*NEWS*CANON’S BIG GUN

[Anonymous]

Canon’s Big Gun
Fujio Mitarai has turned his camera company into a profit engine. Now his sights are set on flat-screen TV.
Ask
Canon CEO Fujio Mitarai to explain how he turned a floundering Japanese
electronics maker into one of the world’s most profitable technology
giants, and he’s apt to tell you about an Internal Revenue Service
auditor named Greg. It was 1966, and Mitarai had been put in charge of
accounting at Canon’s new U.S. subsidiary. In its first year the
venture reported a profit of just $6,000, a sum so paltry it aroused
suspicion at the IRS. After scouring Canon’s books for a month and
verifying its U.S. earnings to be every bit as meager as claimed, Greg,
the agency’s lead auditor, offered Mitarai some free advice: Deposit
your accounts receivable in the bank, close the company, and go home.
”
‘Go back to Japan!’ That’s what he told me,” Mitarai says, slapping the
arm of his chair in an airy conference room atop the company’s suburban
Tokyo headquarters. “U.S. banks were offering 5% on time deposits. If I
couldn’t do better, Greg said, I was wasting my time.” To a young
Japanese executive steeped in a business culture that prized technical
achievement, export volumes, and market share, the admonition came as a
shock. “That’s when it dawned on me,” says Mitarai. “The primary
purpose of any business is to make a profit. If you can’t beat bank
savings rates, your company has no reason to exist.”
Mitarai has
taken Greg’s advice to heart. As head of Canon USA from 1979 to 1989,
he beat the savings rate every year-usually by a wide margin. And since
he was named CEO of the parent company in 1995, Mitarai has transformed
Canon from a debt-ridden industry also-ran into a money machine. During
his tenure, Canon has emerged as the world’s largest manufacturer of
office copying equipment and has eclipsed Sony as the world’s No. 1
maker of digital cameras. Sales are up 40%, while earnings have
improved sixfold. In 2004, the last full year for which figures are
available, Canon reported a net profit of $3.1 billion on sales of
$32.1 billion-making almost as much money as Hewlett-Packard, a
business more than twice its size.
Canon’s success is reflected in
its share price, about $62 in mid-January, a threefold improvement
since Mitarai took over. The company, which trades on the New York
Stock Exchange, is the darling of global investors hunting for value in
the world’s second-largest economy. Indeed, non-Japanese investors own
more than half of Canon’s shares. Goldman Sachs analyst Shin Horie
predicts that ratio will climb even higher as overseas investors gain
confidence in Japan’s recovery.
Mitarai is arguably the best CEO
Japan has seen in a decade. True, Toyota rakes in more cash. But Canon
has higher margins — higher than any other Japanese manufacturer’s.
And while the main task for Toyota’s skippers has been keeping the
juggernaut on course, Mitarai had to bring his ship about sharply just
to keep it from going under. The turnaround may not have been as
dramatic as Nissan’s, but changes at that company came only after
foreign investors gained management control. Mitarai turned Canon
around before being forced to by outsiders. His willingness to make
tough choices early and independently is the difference between success
at Canon and the mess at Sony.
Mitarai, 70, insists the best is yet
to come. He has rolled out an ambitious five-year growth program for
Canon that he says will keep profits high and lift sales beyond $50
billion by 2010. Longer term, he’s betting billions on a new technology
called surface-conduction electron-emitter display, or SED, which he
believes will enable Canon to muscle into the flat-screen-TV market and
occupy a central role in the daily lives of global consumers.
But
Mitarai’s success has brought him a new challenge. Late last year,
Toyota chairman Hiroshi Okuda asked Mitarai to succeed him as chairman
of Keidanren, the influential business lobby that represents Japan’s
largest corporations. It’s an unexpected honor-the post, which will
make Mitarai the public face of Japan Inc., has long been reserved for
leaders from the nation’s smokestack giants — but it has big
implications for Canon. Past Keidanren chairmen have devoted nearly all
their time to the role, surrendering day-to-day management of their
companies. Mitarai has no obvious successor at Canon, and some analysts
have cited his Keidanren appointment as a negative for the company’s
stock. He says he hasn’t made a decision about succession — and
doesn’t plan to until May, the month before his Keidanren term begins.
