Japan is a country that transforms weakness into strength. The archipelago, while beautiful in its diversity, suffers from energy insecurity owing to its geographic features. Not only is this fact recognised by its citizens, it is constantly emphasised to foster determination among the people and pave the way for innovative solutions.
Andrew DeWit, Professor, School of Economic Policy Studies, Rikkyo University, Tokyo, shares his observations. “I read all of the reports,” he says. “One thing consistent in them is how vulnerable we are with regard to energy and through natural disasters.” DeWit notes that after the 1970s oil shocks, the Japanese soon agreed to emphasise energy efficiency, and achieved a 35% reduction in overall energy use between 1970 and 1990. “But that consensus weakened in the 1990s,” DeWit explains, “in large part due to low energy prices, reduced geopolitical risk, and because post-bubble firms were in severe economic difficulty.” With companies focused on writing down their debt, it was difficult to sustain energy efficiency as a priority. But DeWit argues that this dramatically changed in 2011, following the Tohoku earthquake and tsunami that devastated parts of the Tohoku region and triggered one of the worst nuclear crises. Against the backdrop of this crisis, DeWit adds, volatility had returned to energy prices and geopolitics, at a time when Japan’s power mix suddenly became extremely reliant on imported oil and gas.
It is important, DeWit says, to develop a bird’s-eye view of the whole system. Making a case for how vastly different Japanese and European power grids are, DeWit emphasises that while Europeans can trade power among themselves, the Japanese have no external links, and even have two separate regions, East Japan at 50Hz and West Japan at 60Hz, with limited and expensive converter equipment.
“A lot of people compare Japan to Germany,” DeWit says, “saying that they should have feed-in tariffs. What you have to understand about Japan is it’s an archipelago, not just an island. While Germans and Danes import and export power, alleviating the problems from the intermittency of solar and wind, the Japanese can’t do that.” As such, DeWit says, the Japanese look towards a broader portfolio of renewables, including biomass, waste heat from sewers and small and medium hydro and geothermal plants, among others. “They are very aggressive about this,” he says, “because solar and wind cost roughly twice in Japan than what they do in Germany and elsewhere in Europe, and of course much more than in China, Mexico and MENA. They’re separate for baseload renewables, and thus have started making their non-power large multi-purpose dams, for water storage, etc., into power generators, as well as highly intelligent flood control networks.”
Making a case for the government’s commitment towards developing more resilient communities, DeWit points to increased energy measures in the Fiscal Budget for 2018. For example, the Ministry of Economy, Trade and Industry (METI) will spend JPY 110.3 billion (USD 1.004 billion) on diffusing existing energy efficiency technologies in the household, factory and transportation sectors. This is a significant increase over METI’s 2017 budget of JPY 102.8 billion (USD 935.9 million). DeWit adds that METI’s budget for research and development of new energy-efficient technologies will amount to JPY 63.5 billion (USD 578.04 million), up from JPY 50.5 billion (USD 459.80 million) in 2017. And DeWit calculates that METI will devote JPY 58.6 billion (USD 533.49 million) to diffusing renewable energy, including hydrogen generation, again an increase over last year’s JPY 50.5 billion (USD 459.80 million), while METI’s R&D for new renewable energy technologies is slated to be JPY 51.5 billion (USD 468.9 million), sharply up from JPY 40.6 billion [USD 369.8 million] in 2017. Similarly, the Ministry of the Environment’s (MoE) spending on energy efficiency is slated to rise to JPY 84.1 billion (USD 766.06 million), compared to JPY 61.4 billion (USD 559.29 million) last year. The MoE will also devote JPY 81.8 billion (USD 745.11 million) to diffusing renewable energy, a striking increase from last year’s JPY 47.3 billion (USD 430.9 million). The MoE’s new expenditure, DeWit says, also includes JPY 7 billion (USD 430.9 million) in support of hydrogen-centred distributed energy systems in local communities, an initiative that did not exist last year.
