Canon's Makeover Miracle

In 10 years, the electronics maker cut costs, dumped departments, and traded debt for huge profits. A new chief continues the trend

by Ian Rowley

It has now been more than a year since legendary Canon (CAJ) President Fujio Mitarai handed over the day-to-day running of Japan's most profitable electronics company to Tsuneji Uchida. During Mitarai's decade-long tenure, Canon transformed itself from a lumbering, debt-ridden symbol of Japan's economic decline to a lean profit machine. Rivals no doubt hoped the new era under Uchida might see Canon come unstuck, but so far there is scant evidence that the company is suffering from the transition.

This year, Canon expects to deliver net earnings of $4.1 billion, an increase of 10.9% on 2006, from sales of $45 billion. What's more, the growth path mapped out by Mitarai continues apace under Uchida, a Canon lifer who made his name in Canon's ultra-successful camera division.

Canon's margins are what differentiate the company from rivals, and the difference is likely to grow. Nikko Citigroup projects that Canon's operating profit margin, a superb 17% last year, will be a shade under 20% by 2009. To put that into perspective, not one of Canon's Japanese peers—companies such as Matsushita (MC), Sony (SNE), Sharp (SHCAY), Toshiba (TOSBF), Hitachi (HIT), Pioneer (PNCOF), and Sanyo (SANYF)—had an operating margin above 6% in the last financial year. "Japanese electronics companies tend to diversify their businesses too much and dilute their strength, but Canon is different," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "It focuses on fewer business lines and makes far higher margins."

Refining the Business

Of course, Mitarai (now serving a term as head of Keidanren, Japan's biggest business federation) takes much of the credit. When Mitarai took over, he was dismayed by the $7.5 billion debt 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.

Today, each of those remaining lines is a huge earner. In cameras, Canon was late to get into digital, but its Ixy range (called Ixus in Europe and Elph in the U.S.) quickly became a market leader. Aided by higher-priced SLR cameras, the camera division delivered operating margins of 25% last year. Office copiers are another cash cow. Canon's office imaging division took in more than $2 billion in operating profits last year. And profits from printers, which make the largest single contribution to Canon's bottom line, show few signs of slowing down amid higher-than-expected demand for color printers in Europe and the U.S.

Disappointment Ahead?

One concern, though, is Canon's next big technology: surface-conduction electron-emitter displays, or SED TVs, a new kind of flat-screen TV that promises better picture quality than existing sets. Delays have prevented SEDs from reaching electronics stores. Cost issues and a legal spat with Nano-Proprietary (NNPP), a small Austin (Tex.) company (see BusinessWeek.com, 1/8/07, "Fade to Black for Next-Gen SED TVs?"), mean the long-awaited TVs remain just that. In May, Canon said its plans to launch the TVs in the final quarter of 2007 would be "postponed for the time being"—to the disappointment of investors and consumers alike.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.