But in an interview with FORTUNE, he dropped a hint that he means to
keep his day job. “I’ll have to think about it a bit more,” he says.
“I’ve served as a Keidanren vice chairman for the past four years, and
all that time I was CEO. I already know most of what goes on.”
Should
Mitarai opt to stay on as CEO at Canon, it would hardly be the first
time he has flouted convention. In the Western media he is often
portrayed as a traditionalist for venerating old-fashioned Japanese
management practices like lifetime employment and for sniping at the
American system of hiring outside directors. He’s also known for
questioning the wisdom of moving Japanese factories to China. (Wages
may be cheaper in China, he says, “but labor accounts for only about
10% of total production costs. Instead of rushing overseas to get those
small savings, doesn’t it make more sense to focus on how to reduce the
other 90%?”) Yet at home he’s considered a maverick. He keeps a low
profile, and when he does speak out, he has an un-Japanese tendency to
say what he really thinks. In the Japanese press he’s often described
as an American-style reformer for his emphasis on the bottom line and
hailed as an “internationalist” for his 23 years of management
experience in the U.S. Mitarai prefers a different label. “I’m a
pragmatist,” he says. “I like to do what works.”
Young Fujio mitarai
seemed destined to become a doctor. He grew up in a family of
physicians: His father, uncles, and three older brothers all practiced
medicine. But as a young boy during World War II, he was so horrified
by the cries of the wounded that he shunned medicine and earned a
degree in law instead. Upon graduation in 1961, he went to work for the
burgeoning camera-manufacturing business run by his father’s younger
brother Takeshi, a Tokyo obstetrician who had launched the company as a
sideline before the war. By the early 1960s, Uncle Takeshi’s modest
optical-instruments venture was cranking out cameras for consumers
throughout Japan, expanding into office equipment, and wresting market
share overseas from German camera makers. By the time Fujio was
dispatched to New York City in 1966, Canon boasted an office on Fifth
Avenue and $3 million in U.S. sales.
From the beginning, Canon’s
culture was dominated by scientists and technicians. It attracted some
of Japan’s most talented tinkers and entrepreneurs, invested heavily in
research and development, and claimed a slew of new patents every year.
But by the 1980s, Mitarai began to worry that the company’s enthusiasm
for technology was hurtling out of control. The spirit of freewheeling
independence that had generated some of Canon’s most successful
products was giving way to anarchy. As Mitarai saw it, Canon was
devolving into a clutch of warring fiefdoms, each with its own strategy
and free to lavish capital and manpower on pet projects without regard
for the rest of the company. Money-losing ventures staggered on year
after year, siphoning resources from products with genuine promise. The
company’s debt ballooned. No one wanted Canon’s stock. To Mitarai, it
seemed that his physician uncle’s brainchild had suffered a “collapse
of its central nervous system.”
After he was called back to Japan to
head the company’s administrative division in 1989, Mitarai did his
best to sound the alarm. He clashed repeatedly with other executives.
“I offered all kinds of suggestions for reform, but no one listened,”
recalls Mitarai. “They were all techies. It was as if I spoke a
different language.” The odds that his suggestions would ever be
implemented seemed all the more remote when, in 1993, the board chose
Takeshi’s eldest son, Hajime — a Stanford-trained electrical engineer
ten years Mitarai’s junior — as CEO.
But Hajime’s death from
pneumonia in 1995 thrust Mitarai into the corner suite. He set a new
tone from the outset, yanking the plug on Canon’s personal-computer
business. By 1999 he had ordered the company out of six other
money-losing divisions, including liquid-crystal displays, photovoltaic
batteries, and electric typewriters. The announcements stunned Japan
and drew resistance inside Canon. Mitarai reckons it took two years for
enough of the old guard to retire to give him real control.
He
sought further savings on the factory floor, experimenting with a new
manufacturing approach known as cell production that replaced conveyor
belts and old-fashioned assembly lines with small teams of workers who
produced entire products in carefully considered, sequenced steps. In
early trials the method yielded dramatic gains in productivity. Workers
limited to the pace of slower colleagues under the old system were free
to produce at their own speed. By 2000, Canon had ripped out more than
12 miles of conveyor belts from its factories and implemented cell
production throughout the company. The switch enabled Canon to slash
inventories, speed response time, and bring new designs to market
faster.
