CAN CANON KEEP PRINTING MONEY ?

[Anonymous]

CAN CANON KEEP PRINTING MONEY ?
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%.


“STEADY PROGRESS”
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.


SETTING GOALS
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.”


COLORFUL FUTURE
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.

[Author]

August 30, 2005 at 10:24 AM