Collaboration is paving the way for the successful implementation of these initiatives, with central government agencies working with local agencies to integrate planning initiatives to assess the energy endowments in the country. Japan, DeWit emphasises, is an ideal example of horizontal and vertical collaboration, with the academe, businessman and stakeholders encouraged to take part in an inclusive dialogue. “[It’s about] governance, not government,” DeWit stresses. “In a country, like the United States, where they have ample energy sources, people perceive their relationship with central government as conflictual. They have all kinds of reasons not to cooperate, they are not scared of shortages of energy to compel them.”
In Japan, however, DeWit says, the population is declining at the world’s most rapid rate, and the country has the highest debt-to-GDP ratio. “Also, the Japanese are only 6-7% energy sufficient, and they are an island with no external corrections, so if they get in trouble, what happens?” Natural disasters, he says, further exposed vulnerabilities and all these factors united stakeholders in developing, implementing and complying with initiatives.
DeWit says that companies are acutely aware of these issues, stressing that major Japanese manufacturers with factories for critical parts of products and equipment were shut down owing to power shortages. Because of the risk the situation poses to leading brands’ reputation and overall business, DeWit says, it’s easy to make a case for Japanese companies about the need for resilience in the supply chain after 2011, as part of the overall export advantage, not only for the firm but also for the economy.
The sense of urgency is palpable, DeWit says, as the Japanese risk losing out to other competitors such as the Chinese, Koreans and the Germans. “They are compelled to forge a private public sector alliance to diffuse this and create high performance and low-cost options for export,” he says.
Hidenori Matsubara, General Manager, IAQ Department Eco Solutions Divisions, Panasonic Eco Solutions Middle East and Africa, weighs in on the importance companies place on protecting the perception of Japanese products. “We appreciate that Japanese technology or products are regarded as a trusted brand and with high durability,” he says. “It’s an essential thing to keep and enhance the trust, but at the same time we need to also try to consider the pricing.” Touching on the reality of competition, Matsubara says the company has adapted a two-pronged strategy to ensure high value and more volume and is looking towards using overseas factories. Matsubara stresses, however, that the same quality and standards will be implemented. “If we need to compromise quality in order to meet the price range,” he says, “our brand, the trust for the Japan brand, is ruined. Quality is our first priority.”
A move towards refrigerants
Ole Reinholdt Nielsen, Chief, Montreal Protocol Division, Environment Department, United Nations Industrial Development Organization (UNIDO), comments on Japanese technology and the important role that the HVACR sector must play in helping countries meet their respective environmental and sustainability targets, against the backdrop of United Nations Industrial Development Organization (UNIDO) and the Japan Refrigerants and Environment Conservation Organization’s (JRECO) recent decision to join forces, in an effort to combat global warming through the introduction of climate-friendly technologies in the refrigerator and air-conditioning (RAC) sector.
“Many emerging economies are interested in acquiring the technologies developed in Japan,” he says, “because the equipment made by Japanese companies are known for durability and energy efficiency. JRECO’s advice could lead to the introduction of Japanese technologies in countries where UNIDO provides its services. The more various technical choices at different prices are offered, the more sound market development will take place, which is key to achieving sustainable development goals in a limited period of time.”
Speaking on the technical cooperation project opportunities explored as part of this partnership between JRECO and UNIDO, Nielsen says that the Multilateral Fund for the Implementation of the Montreal Protocol allows bilateral funding in its fund allocation scheme. “In this cooperation,” he says, “it is expected that the Government of Japan could fund specific projects that are relevant for JRECO to provide technical assistance and at the same time relevant for UNIDO’s project portfolio.” These projects, Nielsen says, could result in mutually beneficial learning opportunities, both for foreign companies who might adopt technologies originating from Japan or for Japanese companies, who would be exposed to the technological changes taking place in the international market.
