Japan's Digital Camera Picture Still Bright

Never mind Pentax's woes. Demand—especially for SLRs—is high. But heightened competition, particularly from camera phones, may soon cut margins

by Ian Rowley

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Let's call the whole thing off. That's basically what transpired on Apr. 10 when the board of directors at Japanese camera maker Pentax abruptly dumped company President Fumio Urano, the architect of a planned merger with Hoya, a highly profitable optical equipment manufacturer.

Some said the merger, which was supposed to be finalized by October, broke down because the financial terms weren't favorable enough to Pentax' shareholders. Others said it was due to arguments over what to do with Pentax' camera business which, having been slow to embrace digital cameras, had until recently posted losses. "It's all about cameras," one unnamed Pentax executive earlier told the Nihon Keizai business daily.

That Urano was shown the door isn't all that surprising given that Pentax's problems are in such stark contrast to the rest of Japan's camera industry, which is pretty much thriving. True, both Kyocera (KYO) and Konica Minolta Holdings (KNCAF) have exited the business in recent times, while overseas players such as Fujifilm and Eastman Kodak (EK) continue to go through a very painful repositioning of their core businesses (see BusinessWeek.com, 2/10/06, "Camera Makers' Many Negatives").

Smaller Makers Prosper Also

But for all that, global digital camera demand is stronger than ever, and last year grew even more strongly than most analysts expected. According to market research firm IDC, worldwide digital camera shipments rose 14.5% in 2006, to 105.7 million. Japanese camera makers, which control about 70% of the market, performed even better, as shipments increased 22% in 2006 compared to 8.4% a year earlier, notes Japan's Camera & Imaging Products Assn.

Canon (CAJ) and Sony (SNE), the world's first and second biggest camera makers, were among the winners, but smaller makers are also prospering. Casio, for example, was on target to raise shipments 30% to 6 million units in the 12 months through March, and aims to add another million in the year ending March, 2008, by targeting more Chinese and U.S. sales. "All our efforts should boil down to beating our rivals in releasing original products," Casio Chief Executive Officer Kazuo Kashio told the Nihon Keizai

And while Eastman Kodak's shipments slumped 19.6% to 10.6 million amid a restructuring, Korea's Samsung is one non-Japanese camera maker that continues to grow, more than doubling its shipments to 8.3 million in 2006.

Boost From SLRs

Just as important for Japanese camera makers, profitability is generally on the up—no small achievement in a market as competitive as this one. When Canon posted its results in late January, its camera division saw operating margins rise from 19.8% to a startling 25.8% (see BusinessWeek.com, 10/3/06, "Canon Camera's Pretty Picture.").

Sony may have its problems, but it is benefiting both from a foray into the SLR (single-lens reflex) market; which it entered last year with its Alph100 range after acquiring Konica's 100-year-old Minolta camera business in January, 2006; and from its traditional strengths in compact digi-cams (see BusinessWeek.com, 6/7/06, "Sony Sharpens Its Focus").

Nikon, also benefiting from its strength in SLR cameras where it traditionally rivals Canon as the market leader, is expected to raise its net profit for the year 83% to $400 million. And Olympus (OCPNF), which shipped over 9 million cameras in 2006, expects its operating profits to rise by around 50% to $805 million.