Good afternoon. I'm Masahiro Shinada from Panasonic Corporation. Thank you very much for taking time out of your busy schedule to attend this session. I also would like to express my sincere gratitude for your continued support to our company. As just described, today we will cover what we couldn't explain at the Business Strategy Business Briefing in June: the business strategies of our HVAC and cold chain solutions businesses. The company president, Katayama, will give the presentation on these two companies. Before that, I would like to give you an update on Panasonic Corporation's progress this fiscal year. We will have the Q&A session at the end to answer any questions you may have about our lifestyle business, lifestyle segment overall. This is our adjusted operating profit for FY 2025.
During the first half, shown in pink portion on the left-hand side, profits decreased by JPY 19.8 billion year on year, mainly due to sluggish LAS in HVAC businesses, with LAS mainly affected by the worsening market conditions in China and HVAC due to decreased profits of air-to-water in Europe, as explained at the second quarter earnings briefing. Now, for the second half, we expect profit to increase for both LAS and HVAC. Let me explain the reasons why, including an update since the second quarter earnings briefing. First, LAS expect a continued increase in domestic market share since the first half. Again, pink represents the first half, blue the second half. For the domestic home appliances market, we have been able to increase our domestic market share by about 1.6 percentage points since the first half.
In addition to this continued market share increase through cost reductions and improvement in businesses with issues, we expect a profit increase of JPY 9.3 billion year on year. By region, as you can see on the right-hand side, half of this will be for Japan and China, flat, and the remaining half overseas, excluding China. For Japan, while demand is expected to remain the same year on year, we expect to counter the impact of foreign exchange with further market share increase through the launch of new products in the second half, as well as cost improvements through rationalization. For China, big decrease in profit in the first half, but the deterioration in demand is expected to ease due to government measures to stimulate consumption.
We expect the decline in sales to be limited compared to the first half, given the positive impact of the recent Double 11 sales season. That is November 11th, sales day. We saw very positive results in the industry overall, increased by 111% year on year, while we were able to make an improvement of 121% year on year. We are seeing progress in the fixed cost reduction through rationalization. For Asia, there is a gradual recovery in demand, and we expect to see increased revenue and profits, especially in Vietnam, thanks to new products that performed well in the first half. There is a bar that says improvement in businesses with issues. Here we are talking about the kitchen appliances. We are now seeing the results of the measures implemented so far, the management reform measures.
We are to see improvement as a result. In addition to our cost competitiveness vis-à-vis Chinese companies, we have optimized fixed costs by consolidating facilities and shifting personnel. We have increased sales through new product launches. The effects of a series of structural reform efforts across development, manufacturing, sales will be felt primarily in Japan, but also in China and Asia. We have been profitable for the past two months, and we expect the adjusted OP margin for the second half to improve by approximately two percentage points from last year's 5.3% to exceed 7%. This is going to be a very important half year. On the next page, I'll explain the details about the expected increase in profits in Japan. Here you can see the adjusted operating profit for white goods in Japan.
In our June meeting, Dono-san explained the details about the Japanese market. I would like to give you some update on that. On the extreme top left, the adjusted operating profit compared to the previous year for the first half and second half. In terms of adjusted operating profit, you can see what the contributions are. For the first half, demand was almost flat at 100% or 101% year on year, but our market share increased by 1.6%, contributing greatly to profits on expanded sales. That is for the first half. However, the impact of exchange rates was serious, and there were some one-time expenses as well. Therefore, we posted a year-on-year decline. Still looking at the second quarter alone, we have overcome the worsening exchange rates with profits on expanded sales to retain the same profit level as the previous year.
For the second half, we will maintain the structure of the second quarter, and we expect to see the impact of new products for further market share increase and increased profits through rationalization. As in the first half, we expect a worsening exchange rates and raw materials situation continuing, but with one-time expenses almost eliminated, we expect to see an increase in profits year on year. Major drivers are market share increase and rationalization. Let me elaborate on those. First, regarding the market share increase, this is a busy slide. I apologize. Especially on the lower left-hand corner, you can see our products, especially the products in the high-priced areas.
We have many products with enhanced product appeal by combining our design and technical capabilities, such as palm-in shavers, flagship nano ultimate dryer, front-loading drum washing machines equipped with new settings jointly developed with Kao Corporation, and strengthening the appeal of Bistro products in the mid-price range. We have increased our market share in all of these products since last year. We have some micro mist vacuum cleaners as well. In the second half, we will be launching more new products. We recently made an announcement about the tilted drum washer dryer. This is designed to fit in smaller-sized apartment buildings in the metropolitan area. The price is going to be affordable at below JPY 200,000. Since we started the new pricing scheme, one price approach is going to be applied for the very first time.
Manufacturers have been controlling the price, and the price decline has been controlled by the manufacturers. Here, we have a new challenge of maintaining the same single price throughout the year. Through the synergistic effects of these, we are to increase our market share. Regarding the rationalization, as Dono-san of LAS explained in June, we are applying what is called the global standards cost. We have achieved this by narrowing down the functions through subtractive product planning, the subtraction product planning, and the building cost by sharing parts and reducing the number of items through design reviews. The oven range released in September has achieved a 20% reduction in direct material costs through this global standard cost structure. The compact-sized tilted drum washer dryer that I mentioned earlier will be priced at less than JPY 200,000.
