market by fiscal 2025. Moreover, in April 2022, U.S. subsidiary Goodman Global Group, Inc. was renamed as Daikin Comfort Technologies North America, Inc. With a new corporate label that bears the name Daikin, a company that has spearheaded the growth of the global air-conditioning market with cutting-edge environmental technology, we will strive to continue to expand our business in this region and cement our status as a leading company in environmental sustainability. 31 Integrated Report 202234 Special Features 0101In the COVID-19 era, we have seen a shift in people’s lifestyles and behavior patterns, along with a considerable difference in their views on Daikin’s Organizational Strengths That Have Manifested in the Midst of a Crisis In this section, we will explain some of the initiatives Daikin is undertaking to deliver value through ventilation as a company that provides indoor air environments and room ventilation. FUSION25 solutions with air. Domestic Sales Volume of Residential Air Conditioners (Fiscal 2018 = 100%) At Daikin, we continued to expand our line of residential-use air conditioners for the Air Conditioning Business in Japan in light of the surging need for ventilation arising from the ongoing spread of COVID-19. Through the introduction of new products geared to the needs of the ventilation market, our sales have significantly outper- formed the industry average each year since fiscal 2019. +9% (% Change yoy) Daikin Industry average +15% –1% –2% +3% –5% 120 115 110 105 100 95 90 Fiscal 2018 Fiscal 2019 Fiscal 2020 Fiscal 2021 Market Environment Sales decreased due to the absence of last-minute purchases made in the latter-half of the previous year in advance of the consumption tax hike and the impact of the relatively warm winter in fiscal 2019. Sales increased due to the effects of pent-up demand, special cash payments from local governments in relation to COVID-19, and the tailwind created by the intense summer heat. Sales decreased due to the end of pent-up demand and the impact of unseasonably cool summer weather. Ururu Sarara Urusara X Urusara mini Recent Activities Related to Air-Conditioning and Ventilation Products June 2020 Establishment of Air Consultation Service Dec. 2020 Simultaneous release of five air purifier models Nov. 2020 onward Launch of five room air conditioners featuring a unique ventilation function that caters to the needs for ventilation and comfort May 2021 onward Launch of three Venti-air models, commercial-use heat reclaim ventilators that can be retrofitted Oct. 2021 Launch of Urusara X (R series) room air conditioners External Environment 2020 Jan. First COVID-19 case confirmed in Japan Mar. Global epidemic confirmed as a pandemic by the World Health Organization (WHO) 2020 Apr. State of Emergency declared by the Japanese government 2021 Aug. Total COVID-19 cases in Japan surpass one million 32 Senior Executive Officer General Manager of Domestic Air Conditioning Sales Division Satoshi Funada Our Pioneering Spirit and Sales Network That Have Turned Crisis into Opportunity Ururu Sarara was released in 1999 and was the first air conditioner to feature a ventilation function. While ventilation functions on air conditioners are not new, this is an area we had not ventured into deeply due to the lack of consumer interest in ventilation until recently. The spread of COVID-19, however, has triggered great interest in ventilation among consumers. We have adapted swiftly to such market changes by fully embracing ventilation functions and consistently enhancing our product lineup. The Domestic Air Conditioning Sales Division, which I am in charge of, is responsible for providing the products that are deemed essential by customers. The cooperation of local dealers, whom we regard as important business partners, is essential to our ability to propose products that reflect the specific needs of each region. Our role extends beyond the sale of products to distributors. We must assume responsibility for everything from installation through to after-sales services as well. This is a policy that we at Daikin adhere to and apply throughout our global operations. While installation work is an essential element of the air-conditioning business, it is nearly impossible for Daikin to undertake this work entirely on its own. Because of this, the key to forging Daikin’s service network is the dealers who take on this role. Daikin has developed a close relationship with its dealers, by providing them with technical training, support for human resource development and recruitment, and information about customers who have approached it for consultations. If its network of dealers were to diminish due to poor financial performance as a result of the COVID-19 pandemic, Daikin’s business would certainly diminish as well. Therefore, an air of crisis was hanging over the front lines of the business. With the increasing number of people working from home and preventive measures being enforced as a result of COVID-19, we have had fewer opportunities to interact directly with customers and have had to deal with many other restrictions to our sales activities. On the other hand, we believe the increasing focus on ventilation as a form of added value could serve as an opportunity to attract the interest of new customers. In these uncertain times, it has been hard to know the correct approach to take. Nonetheless, we have engaged in a series of unprecedented efforts simply by leveraging our sales capabilities. Our central focus has been to increase the number of contact points with users. We have strengthened our provision of information through video streaming and our corporate website, established the Air Consultation Service, whereby technical advisors address customer concerns, and identified and delivered information on the needs of each region through the efforts of our dealers and the Domestic Air Conditioning Sales Division. Through these and other distinctive measures, we have continued to move forward with our sales activities. Despite the difficult circumstances, we have captured the rising demand for ventilation and disinfection arising from the COVID-19 pandemic, through ongoing efforts to increase user contact points and actively propose new products. From a sales perspective, we were able to exceed the overall market growth rate by a significant margin. One shift in perception can unlock the future, even in light of a critical situation. Once again I am reminded that a spirit of taking on challenges that will open the door to the future is deeply ingrained within our organization. As a company that provides solutions with air, we will ambitiously pursue new challenges to continue to fulfill the expectations of all of our stakeholders going forward. Air Consultation Service, established in June 2020 33 Integrated Report 2022 Special Features Daikin’s Organizational Strengths That Have Manifested in the Midst of a Crisis Rapid Development by Virtue of Modular Design and Fast & Flat Management System In September 2020, Daikin declared its aim to adopt a ventilation function on its entire series of air conditioners. In April 2020, air conditioner sales had dropped nearly 50% from the previous year, so we embarked on a development project involving personnel from the manufacturing and procurement divisions with the belief that this decline in sales volume and the unfavorable circumstances stemming from the COVID-19 pandemic could prove to be an opportunity. Seeing it as our duty as the only manufacturer of ventilation-equipped air conditioners, we strived to bring them to market as quickly as possible through an all-out Groupwide effort. The production team, including me, was expected to develop these air conditioners within a short period of time. While the development process usually takes 14 months, with this project, we aimed to complete the entire process within the fiscal year–or in other words, four months. What turned out to be key to the rapid development was the modular design of our air conditioners (please refer to page 35). The conversion to modular design had been extremely difficult as it conflicted greatly with our conventional design concept and required a change in the perceptions of those on the front lines. Regardless, we continued to embark on new challenges without being content with the status quo and adopted modular design on our models from 2019. Accordingly, we added a humidifier module to our entire series of air conditioners to serve as a functional module, and the fact that we were then able to simply add our waterless humidification and ventilation function to the basic module led to a drastic reduction in the development period. Moreover, we also encountered a myriad of challenges head on from a procurement point of view, particularly with the shortage of semi conductors. We faced a number of situations in which not even the ordinary components that are used throughout our manufacturing sites worldwide were available in sufficient quantities. We were often left trying to decide which manufacturing sites should have priority for the use of these components. From March 2021, when we began to see fluctuations in the supply of semiconductors, the heads of our global production bases and the members of the Global Procurement Division and the Production Division in Japan would convene each week to seek an optimal solution to allocating components throughout the Group. At Daikin, we have always had a system in place that constantly maintains production through the procurement of alternative secondary and tertiary components whenever primary components are unavailable, based on our bill of materials that is used for the manufacture of each product. Whenever none of the components on this bill of materials is available, the Development and Procurement divisions work together to see if an alternative component can be found. If a suitable component is found, development and verification processes are undertaken to ensure that it can be utilized. This development method, which we refer to as “alternative development,” has been ingrained in Daikin since March 2011, when we were forced to overcome a supply shortage as a result of the Great East Japan Earthquake. Alternative development would not be possible if we were to simply rely on the Procurement Division to resolve supply shortage issues. The procurement, development, and sales divisions must each overcome their respective hurdles and work together to figure out what needs to be done to address their issues. And the culture conducive to successfully enforcing these measures exists throughout the Daikin Group. While the term “Fast & Flat” has been incorporated into our Group Philosophy, I believe this approach has become universal throughout our organization in the true sense of the word. These concerted Groupwide efforts have led to the realization of our rapid development and manufacturing processes and stable supply in the COVID-19 era, and the establishment of our brand slogan, “Daikin is the solution to all your ventilation needs.” Executive Officer Deputy General Manager of Air-Conditioning Manufacturing Division (Responsible for Product Development), Manager Responsible for Product Development in Refrigeration Division, General Manager of Shiga Plant Kimikazu Hatou 34 Global Rollout of Module Development Scheme In 2017, we embarked on the conversion to modular design, which was adopted on models released from 2019 onwards. These events proved to be the springboard for our rapidly expanding lineup of ventilation functions. Modular design consists of two types of modules: a basic module and a functional module. The basic module offers universal functions and features that are used throughout the Group and cannot be modified by any of our business sites or developers. Meanwhile, the functional module provides the necessary functions that can be created by the developers at our respective business sites and used on air conditioners. Based on a design that combines these modules, we are able to address the varying needs of each market and enhance the speed of product development. We will look to adopt modular design on all of our air conditioners that are currently on the global market by the end of fiscal 2023. The achievement of this goal is expected to reduce fixed costs and prevent opportunity loss through an increase in product development speed and cost reductions that stem from the shared use of components. Close-Up View of Modular Design Universal Heat exchange Fan Frame Motor Electrical components Basic Module Modification according to country, region, and model Humidification and ventilation Dehumidification Exterior Airflow Internal cleaning Inactivation of viruses Functional Module Wi-Fi Human-detection sensor Creating New Value with Air The COVID-19 pandemic has raised concerns over the safety and reliability of air quality inside factories, offices, stores, houses, and other buildings. Uncovering and creating new value with air is our duty as a manufacturer of air-conditioning systems. Going forward, as a company that provides solutions with air, we will continue to provide value in the form of comfortable and environment-friendly solutions. Start of Trial Operations for Hypoxic System In April 2022, we commenced trial operations of our hypoxic system in partnership with point 0 Inc. This initiative aims to examine the impact on human health of doing brief workouts in low-oxygen settings, in order to explore the creation of health-enhancing environments. Recent research has shown that working out in low-oxygen settings may increase a person’s physical strength, help prevent lifestyle-related diseases, and promote health-related outcomes such as weight loss, healthy skin, and anti-aging effects. By merging our respective technologies and knowledge, a new hypoxic room will be established inside point 0 marunouchi, a membership-based shared workspace operated by point 0. To ensure the oxygen concentration of indoor spaces is optimal for hypoxic training, we will utilize Daikin’s hypoxic system, which was developed through the application of our technology for separating oxygen and nitrogen in the air and controlling oxygen concentration. We will also collect and analyze the biometric data of research participants and assess the impacts of hypoxic training on their health. In so doing, we will continue to build up our bank of knowledge with the aim of deploying it in a range of social settings. 35 Integrated Report 2022 Special Features 0202 Air Conditioner Subscription Service: For the Betterment of Society, Today and Tomorrow Located in eastern Africa, Tanzania is incredibly hot and humid throughout the year. Despite its climate, which makes air-conditioning a necessity year-round, air conditioners are seldom used in this country. This paved the way for the introduction of our air conditioner (AC) subscription service in Tanzania through which we have been striving to provide comfortable air while reducing environmental impact. Offering the Best Air Conditioners in a Market Where Only the Lowest Priced Are in Demand In Tanzania, the lowest priced air conditioner would cost approximately US$500. For most residents of Tanzania, a country with an average annual salary of US$200, air conditioners are a luxury item. For that reason, they are used by only 1% of all residents. Also, they are often in poor condition due to the lack of repairs, service parts, and specialists, as a result of which around 70% of the air conditioners installed are left unused. In April 2021, Daikin unveiled Baridi Baridi Inc., an AC subscription service established in partnership with WASSHA Inc. This business was set up to provide highly efficient, environment-friendly air conditioners incorporating our long-cultivated inverter technology through a subscription-based format. Many of the subscribers are restaurants and drug stores, where the cooling effects of these air conditioners have a direct influence on sales. These high-performance inverter air conditioners can be used only when needed simply through the payment of installation costs and the purchase of a daily, weekly, or monthly plan through a smartphone app utilizing WASSHA’s billing system. While electricity costs are borne by the user, since these air conditioners reduce energy use by around 60% or more compared with their low-priced counterparts the overall operating costs are minimal, even with all of the other costs included. The AC subscription service offers significant benefits from an environmental perspective as well. One such benefit is the ability to recover refrigerants, which also contributes to reductions in GHG emissions alongside the lower use of energy. As refrigerants used for air conditioners have a greenhouse effect 600 to 2,000 times that of CO2, GHGs are discharged into the atmosphere by air conditioners that have malfunctioned and been left unused. For this service, however, since the air conditioners remain the property of Baridi Baridi, all of the systems and refrigerants are ultimately returned. Looking back on its history, the use of air conditioners has taken off enormously in developing countries once they reach a certain level of gross domestic product (GDP). If low-priced air conditioners, which offer poor energy efficiency, were to become widespread instead, this poses a threat to the environment. Baridi Baridi’s business was put in place to offer a low-cost approach to the use of air conditioners that offer comfort and environmental friendliness in light of such circumstances. Going forward, Daikin will continue to develop business models that are geared to earning high profits in all markets, including smaller yet-to-mature markets, and explore the possibility of expanding its business to other immature markets in the years ahead. Financial Costs of Use over a Five-Year Period Low-Priced AC $5,900+α Repair and other costs Operating costs: US$2,700 • Electricity costs: US$2,500 • Cleaning costs: US$200 Initial cost per AC: US$500 Note: Calculations are based on the assumption that 1,000 days of use = 200 days per year × five years Baridi Baridi $3,580 Operating costs: US$1,000 • Electricity costs: US$1,000 • Other costs: None • Subscription fee: US$1,500 Initial cost per AC: US$80 36 Tanzania’s Existing Air Conditioner Market • Air conditioners are used by 1% of all residents. • Non-inverter air conditioners, which offer poor energy efficiency, account for around 95% of all air conditioners used. • Refrigerants discharge GHGs into the atmosphere, having a greenhouse effect approximately 600 to 2,000 times that of CO2. • Roughly 70% of installed air conditioners have malfunctioned and been left unused due to the lack of specialists and maintenance services. Introduce high-performance inverter air conditioners in markets where inefficient air conditioners have become widespread and establish a business model aimed at providing comfort and environmental value Baridi Baridi’s AC Subscription Service • High-performance inverter air conditioners • Provision of maintenance services as a part of customer support • Pay only for the selected term of use through a smartphone app User • Generates profits through the receipt of continuous • Fewer barriers to the use of air conditioners payments by virtue of highly durable air conditioners • Impact of lower electricity costs outweighs the cost of using air conditioners Environmental Benefits • Energy use reduced by roughly 60% through the use of inverter air conditioners • Ability to recover all refrigerants, as the subscription format entails the eventual return of all air conditioning systems to Baridi Baridi Hiroki Asada CEO of Baridi Baridi Inc. We have received feedback from those who have adopted our subscription service indicating that their electricity costs have declined substantially and that these air conditioners are far above and beyond anything they have used to date. Conversely, we have also received feedback about the lack of clarity in our service offerings. Recognizing the fact that not all customers will be completely satisfied with what we offer, we are conducting promotional activities to enhance awareness of the scope of our services. The success of our business brings more joy to people in need in Tanzania and leads to a brighter future for the environment. It also translates into better lifestyles and possibly even more jobs through the fostering of individuals who are highly knowledgeable and skilled in the area of air conditioners. Moreover, if our efforts were to inspire more people in Japan to work with enthusiasm, there is nothing more gratifying than that. Bringing New Value to Society through Co-Creation WASSHA Inc. is a startup company associated with the University of Tokyo. Through a kiosk network of small stores handling basic necessities in Tanzania, from the suburbs to villages without electricity, the company provides LED lanterns through a pay-as-you-go system in which users pay only for the electricity they use. Our collaboration with WASSHA in the AC subscription service transpired as a result of an industry–academia co-creation alliance formed with the University of Tokyo in December 2018. Daikin has decided to invest up to ¥11.0 billion in startup companies across the globe over a five-year period to 2024. To ensure that decisions are made in a timely manner, a framework has been put in place to enable investments within this limit to be made through the approval of the general manager of each division. Our investment in WASSHA is the first project undertaken as a part of this investment scheme. Moving forward, we will continue to engage in co-creation activities with those outside of our organization with a view to creating new value. 