Global Economics

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

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. One reason is the popularity of its Mu series of digital cameras. Even Fujifilm, which during its restructuring cut camera shipments by 10% last year, is expected to beat earlier earnings projections.

Nothing Else to Buy

So it's no surprise analysts remain generally sanguine. "There are currently no indicators [that] suggest the need for an aggressively bearish outlook," Goldman Sachs (GS) wrote to clients in a research note on Apr. 9. "Industry earnings appear generally buoyant."

What explains the resurgence of digital cameras sales growth? After all, it's now over a decade since the cameras first went on sale in Japan and many mobile phones now include a camera as standard.

One big factor explaining the recent growth was a shortage of viable alternatives as 2006 came to a close, says Chris Crotty, a senior analyst in consumer electronics at iSuppli. New games consoles like Sony's PlayStation 3 and Nintendo's Wii were in short supply following November launches, while next-generation Blu-ray and HD-DVD digital video players were seen as too risky by consumers unsure which format would take off. "Consumers did not spend on the technologies, so they spent on more familiar products like digital cameras and MP3 players," Crotty says.

More Bells and Whistles

It helps, of course, that digital cameras haven't stood still since first going on sale a decade ago in Japan. Some models can now transfer photo data via a Wi-Fi wireless connection, for example. Others have increased video functions. And some, such as Canon's $399 Ixy Digital 900IS (called the Canon PowerShot SD800 IS Digital Elph) include just about every popular feature, such as a slim-line design, high pixel count, a wide angle lens, and face recognition. That's more likely to attract new users and, more importantly, increase replacement demand.

Better products also helps explain why competition from mobile phones has largely failed to eat into camera sales. While phone-based cameras are getting better, camera makers have largely managed to stay one step ahead by adding better features.

Add to that the fact that there are fewer players in the industry after the high-profile departures of Kyocera (KYO) and Konica Minolta—not to mention a 10% fall in shipments at Eastman Kodak last—and it's clear why recent months have been kind to Japan's camera makers.

More Price Competition Coming

Then there's the overall SLR market, which is booming and highly profitable. Goldman Sachs reckons SLR shipments grew 39% last year on a unit basis and 29% in value terms as big guns Matsushita and Sony entered the market, which is currently dominated by Canon and Nikon. SLRs have higher prices—typically starting at around $600 for a lower end model—and higher margins than compact models. Goldman projects that global shipments of digital SLRs will rise from 4.9 million in the financial year just ended to 6.5 million in 2008.

Still, for all that, they shouldn't get complacent. Starting this year, many analysts reckon the recent growth—and profitability—will begin to taper off. One problem, notes Nomura Securities' analyst Tetsuya Wada, is the rise of cameras like Canon's Ixy Digital 900IS. By cramming so many functions into cameras, Wada says, there's a risk they will become less differentiated, forcing companies to compete on price.

"The market for cameras in 2006 was stimulated by the launch of products with innovative designs and features…and by companies playing to their technical strengths. Price competition also calmed down" Wada wrote to clients in a February note. "We're concerned that these fully featured compact cameras could undo the diversification in the market, stoking price competition again."

Slowing Growth?

Wada is also worried that the roll-out of more sophisticated mobile phones, particularly those with cameras of 2 million pixels or more, in Europe and the U.S., could yet affect camera sales. For Japanese camera makers, that control about 70% of the global market, Wada reckons shipments will only grow by 5% in 2007 and 3.1% in 2008. Even at Canon, Wada reckons year-on-year profit growth in the camera division will go from the high teens to around 2% in the next two years.

iSuppli's Crotty also doubts whether the recent growth trend can continue. For one thing, the new devices that were hard to get hold of last Christmas are now increasingly available—while it's harder to improve on cameras already crammed full of gizmos. "Household penetration rates are very high" he warns. That could affect Japan's smaller camera makers in particular. Crotty adds that with new competitors such as Sony and Matsushita's Panasonic brand (MC) entering the SLR segment, large margins there could also fall in the next few years. Whether Pentax will still be a serious player when that happens is anyone's guess.

Click here for a slide show on the making of a digital camera.


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