This was launched in time for the year-end sales season. This is to contribute to the upsell. Including the changes in the industry structure, we are to see the effects of all the measures that we have implemented so far. Now, the HVAC outlook. During the first half, we saw a significant decline, but for the second half, we expect a big increase. The largest driver for this is the air-to-water. As was mentioned by Umeda-san in the second quarter earnings briefing, for the first half, market situation deteriorated significantly year on year, resulting in big decline in profit. With the bottoming out in the first quarter, we are seeing an improvement year on year. For October, on a value basis, 120% improvement year on year. For November, 115%-120% compared to the previous year.
There are differences from country to country, but thanks to the lower interest rates and gas prices, and with improvement in the external environment, we are seeing the issue of distribution inventory being eased as well. With the effects of support for installers in each country, including the sales measures to stimulate the demand, we expect profits to improve in the second half year on year. The second driver is the profits in businesses other than air-to-water. Room air conditioners saw an increase in profits in the first half, and we expect to see an increase in the second half, mainly in Asia and Europe. In the engineering devices business, in addition to providing close support to customers, we expect to expand orders in the second half by cultivating growth markets through differentiated technologies.
We expect that the acquisition of projects for EV batteries using environmental technologies and projects using differentiated compressor technologies will contribute to profit. The strategy on HVAC business will be explained in detail by Katayama-s an later. Over the medium to long term, this is our vision. This is the slide that we showed you back in June. The basic concept remains the same. As I just explained, for the second half of the year, we are to see the positive impact of all the measures taken so far. We want to ensure that we reap these benefits so that we can achieve the EBITDA 10% and ROI 10% at the earliest time. We will continue to address management issues head-on and continue to make reforms in the medium to long term. We appreciate your continued support. Thank you for your attention.
Thank you, Katayama here.
I'd like to explain the cold chain solutions that I'd like to refer to as CCS. Next page, please. These are the three points that I'd like to talk about. First, the progress of the current medium-term strategy. Second is the direction of the next medium-term strategy. Then the executive summary. This page shows the KGI trend since the establishment of CCS. Fiscal 2025 targets are already achieved last year. Expected to achieve JPY 400 billion in sales, AOP of JPY 21 billion, and EBITDA of JPY 30 billion. As for the profitability, there is an improvement of about 4 percentage points. With the higher market share in the Americas and Japan, we have realized this improvement in the current medium-term plan. Next page. At the time of the IR meeting previously, we showed this slide.
When the CCS was established, as you can see on the left-hand side, there were three issues or challenges. In the past three years, we have made the major improvements on all of those three. More specifically, the modernization of the facilities and introduction of the digitization have progressed. Also, through the integrated strategy, we launched new products to increase our market share. Also, the biggest asset is Hussmann. Working with Hussmann and the transfer of the CO2 refrigeration system, and also in the area of the digital, we have seen the major progress. Now, about the major business display cabinet in each area, we have focused on the growing areas and existing key customers. That's shown here, the 3% or more increase of the market share in the United States and also 2% increase in Japan.
We have expanded the factories and also introduced the new products. We are building the foundation to improve our position further. Now, let me talk about the refrigerants. We are promoting the strategy to promote the non-fluorocarbon refrigerants. It might be difficult for you to understand because using the greenhouse gas CO2, it is not really intuitive. I would like to explain that. CO2, of course, is the greenhouse gas. When it is released into the atmosphere, the greenhouse gas, as you can see here, is much smaller than the fluorocarbon. In the refrigeration system, where we can use this in the circular way, the contribution is big. We talk about the CO2. This is the concept that we have for that. Refrigeration systems with the more stringent environmental regulations, the market is expanding for the natural refrigerant in Japan and Europe.
We have been capturing this strong demand. Also, in the United States, mainly propane, the sale of the refrigeration system is expanding. We would improve our product lineup in these areas so that we can expand our businesses. For the new large-scale stores, we are increasing and expanding our target. As for the services in Japan and also Americas, we have high MIF or machine in the field. With that, we are expanding our businesses steadily, especially the highly profitable maintenance services that we have shown here. We are improving this, and we have created such a good cycle. Developing the service and the engineering personnel is important. We have an industry academia collaborative development program and the in-house training center to work on this. Now, the major business of CCS is what we call commercial refrigeration or CR.
This is not something that you are familiar with. You might think that the Japanese companies are our competitors. Actually, those companies focus on the kitchen equipment. In our case, the display system is what we have focused upon. Our major competitor is the competitors in the United States and Europe. Those two companies are the major competitors. Compared with the competitors, about the ROIC in the past several years, we have generated above 10%. As for the size of the sales in the past three years, we have become number one in comparison to the competitors. In realizing the growth, I think that we are one step ahead of the competitors. This page shows the next medium-term strategy. In the next medium-term business plan, those are the three areas: the differentiated network and the complementary goods strategies.
Those are the three major points. In each area, the natural refrigerant and the digital and equipment and service, those are the major drivers. First strategy on natural refrigerants. On the left-hand side, the bar charts represent a less than 3% growth of the industry overall. For natural refrigerants, close to 7% growth is expected. On the other hand, currently, we have about 13% global market share. By 2030, we would like to increase this to 20%. The biggest driver is that in the U.S., we are the largest, or Hussmann will be promoting the natural refrigerants, which Hussmann, of course, has the largest market share in North America. Let me elaborate on this strategy on natural refrigerants for Japan. The non-Freon or CO2 refrigeration systems, and the strategy is how to expand this to the rest of the world.
