Daikin is capable of constructing a supply chain independent of Chinese components.

Daikin is capable of constructing a supply chain independent of Chinese components.

Close examination of China and Japan

Daikin Industries plans to construct a supply chain in fiscal 2023 that will allow it to continue manufacturing air conditioners in the event that critical components manufactured in China become unavailable. Suppliers will need to produce in countries other than China, as well as Japan, for parts related to essential functions like energy efficiency. It is becoming increasingly common for Japanese manufacturers to reduce their reliance on China as a result of supply disruption risks and geopolitical tensions brought on by China’s shutdown of its epidemic prevention measures and the confrontation between China and the United States.

In the past, Japanese businesses have largely moved their production and component sourcing to China due to the country’s lower labor and material costs. Japan will export goods worth 17 trillion yen to China in 2020, according to data from the country’s Ministry of Finance. Japan is reliant on China for many different things, but especially for electronics and automobile components. Since the middle of the 2000s, Daikin has placed a special emphasis on sourcing components from China. In 2020, 35% of Daikin’s total purchase value came from China.

Due to the impact of Shanghai’s closure, Daikin has reduced production of some products, even though it plans to reduce its reliance on Chinese suppliers to 20% by 2021. Daikin thinks it’s important to have a system in place for regularly sourcing parts from China and another system in place for sourcing parts from other regions in case of unforeseen emergencies.

Daikin considers specialized air conditioning components, such as special valves, to be “risk parts,” and the company plans to modify its procurement system to prioritize suppliers in Japan, Southeast Asia, and other regions outside of China. The components in question must be manufactured by suppliers with facilities outside of China. Suppliers that currently only produce in China will need to invest in new facilities so they can expand their operations to other countries.

Daikin will manufacture components that are integral to the operation of air conditioners, such as those that reduce energy consumption. Manufacturing of printed circuit boards at Daikin’s headquarters in Shiga Prefecture, Japan, resumed after Shanghai’s closure, and the company has also begun manufacturing these components in Malaysia. Daikin will also set up a system for self-producing motors at a number of bases outside of China.

Daikin has gone to great lengths in the procurement of parts and components to share information and develop alternative products for its production bases in various countries in response to the global chip shortage caused by the new crown epidemic. Using this knowledge to its full potential, we will set up a system to manufacture air conditioners without relying on parts made in China. Since it is expected that the price of supplies will rise, it is likely that gains in production efficiency will be sought to offset the rise in prices.

Japanese businesses have begun to diversify away from China in response to the new crown epidemic and other factors. According to the Imperial Data Bank, the number of Japanese firms operating in China dropped to 12,706 in June 2022, the lowest number in the past decade. This was a decrease of 940 from the number of Japanese firms operating in China reported in the 2020 survey.

Mazda is considering cutting back on the number of Chinese-made components it uses in its vehicles. Lockdown measures in places like Shanghai have reduced production, and for some components, suppliers are now looking to countries like Japan to produce them.

Japanese corporations now face geopolitical risks as a result of Russia’s attack on Ukraine and rising tensions in the Taiwan Strait. In September, Alice Oyama started moving 50 different plastic product lines from Chinese factories to Japan. In order to combat rising geopolitical risks and spiraling transportation costs.

Waseda University professor Takahiro Fujimoto, an expert on corporate supply chains, noted, “Companies pay more attention to the competitiveness of the supply chain in normal times, but when something happens, they need to flexibly switch to alternative production and other systems that prioritize sustainability.”

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