Touching on the uptake of refrigerants in the industry as a result, Nielsen says: “In principle, UNIDO – as a UN agency – is technology independent. We implement our activities within the framework of the Montreal Protocol. The current modus operandi – and in particular after the amendment to the Montreal Protocol in Kigali, has a strong focus on industrial gases that do neither deplete the ozone layer nor have impact on the global climate; expressed in terms of featuring a low global warming potential.” Natural refrigerants indeed meet this criteria, he says however, he adds it is likely that fluorinated compounds will be continuously used in some limited applications where only such refrigerants can adequately optimise equipment performance.
“Initial technology switch costs are indeed not negligible,” he adds. “However, in the long term, the overall cost could be lower due to the lower refrigerant prices in many applications.” Looking at the international market mainly in emerging economies, Nielsen says, technology changes are taking place, and it is becoming imperative for many manufacturers to adopt new technologies and adapt to the international trend to simply stay relevant in the international market.
Nielsen believes that the industry has the proper skill set to keep up with the changes. “Adapting to the new normal is a basic industrial survival skill,” Nielson says. “Some are innovators and early adopters, while others change only when the majority of the companies do. For natural refrigerants, it is believed that it is now at the end of the innovator phase and the phase of early adopters has begun. Any industrial players that take delayed action might lose opportunities to excel or market share globally.” UNIDO, he adds, aims to assist the industry to accelerate the change.
Providing a manufacturer’s perspective, Yuji Miyata, Chairman and President, Daikin Middle East & Africa, touches on the company’s commitment to refrigerants in its air conditioning and refrigeration products. “When selecting refrigerants at Daikin,” he says, “we assess the four basic factors of safety, environmental impact, energy efficiency, and cost-effectiveness. These factors are used to select the appropriate refrigerant for each application. Currently, we believe R32 to be a better refrigerant for a variety of split-type air conditioners.” First used in Japan in November 2012, Miyata says, R-32 equipment has been adopted worldwide with sales of more than 33 million units and reduction of 58 million tonnes in CO2 emissions.
Ripples on the built-environment
The emphasis on energy efficiency has spread from producers of technology to its consumers, as per air conditioning manufacturers grappling with emerging trends in the market. Japan, DeWit says, is rapidly working towards smart community solutions. “We are in the midst of a multi-faceted IoT revolution,” he says. Beyond renewable and energy efficiency, DeWit says, there has been a lot of support for Information and Communication Technology (ICT) networks, which are viewed as a crucial part of the smart energy economy. This, he says, has accelerated in view of the 2020 Tokyo Olympics, which is being used as a deadline to showcase smart and green technologies.
Tariq Al Ghussein, CEO, Taqeef, UAE-based Distributor for Fujitsu General, echoes the growing importance being placed on IoT in Japan. Al Ghussein points out that Fujitsu General being owned by Fujitsu, an IT company that focuses on IoT technology, is placing strong focus on smart air conditioning systems that learns user habits, integrated with mobile devices as part of the smart house, to address growing demand for such features. Additionally, Al Ghussein says, there is a strong emphasis on aesthetics and size. In Japan, he stresses, space is at a premium, and this has driven demand for aesthetically pleasing and compact products. Demand, Al Ghussein says, also sees greater importance on zoning features of air conditioners.
Miyata says that in the Japanese market, inverter-based splits are gaining in popularity and variable refrigerant volume (VRV) systems continue to see strong demand in commercial and high-rise applications. In line with this, Miyata says, the company is actively promoting its inverter R32 split systems, increasing their line-up of mini-VRV series.
Widespread consciousness about energy efficiency in Japan, Matsubara says, has also encouraged developers to leverage investment in energy- saving features within developments to reinforce competitive advantage over other housing developers. This, he says, makes a case for developers to invest in energy-efficient technology, despite possibly higher capex as it allows them to command a premium for their developments. The nature of installation, he says, is changing in accordance with the housing structures, and insulation is getting thicker, especially during summer and winter months, to ensure air tightness and energy savings.
While energy efficiency is front and centre, Matsubara says Indoor Air Quality (IAQ) is of equal importance, with ventilation mandated in most high- end buildings. This, he says, has driven demand for new technologies that provide fresh air changes and offer energy-saving features. Without proper fresh air changes, Matsubara says, inhabitants cannot breathe properly. If you use a conventional ventilation fan, he says, the level of insulation will be reduced as it will be corrupted by the opening of a hole to install the fan.