In the U.S., together with propane, large CO2 and small-size refrigeration systems will be starting next year. The biggest growth is seen in Europe. The area cooling company was acquired recently. We made that announcement, which means that in North America, Japan, and Europe, we have the production basis and can cater to markets. Next is digital. There are two contributions that we can make to our customers, as you can hear, as shown here. One is the reduction of loss cost. Store Connect is the service provided by Hussman. Automatic dispatching can be provided to control the compressor failures as well as to minimize the refrigeration leakage. When engineers are dispatched after a failure, that would prove to be costly. We are trying to reduce that. That is well accepted by our customers.
In terms of improvement of productivity, we are dramatically expanding the spare parts business through web-based services, selling to our competitors as well. The electronic shelf labels business is contributing to our customers as well. Next is the collaboration between equipment and service. Showcase refrigeration systems and service are the normal form of business altogether. In Japan, we are the only company that has refrigeration systems and showcases altogether. Whereas in the U.S., that is the norm, but their service capability is much smaller than us, meaning that in Japan and the U.S., our competitors are missing one of these three elements, whereas Panasonic has strength in all three areas. In Europe, we do not have the case business. For small-sized CO2 refrigeration, we are trying to expand our basis there. The last area is the kitchen equipment business.
With the inbound effect and others, we are seeing a strong growth in the domestic market. Starting next April, we are to launch new products for this market. Our market position in this market is not that strong, but as shown on the upper right, we are number one in terms of the CR business. We can make the packaged bundled proposals for showcase and refrigerations to our customers, which should contribute to our profit increase as well. As for the kitchen equipment, Asian market still has a potential for larger growth. In terms of contribution to the food value chain, there is a potential there as well. We are complying with the Panasonic Holdings guidance at CCS. We are always thinking of how to maximize our contribution to the group corporate value maximization.
We will continue to achieve the ROIC 10% and at the same time trying to expand both the sales and profit. Natural refrigeration, digital, and equipment and service collaboration is the area where we can expect further enhancement. We are hoping that we can achieve the double-digit profit margin as early as possible. This is the summary. The takeaway message is that we are global number one in the area of CR. In terms of scope, coverage, and value contribution, we are still not number one, including in terms of profitability. We want to be number one in all those aspects so that we can further contribute to our customers' business as well. That is all for CCS. Thank you for your attention. Now, concerning HVAC, we are often compared to the major air conditioning companies.
This slide shows that the top portion is where we compete in the area of the room aircon RAC, commercial aircon CAC, and air-to-water. These are the high competition areas. The ones shown, for example, in the bottom, we are showing the low competition areas that include IAQ device and engineering systems and engineering. The percentage of the top part is 70%, and the low part is about 30% of the overall business. Next is KGI. On the left-hand side, we are comparing the previous medium term to the current one and for the three years comparison. From both points of view, there has been a 4 percetage point worsening for both of them. This is what we talk about with the KGI. How can we eliminate this 4 percentage point? That is where I am focused upon.
On the left, we are showing the conventional comparison, mainly air-to-water investments and in IAQ, the integrated air quality and conditioning increase, and also the return to Japan of the RAC production. Those were some of the burdens, and that pushed down our profitability. On the right-hand side, we are showing the adjusted OP of fiscal 2025, comparing first half and the second half. As Shinada-san mentioned earlier, I think that what you do not understand is that the Y sales grew so much in the first half, but the profit did not grow. Now, about the double-digit sales increase in the first half, the low margin products were the drivers. That is a fact. And air-to-water sales in the first half, of course, we had some, but the production capacity utilization was not so high. The first half and second half were so different.
That explains the lower profit for the first half. As for the second half, with the recovery of Europe, which will be the main driver, and frankly speaking, until now, the first half was larger in terms of the profit. You may have difficulty accepting this number. What I can say about this is that this is still at a low level, but the first half was on track in October, exceeding the plan. In October, we achieved a higher profit and higher sales. It has been more than four months since I became the President, and we have been working on the reduction of the fixed cost. Finally, from October, we started to see the effect of these efforts. What I can say now is that the monthly framework is something that we have been trying to create.
Based on that, we'd like to show the better numbers. I'm sure that still you might have difficulty understanding or accepting the four-year number. Anyways, toward the improvement of the profitability, this page shows the comparison to our competitors. This might be easier for you to understand. In terms of ROIC, we are the lowest. That is very clear. What I'd like you to understand is that in the past three years, the top-line growth has been low. One of the major reasons is that the U.S. and Asia, those are the growing markets, and our percentage, as you can see on the left, is low. We are more dependent on Japan. When you look at the development resources, most half of them goes for Japan. To grow the top line, we do not have such structure.
The fixed cost allocation, there was a mismatch for that. That is the major reason why we are still struggling in terms of profitability. In a June timeframe at the IR meeting, we showed the business structure shown in the left-hand side. Before I became the CEO of the HVAC, we talked about the region-based management. The long-term view, this I think is not wrong. Frankly speaking, the size of our business compared to the Japanese peers and overseas peers is much smaller. When you distribute them to each region to try to improve the competitiveness, that was extremely difficult for us to do. Therefore, after July timeframe, we have started to enhance our product competitiveness to optimize our resources based on the competitiveness of the product. That is what we are doing right now.
Next, let me talk about the priority measures for the next medium-term plan. That includes the differentiation, global, and the customer strategies. At page one, I talked about the six businesses. Two businesses are included in each strategy. Air-to-water and IAQ, we are preparing the killer content. RAC, CAC, we are maximizing the fixed cost performance, and engineering and devices, we are trying to focus more on the growing market and take the measures to be closer to the customers. About air-to-water, the HPA mentioned the number 6 million in fiscal 2031. That was the assumption for our strategy. For the medium-term plan, half of that, 3 million, is the kind of assumption that we have for our plan by fiscal 2031. Still, a CAGR of 13% is very high. It is a growing market. There is no question about that.