37 Integrated Report 2022 Foundation for Value Creation Strengthening Our Human Resource Capabilities Advancing Diversity Management At Daikin, our approach to diversity stems from our commitment to the people in our organization who are full of passion and vitality. People-Centered Management. We believe that people are what As our business continues to grow rapidly through partnerships, drive a company’s competitiveness. We also believe that the creation collaborations, and M&As that span the globe, we are seeing a of new products and services through the efforts of a diverse team diversification of not only the members of our organization but also of employees who respect their mutual differences as well as the our values as well. We have a unique diversity management system various ideas, ways of thinking, and values of one another are what in place that unites our diverse group of employees, who differ in will make us stronger as an organization. culture, ethnicity, generation, lifestyle, and other aspects, and The Daikin Group’s workforce consists of over 88,000 employees, leverages the individuality and strengths of each member to drive of whom more than 80% are based overseas. What has helped innovation and enhance the Group’s comprehensive capabilities sustain our growth as a global company to date is none other than and competitiveness. Promoting the Advancement of Women In 2011, we launched a project under the direct control of is an opportunity for those pursuing management and leadership management through which we have been fully devoted to positions to develop the right mindset and behaviors. promoting the advancement of women. Our main focus has been As a result of such efforts, the number of female managers was to expand the scope of measures for changing the perceptions of 68 (5.7%) as of the end of fiscal 2021, increasing roughly threefold management and female employees, accelerating the development from the 20 (2.1%) female managers in 2011 when our initiatives of female leaders, helping women return to work as early as to promote women’s advancement were first introduced. We will possible after childcare leave, and promoting active roles after continue to push forward with developing and securing female returning to work. We also encourage male employees to participate managers. in childcare and take childcare leave as a part of our commitment In addition, since 2011, we have introduced a series of mea- to providing a workplace environment that is conducive to balancing sures that have contributed to realizing a better balance between work and childcare regardless of gender. work and childcare. One of these measures is designed to enable To accelerate the development of female employees for employees to return to work quickly after taking childcare leave, as management and other leadership roles, we have continued to a result of which the number of people returning to work within a implement a range of measures that include our Female Leader year of taking childcare leave increased from roughly nine people Development Program, a sponsorship program in which the (32%) in 2011 to 50 people (56.9%) as of the end of fiscal 2021. Company’s executives provide direct support to female employees Moreover, the percentage of male employees taking childcare leave toward their individual growth, and a mentorship program in which was at a high of 84.4%. employees can consult with and receive advice from more Going forward, we will work to foster a corporate culture that experienced employees in other departments. In particular, our brings out the best in all of our employees, regardless of gender, Female Leader Development Program, in which 20 participants while enabling them to find the right balance between their work enroll each year and a total of 250 participants have enrolled to date, and family life. Action Plan for Promoting the Advancement of Women Details of initiative Plan Period: April 1, 2021 to March 31, 2026 • Accelerate the development of female employees for management and leadership roles • Foster a corporate culture conducive to balancing work and childcare, regardless of gender • Promote a mindset that enables diverse employees to shine KPI Number of female directors appointed internally Number of female managers Childcare leave taken Target As of March 31, 2022 One or more (by the end of fiscal 2025) Achieved 120 (by the end of fiscal 2025) 68 • At least 90% for both male and female employees • Average of 10 or more consecutive days of leave for male employees Female employees: 100% Male employees: 84.4% Average number of consecutive days of leave taken by male employees: 12.6 38 Human Resource Development Policy The Daikin Group has declared as one the principles of its Group leaders; an internal course on fostering specialists in the develop- Philosophy that “the cumulative growth of all Group members ment of AI technology; training programs geared to nurturing young serves as the foundation for the Group’s development.” Based on employees into global professionals; and a HR development pro- the belief that people grow through work experience, we offer a gram built on stronger ties with various universities. These pro- variety of opportunities for personal development to complement grams are a part of our efforts to provide more opportunities for our on-the-job training (OJT),* which challenges each individual by employees to grow as individuals in accordance with the Group’s assigning tasks that are suited to their aptitudes. strategies and business direction as well as the changing times. Opportunities include our Next-Generation Executive Development Program aimed at continuously developing global business * Employees learn and acquire the general knowledge, technical know-how, skills, and commitment necessary for their work through actual work experience. Initiative Next-Generation Executive Development Program Overseas Base Practical Training Global Training Program for Overseas Personnel Details Achievements in Fiscal 2021 This program was established to develop management executives and business leaders who are tasked with steering the Company’s future growth and development through a Groupwide effort. The program is grouped into three tiers: New Executive Program for executives, Group Leadership Development Program for managers of business divisions, Next-Generation Leader Development Program for section chiefs and leaders of Daikin Industries in Japan, and Daikin Executive Program for overseas Group companies. There are also executive and leader development programs in place at the production sites of our various regions of operations. • New Executive Program: 13 participants • Next-Generation Leader Development Program: 18 participants This training program assigns young employees in Japan to Daikin’s overseas bases for a period of one to two years to develop them into globally minded individuals. Unlike ordinary overseas dispatches, the program aims to foster a spirit of taking on challenges unbound by stereotypes and enhance communication skills within a culture and setting that are different from what participants are used to by engaging them with practical themes at distributors, suppliers, business partners, and universities. Fiscal 2021: 28 participants Since fiscal 1999: 346 participants Young employees based overseas participate as trainees in this program to enhance their knowledge of technology, quality, and production technology toward the development of their respective businesses. Fiscal 2015 to fiscal 2019: 33 participants Daikin Information and Communications Technology College In December 2017, Daikin Information and Communications them. Upon completion of the program, in addition to applying the Technology College was established with the full cooperation of knowledge and skills they have gained on-site, trainees are Osaka University, with which Daikin signed a comprehensive expected to act as a bridge between our internal and external cooperation agreement centered on the field of information operations as well as between our various divisions so that AI and science. Established with the aim of developing digital human the IoT becomes embedded throughout our operations. resources* who are able to adapt to the drastically changing In April 2022, the program’s third group of trainees completed structures of industry and society, this internal training program their two-year training and were assigned to their respective selects employees from a wide range of divisions and follows divisions, where they are engaged in new themes related to Daikin’s own unique curriculum. With a view to nurturing experts creating new businesses and improving work efficiency centered who are adept at infusing AI and the IoT into our business and on the use of digital technology. technology development, professors from universities, such as Through Daikin Information and Communications Technology Osaka University, and leading-edge research institutes give courses College, we have expedited the development of our management, on the fundamentals of AI and the uses of AI technology, in addition to incorporating project-based learning (PBL), which is existing employees, and new employees toward our goal of developing 1,500 digital human resources by the end of fiscal 2022. based on actual issues surrounding each division. In fiscal 2018, we also introduced a program geared to new employees that develops them into highly skilled AI and IoT human resources. A total of 440 new employees have enrolled in this two-year training program at Daikin Information and Communications Technology College to date. In their first year, trainees acquire specialized knowledge of AI and the IoT and learn about Daikin’s air-conditioning technology and other core technologies. In their second year, trainees engage in actual on-site exercises either individually or in pairs on a specific theme from among the themes compiled by our development, manufacturing, and sales divisions. This PBL develops trainees to be able to apply the knowledge and skills on AI and the IoT acquired in their first year on the front lines of operations by obtaining information on on-site needs and issues from the people in charge of our various divisions and addressing * Innovators in digital technology and AI with the ability to put their specialized knowledge into action and inspire others around them to do the same Entrance ceremony for the second group of trainees at Daikin Information and Communications Technology College 39 Integrated Report 2022 Foundation for Value Creation Strengthening Technological Capabilities Strengthening Technology Development Capabilities We believe that technological development capability is a The Technology and Innovation Center (TIC) is the control tower manu facturer’s lifeline. Amid rapidly changing external conditions, for all of the Group’s technologies. With TIC at the core, we will we will accelerate the development of distinctive technologies and promote the development of technologies and generate results in a products, and their contribution to business expansion, by timelier manner through our external and internal co-creation promoting both internal and external co-creation that includes projects. Moreover, in order to move ahead with our key domains collaboration between industry and academia. We have established and themes on a global scale, we will enhance the development four key domains (three growth strategy domains and one domain capabilities of our technological development sites overseas, with future themes) in which we will concentrate our resources. strengthen coordination between these sites, and recruit and R&D Bases Europe Heat pump space and water heaters develop the right personnel. Japan USA Applied solutions Technology and Innovation Center Control tower • Technology strategy formulation • Core product development • AI/IoT technologies China IAQ India For high ambient temperature zone Cooling only inverter Asia Technological Development Themes Key domains and themes Target business contributions in FUSION 25 (Three growth strategy domains) Future themes 1 Challenge to achieve carbon neutrality Enhanced heat pumps Next-generation refrigerants 4 Development and research on advanced technologies for the future New environment- related business Energy creation Chemicals environmental technology 2 Promotion of Solutions Business 3 Creating value with air AC Solutions Refrigeration Solutions Safe and reliable IAQ/AE Data utilization Effective use of resources/ energy Alternative technologies for vapor compression Technologies for sustainable business growth while resolving social issues s t c e j o r p n o i t a v o n n i e v i t a r o b a l l o c h g u o r h t e t o m o r P Core / fundamental technology themes in existing businesses AC core Chemicals core Analysis/evaluation Design Digital technology utilization for enhanced technology development capabilities 40 Development of Energy-Saving Solutions Managing Energy Use Across an Entire Building and Community At the Daikin Group, we work not only to mitigate the environmental impact of each air conditioner through the use of our environmental technology, but also to ensure that air-conditioning, peripheral equipment buildings, and renewable energy are all managed together in the best possible manner. For instance, we participate in smart city projects in Manchester (England), Lisbon (Portugal), Singapore, and other locations to facilitate energy conservation throughout each community. Through the optimal control of district heating and cooling systems, we will reduce energy use across entire communities and address energy-related issues that stem from urbanization. Image of fully constructed Tengah Town, a smart city in Singapore Next-Generation Refrigerants for Electric Vehicles (EVs) Contributing to the Promising and Widespread Use of EVs through Energy-Saving Solutions The Group is moving ahead with the development of next-generation forward, we will continue to assess the performance of this new refrigerants for automotive air-conditioning systems. refrigerant with the aim of installing it on production models. Due to the challenges involved in the use of exhaust heat for air conditioning on battery electric vehicles (BEVs), heat pumps are used instead on these vehicles. However, our current R1234yf refrigerants are limited in their capacity to generate heat in low outdoor temperature settings. This necessitates the use of electric heaters, which reduces the cruising distance of BEVs. The new refrigerant, which is currently undergoing development, will enable the use of heaters in low outdoor temperature environments without the use of electric heaters, thereby increasing the cruising distance of BEVs by up to about 50%. Another merit of this new refrigerant is the fact that it has a GWP of less than 1. Going Innovation through Co-Creation between Industry, Government, and Academia Digitalization continues to progress rapidly while industry and principle of self-development , establishing close interaction social structures are shifting drastically. There is a sense of between the leaders, management, and employees of each urgency to transition to a business model that looks ahead to an organization, having them work together to find the right answers, era where experiences are valued over things and customers and and creating new value. Through collaborations between industry, consumers reign supreme. At Daikin, we define co-creation as a government, and academia, we are working to realize innovation comprehensive approach that involves breaking away from the through co-creation. Establishment of Research Unit with The University of Tokyo in Pursuit of a Circular Economy The Group is forming comprehensive partnerships with various Circular economy represents a transformation from the traditional universities and research institutes to develop a new business that linear economic model of mass production, mass consumption, will help resolve social issues around the world. We have also and mass disposal to an economic model whereby value is created formed an industry—academia partnership with The University of through the recycling of resources. We will identify the technology, Tokyo toward the creation of innovation and new businesses. systems, and infrastructure necessary for realizing a circular As a part of this agreement, the Circular economy modeling economy, conduct trial operations, and aim to propose a new towards cleaner air Research Unit was jointly established in 2021. sustainable economic model in 2026. 