Nikon Blues

June 1, 2003--A series of articles over the last month in both the Japanese press (e.g., Nikkei Report) and the US (e.g., The New York Times) have all noted the same thing: in a year where all the digital camera companies in Japan have posted outstanding sales and earnings growth, Nikon stands out as the lone exception.

On May 9th Nikon announced that it had a net loss for fiscal 2002 of 8.14 billion yen and would skip its annual dividend for the first time in 42 years (that's the "red"). Yet the camera division's profit was up 72% on a 130% increase in digital camera unit volume (that's the "white," as in white hot). The problem is Nikon's stepper business, started in 1980, which is dependent upon the health of semiconductor manufacturers (who are all a little "blue" in the current tech slump).

While Nikon's stepper business has big customers, such as Intel and Sony, it closely follows tech cycles. And it didn't help that Nikon didn't seem to catch the shift in microchip manufacturing to South Korea and Taiwan in recent years; Nikon managed to lose its top spot in worldwide stepper sales in the past year. Bottom line: a projected loss of 22 billion yen in the stepper business for fiscal 2003. I guess you could say that's below the bottom line.

Nikkei Report pointed out two significant issues, both of which are of interest to readers of this site:

1. Nikon spent about 18 billion yen in camera R&D in 2002. But that's only about a third of the company's product R&D expenditures, despite the fact that digital cameras are the fastest growing and most profitable of Nikon's businesses. While the total amount represents a significant chunk of change (well, it would to me), it also means that we're unlikely to see Nikon throw dozens of CCD-based cameras against the inkjet paper and see what sticks. What comes next needs to be competitive, so don't expect the world's first digital slot-scan panorama camera or any other small niche product. It probably also means that D-TTL won't get fixed in the near future, either.
2. Nikon uses Sanyo to manufacture the Coolpix cameras rather than doing it directly. This means that they share some of the profits with another company while a company like Canon doesn't. What isn't noted by Nikkei Report (or in any of the articles) is that Nikon has been doing this for some time. I seem to remember a circa 1991 Nikon video camera that was made by Sanyo, too. And frankly, Nikon's not the only one doing this. If you think your Kodak camera is made by Kodak, or your Leica digital camera is made by Leica, well, think again. Sanyo, Kyocera, and a handful of other companies produce a lot more of the consumer cameras you see than you might guess. Yes, Canon is different and probably retains more dollars per consumer camera than Nikon (one estimate 18% of the price versus 10%). But that hasn't helped them unseat the leader in that market, either (Sony).

So should Nikon users and loyalists panic? Not really. Though it's clear that a great portion of Nikon's energy and attention is on the stepper business, Nikon's camera business is healthy and growing. While many of the reports speculate widely about Nikon's mediocre and mid-pack showing in consumer digital cameras, Nikon has never really been a strong contender in the low-price, high-quantity camera market. (Quick, how many Nikon 35mm point and shoot cameras do you see?) I fully expect to see a D1 replacement within the next few months, and if it's as competitive as the current models have been, the camera group will continue to be happy and growing. Besides, Nikon's current camera business problem seems to be delivering enough of what they've already announced (even D100's don't seem to stay in stock at most dealers; I was at the primary Nikon dealer in a major market recently, and they were telling me they get three D100's at a time, and they're all always sold before they come in).

And if the semiconductor business ever picks up again, well, Nikon should be back paying dividends again. Perhaps by then someone will actually be able to tell me what my tax on them will be ;~)

Steppers are a key component in the optical portion (scanning, etching, and printing) of semiconductor chip production, and are used in the mass manufacturing of chips and LCD panels, amongst other things. Note that the Nikon division name for the stepper business is "Precision Equipment Company." These are very precise beasts, indeed. These truck-sized (and bigger) devices have alignment accuracies measured in a few nanometers and use state-of-the-art lasers as light sources. Nikon sells only a few hundred of these behemoths a year (approximately 7000 total since 1981). I doubt that they're user upgradeable.

How Big is the Camera Division?

	Sales	Income
2002	221.5	16.1
2003	271.9	27.7
2004	315	37

(figures in billions of yen, and fiscal 2004, which ends in March 2004, is an estimate)

The more interesting data is in the breakouts of imaging product unit sales:

	2002	2003	2004*
35mm SLR	880k	930k	750k
35mm compact	1530k	1300k	680k
Lenses	1200k	1270k	1350k
Digital cameras	1450k	3360k	5500k

*numbers revised 11/03

Interestingly, both the 35mm SLR and lens sales in the home market of Japan show declines, while everything except 35mm compact cameras show increases globally.

Note: one thing that seems to get glossed over by everyone reading Nikon's projected year forward is that Nikon has made all of their calculations based upon a yen/dollar conversion of 125. I'd be surprised if the average conversion stays that high this year. Frankly, I'm surprised that the big boys all missed that--it seriously changes how you look at the 2004 fiscal year estimates.