For air to water, what is important, as Shinada-san mentioned, is that right now, the inventory adjustment and the market share increase in the past several months, we do not have clear data in this industry. It is difficult to say. In the past several months, I think that our market share has been recovering. Going back to the basics, as you can see on the right-hand side, the capability of the products such as TCAP and the commercial air- to- water and the natural refrigerant with other companies. Those are the three pillars. As soon as possible, we would like to increase our market share so that we can go back to the healthy double-digit profitability. That is something that we need to achieve as soon as possible.
Of course, that is still the market which is taking off and might be difficult for you to believe. As for the air-to-water, in the past two years, we did not experience the deteriorating marginal profit level. The inventory adjustment being completed, and as long as we maintained our market share, the double-digit profitability is something that we can achieve. Next is IAQ. This is the core business in our differentiation strategy. Originally, in Japan, China, and the United States, we have had the leading market share. In the coming three years, we try to achieve higher than the market average sales growth. The core is shown here. The salt- free water softening and others, those are the technology-driven differentiation. We are hoping to achieve the results from them.
As for the regional strategy shown on the right-hand side, in coming three years, the pillars is that the integrated systems that we have been building so far will be launched to the market. In air conditioning, we have a very strong sales channel. We would like to take advantage of them so that we can realize the good results. The right bottom shows the fact that in the different regions, we have different competitors. As of now, as for the ventilation fans, we have a twice as large size. We have each region, and we are the only one who has the coverage of all the regions. We would like to leverage them so that we can realize high revenue and high growth. Now, RAC and CAC, I suppose you think that the profitability is lower than our competitors and scope is smaller.
How are we to make a recovery? What I can say is, in terms of profitability, we find that there are areas where we have extremely high profitability and those that are not. To put it differently, we should be focusing on this high profitability area and geographical area. Simply put, for these two businesses, RAC and CAC, even when we are inferior in terms of scope, we should really be selective in the areas where comparable profitability is achieved. We need to focus on that. We should make a strategic focus in terms of strategic regions and customers and have collaboration amongst the development, manufacturing, and sales to enhance the structure of our mother factory, collaborate with other product materials as well as to expand our market share in the high profitability area. Lastly, but not the least, engineering and device businesses.
Compared to four other businesses, the number of customers is extremely low, which means that as long as we focus on the customers that are growing, we have a bright future. We need to add these customers one by one to be the overwhelming winner. Currently, HVAC companies' ROIC is below WACC, and therefore, we are hurting the corporate value of Panasonic Holdings. We are aware of this grave situation. We need to resolve this as quickly as possible. As you can see on the left-hand side, in terms of product strategy, the alliance strategic and organic, especially when it comes to product strategy, ERV and air-to-water, we need to enhance these so that we can have the ROIC over WACC as quickly as possible.
In the initial year of the medium management plan, if we find that there is a big gap, we will reduce the fixed costs so that we can achieve this framework as much as possible. On the right-hand side, you can see the projection towards FY 2031. Air- to- water, global strategy, and RAC, we are to improve on the profitability in those areas. As mentioned earlier, we cannot compete successfully against global dedicated air conditioner manufacturers in terms of scope. That is not what we are focusing on. Still, the ROIC below WACC cannot be accepted, so we need to resolve this as quickly as possible. We know that we do have a very good position in the industry of the air conditioning, so we need to improve on a profitability worthy of this.
For that, for these six businesses as shown here, we need to focus on where they cross each other. We also need to pursue synergy with CCS company. We need to focus on regions, areas, geography, and customers in these six different businesses. We have to be extremely selective in where we fight. We believe that is the focal area under the new medium-term management plan. Of course, a soft alliance would be important as well. We will not be resulting in hard cash-based alliance and acquisition. Rather, we are going to pursue soft alliance with the companies that have synergy, good affinity with our existing businesses. This is a typical example of that, the air-to-water business in North America where growth is expected. Going forward, there will be more regulations in North America. Therefore, the heat pump water heater business growth is expected.
Through the collaboration with A.O. Smith, we will be launching new products in North America starting FY 2026. This will be the most appropriate strategy for us to grow without resulting much on the hard cash. This is the executive summary. I have already mentioned this. Most of what is shown here, so I am not going to read out. What is needed is to improve on the profitability to exceed WACC. The pillar for that is the differentiation strategy, the global strategy, and the customer strategy to be strengthened. If we cannot achieve the target achieved profitability through this, we will address the fixed cost to achieve this. Focus is the key in the new medium-term plan so that we can live up to your expectation as quickly as possible. I apologize for running over time, but that concludes my presentation.
Thank you, Ezawa from Citigroup Global Markets . I have two questions to Katayama-san. First is about asset allocation and fixed costs. You talked about those. It appears that your point of view is quite reasonable. In the past, the white goods, the global market, and the Japanese market, we should not have such a perspective because each country has different differences. We have to really look at each one of them. I think that's what Katayama-san said in the past. What you talked about today, you talked about focus. By region or by products, the profit model, creating the different profit model, and also to have a global optimization. Which way are you going? How do you think that you can win? Could you respond to that? If possible, about the fixed cost allocation. I think you touched upon that.