41 Integrated Report 2022 Foundation for Value Creation Environmental Initiatives Responding to Climate Change through Our Management Plan We recognize climate change as the most important issue for management. Our approach to it is reflected in Environmental Vision 2050 and our medium- to long-term environmental targets. We will continue to proceed with a variety of climate change-related measures toward the achievement of our five-year strategic management plan. Environmental Vision 2050 Medium- to Long-Term Environmental Strategy Reducing Greenhouse Gas Emissions to Net Zero Establishment of Reduction Targets Aimed at Realizing Environmental Vision 2050 In 2018, we formulated Environmental Vision 2050 with the aim of Based on analysis of the future of its business operations, Daikin has reducing greenhouse gas (GHG) emissions to net zero by 2050. established a GHG emissions reduction target to reduce its emissions to net zero and bring added value to people around the world through its air solutions. Environmental Vision 2050 Open innovation IoT and AI Through Products Through Solutions Target for Reducing GHG Emissions to Net Zero Emissions + BAU Net emissions (= Emissions – Contribution to emissions reductions ) Through Products Through Solutions Daikin Environmental Vision 2050 We will provide safe, healthy air environments while striving to reduce greenhouse gas emissions to net zero. Open innovation IoT and AI Open innovation IoT and AI Through the Power of Air We will reduce the GHG emissions generated throughout the entire life cycle of our products. Furthermore, we are committed to creating solutions that link society and customers as we work with stakeholders to reduce GHG emissions to net zero. Using the IoT and AI, and open innovation attempts, we will meet the world’s needs for air solutions by providing safe and healthy air environments while at the same time contributing to solving global environmental problems. i g n c n a v d A 42 s n o i s s i m e G H G o t n o i t u b i r t n o C s n o i t c u d e r s n o i s s i m e Reduce by 30%+ Reduce by 50%+ Zero or below 2019 (Base year) 2025 2030 2050 Through the Power of Air Image: The power of air l i s e g o o n h c e t Safe and reliable • Protect people's health from air pollution • Reduce risk of infectious diseases • Prevent heatstroke High quality of life • Provide highly productive office environments • Enhance concentration • Improve quality of sleep Healthy and comfortable • Reduce sleep disorders • Reduce stress • Provide consistent whole-house room temperatures Diversifying needs Emissions + BAU Net emissions (= Emissions – Contribution to emissions reductions ) GHG and CO2 Emissions Reduction Targets With the base year set at 2019, we aim to reduce GHG emissions by 30% or more in 2025 and by 50% or more in 2030 compared with emissions without measures (BAU). Fiscal 2021 result: 10% reduction Reductions through energy- efficient construction and spread of renewable energy Zero or below Through Products: • Increase energy efficiency of products • Development and adoption of refrigerants with lower GWP • Reduction of GHG emissions throughout the entire product life cycle including production Through Solutions: • Use energy management to carry out efficient operation of buildings with centralized systems for energy efficiency and renewable energy • Provision of energy services throughout the value chain Reducing the remainder by: • Switching, recovering, and reclaiming refrigerants • Spreading use of heat pump space and water heaters • Conducting renewable energy businesses • protecting forests • Others Topic Establishing Rules for Realizing Carbon Neutrality In order to spread the use of inverters, heat pumps, and refrigerants with lower GWP around the world, we must develop a market in which we can emphasize the effectiveness of these and other environmental technologies for reducing environmental impacts, in addition to ensuring proper understanding throughout society. To this end, we must establish rules that enable the proper evaluation and use of new technology, a goal that cannot be achieved solely through the efforts of a single company. Over the years, the Daikin Group has worked collectively with government agencies, international organizations, industry groups, research institutes, NGOs and NPOs, and a variety of other stakeholders to establish systems and frameworks in each region in which we operate. We will continue to work with industry, governments, and academia to advance discussions on the ways in which markets will be created and rules established in a carbon-neutral era. FUSION 25 Strategic Management Plan Enforcing Various Measures in Line with Our Management Plan Themes The three themes of the growth strategy for achieving Environmental Vision 2050 have been incorporated into the nine key strategy themes of our FUSION 25 strategic management plan. Through the implementation of this plan, we will aim to help resolve social issues and continue to expand our business. FUSION 25 Offer new value for the environment and air to realize both contributions to a sustainable society and Group growth Through Products Challenge to achieve carbon neutrality • Reduce emissions of energy-induced CO2 and hydrofluorocarbons (HCFs) and perfluorocarbons (PFCs) in development and production processes • Accelerate global conversion to inverter units to lead other companies with environmental products (energy-saving equipment) • Position Europe and North America as the priority regions to accelerate conversion of combustion heaters to heat pump space and water heaters • Advance various measures to reduce refrigerant-induced CO2 emissions, leading the way for environmentally conscious society and industry • Ambitiously pursue initiatives toward market expansion and CO2 reduction contributions • Research leading-edge technologies on CO2 decomposition, recovery, and reuse, and put in place specific measures to obtain those technologies Through Solutions Promotion of Solutions business connected with customers • Provide solutions for service/inspections, value-added proposals during equipment operation, and retrofits/replacements to establish a business model centered on providing new experiences • Expand business globally by deploying energy-saving and environmental technologies Daikin has cultivated in the air-conditioning domain Through the Power of Air Creating value with air • Create markets from opportunities presented by growing IAQ/ventilation demand, and create new products and services to establish a large-scale IAQ/Ventilation Business • Accumulate and analyze air-conditioning data and vital data to create value with IAQ/AE for people’s physical and mental well-being 43 High quality of life • Provide highly productive office environments • Enhance concentration • Improve quality of sleep Integrated Report 2022 Foundation for Value Creation Information Disclosure based on the TCFD Framework For Daikin, climate change represents an important issue affecting its business continuity. Daikin endorses the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)*, which are intended to mitigate the risk of instability in financial markets as a result of climate change. We are now working to analyze and reflect the risks and opportunities of climate change as related to our business operations into our management strategies and risk management. We will appropriately disclose the progress of such efforts as we aim for further growth while contributing to the decarbonization of society. * TCFD was established in 2015 by the Financial Stability Board. It recommends the type of information that companies should disclose to enable investors, lenders, and insurance underwriters to appropriately assess and determine the cost of risks related to climate change. Daikin’s Response to TCFD’s Recommended Disclosures Governance The organization’s governance around climate-related risks and opportunities • The CSR Committee, which is chaired by the officer in charge of CSR, discusses and confirms the progress of results on risks and opportunities, policies, and targets concerning climate change and other environment-related matters. • Climate change in particular is an important issue for the Company as our business centers on air conditioning. Accordingly, “Challenge to achieve carbon-neutrality” has been declared as one of our growth strategy themes in the FUSION 25 strategic management plan and progress on this theme is regularly reported to the Board of Directors. Strategy The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning • We analyze the climate scenarios based on Future of Cooling by the 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 GWP, this will also be an opportunity for Daikin to expand its strengths in providing highly environmentally conscious products and services. • Environmental Vision 2050 calls for net zero GHG emissions by 2050 and we have incorporated GHG reduction targets and main measures into our FUSION 25 strategic management plan. Climate Related Risks and Opportunities and Potential Impacts Category Impact on Daikin’s business Stricter regulations on refrigerants If regulations on refrigerants become too strict, existing air conditioners no longer compliant with these revised regulations could become obsolete. Probability of occurrence Potential financial impacts High Large Transition Risks Tight supply and demand for electricity The spread of air conditioners in emerging countries could increase electricity usage and make it difficult to increase sales of air conditioners due to electricity shortages. High Large Physical Production delays due to water shortages Production bases located in water-stressed regions may experience operational disruptions due to the lack of water needed for production. Medium Medium Stricter regulations on refrigerants Companies without technologies compliant with regulations on refrigerants will be weeded out, resulting in increased sales of air conditioners using low-GWP refrigerants, an area of strength for Daikin. Opportunities Transition Stricter regulations on energy efficiency Companies without technologies compliant with stricter regulations on energy efficiency will be weeded out, resulting in increased sales of air conditioners with high energy efficiency, an area of strength for Daikin. 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 these rules, there will be growing demand for and an increase in sales of heat pump heaters, an area of strength for Daikin. High Large High Large High Large Risk Management Process for identifying, assessing, and managing climate-related risks • Based on scenario analysis, gather climate-related risks from business sites around the world, assess them for their degree of importance, and identify them from the perspective of incorporation into our strategies • Recognize climate-related risks as risks that could have a significant impact on our business strategies and integrate them into our Groupwide risk management processes • Confirm the progress of the Group’s risk management through the Internal Control Committee, which is 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 risks and opportunities • Under Environmental Vision 2050, aim to reduce GHG emissions to net zero by 2050 • Under the FUSION 25 strategic management plan, set targets to reduce GHG emissions from our own business operations GHG Emissions Reduction Targets Scope 1, Scope 2, and Scope 3 Reduce net GHG emissions from internal business activities by 30% or more in 2025, by 50% or more in 2030, and to zero or less by 2050, compared with a BAU emissions scenario and with 2019 as the baseline year Scope 1 and Scope 2 Reduce GHG emissions from the Group’s overall manufacturing (development and production) processes to 1.2 million tons-CO2 by fiscal 2025 44 Supply Chain Management Establishing a Flexible and Robust Supply Chain Many supply chains around the world are being burdened by the “Establishing a robust supply chain” was declared as a key theme drastic increase in disruptions, decoupling, and other forms of in our FUSION 25 strategic management plan. Going forward, we uncertainty. In order to further strengthen our supply system, it is will optimize our supply chain management throughout the Group essential that we continue to enhance our risk mitigation measures, by further enhancing our region-based procurement aimed at local such as increasing the visibility of our supply chain and acquiring production for local consumption and by using digital technology to components from multiple suppliers, in addition to conducting share information throughout our supply chain. In so doing, we will procurement activities and establishing a supply chain that is continue to ensure stable supplies of products to markets. geared to local production for local consumption. In view of this, Optimizing Supply Chain Management Using Digital Technology Sales Planning Product Distribution Production Planning Parts Distribution Procurement Planning • Project details for each dealer and product • Product inventory • Delivery planning • Production plan for and occupancy rate of each production line and product type • Parts held in stock for long lead times • Supply capabilities of suppliers Information Centralize information and make decisions based on sales plan Topic Adjust procurement quantities of global suppliers according to their circumstances Daikin’s production bases Primary suppliers Secondary and subsequent suppliers Discontinuation Under normal conditions Adjustments due to unexpected circumstances Establishment of a Global Production System Adaptable to Changes in Demand To mitigate the risk of supply disruptions, the Daikin Group has remained true to its market-localized production approach over the years. A single heat wave will drive up demand for air conditioners, which are considered a lifeline at such times. To be fully capable of responding quickly to such sudden changes in demand, all of our manufacturing sites have implemented a variable-mix, variable-volume production system, which adjusts production items and quantities on a daily and weekly basis. In terms of procurement, we have a system that manages both centralized procurement, which is handled by the Procurement Division at Daikin’s headquarters in Japan, and local production for local consumption, whereby procurements are made locally under the lead of our global business sites. Despite having such a flexible system in place, escaping the consequences of the floods in Thailand and the Great East Japan Earthquake that occurred in 2011 was a daunting task. For this reason, the Group is strengthening its business continuity plan (BCP) with the aim of establishing a highly resilient supply chain. The hallmark of this BCP is the close bond that is formed between our suppliers and each Group company and department based on the shared objective of constantly maintaining production. For instance, after the Great East Japan Earthquake, our Product Development Division was forced to change product specifications so that the alternative components we had obtained could be used. Having been through this experience, we have incorporated into our BCP a system for swiftly developing alternative components and products in times of emergencies. Respect for Human Rights At the Daikin Group, we have declared respect for human rights in countermeasures taken are reported to and shared with the our Group Conduct Guidelines, which specify the standards of Corporate Ethics and Risk Management Committee and the conduct that must be adhered to by all executives and employees compliance committees for each region of operation in order to of the Group, and we are engaging in efforts to promote human mitigate any associated risks. rights across our entire value chain. We also endorse and With regard to the supply chain, respect for human rights is participate in the United Nations Global Compact for supporting included in our Supply Chain CSR Promotion Guidelines in order to and putting into practice universally accepted principles relating to eliminate all forms of child labor and forced labor, as well as acts of such issues as labor and human rights. discrimination on the grounds of race or gender. In addition, we are Respect for human rights forms part of the self-assessments asking for thorough compliance with these guidelines from our we conduct each year to ensure that the Group is in thorough business partners both in Japan and overseas. In fiscal 2022, Daikin compliance with the Group Conduct Guidelines. We verify the enhanced its understanding of promoting respect for human rights existence of human rights violations and related issues through this along the supply chain through lectures given by specialists and by assessment and take the necessary measures in response. Issues learning from the CSR procurement activities of other companies, that are uncovered as a result of these assessments and any which it is utilizing to improve its efforts in this area. 45 Integrated Report 2022 Foundation for Value Creation Safety-Related Measures Product Safety Policy On Product Safety At the Daikin Group we believe that providing customers with safe the case of accidents, we must minimize damage as much as and quality products that ensure their satisfaction by meeting their possible. With this in mind, we formulated our Global Product needs is the most important task for management. We have therefore Safety Standards, which are standards on product safety common formulated our basic policy on product quality in an effort to to all members of Daikin’s global operations to ensure that our provide even higher levels of safety and quality in our products. products are designed for the utmost safety. We must ensure that our products can be operated safely not only under normal conditions but also in unexpected situations. In Quality Management System Establishment of a Global Policy on Quality Management In the Global Quality Guarantee Rules, the Daikin Group has higher standards in our quality. Each aspect of our quality prescribed its basic stance on quality standards across the Group management system is assessed by conducting internal audits and and specified the responsibility and authority structure for evaluating its operational status for each business division, and seamlessly monitoring and improving quality. Moreover, we have maintaining a continuous cycle of implementation, evaluation, and obtained ISO 9001 certification at all of our production bases, with improvement. the standard forming the basis of our quality management system. In addition, a quality assurance program is planned and We work to ensure consistently high levels of product quality implemented each fiscal year, outlining priority quality measures through the extensive management of quality standards by our and targets for each business division based on the Group’s annual development, procurement, and production divisions. We also policy guidelines. work together with our outsourcing partners to continue to strive for Promotion of Occupational Safety and Health Establishment of a Management System in Pursuit of Zero Workplace Accidents To ensure operational and employee safety at its production bases around the world, the Group has established occupational health and safety management systems at each base and has obtained certification for ISO 45001 and other international standards at 61 production bases. Chaired by the director in charge of safety, the Global Safety Meeting is held twice a year with the aim of improving safety standards throughout the Group. We also conduct safety education and training and undertake safety patrols at each base in Japan and overseas with the goal of realizing zero workplace accidents. In fiscal 2021, the frequency rate* of lost-time occupational accidents was 1.19. Frequency Rate of Lost-Time Occupational Accidents Daikin Group (including overseas) Japan (average for all surveyed industries) 2020/3 2021/3 2022/3 1.26 1.01 1.19 1.80 1.95 2.09 * Frequency of deaths or injuries caused by occupational accidents per one million actual working hours Frequency rate = Number of deaths or injuries caused by occupational accidents ÷ Total actual working hours × 1,000,000 Occupational Safety and Health Promotion Structure President Officer in charge of safety Global safety and security meetings d n a y t e f a S l a n o i t a p u c c O y t i l i c a F g n i r u t c a f u n a M s e e t t i m m o C h t l a e H d n a y t e f a S l a n o i t a p u c c O n o i g e R N A E S A e e t t i m m o C h t l a e H d n a y t e f a S l a n o i t a p u c c O a n i h C g n i t e e M h t l a e H d n a y t e f a S l a n o i t a p u c c O s e t a t S d e t i n U g n i t e e M h t l a e H d n a y t e f a S l a n o i t a p u c c O n a e p o r u E g n i t e e M h t l a e H g n i t e e M S H E l a b o l G Production bases in Japan Production bases overseas Chemical manufacturing bases overseas 46 Financial Strategy Basic Policy The Daikin Group will continue to focus on expanding its business while expanding the scope of our business and enhancing profitability. strategically investing its assets. We will enhance our management The cash generated as a result will be used in capital investments, structure with a view to realizing further growth in the years ahead M&As, and other avenues in which we will invest actively toward through the implementation of comprehensive cost-reduction further growth. We will also use it to further increase shareholder measures and the strengthening of our financial position. returns. Through these initiatives, we are committed to being a The basic approach behind our capital policy is to implement truly global and excellent company while at the same time further upfront investments in digital technology, R&D, human resources, improving our corporate value and enhancing profit returns to our and other areas of our business based on the key strategic themes shareholders. outlined in FUSION 25, while increasing our cash flow by Change in Cash Flow (Billions of yen) 400 350 300 250 200 150 100 50 0 –50 –100 –150 –200 –250 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 2020/3 2021/3 2022/3 Net cash provided by operating activities Net cash used in investing activities Free cash flow* * Free cash flow = Net cash provided by operating activities + Net cash used in investing activities Ratio Management and Our Targeted Management Indicators At Daikin, we engage in ratio management based on the Under ratio management, we actively expand our business awareness that the maximization of our corporate value is the issue and enhance our management structure on the basis of free cash of highest priority for management. The background behind flow (FCF), return on invested capital (ROIC), return on assets introducing ratio management started with our intention to pivot (ROA), and return on equity (ROE) as key management indicators. away from emphasizing monetary amounts (i.e., net sales, We place particular emphasis on FCF as a source of corporate operating profit) on our profit and loss (P&L) statements, and value and as an integrated indicator that serves to enhance all instead aim to become global No. 1 under our FUSION strategic management indicators. In addition to increasing earnings and management plan, which was launched in 1996. We then began improving investment efficiency, we are proceeding with the ratio management to focus more on operating profit margin, measures necessary to generate cash flow from a working capital profitability, and financial structure based on our aim to “become perspective, which includes thoroughly reducing the balances of an attractive company that draws together people, capital, and accounts receivable and inventory. information” set forth in the revamped version of FUSION in 1999. 