One thing Mitarai hasn’t scrapped is the Canon tradition of
investing in research. The company spent $2.5 billion on R&D in
2004, and Mitarai wants to raise that figure to $4.5 billion. Last year
Canon ranked just behind IBM as a recipient of new U.S. patents. But
Mitarai has worked hard to change the mindset. Directors who gather at
7:45 most mornings for a meeting outside Mitarai’s office know they
must pull together and keep the focus on making money.
Canon is in a
strong position to continue doing just that in its major business
groups. Markets for printers and copiers, which account for 67% of
Canon sales, are fiercely competitive and have showed signs of
maturity. But Canon is benefiting from the transition to color machines
and profiting from increased sales of toner and ink cartridges, as well
as new equipment. Laser printers, the heavy-duty workhorses used in
large offices, are a key segment for Canon, generating a third of its
annual operating profit. Even though Canon claims only 5% of the global
market-it trails HP, Konica Minolta, Seiko Epson, and Xerox-those
figures don’t reflect its strength as the manufacturer of key
components that account for most of the value of laser printers sold by
HP.
Canon hasn’t fared as well with inkjet printers, trailing HP,
which has a 40% global market share, compared with Canon’s 20%. Its
photo printers are popular, but the company has yet to challenge HP and
Lexmark in sales of multifunction printers that are big in the U.S. And
at the low end, Canon faces growing pressure from Dell, which last year
launched its own line of inkjet printers and has carved out a market
share of about 7%.
Those difficulties have been more than offset by
big gains in sales of digital cameras. Last year Canon bolstered its
lead over Sony by selling nearly 17 million digital cameras, boosting
its worldwide market share to 20%. In the higher-margin digital SLR
segment, Canon, only three years after introducing its first
entry-level model, now claims a 59% global share.
Mitarai is betting
that, five years on, the picture will be just as bright for flat-screen
TVs using the SED technology Canon developed jointly with Toshiba.
Canon engineers, who have been tinkering with SED since 1986, say it
will yield images of superior quality to liquid-crystal or plasma
screens while consuming far less power. A prototype at the headquarters
of the Canon-Toshiba joint venture near Tokyo seemed to live up to the
hype: images that are almost palpable, rich colors, and clarity even
with rapid movement. It also got a good reception at the Consumer
Electronics Show in Las Vegas last month. “Five minutes with this sleek
puppy, and plasma and LCD were but a memory,” raved a technology writer
for the Atlanta Constitution. “Daddy wants one.”
The new SED
displays operate on the same principle as cathode-ray television,
emitting light by shooting electrons into a phosphor-coated screen. But
where cathode-ray TVs use a single large electron gun that has to be
set back from the glass screen (meaning they’re usually as deep as they
are wide), SED screens are illuminated with millions of tiny electron
guns known as emitters that can be aimed at point-blank range, enabling
images to be projected across wide screens only a few centimeters deep.
Canon has invested $1.8 billion in developing the technology for the
screens and building the factories to produce them. It plans to roll
out the first 55-inch screens for consumers in Japan later this year.
Mitarai says he wants to offer the screens for about the same price as
LCD and plasma TVs of comparable size. He hopes to expand capacity to
three million panels a year and capture at least 20% of the global
market for flat-screen TVs by 2010. “We have big plans for the digital
television business,” Mitarai announced at a Canon exhibition late last
year.
With SED screens, Mitarai is thinking big in more ways than
one. The common TV, he predicts, is destined to morph into something
far more useful-what he calls a “multifunction information device”-with
potential applications in other areas where Canon has patents and
expertise. “In the near future,” says Mitarai, “SED displays will serve
as an image and information window in living rooms, linked through a
wireless connection with digital cameras, digital video camcorders,
printers, and other imaging devices.”
The question is whether costs
can be lowered far enough and fast enough to turn a profit. Goldman’s
Horie has his doubts, but he remains bullish. If the SED falls behind
projections, he reasons, Canon’s pragmatic boss won’t hesitate to close
it down

[Author]

February 2, 2006 at 11:34 AM