That included, what are you trying to achieve specifically? Another question that I have is that HVAC under Katayama-san to make a big recovery or revival. That is the expectations that we all have. From your perspective, I'd like to hear from you. Why has Panasonic HVAC struggled? And with you now, maybe this would go well. What are the differences from other businesses from the management perspective? I think that only with Katayama-san you can make it better. If you are the only person, that might make it difficult. You talked about the profitability improvement, and you are very much focused on that, and you talked about that a lot. In Panasonic, I think that was different from other businesses of Panasonic. Is that the major point in making improvements?
About your first point, I cannot mention the name of the company, but the competitors, the major competitors in Japan, if you consider them. This competitor has all the plants in all the countries. Here in Malaysia, that is our core plant. We are dependent on that plant in Europe and Japan. In terms of sales, we have to really focus on the region, and we have to find the good customers. How to optimize the operation of that plant is also another thing. Japan and Malaysia are where we are dependent on, from Europe, for example. I said that the region-based management has become difficult because the major car company, for example, the regional allocation, when you have become a huge company, maybe you do not face that problem. Now, JPY 800 billion is the size that we have.
This is a very global business. HVAC is the most globalized business in Panasonic. If we look at the region-based management capability, we will lose everywhere. HVAC businesses, the current situation, we have to have a global coverage, and we see the opportunities to generate profit outside of Japan. Japan, Malaysia, Asia, Europe, how can we link them? The product-based leaders have to have a strong leadership, especially about development resources. Without it, we cannot compete. From a different perspective, frankly speaking, the high profitability, of course, in some countries, we have a high profitability because we are number one. High profitability when we are number five is also possible. What we need to do, for example, having the high profitability, even if we are number five, the market share in that particular country is not so important.
Since I became the CEO, we have to really consider the segmentation from the significant way. That's what I talk about. Even the Japanese competitors, when you look at the global WACC share, they have only single digit. When it improves from three to five, it's not meaningful. As we talked about WACC in the coming three years, or in coming three years, at least 10%-15%, those would be the regions that we focus. When we try to do so in different companies, we have to have a global leverage to have good efficiency. That's what I meant. Second question. I don't know who said I have to be the person. I don't believe that only I can do it. Until now, HVAC has been sluggish. The profitability is low, single digit. Why was it like that?
What do you think? What needs to be changed? The current HVAC, before the establishment, 6-7% was achieved in total. It was not always low single digit. Only several years ago, it was like that. Former Matsushita Denki Sangyo and Matsushita Seiko and Sanyo, that was the total of the three companies. It was not the current HVAC. Three companies becoming together, the fixed cost, the performance, the air quality, air conditioning, we are focused on that. That is significant. Merging those three companies into one organization, cost structure, I think was high. That was my understanding. In the initial stage, probably that was unavoidable. When you look at the competitiveness of each product, it was not sufficient. Air- to- water market expansion, which is a big superstar. What we need to do was not very clear.
We could not see that very clearly. What we need to do in air-to-water and the RAC, CAC and IAQ, they are so different. When air-to-water recovering is everything go well. There have been the crossing point, but there were different actions. How can we improve the clarity or resolution is something that we are focused upon so that we can generate outcome. Because the current status or the performance is too low. I'm sorry, I don't sound very convincing, but that's how we try to improve the performance. About the fixed cost, the product strategy, if the strategy doesn't work very well, I think you talked about the lowering of the fixed cost as an emergency measure. Strategically, as a result of the three companies being integrated, the cost structure was not good enough.
Strategically, on the constant basis, low fixed cost, more strategic fixed cost reduction, is that something that you're not doing? Of course, we will. I talked about the region-based management in the past two years. We became more of a regional companies, and the cost became not very visible. We went back to the product-based management from July so that we can redefine the optimum cost. The integration of the three companies, we have a kind of vague hypothesis. Doing the benchmarking with the peers and how much do we lack in the cost competitiveness, we have been setting up the targets. Of course, it's not just an emergency measure. As a whole group, this is something that we committed to the capital market, and we have to achieve that.
What we need to do ongoing and also, in addition to that, we will be taking those measures. We are partially going back to the product-based management, and it has kind of become a double standard. We would like to make the corrections as much as possible where we can make those corrections. Thank you. Next person.
Hirakawa from BofA Securities. One question. RAC. You said that there are regions with high profitability. You said you are going to focus there to be the driver. The sales from that high profitability region, what is the percentage in terms of sales? What are the factors for high profitability?
Thank you for your question. I know that is where your interest is, but I would like to defer that until we actually see the results. Sales is not low. Is it 10% versus 90%? No.
If that's the difference, no way we can rebuild. The difference is not that much. This is true for CAC as well, not just RAC. Compared to our competitors, there are regions where we have better profitability than our competitors, while others not. How do we grow the high profitability regions is the key. We have not been able to do that. For example, CAC Labs in Oizumi, we have a very good resource there, but we are not leveraging that. We have to allocate the development resources in a better way. When we say region strategy, that's good. When it comes to the product development, unless we have the local capacity, currently, we only have the sales functions, sales capability in most of the markets locally.
Therefore, we have shifted to focusing on the product axis, so as to improve and enhance the product competitiveness. The sales force or the service capability, the regions with better ability in those functions do have better profitability, generally speaking. Thank you. From Toyo Keizai, we have Megaki-san.
Thank you. I hope you can hear me. I have two questions. First, about the high profitability area and not so high profitability area. There are two areas. Could you tell us which areas? More specifically, in Japan, the market share is not so high. The development cost probably is too high. Could you talk about the RAC for Japan market and what is the direction?
