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By Irene M. Kunii Times are tough for high-tech Japan. Companies that make computers, chips, and semiconductor equipment have seen their earnings plummet over the past year, and they expect more dismal news in the months ahead. To cut costs, some are partnering with former rivals, while many more are shuttering divisions, reducing research budgets, and cutting jobs.
One blue-chip tech company is riding out the bad times in style: Canon. Instead of cutting back, its managers have stayed true to the corporate policy of investing in research and new-product development. As a result, more than 60% of Canon's main products on the market today -- copiers, printers, and digital cameras -- have been developed within the past two years.
That has helped Canon chalk up record earnings in fiscal 2001 -- and score a No. 24 ranking on BusinessWeek's IT 100, the magazine's annual list of the world's top tech companies. While 2002 is expected to present an even tougher business climate, Canon is bullish about the prospects for its next generation of printers and copiers, coming on the market now.
FORWARD MOMENTUM. Canon forecasts 2002 net profits of $1.4 billion, up 5% from last year, on sales of $24 billion. Many analysts expect operating profits to rise 10%, to $2.5 billion. "The earnings of most Japanese tech companies have gone up and down over the past decade," points out Noriko Oki, an industry analyst with Morgan Stanley Japan. "But Canon's [growth] has held steady."
No wonder, then, that the stock has been such a magnet for investors: Canon boasts a healthy market cap of $32 billion and a return on equity of 11.4% -- compared with the average of 2% to 3% for its Japanese peers. Since September 11, its stock has bounced back from just above $25, to the mid-$30s.
"Japanese companies tend to be backward-looking, but Canon is forward-looking," adds Oki. Credit goes to President and Chief Executive Fujio Mitarai, a forward-thinker if there ever was one. Since taking over in 1995, he has kept the focus on research and development of high-value-added products. He has also introduced some Western management reforms, like quarterly earnings reports and attention to shareholder value.
WELCH-LIKE. The most important change, Mitarai says, has been to shift the emphasis away from sales, to profits. "Japanese [companies] put out a wide range of products with the goal of boosting sales," he says. "But when profits decline, these companies find themselves going into debt." In the seven years Mitarai has been in charge, Canon's market cap has more than doubled. Its shareholder equity ratio has risen to 51%, from 33%.
Mitarai might be mistaken for an apostle of Jack Welch, the former CEO of General Electric who achieved one earnings record after another. Like Welch, Mitarai believes his company should dominate the market for its main product lines. So far, Canon is practicing what Mitarai preaches.
With 30% share worldwide, Canon now dominates the market for copiers, once the sole domain of Xerox. After inventing the laser-beam printer in the late 1970s, Canon improved the technology and shrunk the size. Today, its market share for such printers is a steady 70%, if one tallies in the machines it manufactures for Hewlett-Packard.
"STABLE BUSINESS." Of course, it helps to be in a line of business that isn't soley dependent on hardware. Canon has built up a solid business in "consumables," supplying paper, toner, and ink to companies that have invested in its copiers and printers (see BW Online, IT 100, "Lexmark May Not Be Sexy, But..."). Mitarai, to his credit, is pushing into other services, such as helping companies design their office machine networks. "Even if times are bad for IT equipment, Canon still has a stable business in supplying consumables and providing other services," says Hiroaki Jo, an analyst with Nomura Securities in Tokyo.
The question is: Can Canon maintain its stellar track record in the long term? Analysts remain concerned about its commitment to providing Japanese staff with jobs for life, a social contract many other major Japanese companies are now discarding. Another issue involves domestic production: While many companies are shifting manufacturing to cheaper, offshore locales, Canon continues to turn out 65% of its products in Japan. Yet it depends on overseas sales for 70% of its revenue, which is an external risk factor when the yen is in flux.
On the jobs front, Mitarai points out that Canon has tempered its hiring over the years, so it's not burdened with excess labor, like many Japanese info-tech companies. Moreover, Canon is now in the process of increasing production overseas: By yearend 2002, Japan will account for only 60% of all production, down 5% in just one year.
LEFTOVERS? While Canon will continue to use Japan as a base to produce high-value-added goods, Mitarai believes more growth will be generated abroad in the years to come. "Japanese society is aging rapidly, and it will be difficult to create new business here," he says. "We'll use the cash we generate in the U.S. to develop new lines of business." One way could well be through heightened merger-and-acquisition activity in Europe and the U.S.
Mitarai has big plans for Canon. To remain on the growth path, he wants to build it into a market leader in three areas where it now lags -- digital cameras, ink-jet printers, and steppers. As digital photography catches on, Canon hopes to sell not only cameras and home printers, but the more-profitable paper and cartridges.
This is where it could run into problems, analysts say. "To become a market leader, Canon will have to keep coming out with new digital cameras," notes Oki of Morgan Stanley. "Unless it emerges as a winner, it could end up with leftover inventory." The same can be said for low-cost ink-jet printers. Canon plans to market models to compete with leaders HP and Seiko Epsom, but could find itself burdened with unsold units.
Mitarai is counting on product innovation to fuel growth in the years ahead. Looking back over his tenure as CEO, he says his only regret is that he didn't invest more in R&D. "As we diversify, we need to do more research," he says, vowing to push research spending in the next few years to 10% of sales, from 7%. Thanks to Mitarai, Canon is one Japanese tech company that remains a rising sun. Correspondent Kunii covers technology from BusinessWeek's Tokyo bureau