Awareness with regard to fresh air changes and proper ventilation is largely owing to growing concerns related to air pollution, Matsubara says, with PM2.5 particulate matter reaching Japan and fuelling concerns of possible respiratory diseases. This, he says, further drove the demand for Panasonic’s Energy Recovery Ventilator (ERV) systems, which he says has a filter that purifies the outside air taken into the house.
Matsubara adds that more than a decade ago, Japan made it compulsory for residential and commercial buildings to have 24-hour ventilation.
For Matsubara, however, energy efficiency need not be at the expense of lower IAQ and that compliance with the mandate can be achieved for the benefit of all stakeholders. “As I mentioned 24-hours ventilation is highly required for human health,” he says. “Of course, energy consumption is very important. It is possible to realise energy saving and ventilation at the same time, using this technology. If you install an exhaust fan in [the conventional] way, the cool air or heated air inside of the house is exhausted to the outside. It’s waste, so such technology is really appreciated in Japan.” DC motors, Matsubara says, have also grown in popularity owing to their energy-saving features, adding that this is the trend in the United States. “We have the biggest market share of DC motor ceiling mount ventilation fans in US,” he says. Matsubara adds that Panasonic’s sales in Japan continue to be the highest, owing to the company’s long history cultivating the culture of ventilation in the country.
Footprints in the sand
Despite the obvious differences in the weather conditions between countries in the GCC region and Japan, Japanese products managed to enter the region early on. “In the Middle East, temperatures are not only extreme, they are extreme for a long period of time,” says Al Ghussein, “and the biggest factor is the existence of sand and the dust.” Al Ghussein shares that Fujitsu entered the air conditioning industry in the Middle East following a joint agreement between Kuwait-based United Trading Company (UTC) and Taqeef, at the time named Electronic Appliances Company.
“We got together and we decided to bring in a Japanese manufacturer to develop a bespoke solution for this region,” Al Ghussein says. “At the time, air conditioning was simple, it was mainly window units. The problem is people were using American products, and these air conditioners wouldn’t work in the summer.” This, he says, was owing to high ambient conditions in the region. “Nobody had designed for this region,” he says. “When Fujitsu did, it was the first one ever. When they came, they also very cleverly noticed that the worst obstacle is the sand, because the sand comes in and clogs up the back of the AC. Fujitsu put fins so the sand couldn’t get in.”
The bespoke solution for the region, Al Ghussein says, proved to be successful. “Word got around,” he says, “When the container used to arrive, people would queue outside waiting. It was Japanese, and it was high quality. I remember the quality of the carton that it came in was so good, people used it. We had demand for the cartons.” Fujitsu, Al Ghussein says, quickly became a leading brand in Kuwait, Saudi Arabia and Oman. The company, Al Ghussein says, has since leveraged long-experience in the region ensuring to test products according to the Middle East’s high-ambient conditions.
“They were not a specialist air conditioning company,” Al Ghussein says. “Their conditioning market started in the Middle East and then went outward. Whereas generally what happens is most air conditioning manufacturers did not develop for this market, but started to, as they saw interest.” Fujitsu, he adds, was the first to coin the term tropical air conditioners for the climate, and soon more Japanese manufacturers came in. “They didn’t develop specifically tailor-made products for the market, but the association with Japan and quality was there,” he says. Making a case for its durability, Al Ghussein says that in second–hand shops Fujitsu General’s window air conditioner still has the highest selling price in the market and is the most expensive in the retail market. “People are happy to pay, because they’re comfortable and they trust it very much,” he says.
Miyata says that for Daikin, the Middle East and Africa region offers great potential. “Most countries are developing and increasing their budgets for infrastructure projects,” he says. “Hence we foresee more construction projects, with trends to use energy-efficient solutions.”
