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Corporate Governance

Risk Management

Basic Policy

The directors and executive officers in charge of a duty have the authority and responsibility to create a Group-wide, cross-organizational system that covers the entire sphere of that duty; for example, in terms of product liability and quality, safety, production and sales activities, and disasters.

To deal with risk across the entire company, officers in charge of compliance and corporate ethics, through the legal department, identify major risks based on risk management principles, and these are deliberated by the Corporate Ethics and Risk Management Committee in order to formulate measures to deal with risk.

Corporate Ethics and Risk Management

Corporate Ethics and Risk Management

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Principal Risks Associated with the Daikin Group’s Operations

Identifying Major Risks and Proposing and Implementing Measures

With the Daikin Group expanding rapidly around the globe, we have introduced company-wide, cross-organizational risk management in order to quickly get an overall picture of risks from a global point of view and reduce the risks.

All divisions carry out annual risk assessments in which they determine important risks and create measures to deal with them. Based on the results of these assessments, the most important company-wide risks are determined, with measures proposed and implemented to deal with them in order to reduce risk.

In fiscal 2015, efforts involved six key risk areas: earthquakes, product liability and quality, intellectual property, information leaks, overseas crisis management, and improper accounting practices.

Cross-Organizational Risks for Fiscal 2015

  1. Earthquakes
  2. Product liability and quality
  3. Intellectual property
  4. Information leaks
  5. Overseas crisis management
  6. Improper accounting practices

The following are possible risks affecting the Daikin Group’s financial situation, business performance, and other areas.

Please note that forward-looking statements made here are based on knowledge current as of the end of March 2016.

Risks Directly Affecting Operations

(1) Sudden changes in politico-economic conditions or supply-demand relationships in principal markets

The Group provides goods and services throughout the world, and there is a possibility that Group performance could be impacted if politico-economic changes occur in such markets as Japan, Europe, North America, China, and other countries in the Asian region.

In particular, the Group is proactively developing business operations outside Japan through measures including constructing new air-conditioning equipment manufacturing facilities and acquiring air-conditioning equipment dealers in Europe as well as establishing manufacturing and marketing companies in China. There is, thus, a possibility that the Group’s performance could be impacted by business environment changes in one or more global regions. These changes could include the deterioration of economic conditions, raw material price surges, and/or the intensification of competition with other companies.

In the United States, on November 1, 2012, Dakin completed all procedures for the acquisition of Goodman Global Group, Inc. (Head Office: Houston Texas; hereinafter “Goodman”) for a purchase price of US$3.7 billion (including the refinancing of Goodman’s existing debt).

By means of this acquisition, Daikin intends to reinforce Goodman’s sales network—the largest sales network in the U.S. residential and commercial air-conditioning equipment market—through the launch of environmentally friendly products incorporating Daikin’s state-of-the-art environmental technologies. In doing so, Daikin aims to bring about new trends in the U.S. air-conditioner market that will enable the Group to realize business expansion and contribute to environmental protection. Furthermore, Daikin hopes to further improve its competitiveness by leveraging Goodman’s low-cost management know-how to develop business in emerging economies and volume-zone markets. Daikin also hope to use this know-how to reform the Group’s earnings structure, including at operations in advanced economies. There is a possibility that the degree of progress toward realizing these objectives could impact the Daikin Group’s performance.

(2) Changes in demand for air conditioners due to cold summer weather and other unusual weather patterns

Air-conditioning and refrigeration operations accounted for 89.4% of the Daikin Group’s consolidated net sales in fiscal 2014. Therefore, the Group strives to accurately monitor weather information and weather-related demand trends in the world’s principal markets. It also employs flexible manufacturing methods and marketing policies designed to minimize the impact of those demand trends on its performance. However, depending on the magnitude of demand changes resulting from cold summer weather or other unusual weather patterns, there is a possibility that the Group’s performance could be impacted.

(3) Large fluctuations in currency exchange rates

Overseas sales accounted for 75.4% of the Daikin Group’s consolidated net sales in fiscal 2015. The acceleration of global business development going forward is expected to further elevate this overseas sales ratio. Consolidated financial statements are prepared by translating local currency-denominated items, including sales, expenses, and assets, for Group operations in each global region, into Japanese yen. Accordingly, depending on currency exchange rates at the time of the currency translation, there may be an impact on yen translation values even when there has been no change in local currency-denominated figures. In addition, because some of the Group transactions in raw materials and component procurement and in the sale of goods and services are foreign currency-denominated, there is a possibility that changes in currency exchange rates could impact manufacturing costs and sales performance. To avoid such currency exchange rate-related risks, the Group undertakes short-term risk hedging via forward exchange contracts and similar instruments. Daikin also undertakes medium- to long-term measures to continuously adjust procurement and manufacturing operations and optimize them for changing currency exchange-rate trends, and to balance imports and exports in each currency. Through this, the Group works to realize a business structure that is not greatly impacted by changes in currency exchange rates. However, currency exchange rate-related risks cannot be completely avoided.

(4) Major product quality claims

The Daikin Group conducts the highest level of quality control on all products it manufactures, no matter what country they are manufactured in. In new product development, we strive to constantly improve quality, cost, and development speed by revamping all processes—starting in the pre-development stages—in a cooperative effort synchronizing the four facets of design, manufacturing technology, purchasing, and suppliers. Although the Group has liability insurance in case a product claim arises, there is still the possibility that major product quality claims could impact Group performance.

(5) Major problems in manufacturing

The Daikin Group takes every possible measure to prevent problems at its worldwide manufacturing bases, and it constantly works to improve its safety inspections and security measures, especially in the chemicals business. In preparation for potential manufacturing problems, the Group has insurance covering things like damage to equipment and lost profits. However, there is the possibility that major manufacturing problems could impact Group performance.

(6) Major changes in the market prices of securities

Securities of the Daikin Group are held mainly for the purpose of mutually expanding business with and strengthening relationships between Daikin and its business partners. However, factors such as fluctuations in the stock market and bankruptcy of business partners could possibly impact Daikin Group performance.

(7) Impairment of long-lived assets

The Daikin Group records a variety of tangible and intangible assets, including assets for business purposes and goodwill arising from the acquisition of another company. It may be necessary to book impairment losses on these assets; for example, due to a decline in business performance or in the market value of the assets, they may not generate the expected cash flow. Such impairment losses could impact Daikin Group performance.

(8) Natural disasters

Natural disasters can affect Daikin Group manufacturing, sales, and distribution bases, leading to a possible impact on Group performance.

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Preparing for Earthquakes

Revamping Earthquake Risk Measures and Stepping Up Safety Measures

Daikin has made earthquake risk measures a key company-wide theme and we are formulating measures via task-specific teams.

Based on estimates made by the Central Disaster Management Council of Japan's Cabinet Office (such as estimated maximum magnitude and maximum tsunami height), we have made and are implementing proposals in areas including reinforcement of earthquake resistance at our plants and flooding measures at our chemical plant, as well as evacuation drills to prepare for flooding.

We are also creating a business continuity plan (BCP) that includes concrete measures to eliminate risk and we are putting this plan into action.

Group companies are all proceeding with their own BCPs.

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Measures to Deal with Information Leaks

Stepping Up Information Leak Prevention

Preventing information leaks is a Group-wide concern. IT-related divisions and compliance-related divisions cooperate closely, and personal information managers and IT security managers in each division lead efforts to minimize the risk of information leaks.

Recently, there has been a rash of targeted attack emails. In response, the Group has stepped up efforts, including supplementing employee training with actual practice in dealing with such targeted attack emails.

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