Also, Panasonic Coatings, as Panasonic Coatings, within this fiscal year, if it does not improve in terms of the lower than WACC, do you think that that'd be one of the reasons for withdrawing? In the second half, JPY 12.1 billion adjusted profit probably is difficult to achieve. If that is the case, eliminating the current status, ROIC, below what, maybe you won't be able to achieve that. Those are the two questions.
Yes. Thank you very much for your questions. About the second point, maybe there was a misunderstanding. Fiscal 2027, that was what Kusumi-san said. It is not within this fiscal year. Having said that, it does not mean that we still have two years. If that is the case, of course, we are trying to meet with the group guideline. That is my response. That is for your first question.
As I said, CAC and RAC, they are combined. The difficulty is in Japan market. That is with issues. Profitability is better in Europe and Asia. That's my answer to your first question. Development cost too high in Japan. To lower the cost, for example, reducing the number of the models in Japan is one way. Are there any future measures? Mizaki-san, I think you referred to RAC, but RAC, our market share is not too low. Together with CAC, the market share is not so high. In CAC, gas, heat pump, and ABS, and various things are included. In one word, talking about the market share and profitability in Japan, it's not very easy to explain.
Having said that, number of the models being reduced, of course, that depending on the products, I think that you might have a different image. Generally speaking, the number of the models, too many, is something that we fully recognize. The direction is to decrease. It is not specifically for RAC, but rather for the commercial ones. We have maybe more models than are needed. Thank you. Next person.
Yasui from UBS Securities. I have two questions. First. Air conditioner. You talked about three different entities coming together, having a bit of a problem in terms of a good matching for production and region. I think this is true in other businesses as well, not just air conditioners. You are a former analyst, and now you are with Panasonic. Manufacturing and sales mismatch.
Do you think that's too big of an issue that cannot be resolved immediately? No improvement in efficiency for Panasonic overall. Do you think that is an issue? Is my question. My second question, cold chain. With you as President, I think productivity or the profitability has improved dramatically. Were you just lucky? As part of the management now, what were the things that worked? What are the things that didn't work? You said that cold chain is improving, market share is improving. Now that you are part of the management, as a former analyst, what is your observation is the question.
Thank you. Your first question, maybe you are a bit misinformed. What Matsushita was doing was air conditioner, and Matsushita Seiko was doing the fans, ventilation, and Sanyo was doing something else.
There was no redundancy in the product areas, and they all came together for HVAC. It is not overlapping that resulted in redundancy or waste. That is not the case. Still, we are talking about three different entities coming together after years of independent operation. Of course, there is always room for improvement in terms of efficiency. Your second question for Japan and overseas. Since day one of being the President, I had always focused on market share because in this industry, no indicator is more important than market share. Market share has been larger, declining, and then focused on certain areas. Because of that, we were able to raise prices. That was under the previous leadership. I do not think me becoming the President, the timing of that had anything to do with the recovery in our business.
The monthly settlement is what I mentioned in relation to HVAC. For CCS and HVAC, I do not think the companies, either company, had looked at the results so closely on a monthly basis. I am a firm believer that what cannot be done in one month can be done in three months. For cold chain, I think we were able to streamline that whole process, and that made a big difference.
I see. Okay. About the first points, I apologize for being misinformed, but air conditioning overall, I think personally that this is an industry with an economy of scale that could play. If the scope of scale is lacking, I think that is an issue with Panasonic. Once you gain sufficient market share, do you think you can grow your business, or would you continue to pursue under profitability from region to region?
I think what you have in mind is the Chinese players. If you just focus on RAC, all Japanese manufacturers are in the single-digit range. Still, my projection is Japanese players with their normal business can enjoy pretty good profitability. Energy-saving features will become even more challenging going forward. I think there will be fewer players, not more players in Japan in terms of number of units. The market is still growing. Of course, scale can be part of your competitiveness. As I said, there are certain regions that are more profitable than others. The major manufacturers already have the manufacturing facilities in most of the markets, and yet they're not leveraging that global production capacity. Most of the basic technologies components are made in China, but for others, it's very diverse.
Some industries have 30%-40% market share, but I don't think this is such an industry. I don't think there'll be a dominant player with a market lion's share of 30%-40%, for example. We are getting to the end of the first half. We will take one question online and one question from the room. Tokyo Kaijo Asset Management, Nemoto-san, please. Please unmute. Sorry, that was not the question. We would like to take two questions from the room.
Okazaki from Nomura Securities. During the presentation, you talked about the M&A or investments, not spending too much money. As somebody else asked, the global scale has been discussed in other countries, so U.S., India, Indonesia. The issue of the tariff is not something that we can ignore. You have to do local production, local consumption. I think in this industry, that's important.
In your case, you're going to the different direction?
Okazaki-san, thank you. For example, air-to-water has to be manufactured in Europe. We established a plant there. As for the air-to-water, it'll be mainly manufactured in Europe. Right now, we export from Malaysia, but in the future, that is what we do in Europe. If the regulation requires that, that's the only way. As for India, it's kind of complicated. I do not have a good answer. The market share in India, for example, in RAC, I think that the share is fragmented. In India, the companies who can make the key devices, there are not so many. The superficial local production, local consumption can be done. To answer your question, the local production, local consumption, if it is absolutely necessary, of course, we would do that.