47 Integrated Report 2022 Foundation for Value Creation Financial Strategy Promoting Internal Awareness of Our ROIC Tree We are working to enhance internal awareness of ROIC as a For example, during employee training we describe ROIC as a tree management indicator for each division. To facilitate greater as a way to explain concepts such as how inventory reduction implementation among employees, we have positioned ROIC as an improves ROIC and how adjusting the relationship between selling internal management indicator linked to Companywide ROE targets prices and costs can increase profitability. We use the ROIC Tree and then applied it to each business target as a means to show concept to explain to our employees both in Japan and at our specifically how ROIC is connected to the duties of each employee. overseas bases how ROIC is linked to their daily duties. ROIC Tree Profitability Asset efficiency ROIC Net sales/ operating profit margin Invested capital turnover rate Marginal profit ratio Fixed ratio • Maximize variable cost reductions • Implement selling price increase • Control logistics cost surge, implement cost-reduction measures, revamp supply chain management (SCM) • Reduce fixed costs • Enhance product quality No. of days working capital is held Fixed asset turnover rate • Accelerate investment returns No. of days inventory is held No. of days receivables are held • Reduce inventories Investment Plan under FUSION 25 We will actively invest our assets to realize the growth strategies set product for Daikin, and to speed up the growth of our premium forth in FUSION 25 and to capitalize on the opportunities for environmental business. business growth arising from the changing times. Our plan is to We will also look to significantly expand our investment in digital allocate roughly ¥800.0 billion over a three-year period spanning technology. In so doing, we will strengthen our management fiscal 2021 to fiscal 2023 and approximately ¥1,300.0 billion over foundation, not only by accelerating the creation of innovation, a period of five years through to fiscal 2025 toward capital such as by utilizing data to advance our Solutions Business and investment, R&D expenses, digital technologies, and human create value with air, but also by promoting process innovation to resources. More specifically, these investments will be used to shorten development lead times and improve supply chain expand our Heat Pump Space and Water Heating Business in efficiency. Through the transition to development processes that Europe by reinforcing our sales and service structure and draw on digital technology, we will refine our environmental enhancing our lineup of differentiated products, in addition to technologies, such as heat pumps and next-generation increasing our capital and establishing new production bases refrigerants, and develop a series of differentiated products. To do ahead of schedule toward the expansion of our production so, we must acquire and develop exceptionally talented individuals capacity. Meanwhile, in North America, the increasingly stringent with the ability to inspire innovation, and we will therefore continue environmental and energy-saving regulations will serve as an to actively invest in our human resources going forward. opportunity to enhance sales of FIT inverter units, a strategic 48 Policy on M&As At Daikin, we believe that alliances, collaborations, and M&As are plans, whether they function as a business strategy that parallels essential to increasing the pace of our business expansion. M&As the direction of the Group’s growth and development, and whether have been actively taken into account for FUSION 25, with plans to they are likely to generate sufficient synergies. Based on these invest approximately ¥600.0 billion over the course of three years factors, under FUSION 25, we are examining the possibility of spanning fiscal 2021 to fiscal 2023 and over ¥1 trillion over the acquiring heating manufacturers and refrigeration service five-year period of the plan. When considering the possibility of companies in Europe; service and engineering companies in Asia M&As, emphasis is placed on whether their objectives align with the and North America; and sales and wholesale companies in North key priority themes set forth in our FUSION strategic management America in order to strengthen our sales network in the region. Policy on Cross-Shareholdings As our business becomes more complex and wide-ranging, The Board of Directors conducts a comprehensive review for alliances and partnerships with other organizations in diverse fields each cross shareholding to ensure that these shares are being held are becoming increasingly important for our continuous growth. for strategic purposes, after carefully assessing the benefits We have determined it appropriate to hold shares in companies and risks of each holding based on the cost of capital. Any with potential for improvements in corporate value. This policy is cross-shareholdings that are deemed unreasonable to hold on the the result of a strategic decision to engage in alliances and basis of these reviews are sold as appropriate. partnerships to rapidly expand our business and to enhance our corporate value over the medium to long term. Dividend Policy Based on our policy of providing stable dividends on a continuous with the aim of continuing to grow as an organization while basis, we will strive to maintain a ratio of dividends to shareholder expanding the scope of our business. We will also strive to increase equity (DOE) of 3.0% while aiming to further increase our dividend payout ratio. In addition, we will implement upfront investments our corporate value and market capitalization and provide even greater returns to shareholders in the process. Annual Dividend / Dividend Payout Ratio / Ratio of Dividends to Shareholder Equity (DOE) (Yen) 240 210 180 150 120 90 60 30 0 25.5 24.0 15.7 50 2.1 36 2.1 36 1.9 200 26.9 30.0 160 25.6 120 24.7 130 140 21.7 24.4 100 160 27.4 160 24.8 3.2 3.4 3.6 3.4 3.5 3.3 3.0 3.2 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 2020/3 2021/3 2022/3 Annual dividend Dividend payout ratio Ratio of dividends to shareholder equity (DOE) (%) 40 35 30 25 20 15 10 5 0 49 Integrated Report 2022 A Governance System That Facilitates Value Creation Corporate Governance Our Vision for Corporate Governance: A System That Ensures Management Is Always a Step Ahead A Supervisory Function That Ensures Sound and Transparent Management Through its adoption of a Company with Audit and Supervisory Board organizational system, Daikin is strengthening and exercising the supervisory function of the Board of Directors through the efforts of its internal directors. This function is also being enhanced through the efforts of the Company’s Audit & Supervisory Board members and the participation of external directors who possess a wealth of experience in supervising manage- ment from an independent and objective perspective. An Integrated Management Framework That Facilitates Timely Decision-Making and Business Execution Under this framework, directors assume responsibility for both business execution and management. Directors make strategic decisions in a timely manner and provide sound and appropriate supervision and guidance, thereby fulfilling their responsibilities for all areas of management through cooperation. An Officer Personnel and Compensation System Tailored to Medium- to Long-term Increases in Corporate Value To fulfill the expectations of shareholders and all other stakeholders, Daikin’s officer personnel and compensation system is designed to enhance the motivation of directors so that they continuously improve the Company’s performance over the medium to long term and contribute to increasing the overall value of the Daikin Group in accordance with its management policies. Please refer to our Corporate Governance Report for details on our corporate governance system. 50 Basic Philosophy The Daikin Group strives to raise corporate value through corporate and providing appropriate supervision. We also seek to improve the governance. We carry out decision-making with foresight, as well monitoring function conducted by third parties, including multiple as by executing business with greater speed, soundness, and external directors. transparency in response to challenges and changes in the We aim for management with greater speed, soundness, and business environment. transparency. We will continue to boost corporate value by seeking We strive to improve our current integrated management and implementing new ways to achieve optimal corporate framework, under which directors assume responsibility for both governance, pursuing best practices in all facets and at all levels of business execution and management. In this way, we fulfill our the Daikin Group. responsibility for management, making strategic decisions quickly Key Points 1) Our Unique Integrated Management Framework accelerate the pace at which Daikin decides future strategies Under its unique integrated management framework, Daikin and solves issues related to important management policies seeks to increase the speed of management’s decision-making and strategies. Meanwhile, the Group Management Meeting and actions, while its directors work together in assuming aims to establish a general consensus regarding all corporate responsibility for management and business execution in actions and policies taken, which is accomplished by response to the increasingly complex and wide-ranging issues Groupwide sharing of all major Group management policies and and challenges faced by management and the Daikin Group as basic strategies, and by more effectively supporting Group a whole. companies in solving their problems. The Group Auditors Meeting strengthens auditing and control functions throughout 2) Executive Officer System and Board Composition the Daikin Group, including those at overseas subsidiaries. In Daikin has implemented an executive officer system aimed at this way, the Group Auditors Meeting ensures these functions increasing efficiency through independent assessments and are working effectively. decision-making conducted in each of its businesses, regions of operation, and functions. Under this system, executive 4) Enhancement of Group Cohesiveness officers engage in prompt and strategic decision-making, and The chief global group officer leads efforts to strengthen the sound management. The number of directors maintained is cohesiveness of the Daikin Group. This officer is also well suited to carrying out appropriate discussions and responsible for enhancing corporate governance and the decision-making on all issues. The Company appoints a organizational management of Daikin as a multinational minimum of four external directors at all times. Currently, the company. Board of Directors consists of 11 members, including four external directors (including one female director) and one 5) Officer Personnel and Compensation System non-Japanese director. 3) Management System The HRM Advisory Committee and the Compensation Advisory Committee are chaired by external directors. The role of these committees is to improve the transparency and appropriateness The Group Steering Meeting is the highest deliberative body in of decisions related to personnel matters and compensation the Company’s management system. Its function is to for officers. Audit System Daikin has adopted a Company with Audit and Supervisory Board To ensure effective audits, the Audit & Supervisory Board organizational system and accordingly established an Audit & receives reports on important issues related to management and Supervisory Board. As of the end of June 2022, Daikin had four business performance when necessary while monitoring relevant Audit & Supervisory Board members, two of whom were external units, confirming and approving documents, and regularly Audit & Supervisory Board members. One of the principal exchanging opinions with representative directors, executive nomination criteria for external Audit & Supervisory Board officers, and the accounting auditor. In addition, the Audit & members, which are the same as those for external directors, is Supervisory Board Member Office has been established, with the being independent of the Company in terms of not having a personnel thereof performing duties under the direction of Audit & conflict of interest with Daikin. Supervisory Board members. Respect is given to the opinions of Audit & Supervisory Board members attend meetings of the Audit & Supervisory Board members regarding job rotations, Board of Directors, as well as other important meetings, receive performance evaluations, and other matters pertaining to reports, and express frank and diverse opinions. personnel of the Audit & Supervisory Board Member Office. 51 Integrated Report 2022 A Governance System That Facilitates Value Creation Corporate Governance Daikin’s Governance at a Glance Organizational System: Company with Audit and Supervisory Board Number of Directors: 11 (of whom one is a non-Japanese director and one is a female director) Number of Audit & Supervisory Board Members: 4 Anti-Takeover Measures: None Percentage of Shares Held by Non-Japanese Persons: 36% Composition of the Board of Directors and Other Committees Ratio of Independent, External Directors Four out of 11 members 36% Directors Four out of six members 67% Two out of four members 50% Members of the HRM Advisory Committee and the Compensation Advisory Committee members Audit & Supervisory Board members Corporate Governance System (As of June 30, 2022) Appointment, dismissal Shareholders’ Meeting Appointment, dismissal Audit Appointment, dismissal Accounting auditors Audit & Supervisory Board Board of Directors HRM Advisory Committee Group Auditors Meeting Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, CSR Committee Compensation Advisory Committee Group Steering Meeting Group Management Meeting Appointment, supervision Executive Officers Meeting (The remaining components of the system are not shown) 52 Policy for Appointment of Directors The Company strives to realize effective and appropriate management via an integrated management system. Through this system, directors efficiently make strategic decisions and conduct sound and appropriate supervision and guidance—thereby collectively sharing responsibility for all facets of management—while assuming responsibility for business execution through prompt action. Accordingly, Daikin believes this integrated management system is effective in accelerating decision-making and business execution. Directors make decisions, execute operations, and provide supervision and guidance in an integrated manner, thus independently making decisions and taking responsibility for the outcomes thereof. The Company appoints multiple external officers who monitor the execution of operations from an independent perspective and offer appropriate supervision and advice during decision-making. Through this process, external directors take responsibility for supporting the Company’s integrated management system from the standpoint of transparency and soundness. Daikin prioritizes diversity when appointing directors in terms of their nationality, gender, and experience, with a particular emphasis on business expansion, globalization, and diversity management. Furthermore, the Company seeks in director candidates the expertise and competencies required for carrying out effective corporate management, namely, leadership skills that bring out the potential of employees and lead an organization to enhance its business execution capabilities; the ability to act swiftly based on foresight and insight gained from frontline operations, where trends first emerge and can be understood; the determination and decisiveness to create solutions to unresolved issues; and the capacity to put into practice the Group Philosophy and Core Values of the Daikin Group and pass them down to future employees. Directors are appointed based on the above criteria, while independent directors are required to have assumed such a role at a listed company, among other experience. With the aims of boosting the corporate value of the Daikin Group, furthering global business expansion, and accomplishing the key strategies set forth in FUSION 25, the Company will further enhance corporate governance through its Board of Directors, which consists of corporate managers with extensive experience and deep insight. All of the Board’s 11 directors, based on their extensive experience and deep insight as corporate managers, have achieved significant results in their respective fields. Daikin believes the skills and attributes possessed by each director are necessary for further improving the Group’s corporate value. The seven internal directors, while carrying out their respective duties, will further expand the Company’s global businesses, promote and execute initiatives as part of environmental strategies and for the Solutions Business, and strive to accomplish them. The four independent external directors are appointed to aid in decision-making and management supervision from an independent and objective standpoint. Based on experience at their respective companies and knowledge in their respective areas of expertise, the incumbent Board members possess the necessary skills for helping accomplish the Group’s key strategies. Furthermore, for such business functions as sales, production, finance and accounting, legal affairs, and digital transformation, executive officers are appointed to execute business operations in earnest. At the same time, they attend Board of Directors’ meetings in accordance with Board meeting agendas, in order to ensure effective decision-making and supervision by the Board of Directors. Skill Sets of Directors Name Noriyuki Inoue Experience and Knowledge of Each Director and Their Expected Roles Noriyuki Inoue has been overseeing the Company’s management for many years and has achieved significant results in globally expanding Daikin’s businesses and improving corporate value through sound judgement and foresight and Group management capabilities that embrace diversity. The Company expects that he will promote the building of a business model looking ahead to a new era. Masanori Togawa As representative director, president and CEO, Masanori Togawa has made efforts in executing FUSION 25, the Company’s strategic management plan, and in developing the Daikin Group. The Company expects that he will continuously strive to achieve FUSION 25 as well as demonstrate his strong leadership to promote measures flexibly and quickly amid a constantly changing business environment for further business expansion. Ken Tayano Ken Tayano has been in charge of the Air Conditioning Business in China for many years and has significantly contributed to business expansion. He is currently in charge of all business operations in China and the Air Conditioning Business in Japan, while