There has been a flurry of reports about Nikon as the second quarter results hit the press, which show the manufacturer fighting to turn around the business but struggling under the impact of COVID-19.
Nikon's 2020 year-end financial results and medium-term strategic plan highlighted the painful restructuring the company was going through in order to return the business to profit as it shut down compact camera sales and pivoted from DSLR to mirrorless sales. This was complicated by a reliance upon income generated by their Imaging Products division — in short, Nikon wanted to spread income across all their business divisions (and particularly Precision Equipment) while cutting costs and increasing mirrorless sales. The weakness was in increasing mirrorless sales, in part a result of the relatively unsuccessful 1 System, which was canceled in 2018. In comparison, Sony has gradually built up mirrorless sales and Canon has been largely successful with its EOS-M range. This weakness was highlighted by a recent Nikkei report on 2019 MILC sales which placed Nikon fifth. Nikon has been rapidly trying to build out its Z-system range and increase sales. Then, COVID-19 hit.
So, what do the second quarter results look like? The broad headline figures are a 58% increase in sales (¥110.9B), but still a slight increase in overall losses at ¥-23.1B. While the other divisions were largely profit neutral, Imaging Products saw a relatively large increase in losses, which doubled to ¥-19.3B on the back of increased sales of ¥39.3B. Nikon report that this is largely due to ¥15.5B impairment losses (asset depreciation in excess of their stated value) in Imaging Products on manufacturing equipment in Thailand and Japan, which could relate to older compact camera and DSLR production lines. If this is taken into account, then Imaging Products is closer to profit neutral and performed better than expected. As a result of this, they have revised up the end-of-year performance.
Comparisons to previous years are less relevant because of the uniqueness of the impact of COVID-19. What is more important is relative performance to other manufacturers as their restructuring continues. It's self-apparent that unit sales and their value will be significantly down on last year, with revenue decreasing by 46% and units down 58% (1.2M to 0.5M) in the half-year to date.
Nikon has stuck with their medium-term strategic plan and use the following graphic to place a positive spin on their repositioning within a new camera market. It shows a 57% drop in sales, while retaining the pro/hobbyist segment. As a result, they make up a significantly larger proportion of sales which supports the strategy of targeting high-end models. They are also promoting the idea of a 59% drop in costs although that is yet to be realized.
The above graphic implicitly highlights the dramatic reduction in camera sales but hides Nikon's poor performance in the compact camera and mirrorless markets. Nikon remains strong in DSLR and lens sales, and the mirrorless pivot is designed to make the business unit sustainable. Some other takeaways that are worth reporting are, firstly, the continued decrease in relative income of Imaging Products, with Healthcare and Industrial Metrology continuing to expand. Secondly, European and Japanese markets increased in importance at the expense of the US and China, and while this is across all segments, it will inevitably change the way sales are targeted and supported. Finally, and perhaps most importantly, Nikon has consistently spent ~¥62B annually on research and development as it pivots Imaging Products and expands its other divisions; however, as income has fallen, this has increased the proportion spent from 8.5% to 14.4%, meaning cost-cutting is coming elsewhere. Nikon Rumors summarizes a Nikkei report that states a 20% cut in the overseas workforce (2,000 employees), while also transferring some production from Japan to Thailand.
The key to the future is therefore building out its Z range and being both economically and technically competitive in the market. What would make you buy Nikon? Where should it focus?
Body image copyright Nikon.