Speaking from Panasonic’s Middle East strategy, Matsubara says that the company is also placing greater focus on the region. “In the past, Panasonic could not develop specific products to meet local requirements,” he says. “We just developed for Japan and the Asian market. Then we try to bring those items to other regions like Middle East or Africa, but we are recently trying to change our way. People’s requirement for each region is different, so now we are trying to develop products according to local requirements.”
“Panasonic’s commercial air conditioner market share in the region is low,” Matsubara says, “because we didn’t have a branch for product line- ups, so other competitors took market share.” Matsubara says the company is set to introduce commercial air conditioners and ventilation. Currently, Matsubara says, Panasonic enjoys good market share for the residential segment and the company is targeting commercial segments.
Further elaborating on trends in the region, Al Ghussein says, there has been an uptake in demand for variable refrigerant flow (VRF) technology, gleaning from the company’s increasing sales. “VRF is now able to replace chillers,” he says, “where the only solution possible before was a chiller and, in certain scenarios, a split.” In certain buildings, such as malls and airports, he says, chillers are more economical; however, in conditioning small zones, VRF is ideal. “There are certain pros and cons with each,” he says, “but I think it’s a segment of the market that is fastest growing, and that is globally, not just in the Middle East. The reason is it fits in sweetly in a specific segment. It’s the best solution and it’s the most efficient solution.”
Matsubara says that concerns with regard to air pollution and IAQ are similarly gaining traction in the Middle East and that the company is developing products with this trend in mind. Soon, Matsubara says, the company aims to introduce a new model of DC that will reduce energy consumption, with the PM2.5 filter developed especially for the region, taking into account concerns on sand particles and dust for residential and commercial buildings.
Price tag and lack of regulation – bottlenecks for greater market share?
The price tag attached to high quality products associated with a Japanese brand, while often overlooked, is still a bottleneck in a reportedly cost- centric market. Gleaning from the company’s experience, Miyata says Daikin is proactive in raising awareness on the benefits of a more long-term approach in choosing equipment. “We started to fully promote only inverter products across our region,” he says. “Our aim is to educate the market to use high efficient products, and not only think about initial investment, but rather think about the life-cycle cost.”
Commenting on the introduction of regulations in the region, Al Ghussein says that while there is a positive move forward, there is much room for improvement. “Fujitsu worked very closely with ESMA in helping develop regulation,” he says. “They worked with other AC manufacturers, but Fujitsu played a significant role in guiding them, which we welcome very much. We welcome regulations, because we are selling a product that is high-end, it’s expensive and it’s expensive because it’s quality. There used to be no controls here, so you have a lot of products a lot cheaper without any proper regulations.”
Regulation in this sector in the Middle East, Al Ghussein says, began in Saudi Arabia following erratic oil prices. “[Saudi Arabia] began to realise that if they continued on this current trend, they would become a net importer of energy because of their consumption,” he says, stressing that air conditioning is responsible for the bulk of the consumption for the region. Despite a recent move towards regulation, Al Ghussein says that subsidies often deter consumers from buying efficient air conditioners as the full burden of electricity cost is not realised. “The other disconnect,” he adds, “is sometimes the developer is not the person who will pay the electrical consumption, so if we will go up to some people and say, look you have this project and we offer you a system that is 30% more efficient, they don’t get it.” While commending initiatives such as the Abu Dhabi Pearl Rating system, Al Ghussein notes that such good building practices are not yet a norm across all projects, especially in the private sector. Awareness, he says, is key and regulation is welcome to help move the dial.
Matsubara believes that there will be a growing trend in Middle East countries to cut subsidies for electricity. This, he say, will serve as a catalyst for greater appreciation on the importance of energy saving which, he believes, is gaining more traction in the region as it echoes the trends of other developed countries such as the United States and countries in Europe.
As the Middle East countries showcase greater recognition of the finite nature of their resources, growing concern towards electricity consumption, coupled with sustainable development goals, could reportedly create a gap in the market for Japanese manufacturers to leverage their experience in addressing energy insecurity as a means of competitive advantage.