reinforcing the sales and marketing capabilities of the Daikin Group. Leveraging his ability to respond to rapid changes in China and management skills that maximize the potential of local human resources, the Company expects that he will further expand business. Masatsugu Minaka Masatsugu Minaka has been in charge of the Air Conditioning Business in Europe for many years, thereby significantly contributing to business expansion. He is currently in charge of all business operations in Europe, the Middle East, and Africa. Leveraging his ability to respond to environmental issues in Europe and his management skills to create synergies among diverse local human resources, the Company expects that he will further expand business. Takashi Matsuzaki Takashi Matsuzaki has been engaged in the Air Conditioning Business for many years and has significantly contributed to business expansion, particularly in terms of R&D and product development. He is currently in charge of R&D and the Applied Solutions Business in North America. The Company expects that he will develop leading-edge technology beyond air-conditioning equipment and create new businesses. Yoshihiro Mineno Yoshihiro Mineno has been engaged in the overseas Air Conditioning Business, particularly in Asia and Oceania, for many years, thereby significantly contributing to business expansion. Currently, he is in charge of the Air Conditioning Business in Asia and Oceania, including India, and the Filter Business. Leveraging his experience working overseas and business creation capabilities in new fields, the Company expects that he will further expand business as well as globally reinforce sales and marketing capabilities. Kanwal Jeet Jawa Kanwal Jeet Jawa has been engaged in the Air Conditioning Business in India for many years, thereby significantly contributing to business expansion. Currently, he is in charge of the Air Conditioning Business in India and East Africa. Leveraging his vast experience in the Air Conditioning Business and ability to develop businesses in emerging regions, the Company expects that he will further expand business. Tatsuo Kawada Leveraging his abundant experience and deep insight as a corporate manager at Seiren Co., Ltd., Tatsuo Kawada provides advice and supervises the Company’s management matters based on extensive and deep insight as an independent external director, with a focus on his viewpoints regarding business model transition, innovation creation, and other matters. Akiji Makino Shingo Torii Yuko Arai Leveraging his abundant experience and deep insight as a corporate manager at Iwatani Corporation, Akiji Makino provides advice and supervises the Company’s management matters based on extensive and deep insight as an independent external director, with a focus on his perspectives regarding the energy and environmental fields, service businesses, and other matters. Leveraging his abundant experience and deep insight as a corporate manager at Suntory Holdings Limited, Shingo Torii provides advice and carries out supervision based on extensive and deep insight as an independent external director, with a focus on his perspectives regarding corporate management anticipating customers’ needs, corporate activities pertaining to the SDGs and ESG, and other matters. Leveraging her abundant experience and deep insight as a corporate executive at the ANA Group, Yuko Arai provides advice and carries out supervision based on extensive and deep insight as an independent external director, with a focus on her perspectives regarding customer-centric corporate management and business development as well as the further empowerment of female employees in the workplace. 53 Integrated Report 2022 A Governance System That Facilitates Value Creation Corporate Governance Evaluation of the Effectiveness of the Board of Directors Daikin evaluates the effectiveness and appropriateness of its Board of Directors and the corporate governance system through interviews with directors and Audit & Supervisory Board members and deliberations by the Board of Directors. The Board of Directors of the Company has been deemed to be making appropriate decisions through open and active discussions, and to be playing an effective role in enhancing corporate value over the medium to long term. Daikin will continue to improve Board effectiveness as well as engage in other initiatives, including discussions on Groupwide strategies and issues and improvement of reporting regarding the status of business execution. Officer Compensation System To ensure the transparency of management by executive officers and of compensation processes, Daikin has established the HRM Advisory Committee and the Compensation Advisory Committee. These committees engage in discussions and deliberations regarding issues including executive officer nomination criteria, candidates, and compensation levels. To fulfill the expectations of shareholders and all other stakeholders, the Company’s officer compensation system is designed to enhance the motivation of internal directors to continuously improve the Company’s performance over the medium to long term and contribute to increasing the overall value of the Daikin Group in accordance with its management policies. Compensation of directors, excluding external directors, consists of fixed compensation; performance-linked compensation, reflecting the short-term performance of both the Group and the division of which the director is in charge; and compensatory stock options, reflecting the medium- to long-term performance of both the Group and the division of which the director is in charge. Compensation levels are determined upon analyzing and comparing the compensation data of major manufacturers in Japan, selected from objective data based on compensation surveys. These surveys are compiled by a third-party institution specializing in research on the levels of compensation of corporate officers active in approximately 300 Japanese companies listed on the Prime Market of the Tokyo Stock Exchange. More specifically, net sales growth rate, operating profit margin, and ROE are used as basic indicators, while the status of the Company’s performance and director compensation levels relative to other companies are assessed and determined commensurate with medium- to long-term improvements in corporate value. Moreover, in terms of performance-linked compensation, our ratio of compensation based on performance is higher than that of other major manufacturers in Japan, ensuring that sufficient incentive is provided to directors. Performance-linked compensation for the chairman, and for the president and CEO uses a performance-linked coefficient derived from Companywide performance-linked indicators. Meanwhile, performance-linked compensation for directors other than the chairman and president and CEO is determined using a performance-linked coefficient derived from Companywide performance-linked indicators, adjusted by single-year performance versus quotas for net sales and operating profit for directors’ respective divisions, which serve as objectives for the day-to-day business activities of each division, and the progress of each director in carrying out priority initiatives over the short, medium, and long term. In addition, for these priority issues, targets have been established based on the responsibilities of each individual in accordance with the nine key strategy themes laid out in the Group’s FUSION 25 strategic management plan. The amount of compensatory stock options paid to directors excluding external directors is determined each fiscal year by dividing a sum determined by taking into account the status and results of each individual’s efforts regarding short-term, medium-term, and long-term priority issues in the previous fiscal year, which are determined based on each director’s respective position, by the recent average closing price of shares. These options are exercisable from three to 12 years after the date they were granted. With regard to the policy for determining director compensation and the details thereof, the Compensation Advisory Committee, which is chaired by an external director and the members of which are mainly external directors, deliberates on the policy and appropriateness of the system and levels of director compensation and individual compensation amounts while taking into account the wider context of executive compensation. To enhance the effectiveness of its functionality as an advisory body while ensuring the independence of its decisions, the Compensation Advisory Committee not only gathers information and utilizes advice from compensation advisors of external specialist organizations but also assesses and deliberates on the status of the Company’s performance and compensation levels relative to other companies, and the appropriateness of compensation from a variety of angles. Furthermore, the Committee confirms and deliberates the contents of proposals concerning the amount of compensation for each individual director from an objective perspective and submits its opinions to the president and representative director. Representative Director, President and CEO Masanori Togawa shall determine the amount of compensation for each individual director on the basis, in principle, of the opinions submitted to the chairman upon receiving approval from the Board of Directors for their reappointment. If his decision were to contradict with the opinions submitted to the chairman of the Committee, the reasons thereof will be reviewed by the Compensation Advisory Committee. The reason for delegating this authority to Masanori Togawa is that he is the most suited to overseeing the Company’s management and its overall performance and to accurately assessing the performance of the relevant divisions of each director as well as the directors themselves based on sufficient information. Furthermore, the Compensation Advisory Committee comprises six members, including four external directors, one internal director, and one executive officer in charge of human resources, and is chaired by an external director. Total Compensation for Directors and Audit & Supervisory Board Members (Fiscal 2021) Position Total compensation (Millions of yen) Total of different types of compensation (Millions of yen) Fixed compensation Compensatory stock options Performance-linked compensation Number of persons paid Directors (excluding external directors) Audit & Supervisory Board members (excluding external Audit & Supervisory Board members) External executive officers 1,294 70 99 517 70 99 235 — — 540 — — 9 2 7 Compensation for Certified Public Accountants (Fiscal 2021) Compensation for audit certification duties ¥255 million 54 Messages from External Directors At the Daikin Group, we believe corporate governance serves to enhance corporate value by allowing us to make and act on decisions quickly to ensure that we are constantly one step ahead and to continuously improve the transparency and soundness of our business operations in relation to our management issues and the changes in our business environment. In this section, our external directors explain the features of Daikin’s Board of Directors and their stance as external directors. Tatsuo Kawada Chairman of the HRM Advisory Committee, Chairman of the Compensation Advisory Committee Significant concurrent posts Chairman and CEO of Seiren Co., Ltd. External Director of Hokuriku Electric Power Company Attendance at the Board of Directors meetings Attended 14 out of 15 meetings held in fiscal 2021 At the Company’s Board of Directors meetings, agendas are set from the perspective of employees on the front lines of our operations and are discussed in detail, allowing me to feel connected to the front lines at all times. For instance, the views of frontline employees in regard to the direction that the Company should take and the strategies it should execute were firmly incorporated into the discussion and formulation processes of the FUSION 25 strategic management plan. For that reason, the strategies or the so-called five Gen principles, genba (actual location), genbutsu (actual product or material), genjitsu (actual situation), genri (rationale), and gensoku (general rule) are fully embraced by those on the front lines. Daikin’s business environment has undergone drastic changes as a result of the COVID-19 pandemic. However, as the Group continues to expand its business with a focus on air, we are seeing a substantial increase in possibilities going forward. While management’s priority to date has been to improve profits and business results, environmental and social contributions must be emphasized to a greater degree hereafter. As an external director, I will continue to monitor the gap between the ideal state of Daikin’s business and its actual business growth, and work to realize a corporate governance that fulfills the expectations of its shareholders and all other stakeholders. In so doing, I will help ensure that the Group continues to grow and develop as an organization while resolving social issues in the years ahead. Shingo Torii Member of the HRM Advisory Committee, Member of the Compensation Advisory Committee Significant concurrent posts Representative Director and Vice Chairman of the Board of Suntory Holdings Limited Outside Director of Zojirushi Corporation Chairperson of the Osaka Chamber of Commerce and Industry Attendance at the Board of Directors meetings Attended 14 out of 15 meetings held in fiscal 2021 While the Company has laid out its strategy of challenge to achieve carbon neutrality in FUSION 25, I am delighted about the prospect of significant growth that lies ahead as the trend toward decarbonization accelerates the shift from combustion heaters to heat pump space and water heaters in Europe and other regions. Moreover, in addition to aggressively pursuing M&As, we have been focused on strengthening the value chain of upstream to downstream businesses through medium-scale acquisitions, rather than large-scale acquisitions, in recent years. These moves, I think, are very strategic. I will draw on my management experience at Suntory Holdings Limited in support of the Company’s initiatives related to the sustainable development goals (SDGs) and environmental, society, and governance (ESG) factors, as well as its measures to anticipate customer needs. I will also contribute to highly effective oversight and decision-making based on the perspectives of shareholders and all other stakeholders. In these ways, I will help guide the Group toward sustainable growth and enhance its corporate value. Akiji Makino Member of the HRM Advisory Committee, Member of the Compensation Advisory Committee Significant 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 Attendance at the Board of Directors meetings Attended 14 out of 15 meetings held in fiscal 2021 At the Company’s Board of Directors’ meetings, monthly budget progresses are reported in detail from a frontline perspective, while at the same time, under the direction of the chair of the Board of Directors, executive officers and directors, including external directors, come together to discuss the market environment (opportunities and risks) of each region and business. I am convinced that the outcomes of these discussions have led to strong business results. Specific measures are being developed and implemented for the growth strategy themes in FUSION 25, such as “Challenge to achieve carbon neutrality”, and I believe that the Company is making exceptional progress with these measures. By continuing to facilitate lively discussions, I will contribute to sustainable increases in the Company’s corporate value and its further growth and development as an organization. Yuko Arai Member of the HRM Advisory Committee, Member of the Compensation Advisory Committee Significant concurrent posts Senior Advisor of ANA Akindo Co., Ltd. Outside Director of Aichi Steel Corporation Attendance at the Board of Directors meetings Attended 12 out of 12 meetings held in fiscal 2021 (upon appointment as director on June 29, 2021) The Company's Board of Directors meetings are conducted in an appropriate manner as agenda outlines are provided in advance, the meetings are held online, and matters are reported in a concise and easy-to-understand way. In addition, the discussions are always held in a lively and determined manner, regardless of the Company’s business performance, and I am always impressed by this determination. It has been roughly a year since I was appointed outside director of the Company. I will continue to draw on my experience in the airline industry and as an external director at other manufacturing companies to provide the Company with oversight and advice on its supply of products and services from a customer perspective and on the empowerment of its female employees, enhancing the Company’s corporate governance in the process. 55 Integrated Report 2022 A Governance System That Facilitates Value Creation Corporate Officers (As of June 30, 2022) Directors Noriyuki Inoue Chairman of the Board and Chief Global Group Officer Masanori Togawa Representative Director, President and CEO Tatsuo Kawada Member of the Board (External) Date of birth March 17, 1935 Date of birth January 11, 1949 Date of birth January 27, 1940 1957 Joined the Company March February 1979 Director of the Company February 1985 Managing Director of the Company June June May 1989 Senior Managing Director of the Company 1994 President, Representative Director of the Company 1995 Chairman of the Board and President, Representative Director of the Company 1996 President, Representative Director of the Company 2002 Representative Director, Chairman of the Board April June June 1973 Joined the Company 2002 Director of the Company 2004 Director and Senior Executive Officer of the Company July 2006 Member of the HRM Advisory Committee and the Compensation Advisory Committee of the Company (Current positions) June 2007 Director and Senior Executive Officer of the March 1962 Joined Fukui Seiren Kako Co., Ltd. (Currently, Seiren Co., Ltd.) 1981 Director of the above company 1985 Managing Director of the above company 1987 President of the above company 2003 President and COO of the above company August August August June October 2005 President, CEO and COO of the above company June 2011 Chairman, President, CEO and COO of the above Company company and CEO of the Company June 2011 Representative Director, President and COO of the June 2014 Chairman and CEO of the above company June June June 2014 Chairman of the Board and Chief Global Group Officer of the Company (Current position) Company June 2014 Representative Director, President and CEO of the Company (Current position) Number of Company shares owned 67,700 July 2016 Chairman of the Internal Control Committee of the Significant concurrent posts Chairman of the Daikin Foundation for Contemporary Arts Chairman of Specified Nonprofit Corporation of Kansai Philharmonic Orchestra Company (Current position) Number of Company shares owned 10,300 Significant concurrent posts — June July July (Current position) 2016 Director of the Company (Current position) 2016 Member of the HRM Advisory Committee and the Compensation Advisory Committee of the Company (Current positions) 2021 Chairman of the HRM Advisory Committee and the Compensation Advisory Committee of the Company (Current positions) Number of Company shares owned — Significant concurrent posts Chairman and CEO of Seiren Co., Ltd. External Director of Hokuriku Electric Power Company Akiji Makino Member of the Board (External) Shingo Torii Member of the Board (External) Yuko Arai Member of the Board (External) Date of birth September 14, 1941 Date of birth January 18, 1953 Date of birth January 27, 1961 March June June June June April June 1965 Joined Iwatani Corporation 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 Officer of the above company June 2012 Chairman, CEO and Executive Officer of the above company June July 2016 Director of the Company (Current position) 2016 Member of the HRM Advisory Committee and the Compensation Advisory Committee of the Company (Current positions) April 2019 Chairman and CEO of Iwatani Corporation (Current position) Number of Company shares owned 2,000 Significant 