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 user 2005-08-30 at 10:24:00 am Views: 27
  • #12676

    Cost cutting and lavish R&D spending have made it strong. But maintaining profit growth won’t be easy

    The giant statue of Buddha that overlooks Canon Inc.’s Ami plant
    in Ibaraki, north of Tokyo, is hard to miss. Standing 120 meters tall
    – higher than the Statue of Liberty — the Buddha watches over a
    landscape of verdant fields and the occasional factory. For workers
    assembling photocopiers in the Canon facility, though, Buddha’s stare
    pales in comparison to Hiroshi Ishii’s steely gaze. Plant manager Ishii
    likes nothing more than to scour the factory for even the tiniest hint
    of inefficiency. “No matter how small, we have to identify waste and
    find ways to eliminate it,” he says, casting a knowing eye over a young
    worker wrapping freshly assembled copying machines in plastic.

    Ishii may sound obsessive, but it’s that sort of passion for
    improvement that has transformed Canon from a lumbering symbol of
    debt-ridden post-bubble Japan into one of the country’s leading
    enterprises. Ishii and his colleagues at Ami, for instance, have
    developed simple but effective systems to make their operation more
    efficient, such as ropes and pulleys that deliver components in a
    jiffy, and foot-controlled motors that rotate workstations so workers
    don’t have to step around the copiers they’re assembling. And since
    extending one’s arm takes time, Canon is shaving seconds by striving to
    put all components and tools within 20 centimeters of a worker’s hand.

    Driving Canon’s quest for efficiency has been CEO Fujio Mitarai, who
    stepped into the top job a decade ago after his predecessor died
    suddenly of pneumonia. When he took over, Mitarai was dismayed by the
    debts of $7.5 billion he inherited. Worse, perhaps, was Canon’s
    mishmash of businesses, ranging from liquid crystal displays to
    typewriters. So, going against years of Canon tradition, he became one
    of Japan’s leading cost-cutters. Mitarai focused only on the profitable
    products — mainly copiers, printers, and cameras — and dumped seven
    departments, including the personal computer, typewriter, and LCD
    screen divisions. In the past five years, savings have averaged $800
    million annually, even as sales have jumped by 30%.


    Mitarai’s fixation on cost cutting and financial prudence — picked up
    during 23 years at Canon’s U.S. operations — has paid off in profits.
    On July 27, Canon announced that its operating margin for the first
    half was 15.4% — about double that of most printer-and-copier rivals
    and triple that of leading consumer electronics makers. For the year,
    Canon expects earnings to grow by 6.9%, to $3.28 billion, on sales of
    $32.9 billion, up 6.1% from 2004. Today, Canon’s market capitalization
    stands at $45 billion, No.10 in Japan and more than triple what it was
    when Mitarai took over. “Thanks to the cost reductions we have achieved
    and the competitiveness of our products, we’re making steady progress,”
    Mitarai said in an interview on the top floor of Canon’s headquarters
    in Shimomaruko, the bland Tokyo district where the company has been
    based since 1951 — 14 years after its founding as a camera maker.

    That’s not to say Canon has no worries. Canon’s digital camera
    business, while more resilient than many rival operations, is unlikely
    to repeat the profit growth of the last five years as camera prices
    tumble. In a sign of things to come, last year the value of overall
    digital camera sales in Japan fell for the first time, even as
    production edged up 1.3%, to 8.5 million units. JPMorgan Chase &
    Co. (JPM ) projects that margins at Canon’s camera division will fall
    to 12.2% by 2009 from 17% today. Meanwhile, despite
    better-than-expected sales, Canon’s second-quarter operating profit
    fell short of expectations because of the declining prices. In
    response, Canon’s stock has tumbled by 8% since July 20. “Canon has
    been one of the few electronics companies able to maintain double-digit
    margins, but this shows that even Canon isn’t immune to price
    pressure,” says John Yang, an equity analyst at Standard & Poor’s
    in Tokyo. Yang cut his Canon rating from “buy” to “hold” after the most
    recent results.

    Another concern is the emergence of new competitors in Canon’s mainstay
    business-machine segment, the printers and copiers that make up 65% of
    sales. One fear is that Chinese manufacturers that have grabbed sales
    in their home market for replacement toner cartridges — which
    represent the bulk of profits for Canon and virtually all of its
    printer rivals — may step up exports and seize share worldwide, says
    Tomoko Mitani, an analyst at Gartner Dataquest in Tokyo. Challenges
    could come from the West, too. Hewlett-Packard Co. is both a partner
    and rival to Canon, buying the guts of its laser printers from the
    Japanese company, but pushing hard to boost sales of its own ink-jet
    models. And Dell Inc. last year sold $1 billion worth of printers and,
    Gartner estimates, has nabbed 13.3% (in units) of the U.S. market for
    color laser printers since jumping into the fray just over two years
    ago. Although Dell has so far focused on low-end models, “we could see
    Dell emerging as a fairly big threat to Canon in the next few years,”
    says Yoshikazu Higurashi, an analyst at Deutsche Securities in Tokyo.


