Japan’s top air conditioner making company, Daikin industries has planned to dump China as it has failed to supply parts for manufacturing of Air conditioners. Daikin’s decision to find an alternative has caused a huge embarrassment to China even as relations between Japan and China complete 50 years.
Daikin which has always relied on China for air conditioner parts in the last decade, got fed up with China’s long zero Covid policy. In February, China had tightened chip supply after it imposed lockdown Suzhou in Jiangsu province. The tough step had a negative impact on the chip supply and fuelled the global chip shortage.
With rise in temperature all over the world, the Japanese tech firm wants to capture AC market and hence it announced that it would start making air conditioners without Chinese-made parts as early as March 2024. By depending on China for chip and other items, Daikin doesn’t want to suffer financial losses.
For the past few years, Daikin has been fully relying on China for AC parts. Back in 2020, 35% of its air-con components were imported from China. However, this import record decreased to 20% ever since Shanghai implemented COVID-19 lockdowns. Because of this, Daikin said it now needs contingency suppliers outside China. But, valves, large sheet metal, and other similar parts will still be Chinese-made. Meanwhile, Daikin explained that it would purchase other AC parts from Japan-based manufacturers, as well as other companies located in Southeast Asia.
A report by Nikkei statted that Daikin has developed a way to produce a crucial chipmaking chemical using raw materials from Mexico, an opportunity to reduce reliance on China. Basically, Daikin has developed a purifying process that paves the way for producing hydrofluoric acid from Mexican fluorite minerals, which is less pure than Chinese fluorite.
“This breakthrough is expected to diversify the supply chain for the acid,” the report stated. For context, hydrofluoric acid is used in the etching process for semiconductors, and the compound is also the main ingredient for hydrochlorofluorocarbon (HCFC) refrigerants.
Each year, around seven million tons of fluorite are produced globally, and China accounts for 60% of the output. Global reserves are estimated at 310 million tons. It is Mexico that is reportedly hosting larger fluorite reserves than China, however, Nikkei said the Mexican reserves contain arsenic. “Daikin’s technology overcomes the obstacle by solidifying the arsenic and discarding it,” it added. The downside is that the extra steps are expected to double the cost of producing hydrofluoric acid compared with using Chinese fluorite. Daikin apparently will explore cost-cutting measures as it adopts the new method.Daikin, which is among the world’s leading AC makers, will manufacture its own core components, including parts that help conserve energy.The Japanese manufacturers have been mostly reliant on China for their production and parts supplies as the country offers cheaper labour and overheads costs.Their dependence on China is particularly high for parts used in home appliances and automobiles.Since mid-2010s, Daikin has relied heavily on China for parts, importing 35 per cent of its needs, on a value basis. However, that figure fell to 20 per cent last year.
The lockdowns to contain COVID spread in Shanghai this year led to a fall in the production of some parts, which impacted Daikin’s production as well.The adverse impact on Daikin’s production due to China’s zero-Covid policy made the company to realise the need of having contingency suppliers in other regions.
In March, researchers at the Chinese University of Hong Kong had estimated that China’s lockdowns were likely to cost at least 35billion US dollars a month, or 3.1% of GDP in lost economic output. The authors also estimated that imposing full-scale lockdown on a major city such as Beijing or Shanghai would reduce the national real GDP by 4%, of which 7% is contributed by the spillover effects.
Another economist, Alicia García-Herrero from Natixis said that 40% of China’s GDP was already “in some form of lockdown”. “GPS data shows that China is already halfway to the mobility lost during the first Covid outbreak in Hubei province in 2020. As of 12 April, monthly mobility in China fell by 29% versus 2019, with 24 provinces seeing a decline.”In February 2020, the reduction in mobility was 66%, collapsing in 29 provinces, García-Herrero said. “The situation is particularly alarming for manufacturers in Shanghai, Jiangsu and Jilin – the key hubs for cars, electronics and semiconductors.”
The lockdown has huge ramifications for the global economy, adding to strong inflationary pressures by choking off the supply of goods. In April, almost 500 bulk cargo ships were moored off Shanghai, as the port struggles to handle them.The spillover effect of China’s lockdown was felt in other parts of the global supply chain. Since Chinese cities such as Shanghai and Jilin entered lockdowns, shares of the car and semiconductor producers had been badly hit. Pegatron, a key iPhone maker, halted its operations at two subsidiaries in Shanghai and nearby Kunshan. But China was least bothered about the ill effects of zero covid policy.
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