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 April June 1980 Joined ITOCHU Corporation 1983 Joined Suntory Limited (Currently, Suntory Holdings Limited) March March March 1992 Director of the above company 1999 Managing Director of the above company 2001 Representative Director and Senior Managing Executive Officer 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 June July Board of the above company (Current position) 2020 Director of the Company (Current position) 2020 Member of the HRM Advisory Committee and the Compensation Advisory Committee of the Company (Current positions) Number of Company shares owned 1,000 Significant concurrent posts Representative Director and Vice Chairman of the Board of Suntory Holdings Limited Outside Director of Zojirushi Corporation Chairperson of the Osaka Chamber of Commerce and Industry April April April April June July 1979 Joined ALL NIPPON AIRWAYS CO., LTD. 2014 Corporate Executive Officer of the above company 2016 Senior Executive Officer 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) 2021 Director of the Company (Current position) 2021 Member of the HRM Advisory Committee and the Compensation Advisory Committee of the Company (Current positions) April 2022 Senior Advisor of ANA Akindo Co., Ltd. (Current position) Number of Company shares owned — Significant concurrent posts Senior Advisor of ANA Akindo Co., Ltd. Outside Director of Aichi Steel Corporation 56 Directors Ken Tayano Representative Director, Senior Executive Officer Masatsugu Minaka Member of the Board, Senior Executive Officer Takashi Matsuzaki Member of the Board, Senior Executive Officer Date of birth January 12, 1947 Date of birth July 9, 1953 Date of birth December 23, 1958 April June June June May 1970 Joined the Company 2000 Associate Officer of the Company 2002 Senior Associate Officer of the Company 2004 Senior Executive Officer of the Company, Representative of China business of the Company (Current position), Member of Global Air- Conditioning Committee of the Company 2009 Chairman of the Board and President of Daikin (China) Investment Co., Ltd. June 2011 Director and Senior Executive Officer of the Company June June 2013 In Charge of the Air Conditioning Business in Japan of the Company (Current position) 2014 Representative Director and Senior Executive Officer of the Company (Current position) December 2014 Chairman of the Board of Daikin Fluorochemicals (China) Co., Ltd. Number of Company shares owned 5,300 Significant concurrent posts Chairman of the Board and President of Daikin (China) Investment Co., Ltd., October 1983 Joined the Company July June 2005 Director and President of Daikin Europe N.V. 2007 Associate Officer of the Company, Member of June June June June Global Air-Conditioning Committee of the Company 2008 Executive Officer of the Company 2010 Senior Executive Officer of the Company 2011 Director and Senior Executive Officer (Current position), Representative of Air Conditioning in Europe, the Middle East, and Africa of the Company 2018 Representative of Air Conditioning in Europe, the Middle East, and Africa (excluding East Africa) of the Company 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 Company shares owned 8,100 Significant concurrent posts Chairman of the Board of Daikin Europe N.V April June June June June June 1982 Joined the Company 2004 Executive Officer of the Company 2008 Director and Senior Executive Officer of the Company 2010 Senior Executive Officer of the Company 2012 Director and Senior Executive Officer of the Company 2015 In Charge of R&D in North America (including Applied Solutions, Commercial and Industrial Refrigeration, Filter and Dust Collection) for the Company June 2017 In Charge of R&D in North America for the Company (Current position), In Charge of Applied R&D Center of the Company (Current position), General Manager of Silicon Valley Technology Office of the Company June 2018 Senior Executive Officer of the Company, In Charge of the Applied Solutions 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 Officer of the Company 2020 Director and Senior Executive Officer of the Company (Current position) Number of Company shares owned 8,000 Significant concurrent posts — Yoshihiro Mineno Member of the Board, Senior Executive Officer Kanwal Jeet Jawa Member of the Board, Senior Associate Officer Date of birth May 14, 1953 Date of birth November 10, 1959 September 1978 Joined the Company May 2010 General Manager of Global Operations Division of June June June the Company 2012 Executive Officer of the Company 2016 Senior Executive Officer of the Company, Director of Goodman Global Group, Inc. (Currently, Daikin Comfort Technologies North America, Inc.) (Current position), Director of Daikin Holdings (Houston), Inc. 2019 Senior Executive Officer of the Company, In Charge of the Filter Business of the Company (Current position), In Charge of Training for the Company (Current position) June 2021 Director and Senior Executive Officer (Current position), In Charge of Global Operations Division of the Company (Current position) Number of Company shares owned 6,500 Significant concurrent posts Director of Daikin Comfort Technologies North America, Inc. 1997 2001 2005 2006 May Regional Director (Asia Pacific) of Carrier Aircon Limited Regional Vice President (North and East) of Voltas Limited Senior Vice President of the above company Managing Director of Uniflair India Pvt. Ltd. 2010 Deputy Managing Director and COO of Daikin Airconditioning India Pvt. Ltd. September 2010 Managing Director and COO of the above company 2017 Managing Director and CEO of the above company July June (Current position) 2018 Member of the Board and Associate Officer of the Company, Regional General Manager of Air Conditioning Business in India and East Africa of Global Operations Division of the Company (Current position) June 2019 Member of the Board and Senior Associate Officer of the Company (Current position) Number of Company shares owned — Significant concurrent posts Managing Director and CEO of Daikin Airconditioning India Pvt. Ltd. 57 Integrated Report 2022 A Governance System That Facilitates Value Creation Corporate Officers As of June 30, 2022 Audit & Supervisory Board Members Ryu Yano Audit & Supervisory Board Member (External) Toru Nagashima Audit & Supervisory Board Member (External) Kosei Uematsu Audit & Supervisory Board Member (Standing) Date of birth April 21, 1940 Date of birth January 2, 1943 Date of birth January 21, 1952 1963 Joined 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 1965 Joined Teijin Limited April 2000 Director of the above company June June 2001 Managing Director of the above company November 2001 President and Representative Director COO of the Director of the above company above company April 1999 Representative Director and President of the above June 2002 President and Representative Director CEO of the June February 1982 Joined 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 2004 Executive Officer, 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 Officer of the Company, General Manager of New York Office 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) Number of Company shares owned 8,000 Significant concurrent Posts — company above company June 2002 Representative Director and Executive Officer of the above company April 2010 Representative Director and Chairman of the Board of the above company June April June June 2008 Chairman of the Board of the above company 2013 Director and Advisor of the above company 2013 Senior Advisor of the above company 2016 Audit & Supervisory Board Member of the June 2013 Audit & Supervisory Board Member of the Company (Current position) Company (Current position) April 2018 Honorary Advisor of Teijin Limited (Current position) April 2020 Director and Corporate Advisor of Sumitomo Forestry Co., Ltd. June 2020 Chief Advisor of the above company (Current position) Number of Company shares owned — Significant concurrent posts Chief Advisor of Sumitomo Forestry Co., Ltd Number of Company shares owned — Significant concurrent posts Honorary Advisor of Teijin Limited Hisao Tamori Audit & Supervisory Board Member (Standing) Date of birth July 31, 1960 August July 1989 Joined the Company 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 Officer of the Company 2019 Audit & Supervisory Board Member of the Company (Current position) Number of Company shares owned 1,000 Significant concurrent posts — 58 Executive Officers Position Name Main Responsibilities / Titles Senior Executive Officer Koichi Takahashi Senior Executive Officer Masayuki Moriyama Responsible for Finance, Accounting/Budget Operations, Promoting Operational Efficiency, General Manager of Finance and Accounting Division Responsible for Applied Solutions Business in China Region, Refrigeration Business, Director of Daikin (China) Investment, COO of McQuay China Senior Executive Officer Satoshi Funada Responsible for Service Operations, General Manager of Domestic Air Conditioning Sales Division Senior Executive Officer Naofumi Takenaka Responsible for Human Resources, General Affairs Senior Executive Officer Yoshikazu Tayama Department Manager of Budget and Administration Group in Finance and Accounting Division Senior Executive Officer Katsuyuki Sawai Responsible for CSR, Global Environment Affairs, Public Relations, General Manager of Tokyo Office, Manager of Public Relations Department in Tokyo Office, Chairman of CSR Committee Senior Executive Officer Tsutomu Morimoto Responsible for Daikin Comfort Technologies North America, Inc., Executive Secretarial Department, Cooperation within North America Senior Executive Officer Yuji Yoneda Responsible for Air-Conditioning Product Development (including Applied Solutions and Refrigeration), General Manager of Technology and Innovation Center Senior Executive Officer Masaki Saji General Manager of Human Resources Division, Department Manager of Diversity Promotion Group in Human Resources Division Senior Executive Officer Toshio Ashida Responsible for Corporate Planning, Electronics Business, Technology Innovation Strategy Office in Technology and Innovation Center Senior Executive Officer Yasushi Yamada Responsible for Safety Executive Officer Hitoshi Jinno General Manager of Filter Division Executive Officer Kota Miyazumi Responsible for Marketing, Corporate Communication, General Manager of Marketing Research Division, Department Manager of Planning Group in Marketing Research Division, Chairman of Information Disclosure Committee Executive Officer 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 Executive Officer Akira Murai Responsible for Defense Systems Business, SCM, Logistics, Co-Creation Projects Member of Technology and Innovation Center, General Manager of Yodogawa Plant Executive Officer Makio Takeuchi Responsible for Global Procurement Executive Officer Yoshiyuki Hiraga Responsible for Chemicals Business and Chemical Environment/Safety Executive Officer Hideki Maruoka Responsible for Oil Hydraulics Business Executive Officer Shigeki Morita Affiliation Alliance Promotion, Concurrent Development Promotion, General Manager of Air-Conditioning Manufacturing Division, Responsible for PL/Quality (Air Conditioning/Applied/Refrigeration), Alliance Promotion with Gree Electric Appliances Inc., PD General Manager of Sakai Plant Executive Officer Katsumi Kawahara Deputy General Manager of Technology and Innovation Center (Responsible for Promoting Industry, Government and Academia Collaboration) Executive Officer Shoji Uehara General Manager of Global Operations Division Executive Officer Hiroaki Ueda Responsible for DX Strategy Promotion, General Manager of Corporate Planning Department Executive Officer Katsuya Miura General Manager of Chemicals Division, Manager of Planning Department in Chemicals Division Executive Officer Kenji Matsuba Deputy General Manager of Air-Conditioning Manufacturing Division (Responsible for Business Strategy), Manager of Planning Department in Air-Conditioning Manufacturing Division Executive Officer Tomohiro Mizuguchi Responsible for IT Promotion, Manager of General Affairs Department, Manager of General Affairs Group in General Affairs Department Executive Officer Kimikazu Hatou Deputy General Manager of Air-Conditioning Manufacturing Division (Responsible for Product Development), Manager Responsible for Product Development in Refrigeration Division, General Manager of Shiga Plant Executive Officer Keiko Mori Responsible for Human Resource Development and Maximizing the Talents of Women, Senior Manager In Charge of Executive Secretarial Department 59 Integrated Report 2022 A Governance System That Facilitates Value Creation Compliance and Risk Management Taking an Integrated Approach to Promoting Compliance and Risk Management At Daikin, the Internal Control Committee, chaired by the president The Daikin Group has established its Group Conduct Guidelines and CEO, checks and confirms that internal controls, including risk that clearly outline required conduct for individual officers and management, are functioning properly throughout the Group. On employees. In addition, it has appointed a compliance and risk top of this, the Corporate Ethics and Risk Management Committee management leader (CRL) for each division and each of the main promotes operational risk management and ensures thorough Group companies in Japan and overseas to ensure thorough compliance. compliance with these guidelines. By regularly checking the status In principle, the Corporate Ethics and Risk Management of compliance and risk management, sharing information, and Committee meets twice a year to identify issues that need to be disseminating the guidelines, Daikin is making every effort to foster addressed and promote their resolution, and to report on the status a “culture free of compliance violations” and to elevate of initiatives at overseas Group companies. Steps are also taken to “mechanisms to ensure that there are no compliance violations.” formulate and develop comprehensive common rules concerning In fiscal 2021, compliance meetings were held in the United compliance and risk management for overseas Group companies. States, Asia, Oceania, and Europe to share information on self-assessment, risk management, and education and training initiatives. Self-Checks and Audits to Monitor Status of Compliance with Group Conduct Guidelines Daikin uses a unique self-assessment system to enable assess the status of their compliance activities. The results of employees to assess their own actions in relation to the Group the self-assessments are shared with the Internal Auditing Conduct Guidelines. Department and the Finance and Accounting Division and used in Each year, departments and Group companies are selected to our various audits. take part in legal audits held by the Legal Affairs Department to Identifying Important Risks and Planning and Implementing Countermeasures With the rapid expansion of its business, Daikin has introduced these risks. The status of each company’s risk reduction measures risk management across the Group to gain a timely, accurate, is shared with and reported to the Corporate Ethics and Risk overall picture of risks from a global perspective and to mitigate Management Committee. In fiscal 2021, efforts focused on risks them. Every year, each division and the main Group companies related to key themes such as natural disasters, product quality, overseas and in Japan use risk assessments to identify critical harassment prevention, information management, and the risks. Based on these findings, each Group company puts forward strengthening of overseas crisis management. and implements countermeasures and works diligently to reduce 60 Corporate Ethics and Risk Management Structure Board of Directors Corporate Ethics and Risk Management Committee Organizational body for promoting corporate ethics and risk management activities for the entire Group Officer in Charge of Compliance and Corporate Ethics Person 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 n o i t o m o r P n o i t u c e x E Persons in Charge of Corporate Ethics and Risk Management Persons responsible for implementing 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 Preventing Bribery and Corruption The globalization of the economy has led to a growing need for preventing corruption and a tightening of regulations among Specific Measures • Established Compliance Guidelines for Preventing Bribery of businesses not only in Japan but throughout the world. At Daikin, Public Officials, Etc. the Group Conduct Guidelines outline our stance on Free • Utilized self-assessment system to assess compliance with the Competition and Fair Trading, Practicing Moderation in Group Conduct Guidelines Entertainment and Gift Exchanges, and Maintaining a Firm • Conducted audits of divisions and Group companies that do Attitude against Anti-Social Activities, and various measures have business in countries and regions with high rates of corruption been put in place to prevent corruption. and monitored their progress on bribery prevention measures • Provided consultations to employees on all matters concerning corporate ethics, including those related to bribery, through our Help-Line for Corporate Ethics Group Management The Company and Daikin Group companies strive to enhance information on a Groupwide basis, raise awareness of basic policies, corporate value and fulfill corporate social responsibility through and help address the issues facing Group companies. When actions based on our Group Philosophy. Group companies establishing and revising our FUSION strategic management maintain close communication to share directives and orders, as plans, the Group Management Meeting convenes to deliberate on well as to share guidance, advice, and feedback, while ensuring and establish a course of action for achieving the plan through the that business is conducted appropriately throughout the Group. sharing of Groupwide policies and specific issues by the heads of With the exception of inside information, the details of key each global business site. In addition, regional manager meetings decisions made by the Board of Directors and the Executive are held regularly to enable our head office management to determine Officers Meeting are shared promptly within the Group. Decisions regional business strategies through face-to-face discussions with on corporate activities are made based on consensus to ensure the heads of each Group company. satisfaction and agreement by all relevant parties and the Furthermore, important matters at our subsidiary companies are appropriateness of operations. determined and addressed in accordance with our Management The head office establishes divisions responsible for managing Regulations to Limit Authority of Daikin Group Companies, which and supporting Group companies and promotes measures to were revised in April 2008, as well as through prior consultations constantly provide operational support. At the same time, the Group and engagements and the regular monitoring of the status of their Steering Meeting has been established to promote the sharing of business conditions. 