    A greater potential issue for investors is the retirement of Canon’s
    dynamic 69-year-old boss. Currently, no hand-off plan has been publicly
    discussed, and the company declines to comment on potential successors.
    “I’m very concerned about what happens after Mr. Mitarai,” says Hisashi
    Moriyama, an analyst at JPMorgan Chase in Tokyo. Despite his age,
    though, Mitarai doesn’t sound like someone with one eye on the exit
    door. “I won’t say in how many years I will quit or how many years I’ll
    be president. I don’t think about it that way,” he says. “I set myself
    a goal and make sure I achieve it.”


    The goal now is profits, and Mitarai says Canon’s current run in that
    department is far from over. The company is the world’s No.1 digital
    camera maker, with 23.6% of the global market, just ahead of Sony
    Corp.’s  23.2%. Despite the slowdown in digital camera sales
    growth, Canon’s digital SLR cameras and smaller models — known
    variously as IXY, ELPH, and IXUS in different markets — are still
    delivering healthy earnings at a time when some big rivals are losing
    money. And Canon is likely to ride the transition from monochrome
    printers and copiers to more profitable color models for the rest of
    this decade. “Color will be the big earnings drivers for Canon,” says
    Satomi Ushioda, an analyst at brokerage Nikko Citigroup Ltd. in Tokyo.
    Ushioda reckons that by 2009 color printers will make up more than 40%
    of Canon’s sales, compared with 25% in Japan today and 20% in the U.S.
    and Europe. That should also drive cartridge replacement sales, since
    color printers typically use 30% more toner ink than black-and-white
    models do.

    Some analysts fret that the company may not be able to come up with the
    kind of new products necessary to keep growing and achieving
    double-digit margins, but Mitarai is devoting piles of yen to research.
    Over the years, that has paid off in lots of ideas: Canon has filed
    more than 17,000 patents in the U.S. since 1995 — second only to IBM
    (IBM ). Most of Canon’s products rely on patented core technologies
    developed in-house, such as photosensitive drums in laser printers or
    imaging engines used in digital cameras. This year, Canon will spend 8%
    of sales on research and development, compared with 6% to 7.5% at many
    large rivals. “We have to plant the seeds for the next decade and
    beyond,” says Mitarai.

    Some of those seeds, Canon hopes, will grow into three video display
    technologies: SED TV panels, which are a new kind of flat-screen
    television that Canon plans to build with Toshiba; rear-projection TVs;
    and OLEDs (short for organic light-emitting displays). Canon has
    announced plans to begin selling the SED TVs next year, arguing that
    they offer better picture quality than plasma or LCD screens. Skeptics,
    however, say it may not be enough to bring down costs fast enough to
    seriously challenge the other flat-screen technologies. OLEDs,
    meanwhile, use less power and are brighter than LCDs. Starting in 2007,
    Canon hopes to begin swapping them for some of the 20 million small LCD
    screens it currently buys annually for use in its printers, cameras,
    and camcorders. “Displays could create a new pillar for our business,”
    says Mitarai.

    Canon is also looking to boost productivity. Already, the company has
    seen great gains from “cell assembly,” where small teams build products
    from start to finish rather than each worker repeatedly performing a
    single task on a long assembly line. Canon now has no assembly lines;
    it ditched the last of its 20 kilometers of conveyor belts in 2002,
    when a line making ink-jet printers in Thailand was shut down. Today,
    cell workers get to know their jobs so well that they often find ways
    of boosting efficiency: Many of the improvements at the Ami plant and
    elsewhere were suggested by them. The best are an elite group of about
    30 employees called Super-Grade Experts, who have memorized 1,000-page
    assembly manuals and can build entire products alone. Their reward: a
    modest bonus and a dinner with Mitarai. “Working on the assembly line,
    we only knew about part of the process, but now we have to know all of
    the various aspects of production,” says Kiyomi Onda, who became one of
    the first Super-Grade Experts in 2000 and now oversees production of a
    color copier model at the Ami plant. “It’s more interesting, and it has
    improved our work ethic.”

    Canon isn’t finished with its cost cutting, either. Last year, the
    company announced plans to trim an additional 10%, or $1.1 billion,
    from procurement costs by 2006. To do that it will increase in-house
    production — for instance, by replacing LCDs from outside suppliers
    with Canon-made OLEDs. And executives expect more savings from
    increased automation. “We have to start thinking of a new production
    method that will be more efficient than cell production,” says Mitarai,
    who aims to triple the number of robots used at Canon by 2008. At one
    hyperautomated toner cartridge plant on the southern island of Kyushu,
    Canon has reduced the number of assembly workers by 85%, with most
    production now done by machines. By the end of 2007, Canon hopes to
    retool five more plants to see similar gains in efficiency. Attention
    to detail. Relentless cost cutting. Lavish spending on research. It’s a
    formula that has served Canon well