Has Nikon Turned the Corner on Poor Results?

Nikon had a torrid 2019 and the impact of COVID-19 on manufacturing and sales has simply added to that misery. However, does recent news suggest they are beginning to turn the corner of poor financial results?

Nikon's 2019 financial results were generally poor and reflected a business that relied heavily on its Imaging Division which was significantly underperforming to the point that it was undermining other profitable divisions. This was to some extent validated by Nikkei's 2019 DSLR and ILC sales data which showed very poor sales for Nikon's mirrorless cameras. To counteract a significant contraction in sales Nikon had implemented a new medium-term strategy that sought to cut costs and increase sales. That's perhaps an obvious strategy for any business to follow, but in Nikon's case, it had four primary areas to focus upon: cutting operation costs, focusing upon high margin products, improving its sales and marketing, and reducing production costs.

This is a tricky path to navigate (although one that Fuji successfully completed) that starts with the product focus. The global compact camera sector peaked at 108M units in 2010, crashing to a demoralizing 6.5M units by 2019. Both Canon and Nikon were large players in this profitable sector, but have had to dramatically scale back production. For Nikon, this has meant a significant reorganization of overseas labor from the closure of its Chinese Jiangsu factory in 2017, to over 700 job losses earlier this year in Laos and Thailand. The intention of the reorganization is to allow focus on more profitable camera products which includes building up the Z-System from scratch. The Z 6 and Z 7 were both very favorably received, particularly for first-generation products, however, it is arguable that it hasn't been as aggressive as Canon in both pivoting to mirrorless and innovating technically. In some senses, it's surprising that — in order to achieve this rapid product development — Nikon hasn't increased R&D spending, although as income dwindled that proportion has risen. It's this convergence of requirements that is exposing it financially.

Nikon's second-quarter results made for interesting reading as it showed an Imaging Division that was performing better than expected with a 58% increase in sales, although included significant impairment losses (one-off depreciation on asset values) on manufacturing equipment in Thailand and Japan. We now know that that was likely both the retirement of an older compact camera and DSLR production lines, but also the closure of their Japanese Sendai factory, ending over 70 years of domestic camera manufacturing. With production moving to Thailand, this remains a significant withdrawal from their home-grown labor market. That said, it is a pragmatic cost-cutting move that has clearly been planned for at least a year; however, they are also not alone, with Sony also manufacturing in Thailand.

Impact of COVID-19

Perhaps most encouraging, for all manufacturers, has been the increase in shipments recorded by CIPA. As can be seen from the graph below (January to October), shipments have recovered strongly from June to the inexorable Christmas peak. OK, so this is still lower than 2019 and it will be fascinating to see how 2021 progresses; given the circumstances, this is great news for manufacturers. It's a more interesting picture for lens shipments that are selling in the same numbers as cameras, albeit at a lower total value. This is the first time that lens shipments have been in this position which shows that they are increasingly an important aspect of manufacturer income. CIPA doesn't record shipments for budget manufacturers, such as Samyang and Viltrox, so total units will be much larger. The question is how margins on these units compare to cameras, although it is clear that these budget manufacturers are impacting in this area. On balance, this is good news for Nikon, although its failure to build out its lens range is limiting both uptake of the Z system, as well as potential income.

The Future

For Nikon, mirrorless sales are now key and it needs to improve on its 5th place ranking from 2019 which will make its 2020 financial results eagerly anticipated by both investors and consumers alike. This has, of course, led to initial speculation about whether Nikon might "pull an Olympus" and sell off its Imaging Division. However, that is about as close as a comparison with Olympus comes — whilst Olympus has long manufactured cameras they only represent 6% of turnover with the medical and instrument divisions driving growth. This is both a strategic choice and business statement: "We are not a camera company." This isn't the case for Nikon and whilst it's true that income from their Imaging Division is falling year-on-year, it still represents 38% overall. Cameras are their heritage, however, their failure to significantly diversify into other product areas has left them over-reliant on Imaging. There's no doubt that this is a critical period in their history and while Nikon is obviously more than just a camera company, it needs this to be successful in this division for the business to survive in its current form.

The problem of relying on so much income from camera and lens sales has been the commodification of the photographic industry by smartphones and the subsequent devaluation of what are increasingly complex electro-mechanical devices. That the market is falling has meant too many manufacturers and an oversupply of devices in a highly competitive sector. Whilst this is good for the consumer in the short term, it has led to financial stresses for manufacturers. Fuji is a good example of how a business can play to its strengths, build out a completely new camera range, and be both profitable and successful. Nikon is treading a similar path, however, the media focus has been on its attempts to turn around its Imaging Division. Perhaps the more pertinent question to ask is how well it is diversifying the business so that all of its divisions are profitable with no over-reliance on any one single group. In that sense, whilst it is important to both Nikon and its customers that its Imaging Division returns to profit, it is more important that the other divisions grow the income both significantly and rapidly. Those camera businesses that are invested in heath (such as Fuji, Canon, and Olympus) have tended to be more resilient. 2021 will be a pivotal year for Nikon.