61 Integrated Report 2022 Business Strategies Overview of Daikin’s Core Businesses and Global Network The Daikin Group has expanded its global business to over 170 countries, comprising more than 100 production bases focused on market-localized production. Employees: 88,698 Consolidated Subsidiaries: 322 China ¥478.1 billion 19,567 32 8 Ratio of Net Sales Air Conditioning 91% Chemicals 7% Oil Hydraulics 1% Defense Systems 1% Europe ¥553.2 billion 11,147 77 15 Air Conditioning Net Sales and Operating Profit (Billions of yen) 282.4 2,828.5 (Billions of yen) Chemicals Net Sales and Operating Profit (Billions of yen) 27.3 212.4 (Billions of yen) 3,000 2,400 1,800 1,200 600 0 300 240 180 120 60 0 250 200 150 100 50 0 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 Net sales Operating profit Net sales Operating profit 35 28 21 14 7 0 Major Products • Fluorocarbon gas • Fluoropolymers • Fluoroelastomers • Fluoropaints • Fluoro coating agents • Semiconductor-etching products • Water and oil repellent agents • Pharmaceuticals and intermediates • Dry air suppliers Major Products • Room air-conditioning systems • Air purifiers • Heat-pump hot-water supply and room-heating systems • Packaged air-conditioning systems • Multiple air-conditioning systems • Freezers • Water chillers • Turbo refrigerator equipment • Air-handling units • Air filters • Industrial dust collectors • Marine-type container for office buildings refrigeration • Air-conditioning systems for • Refrigerating and freezing facilities and plants • Heat reclaim ventilators showcases 62 Japan ¥638.4 billion 13,369 30 7 U.S. ¥840.5 billion 20,275 67 9 Asia and Oceania ¥426.1 billion 18,542 55 7 Other Regions (Latin America, Middle East, and Africa) ¥172.8 billion 5,798 61 Sales Employees Consolidated subsidiaries Global R&D centers (Total for Air Conditioning, Chemicals, and Filter businesses) Defense Systems (Billions of yen) Net Sales and Operating Profit (Billions of yen) 1.6 20.2 (Billions of yen) 3.9 42.5 Oil Hydraulics Net Sales and Operating Profit (Billions of yen) 50 40 30 20 10 0 5 4 3 2 1 0 25 20 15 10 5 0 2018/3 2019/3 2020/3 2021/3 2022/3 2018/3 2019/3 2020/3 2021/3 2022/3 Net sales Operating profit Net sales Operating profit Major Products • Oil hydraulic pumps • Oil hydraulic valves • Cooling equipment and systems • Inverter controlled pump motors • Hydrostatic transmissions • Centralized lubrication units and systems Major Products • Warheads for Japan’s Ministry of Defense, warhead parts used in guided missiles for training purposes • Home-use oxygen therapy equipment 2.5 2 1.5 1 0.5 0 63 Integrated Report 2022 Business Strategies Review of Operations Air Conditioning From the familiar living spaces of residences and offices to the large spaces of factories and airports, our Air Conditioning Business utilizes a wealth of air-conditioning solutions to provide customers with comfortable spaces. Solutions extend even to the unique spaces of hospitals and kitchens as Daikin continues to meet the needs of various climates around the world. 3% 14% 19% 18% Ratio of Sales by Region Total: ¥2,828.5 billion (Fiscal 2021) 31% 15% Japan Europe Sales ¥523.9 billion Sales ¥518.7 billion Americas Sales ¥889.8 billion Asia and Oceania Sales ¥398.0 billion China Other Sales ¥424.7 billion Sales ¥73.3 billion Ratio of Products Sold by Region Japan Europe Residential 30% Commercial 30% Other*1 40% Residential 40% Commercial 15% Heater 20% Americas Ducted unitary for houses 55% Ductless*2 10% Applied 25% Other*3 10% China Residential multi-split ACs 55% RA*4 5% Commercial 20% Applied 20% Refrigerator and Freezer 15% Applied 10% Asia and Oceania Applied 5% Residential 60% Commercial 35% *1 Includes Applied Systems, after-sales service, and air purifiers *2 Includes residential and commercial use *3 Filter Business and Latin America business *4 Room air conditioners (excluding residential multi-split ACs) Global HVAC&R* Market Scale (Daikin Estimates) (Billions of yen) Average annual growth 4% 18,000 12,000 6,000 0 Average annual growth 1% Average annual growth 7% Global ¥34 trillion (2020) 43 trillion (2025 forecast) Average annual growth 2% Average annual growth 5% Average annual growth 3% Japan North America China Europe Asia and Oceania Other 2020 2025 * Heating, ventilation, air-conditioning, and refrigeration 64 Japan In 1951, Daikin launched Japan’s first packaged air conditioner. Since then, we have pressed forward and Business History diversified to provide air-conditioning systems that meet the needs of factories, ships, vehicles, buildings, and residential housing. Daikin has expanded its market share with a fine-tuned sales network and the pursuit of a broad lineup of high-value-added products that offer energy efficiency and comfort. Market Environment Review of Fiscal 2021 The air-conditioning market in Japan is mature and anchored by In the residential-use market, Daikin launched its Urusara X, a new replacement demand. In fiscal 2021, demand for residential-use air conditioner that can switch between air supply and air exhaust products declined from the previous year due to the impact of ventilation functions. Sales grew on the back of our response to unseasonable weather in the summer and the end of pent-up increasing interest in energy saving as a result of people spending demand. Conversely, demand for commercial-use products more time indoors and the growing need for IAQ. In the increased from the previous year through a gradual renewal of commercial-use market, sales increased through our strengthening economic activities. of proposals for systems combining air conditioners with ventilation products such as heat reclaim ventilators. As for air purifiers, we saw an increase in market share owing to the expansion of our product lineup. Urusara X air conditioners can switch between air supply and air exhaust ventilation functions Strategies for Fiscal 2022 In the residential-use market, we will look to expand sales of high-value-added products by promoting the merits of ventilation and air-purification functions. In the commercial-use market, we will enhance our lineup of heat reclaim ventilators that can be easily retrofitted, and of ultraviolet (UV) steamer units, which are highly effective in suppressing viruses and bacteria, thereby strengthening our proposal-based sales. In terms of air purifiers, we will aim to boost sales for both residential and commercial use. FUSION 25 Strategies We will accelerate growth by building new sales models that utilize digital technologies to capture changes in market conditions. We aim to establish a large-scale IAQ/Ventilation Business by, for example, launching new heat reclaim ventilator products suitable for renewal and retrofitting, as well as by heightening the appeal of our unique ventilation function and streamer technology. In addition, we will enhance our solutions proposal capabilities by application and market, while developing solutions menus that meet diverse customer needs. Through such efforts, we aim to have the No. 1 share in all areas and markets. In addition, with a view to realizing carbon neutrality, we will switch to the use of R32 refrigerant for our VRV (multi-split air conditioners) and chiller products while aiming to build a scheme for the recovery, reclamation, and destruction of refrigerants. 65 Integrated Report 2022 Business Strategies Review of Operations Americas Daikin made its first attempt to enter the United States, the world’s largest air-conditioning market, in the 1980s. However, given the well-entrenched culture of ducted air conditioning, market entry proved difficult and withdrawal from the market was unavoidable. We subsequently revisited the idea of establishing a U.S. Business History presence during our push to establish our business globally, and in the 2000s, with the acquisition of O.Y.L. Industries Bhd and Goodman Global Group, Inc.,* added ducted air-conditioning products to our lineup marking the start of full-fledged operations in the United States. * Renamed as Daikin Comfort Technologies North America, Inc. in April 2022 Market Environment Review of Fiscal 2021 The air-conditioning market in the United States, has reached maturity In Ducted Unitary for Houses, we honed our supply capabilities by and is based mainly on replacement demand. In fiscal 2021, moving ahead with initiatives to improve the employee turnover government economic measures and strong personal spending rate and increase the number of manufacturing personnel at our bolstered the economy, and demand was steady in the housing market. Goodman factory. The introduction of new inverter products spurred a growth in sales. In Ductless, we improved sales by capturing the growing demand for RA/SKY in the residential-use market. Sales of VRV systems were favorable for both residential and commercial use. In Applied Systems, we strengthened our Solutions Business in each market while capitalizing on market recovery to increase sales of chillers. The After-Sales Service Business also posted a growth in sales. Shop floor for Ducted Unitary for Houses Strategies for Fiscal 2022 In Ducted Unitary for Houses, we will focus on improving sales of inverter products by enhancing our lineup of products complying with energy-saving regulations and strengthening our support for dealers. In Ductless products we will continue to promote sales in the northeastern and northwestern regions of the Americas. In Applied Systems, we will work to increase sales of equipment to markets with robust demand while expanding the Solutions Business by increasing service personnel and broadening the coverage of after-sales services. FUSION 25 Strategies Our goals for fiscal 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 market, 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 efficiency regulations as a business opportunity, we will promote in the market the spread of inverters, heat pumps, and refrigerants with low GWP. 66 China 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 focusing on establishing Business History an image as a high-end brand, and on building up its own dealer network. Moreover, in an effort to create a new type of air-conditioning culture, we introduced ceiling-embedded indoor units and residential multi-split air conditioners. Market Environment Review of Fiscal 2021 In the first half of fiscal 2021, the Chinese economy gained In the residential-use market, we moved ahead with sales activities momentum to a certain degree through the increase of exports and incorporating both online and conventional sales at our PROSHOP new government-led infrastructure investments. In the latter half, specialty stores and focused on identifying new customers and however, the number of COVID-19 cases increased once again, capturing replacement demand. We reinforced our proposals for prompting the government to impose strict restrictions on activities, systems combining heat-pump hot-water heaters and other which drove both personal consumption and the Chinese economy products and bolstered sales of residential multi-split air conditioners. In the commercial-use market, we expanded our contact points with customers by leveraging the interest of stores and offices in ventilation and air purification. We also seized demand for equipment replacements and additional purchases. As for factories and other large-scale projects, we improved sales by tapping into the replacement demand for energy-saving equipment, which is increasing in line with the tightening of environmental regulations. downward. New Life Multi series for mid-range to high-end residences Strategies for Fiscal 2022 Along with expediting our user-direct proposal-based sales, we will expand our lineup of products and services by capitalizing on the growing interest for better solutions for ventilation, IAQ, and energy efficiency. For the residential-use market, we will push forward with sales activities incorporating online methods, and direct our focus on improving sales of residential multi-split air conditioners. In the commercial-use market, we will look to expand sales by providing comprehensive solutions for each market and customer. FUSION 25 Strategies By combining offline activities—such as comprehensive customer centers and the Daikin New Life Station—with online sites and social media, 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 our success rate for closing contracts. 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. 67 Integrated Report 2022 Business Strategies Review of Operations Europe, the Middle East, and Africa Our presence in Europe started with the establishment of a production and sales base in Belgium in the early Business History 1970s. We succeeded in bolstering sales in Italy, Spain, France, and other nations across the European Union (EU), and the scale of our business grew rapidly. From the 2000s, we also expanded into the Heating and the Refrigerator and Freezer businesses. Market Environment Review of Fiscal 2021 In Europe, the demand for residential-use products tapered off Despite restrictions on economic activities due to another upswing from November 2021 as a result of price hikes and restrictions on in COVID-19 cases, sales of residential air conditioners and heat-pump economic activities due to the upswing in COVID-19 cases. hot-water heaters grew while sales for the region overall climbed Meanwhile, demand was steady in the Heating Business owing to substantially from the previous year. In the residential-use market, incentives aimed at promoting the use of heat-pump hot-water sales increased on the back of a tailwind resulting from a subsidy heaters in place of combustion heaters. system introduced in Italy and an intense heat wave that hit Greece and other parts of southeastern Europe. In the commercial-use market, we enhanced our sales to hospitals and food retailers. Sales improved through our proposals of better solutions for IAQ. The Heating Business saw a significant improvement in sales behind its extensive lineup of heat-pump hot-water heaters. The Refrigerator and Freezer Business accelerated the rollout of one-stop solutions and expanded sales to food retailers, where demand continues to be strong. Heat-pump hot-water heater for outdoor use, a product for which Daikin aims to improve sales in fiscal 2022 Strategies for Fiscal 2022 In the residential-use market, we will take advantage of the growing interest in energy conservation stemming from rising energy costs, with the aim of improving sales of high-value-added products. In the commercial-use market, we anticipate a recovery in demand for offices and hotels due to the increasing interest in the environment and energy conservation. The Heating Business will look to increase its market share by capturing the growing demand for heat-pump hot-water heaters, which were developed in pursuit of decarbonization. The Refrigerator and Freezer Business will aim to increase sales to food retailers while forging a business foundation in the medical field. FUSION 25 Strategies Daikin will strive to capture demand, which is being driven by increasing environmental awareness and ongoing investments into living environments, 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 Space and Water Heating Business, we will also work in the refrigeration domain to bolster the business for one-stop solutions in stores, including for air-conditioning and ventilation. In all the HVAC&R markets, we aim to be a solutions provider capable of responding with flexibility to customer needs pertaining to IAQ and energy. Moreover, we will also push forward with developing a refrigerant eco-cycle (recovery, reclamation, and destruction) among other initiatives that take the lead in environmentally conscious society and industry issues. 68 Asia and Oceania Daikin began product exports and knock-down 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 Business History cooling-only models tailored to regional needs. From 2010 onward, air-conditioning demand soared in line with economic development, and Daikin reinforced its production capabilities with the establishment of plants in Thailand, India, Malaysia, and Vietnam. Market Environment Review of Fiscal 2021 Asia is in the process of adopting air-conditioning equipment and In light of the significant impact on demand posed by yet another systems, making it a market for growth. In fiscal 2021, we felt the upswing in COVID-19 cases, we expanded our sales network and impact of COVID-19 in regions where demand failed to recover and strengthened our support for dealers through the use of online restrictions on economic activities remained in force. Meanwhile, tools. In addition to sales growth in Oceania and countries in Asia demand was relatively stable in Oceania. Daikin dealer in Asia, where a recovery in demand is expected where restrictions on economic activities were relatively relaxed, the effect of selling prices contributed to an increase in regional sales over the previous year. In the residential-use market, sales grew in Indonesia and Australia. Sales also increased in India behind the expansion of our dealer network and the forging of stronger ties with dealers. In the commercial-use market, we expanded sales to public facilities, where demand is relatively stable, despite the ongoing impact of the scale-down of capital investment due to the economic downturn and delays in construction work and the lengthening of construction periods resulting from labor shortages at building sites. Strategies for Fiscal 2022 In Asia, where demand will likely bounce back, we will seek to bolster our manufacturing systems and expand sales. In the residential-use market, we will launch a highly cost-competitive inverter unit and promote its widespread use primarily in Malaysia, Indonesia, and other markets where inverters have yet to catch on. In the commercial-use market, we will reinforce our product appeal and proposal-based sales while emphasizing sales to hospitals, schools, and other markets with growth potential. FUSION 25 Strategies Together with expanding our sales network and product lineup in the Asian region, a market anticipated to experience further 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 the adoption of inverters and R32 refrigerant. We aim to establish India as a major hub in the future. To that end, we will further cement our position as the leader in shares of sales for this market by capturing the leading shares of room air conditioners. Moreover, we will strengthen ties between production sites across Asia, and, in addition to optimizing production throughout the region, will commence regional production of air purifiers while endeavoring to create markets. 69 Integrated Report 2022 Business Strategies Review of Operations Chemicals Fluoropolymers offer exceptional capabilities in the form of heat and chemical resistance, water and oil repellency, and lubricity. Through its distinctive technology that utilizes these properties, Daikin will continue to expand its Chemicals Business worldwide, where its fluoropolymers are considered an indispensable material for household products, automobiles, semiconductors, air conditioner refrigerants, and in a variety of other fields. 