Of course, having the one factory in the global market, whether it is better in terms of cost, for example, in RAC, manufacturing only in Europe is not realistic. We want to take advantage of what we have. In the case of air to water, penetration is only like 2%. Because of that, we can be number one, and the regulation is very stringent in Europe. That is why we manufacture in Europe. We cannot really explain it in simple terms. If you have any additional specific questions, I can answer. It does not mean that we are moving away from local production, local consumption. Thank you. This will be the last question for the first half of the Q&A session.
JP Morgan, I have two questions. RAC, CAC, profitable regions is where you are going to focus, and you say Europe and Asia.
When I talk to your peers, they say that European markets, from country to country, distributors are different, the commercial business practices are different, languages are different, and therefore, it will take time to really be successful in all countries. Now, Asia, China and Korean manufacturers are selling affordable products and therefore pretty competitive. With that, what is your sales strategy in these two regions? My second question is regarding the production. You said that you are mainly manufacturing, producing in Malaysia, and it's efficient. I can agree. In air conditioning manufacturing, the competitiveness of parts and components, how much of that is a factor in terms of your competitiveness? Motors, the heat exchange, and many other parts and components that are involved. If your peers are doing the local production for local consumption, maybe that would not be much of a factor.
Can you comment on that?
Thank you for your questions. The first question, of course, both Europe and Asia have the issues of their own. We are much smaller than our competitors, and therefore, we can afford to select which market to compete in, as I mentioned in CCS. For the small-scale refrigeration systems, we are number one in Europe already, and that is translated into our good position in air conditioning. We need to develop a strategy that fits our current business size. The optimal solution for us is different from our competitors who are much larger. As I said earlier, even when we are number five in terms of market share, we have good profitability in certain markets. This is an industry for small CAC markets. The largest share, largest manufacturer is only 20% or so. In other words, there is no overwhelming dominant market shareholder.
That is why a favorable position within the market is the key. We are not threatened in terms of size because we are small. That is not the nature of this business. As long as we can select the markets that fit our market size, business size, we will be the winner. Your second question about cost, again, that is rather difficult. The largest manufacturer in Japan, as far as the RAC market is concerned, on a global scale, the market share is comparable. If you compare yourself with the Chinese players and say how many compressors you are manufacturing, you really cannot compete. I do not think there are many companies that are trying to compete based on lower fixed cost. That, in turn, means that the only winning formula is to leverage your own resources.
I see. Thank you.
Thank you.
That concludes the first half of the Q&A. Thank you. We'd like to start the second half from Panasonic Corporation. We have Mr. Shinada, CEO, and Mr. Nakashima, CFO. We are running late. I'd like to limit the number of questions to one question per person.
About last, Hirakawa from BofA Securities. About last, the 20% down in terms of direct material cost. I think we will see others happening. So 20% reduction using that for the profitability improvement and lowering the cost so that you can improve the market share, which is more important. What I would like to know is that by lowering the direct material cost, the gross margin, how would it change? You don't have to give us specific numbers, but if you can talk about the way of thinking.
Yes. Or it's really case by case.
Depending on the market position of the product, the way of thinking would be different. That is a fact. Basically, to try to gain the market share, unless you win or unless you are supported by the customers, you have to increase. You cannot increase the sales. To show a presence in the market, I think, is the most important thing. In fact, as I explained earlier, those products that are shown, those have been the driver to increase our market share. We would like to make sure that we show the presence in the market, so that is the correct, the right direction in the home appliances or consumer electronics. As for the profitability improvement, as I mentioned, it is really case by case, frankly speaking. In terms of contribution to the profit, it is actually high.
About a 3% increase of the profitability, that would be the impact that we will start to see. Of course, depending on the products, there are some differences. As you see on this slide, concerning those products, I think that would be the impact that we can expect. Next, first and please, Harada-san from Goldman Sachs.
Thank you. One question. Regarding HVAC, you said that whether the current strategy would work or not, and if it doesn't, then you will address the fixed cost. I'd like to ask about the time frame. I think you were talking about the first half of the current medium-term management plan, but do you have a more specific schedule? What would be the major KPIs that you will be using to measure the progress? You use KPIs for management, but that didn't work much in the past.
At least that's my impression. What are the clear definitions of what the success looks like?
As I mentioned earlier, this year, a little less than 2% in terms of profit margin. During fiscal 2027, we are going to eliminate the businesses that are below our capital cost. HVAC, the same here. What's important is the median points, FY 2026, how much we can make a leap. Capital costs and 2% somewhere in between would be the threshold, internal threshold that we will strive towards. The management, not on the annual basis, but on the quarterly basis, so that we will have the quarterly review solidly with the holdings as well. If we can achieve these targets early on, what are the other targets that we need to achieve on a quarterly basis? There is continuum thinking that does exist within the management.
We do have the minimal target for FY 2026, which are broken down into more specific targets that we need to achieve on a quarterly basis.
I see. Fixed cost reductions as a last resort. Do I take it correctly that that showed the strength of your resolve and that you will be working on other measures?
It's both. HVAC is a new company, new divisional company. Appliances Company had the air conditioning business with Matsushita and Sanyo coming together. In Kasugai in Aichi, this was in charge of IAQ. Those two to be integrated, it was the intention of establishing the HVAC company. To bring about new value of integration is what we'll be working on in a three-year period. There will be a gear shift, so that we will have the new products, competitive new products based on the lean operation.
That is the underlying thinking of what Katayama-san explained earlier. Given that HVAC company resulted from putting different entities together, we still have room to work on in terms of realizing the true lean operation, frankly speaking, and therefore pursue the marginal profit through differentiated products would be the basic approach, but we would also work on other aspects as well. Thank you. Nishimura from Okasan Securities.