1% 16% 27% 13% Ratio of Sales by Region Total: ¥212.4 billion (Fiscal 2021) Japan Sales ¥58.4 billion Americas Sales ¥41.2 billion 24% 19% China Sales ¥51.2 billion Asia Sales ¥27.0 billion Europe Sales ¥33.5 billion Other Sales ¥1.1 billion Ratio of Products Sold Fluoropolymers/ Fluoroelastomers 61% Fine chemicals 32% Fluorocarbon gas 7% Main Fields and Applications of Fluorine Chemical Products Semiconductor Automotive Wafer carriers (PFA) Fuel hoses (Fluoroelastomer) Chemical bottles/tanks (PFA) Crankshaft seals (Fluoroelastomer) Piping fittings (PFA/PTFE) Fuel injection devices (Fluoroelastomer) Information and Communications / Devices Touch panel anti-smudge coating (OPTOOL) LAN cables (FEP) Printed circuit boards (OPTOACE) Environment / Energy Home and Living Lithium-ion batteries (Fluoropolymers) Solar cells (ETFE film) Wind power generation (ZEFFLE) Frying pans (Fluoropolymer coating) Rice cookers (Fluoropolymer coating) Hamburger packaging materials (Oil resistant agent for paper) Home roofs/exterior walls (ZEFFLE) Air conditioners (Fluorocarbon gas) Apparel (Water and oil repellents) Fluoropolymers/Fluoroelastomers Fine chemicals Fluorocarbon gas Global Fluorochemicals Market (Daikin estimates) (Billions of yen) Global ¥620.0 billion (2020) ¥800.0 billion (2025 forecast) Japan Americas China Europe Asia/Developing countries 250 200 150 100 50 0 2020 2025 70 In 1933, Daikin became the first company in Japan to engage in the business of fluorochemicals and the Chemicals Business has evolved into one of the pillars of its operations ever since. Today, our activities range Business History from research and development to applications development, and we offer a lineup of 1,800 fluorine compounds that include fluorocarbon gas, fluoropolymers, and fluoroelastomers In recent years, we have devoted our efforts to developing new fluorine applications for growth fields such as semiconductors, electric vehicles, information and communications technology (ICT), and new energy. Market Environment Review of Fiscal 2021 While the market was hit hard in fiscal 2020 due to the global We increased sales and market share primarily in the impact of the COVID-19 pandemic, demand recovered in fiscal semiconductor and automotive markets, which continue to enjoy 2021 for a variety of sectors, including semiconductors and strong demand, as sales for the business overall improved automobiles. Over 50% of the raw materials used in non-fluorine water repellent agents are natural ingredients. remarkably from fiscal 2020. Sales of fluorocarbon gas flourished as a result of greater demand in existing markets. Fluoropolymers saw sales grow for the semiconductor market and the information and communications market, including local area network (LAN) cables. Sales also grew for fluoroelastomers in the automotive market. Fine chemicals achieved sales growth, particularly in Europe, China, and Asia, led by the solid results of water and oil repellent agents. We also saw sales of etching gas improve in Japan and China through our anticipation of the recovery in demand for the semiconductor market. Strategies for Fiscal 2022 We will look to increase sales and market share by introducing differentiated products and strengthening our supply capabilities particularly in the semiconductor, automotive, and information and communications markets, where demand is expected to remain strong. For the textile and food product markets, we will distinguish ourselves from the competition by launching non-fluorine water repellent agents and oil resistant agents that reflect sustainability needs and drawing on their exceptional performance and ease of processing . We will also ramp up our application development particularly in lithium-ion battery materials and the information and communications market in response to the rising demand for EVs and 5G technology. FUSION 25 Strategies In addition to the accelerating movement toward the realization 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. For example, the movement toward non-fluorination is becoming apparent in food and apparel applications. Taking these changes as an opportunity to expand our business, we will implement a variety of measures ahead of our competitors. In addition to accelerating the creation of results centered on four key markets (semiconductors, automotive, information communications, and information devices) in applications development, Daikin will also develop and expand sales of highly functional, non-fluorinated materials for further business expansion. We will also aggressively implement upfront investments, such as increasing production capacity, in preparation for growth in demand in the coming years. 71 Integrated Report 2022 Business Strategies Review of Operations Oil Hydraulics Daikin’s unique hydraulic technologies offer outstanding energy-conservation performance and are contributing to the development of industry by unleashing the potential of power control. Overview of Business Activities In 1929, Daikin became the first company in Japan to handle lubrication equipment for shipbuilding and engine manufacturers, and since then the Oil Hydraulics Business has been contributing to worldwide industrial development. Applying the energy-saving technologies acquired through the Air Conditioning Business, we develop and manufacture environmentally conscious oil hydraulic pumps and oil hydraulic units under the themes of higher machine precision, quieter operation, and further miniaturization. Market Environment Review of Fiscal 2021 The demand for hydraulic equipment for industrial machinery was Sales of hydraulic equipment for industrial machinery grew solid at a global level for the machine tools market. Demand was particularly in Japan’s machine tools market, as well as in Asia, also brisk for hydraulic equipment for construction machinery and Europe, and the United States As a result, sales for the business vehicles, particularly in the United States, where housing starts overall increased from the previous year. Hydraulic equipment for have remained steady. construc tion machinery and vehicles also improved on the sales front through higher sales to our core customers in Japan and the United States. Hydraulic hybrid system that can be used overseas in areas with a power supply voltage of 400V without the need for a transformer Strategies for Fiscal 2022 In the area of hydraulic equipment for industrial machinery, we will draw on the acquisition of Duplomatic MS S.p.A. to build a business foundation for the European market with the aim of helping realize a better environment and expanding our business. In hydraulic equipment for construction machinery and vehicles, we will look to differentiate ourselves from the competition with products that reflect customer needs and expand our market share on a global scale. FUSION 25 Strategies In response to the growing momentum for energy saving toward the elimination of carbon emissions, Daikin will expand its lineup of high-efficiency products that utilize the technological capabilities cultivated so far. In hydraulic equipment for industrial machinery, we will expand our Solutions Business in the United States. and improve profitability 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 hydraulic equipment for construction machinery and vehicles, we will strengthen customer-oriented proposal sales in Japan and introduce highly efficient and durable differentiated products for small construction machinery in the United States to increase our market share. 72 Defense Systems Daikin’s superior machining and quality control technologies are used in the production of defense-related products, medical products, and other industries where high levels of reliability and performance are critical. Overview of Business Activities In the Defense Systems Business, we design and manufacture various products for Japan’s Ministry of Defense (MOD), including aircraft parts and missile components and fuses, particularly for ammunition used in training. We continue to expand the scope of manufacturing in this business by drawing on the high-precision processing technology that has been refined through our research and development and manufacture of defense-related products, which form part of Daikin’s series of special technologies that contribute to the realization of safe, healthy, and comfortable lifestyles. Daikin also engages in the manufacture and sales of home-use oxygen therapy equipment as well as in the supply of oxygen concentrators, which require the highest levels of reliability, performance, functionality, and quality. Market Environment Review of Fiscal 2021 The need for oxygen concentrators has increased substantially We continued to deliver products consistently in response to rising among government-operated medical facilities such as oxygen need driven by the COVID-19 pandemic by establishing a production stations and in at-home treatments of patients infected with system that can adapt flexibly to shortages in supply of and COVID-19. The demand for pulse oximeters, a medical device that fluctuations in demand for components. As a result, sales of oxygen measures oxygen saturation in the blood without the need to take concentrators and pulse oximeters increased considerably from the blood samples, has also risen dramatically due to its effectiveness previous year. for monitoring and maintaining the health of COVID-19 patients. Strategies for Fiscal 2022 As the effects of COVID-19 ease and demand returns to its pre-pandemic level, we will address customer needs and boost sales by enhancing the durability of our oxygen concentrators. In addition, we will commence sales of our hypoxic system, which enhances physical performance by controlling the oxygen concentration in the air, to fitness centers and other businesses with a view to expanding our operations in the medical and healthcare field. FUSION 25 Strategies In the field 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 the growing interest from society for preventive medicine, we will move full steam ahead with the development of our Healthcare Business. Utilizing the oxygen control technology cultivated in the development and production of our oxygen concentrators, we will expand sales of our hypoxic system. By acquiring and drawing on a multitude of vital data, we also aim to develop new services that will lead to the promotion of health in our daily lives. 73 Integrated Report 2022 Financial Summary Eleven-Year Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries (For the Years Ended March 31) Operating Results (for the year): Net sales Gross profit Selling, general and administrative expenses Research and development expenses (Note 1) Operating profit EBITDA (Note 2) Net profit 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 flow (Note 3) Net cash provided by (used in) financing 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 flow Cash dividends Ratios (%): Gross profit margin Operating profit margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 (Millions of Yen) ¥1,218,701 ¥1,290,903 ¥1,787,679 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 ¥2,481,109 ¥2,550,305 ¥2,493,387 ¥3,109,106 371,902 290,709 32,987 81,193 131,719 41,172 388,046 299,419 33,569 88,627 140,151 43,585 568,323 411,786 40,177 156,537 235,439 92,787 649,902 459,314 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 67,968 265,513 393,999 170,731 864,136 625,513 71,738 238,623 372,217 156,250 1,057,338 740,987 81,535 316,351 464,413 217,710 ¥ 44,967 ¥ 103,161 ¥ 179,713 ¥ 160,423 ¥ 226,186 ¥ 267,663 ¥ 223,740 ¥ 250,009 ¥ 302,167 ¥ 374,691 ¥ 245,071 (62,955) (218,386) (80,835) (17,988) (115,225) (1,113) 143,520 98,878 (38,249) ¥1,160,564 ¥1,735,836 ¥2,011,870 389,891 502,309 705,871 618,118 693,944 801,854 ¥ 141.37 ¥ 149.73 ¥ 318.33 1,725.64 2,123.10 2,748.08 (62) 36.00 (396) 36.00 339 50.00 (77,331) (105,493) (128,823) (127,459) (165,773) (156,187) (159,667) (180,790) 83,092 120,693 138,840 96,281 84,236 145,980 (83,073) (85,422) (73,544) (93,955) (68,721) (169,934) 215,024 98,942 64,282 (48,698) ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,475,708 ¥2,700,891 ¥2,667,513 ¥3,239,663 3,823,998 662,413 608,981 609,430 554,371 585,642 553,807 751,213 824,874 1,024,725 1,014,409 1,111,636 1,296,553 1,416,075 1,434,968 1,665,689 1,969,687 ¥ 410.19 ¥ 469.23 ¥ 526.81 ¥ 646.53 ¥ 646.39 ¥ 583.61 ¥ 533.97 ¥ 743.88 3,511.34 3,473.54 3,802.10 4,433.62 4,841.15 4,904.46 5,691.85 6,729.73 285 100.00 413 120.00 475 130.00 329 140.00 288 160.00 499 160.00 735 160.00 220 200.00 30.52% 30.06% 31.79% 33.94% 34.82% 35.76% 34.87% 35.02% 34.70% 34.66% 34.01% 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 8.76 13.17 13.07 39.86 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 10.17 14.94 11.98 51.51 Notes: 1. R&D expenses are included within general and administrative expenses and manufacturing expenses. 2. Earnings before interest, taxes, depreciation, and amortization (EBITDA) = Operating profit + Depreciation and amortization. 3. Free cash flow = 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 financial statements for the fiscal year ended March 31, 2014 and subsequent years have been revised. 5. Effective from April 1, 2018, the consolidated financial statements for the fiscal year ended March 31, 2018 have been revised in accordance with a change in accounting policy. Net Sales (Billions of yen) Operating Profit (Billions of yen) Net Profit Attributable to Owners of the Parent (Billions of yen) 320 240 160 80 0 12/3 14/3 16/3 18/3 20/3 22/3 250 200 150 100 50 0 12/3 14/3 16/3 18/3 20/3 22/3 12/3 14/3 16/3 18/3 20/3 22/3 3,200 2,400 1,600 800 0 74 Operating Results (for the year): Net sales Gross profit Selling, general and administrative expenses Research and development expenses (Note 1) Operating profit EBITDA (Note 2) Net profit 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 flow (Note 3) Net cash provided by (used in) financing 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 flow Cash dividends Ratios (%): Gross profit margin Operating profit margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 371,902 290,709 32,987 81,193 131,719 41,172 388,046 299,419 33,569 88,627 140,151 43,585 568,323 411,786 40,177 156,537 235,439 92,787 (62,955) (218,386) (80,835) (17,988) (115,225) (1,113) 143,520 98,878 (38,249) ¥1,160,564 ¥1,735,836 ¥2,011,870 389,891 502,309 705,871 618,118 693,944 801,854 ¥ 141.37 ¥ 149.73 ¥ 318.33 1,725.64 2,123.10 2,748.08 (62) 36.00 (396) 36.00 339 50.00 8.76 13.17 13.07 39.86 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 (Millions of Yen) ¥1,218,701 ¥1,290,903 ¥1,787,679 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 ¥2,481,109 ¥2,550,305 ¥2,493,387 ¥3,109,106 649,902 459,314 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 67,968 265,513 393,999 170,731 864,136 625,513 71,738 238,623 372,217 156,250 1,057,338 740,987 81,535 316,351 464,413 217,710 ¥ 44,967 ¥ 103,161 ¥ 179,713 ¥ 160,423 ¥ 226,186 ¥ 267,663 ¥ 223,740 ¥ 250,009 ¥ 302,167 ¥ 374,691 ¥ 245,071 (77,331) (105,493) (128,823) (127,459) (165,773) (156,187) (159,667) (180,790) 83,092 120,693 138,840 96,281 84,236 145,980 (83,073) (85,422) (73,544) (93,955) (68,721) (169,934) 215,024 98,942 64,282 (48,698) ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,475,708 ¥2,700,891 ¥2,667,513 ¥3,239,663 3,823,998 662,413 608,981 609,430 554,371 585,642 553,807 751,213 824,874 1,024,725 1,014,409 1,111,636 1,296,553 1,416,075 1,434,968 1,665,689 1,969,687 ¥ 410.19 ¥ 469.23 ¥ 526.81 ¥ 646.53 ¥ 646.39 ¥ 583.61 ¥ 533.97 ¥ 743.88 3,511.34 3,473.54 3,802.10 4,433.62 4,841.15 4,904.46 5,691.85 6,729.73 285 100.00 413 120.00 475 130.00 329 140.00 288 160.00 499 160.00 735 160.00 220 200.00 30.52% 30.06% 31.79% 33.94% 34.82% 35.76% 34.87% 35.02% 34.70% 34.66% 34.01% 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 10.17 14.94 11.98 51.51 Research and Development Expenses (Billions of yen) Shareholders’ Equity (Billions of yen) Total Assets (Billions of yen) 80 60 40 20 0 12/3 14/3 16/3 18/3 20/3 22/3 2,000 1,500 1,000 500 0 12/3 14/3 16/3 18/3 20/3 22/3 4,000 3,000 2,000 1,000 0 12/3 14/3 16/3 18/3 20/3 22/3 75 Integrated Report 2022 On Publishing the Integrated Report 2022 The Daikin Group has been issuing its Integrated Report since fiscal social issues affecting the Group’s value creation over the medium to 2020 to provide all shareholders and investors with information on the long term based on the changing business environment, and sets out initiatives it is taking to increase corporate value over the medium to related risks and opportunities. long term. By working alongside all our stakeholders, including customers, Strategic Management Plan FUSION 25 (pages 28–31) provides business partners, employees, and local communities, we will help an overview of our FUSION 25 strategic management plan, which was overcome social and environmental issues while continuing to develop launched in fiscal 2021, and details the progress of key initiatives as of our business and grow as an organization. Daikin Group’s ultimate goal the end of the first year of the plan. FUSION 25 sets out key strategy is to help realize a sustainable society and this report incorporates themes, including “Challenge to achieve carbon neutrality.” These detailed information on our approach to achieving this goal. This report themes are based on our commitment to continue to grow and develop has been compiled with reference to guidelines such as the as an organization by contributing to a better society and environment International Integrated Reporting Framework of the IFRS Foundation while expanding the scope and profitability of our business, as well as and the Guidance for Collaborative Value Creation of Japan’s Ministry of our vision of offering new value for the environment and air to realize Economy, Trade and Industry. both contributions to a sustainable society and Group growth. This The report outlines our value creation process with reference to our section explains the specific measures the Group will undertake to accumulated strengths, our business model that draws on these realize this vision by fiscal 2025, the final year of FUSION 25, from strengths, and our FUSION strategic management plan in the following both a financial and non-financial perspective. sections respectively: Our accumulated Strengths (pages 20–21), This report contains information that is of particular importance to Daikin’s Unique Business Model (pages 22–23), and Daikin’s Aims for enhancing the corporate value of the Daikin Group. For more detailed Value Creation (pages 26–27). Risks and Opportunities That Affect information, please refer to our website. Medium- to Long-Term Value Creation (pages 24–25), identifies major IR team members Other Means of Information Disclosure Reports on Financial Information: Reports on Non-financial Information: Disclosure of information related to financial results Disclosure of initiatives on sustainability centered on performance and stocks and shareholders corporate social responsibility (CSR) and the environment • Investor Relations section of our corporate website https://www.daikin.com/investor • Brief Report on the Settlement of Accounts https://www.daikin.com/investor/library/results_brief • Financial Results https://www.daikin.com/investor/library/results_materials • Daikin Review (business report, in Japanese only) https://www.daikin.co.jp/investor/library/review • Sustainability section of our corporate website https://www.daikin.com/csr • Sustainability Report https://www.daikin.com/csr/report • Corporate Governance Report https://www.daikin.com/csr/management/governance#chap03 76 Company Overview / Investor Information (As of March 31, 2022) Company name Daikin Industries, Ltd. Total number of authorized shares 500,000,000 Head office Umeda Center Building, 4-12, Nakazaki-Nishi Total number of shares issued 293,113,000 2-chome, Kita-ku, Osaka 530-8323, Japan Tel: 81-6-6373-4312 Number of shareholders 29,906 Shareholder register administrator Mitsubishi UFJ Trust and Tokyo office JR Shinagawa East Building, 18-1, Konan 2-chome, Minato-ku, Tokyo 108-0075, Japan Tel: 81-3-6716-0111 Fiscal year-end date March 31 Date of founding October 25, 1924 Paid-in capital ¥85,032 million Number of subsidiaries and affiliated companies Consolidated subsidiaries: 322 Affiliates: 15 Number of employees 88,698 (Consolidated) Individuals and others 12,516 thousand shares 4.27% Non-Japanese entities 106,305 thousand shares 36.28% Composition of Shareholders Financial institutions 143,478 thousand shares 48.97% Other entities 25,993 thousand shares 8.87% Securities companies 4,728 thousand shares 1.61% Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo Ordinary General Meeting of Shareholders June Auditor Deloitte Touche Tohmatsu LLC Major shareholders (10 largest by shareholding) Shareholder The Master Trust Bank of Japan, Ltd. (Trust Account) Custody Bank of Japan, Ltd. (Trust Account) Sumitomo Mitsui Banking Corporation JP Morgan Chase Bank 385632 Custody Bank of Japan, Ltd. Retirement Benefit Trust Account for The Norinchukin Bank MUFG Bank, Ltd. SSBTC CLIENT OMNIBUS ACCOUNT Custody Bank of Japan, Ltd. (Trust Account 4) State Street Bank West Client-Treaty 505234 SUMITOMO LIFE INSURANCE COMPANY No. of shares held (thousand shares) Shareholding ratio* (%) 61,402 20.98 20,035 9,000 7,763 4,999 4,900 4,729 4,621 4,059 3,595 6.85 3.07 2.65 1.71 1.67 1.62 1.58 1.39 1.23 Note: Treasury stock of 424,908 shares is included in Individuals and others Shares have been rounded down to the nearest thousand shares * Based on the total number of shares issued excluding treasury stock Stock price Total shareholder return (TSR) 2018/3 2019/3 2020/3 2021/3 2022/3 Daikin Nikkei 225 106.2 113.5 118.6 112.1 121.9 100.0 205.1 154.3 207.7 147.1 1,400 1,200 1,000 800 600 400 200 0 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 2020/3 2021/3 2022/3 Daikin TOPIX TOPIX Machinery Notes: 1. TSR (total shareholder return): Total rate of return on investment reflecting capital gains and dividends 2. TSR is calculated based on cumulative dividend amount and stock price fluctuations for Daikin and based on the stock market index inclusive of dividends for TOPIX (prepared by the Company based on data provided by Bloomberg, etc.). 3. Graph data represents market prices indexed by TSR with closing price data as of March 31, 2012 as a base of 100 (holding period up to March 31, 2022). 77 Integrated Report 2022 https://www.daikin.com