Thank you. One question. Earlier, toward the next fiscal year, the improved profitability is something that you expect. If you look at the divisions, which division will be the driver in the second half? The higher profitability, HVAC, and last, do they continue to make contributions? Especially air-to-water, in the past two years, the market environment impact was strong. Utilization rate improvement could contribute to the higher profitability. If you can talk about that.
There are four divisional companies, and as you said, the four divisional companies. In terms of the improvement, HVAC and last, we expect that the biggest improvement in CCS and EW, they are achieving targets earlier than their plan in this fiscal year. Basically, organically, they want to continue to grow. The improvement, in terms of the range or the size of the improvement, that would be the HVAC and last. In addition, in the past three years, of course, that the May, June time frame next year, we will be talking about that at the IR meeting. The fixed cost as a whole is up. That is one of the challenges that we still have. We have not yet fully worked on this. The cost, we want to lower it significantly next year.
Improvement of the profitability of the business and cost, lowering that, we have to do both. Through those, we want to make further progress in terms of the profitability improvement. Anything that you want to add? About the cost, that is the Panasonic Corporation and also a group as a whole, the overhead cost is something that we need to think about as a group. Especially as a Panasonic Corporation, we have to take the initiative in reducing that. Thank you. Thank you. Next. Megaki-san from Toyo Keizai.
Thank you. Megaki from Toyo Keizai. I'm focusing on the Japanese market. The OEM products and private brand products made in China, I think, are increasing amongst the large merchandisers in Japan. Can you comment on that?
We are still in the midst of negotiation. That's all we can say for now about the private brands.
The exchange rate situations are improving somewhat based on following the presidential election in the U.S. We are talking with different players regarding the private branding, but there are no specific deal that I can comment on today. All I can say is that it's still ongoing, but there is a need for that. What our counterparts expect is the serviceability regarding the ODM, and they want to provide the after-the-sales services, the quality after-the-sales services by leveraging our capability. While keeping in mind that advantage, they want to see what the trade-off is. To answer correctly, there has been a progress since May. Yes, the business negotiations are progressing. Yes. Thank you. We are getting close to the end. We would like to take two more questions. Yasu i, from UBS Securities.
About the China market concerning the Chinese competitors, could you give us some update? The intention of my question is that there has been some stimulus measures taken in China, so it's more likely to have a decline in reaction to it. Among your product categories, was the stimulus measures effective or too effective? If you can give us some status and if you made any preparation for that. When the market becomes bigger and when the tariff is increased, I think that the competition will happen more within the country. About the competitive environment, I'm sure it is already difficult, but is it going to be more difficult, will there be some consolidation and others?
The tariff issue or topic for the global operations, we have to come up with various scenarios. I think that the Chinese players will not just wait and see.
I think that exporting to other regions, aside from Asia, is something that we are starting to see. I think that going via Asia, going to different countries, I think that's one of the things that probably they are thinking about. In consideration for the global situation, what kind of actions that the Chinese players will take? We have to really consider the various scenarios that, as you said, is something that we have to do. We'd like to make sure that we take care of it. Now, within China, in coming three years, maybe the difficulty will continue, frankly speaking. That is our assumption in the medium-term plan, and that's the basis for our forecast. More recently, the government subsidy, I think that the effective part is the major appliance category. Maybe in our case, what we benefited was the refrigerators.
In the first half, we struggled. In the second half, we benefited. The subsidy is quite big. It's like JPY 20,000 in Japanese yen. That's the subsidy that they are offering. Relatively speaking, compared to the selling price, that subsidy is quite big. In China, they are becoming larger sized. The customer's preferences and the value of the subsidy, I think that is inflating the demand of the refrigerator. I think that's the biggest area. Also the washing machine, refrigerators, and washing machines. Just like Yasui-san said, you don't have two or three products at home. I think that those are more of a productive, proactive demand, I think. We have to really take care or be careful, including the Q4. I think that maybe the demand has come in Q3 rather than Q4 or earlier than later.
That is how we are looking at this. Next will be the last question.
Thank you. Okazaki from Nomura Securities. Earlier, you talked about the costs. You said you were intentionally increasing because that was a must. I think you were saying that going forward, you will be reaping the results of that. Based on what you said today, is it that you have shifted?
Hydrogen-related portion accounts for a large portion of our corporate expense. By 2030 or so, the hydrogen business is expected to be a sizable business, or we are preparing for that. As you know, in Kusatsu, RE100 facilities have been built. Next week, I will be visiting Cardiff in the U.K. The same RE100 facility has been established, the very first in Europe, which should be a showcase in Europe.
This would mean that we will have a base in Europe for the hydrogen business negotiations. During the current medium term, we will have completed laying foundation for our hydrogen business and for IT. The SCM with distributors in Japan for IT is often cited, B2B, B2C, including the distribution system in the SCM. That is another thing that we have invested quite a bit during the current term, medium term. Regarding the branding, certain size, if it is maintained each year, then the branding effect will not be tarnished. That is an established fact, and therefore, we would reduce that. Branding, hydrogen, and IT, these are the areas where the investments could be reduced compared to the current phase one. It is not that we are going to forcibly terminate things. That is not how we are controlling the investment. The IT investment is the strategic investment.
Of course, the next medium-term plan phase would be where we would be recovering that investment.
In addition to what Shinada-san said, we would be discerning where the waste is, improve the efficiency. Thank you.
With that, we'd like to end the Panasonic Group strategy briefing. Thank you very much for your participation.