Financial results are one thing and pundit commentary another; however, there is nothing like hearing it directly from the horse's mouth. So, how does Nikon think they are doing? Hear what they've got to say.
Nikon has just published their Annual Report for the 2020-21 financial year, which is a roundup of how the whole business is doing, where they think they have done well, and areas they believe need further focus. As I commented on earlier this year, Nikon's Imaging Division has had a tough time recently, as they implemented the business' three-year medium-term strategy, which involved significant restructuring, job losses, and impairment losses.
The report begins with a summary from Nikon's President, Toshikazu Umatate, and there isn't any way to dress up what is a painful restructuring moment in their history. In black and white, he notes that the Imaging Division has seen losses over the last two years of ¥17 billion and ¥35 billion. In terms of restructuring, they have recorded ¥30 billion in impairment losses (i.e. writing off capital assets) and laid off some 2,000 staff, principally through their overseas production operations, but also including sales companies. Moving on to the positives, he believes the current financial year will see a return to profit for the division, driven by a focus on new mid-to-high-end cameras and lenses, touting the imminent release of the Z 9 and expansion of the lens lineup from the current 22 to "nearly 30." Nikon has stuck to its core plan since the birth of the Z system and there is nothing inherently wrong with it. The problem is that they are not developing it in a vacuum of isolation; Nikon is up against well-funded, innovative, and motivated competitors in the form of Sony and Canon.
With all manufacturers targeting mid-to-high-end customers, one obvious tactic is to expand the size of the market to sell to. Umatate focuses upon new markets, which could include entry-level models for young customers. Interestingly, he conflates the young with low value (and presumably low income), which is not necessarily the case. There is something to be said for separating these two problems. How do you sell to the young and how do you sell entry-level models? The latter is decidedly difficult in the current smartphone-dominated world, while the former requires a different approach to marketing. Nikon isn't exactly known for being a hip, upstart brand. The other market Umatate pushes is business-to-business (B2B), where manufacturers sell to other businesses rather than consumers. Quite who these businesses are for Imaging remains to be seen, so I guess we'll have to watch this space.
Imaging is only one of five divisions, so any discussion of Nikon's future needs to take the others into account. Umatate is keen to promote the new Components division, which had a solid start to the current year (¥7.7 billion turnover), producing an exceptional ¥2.1 billion in profit. This good news is mediated by the relatively weak performance of its two biggest divisions: Imaging and Precision Equipment. That said, all divisions (other than Imaging) were largely profit neutral last year, and all had a good start this year bar a small loss at Industrial Metrology.
As a business then, the main headlines are a consistent reduction in income over the last decade from a high of ¥1010 billion to the current ¥451, with that large loss last year. That said, 2019 had Nikon's biggest surplus in the last ten years, so profitability has been less affected. In terms of inventory, this is consistently around the ¥250 billion mark; however, more problematic for a fast-moving business is the rise in the turnover period from 3.1 to 6.4 months over this period. Products in warehouses are not good for manufacturers or consumers. As I've noted before, Nikon has maintained a ~¥60 billion R&D investment even as income has fallen meaning that its relative investment is at an all-time high of 13.3% of turnover.
Umatate finishes his summary by focusing upon the brand. He notes:
we cannot deny that the Nikon brand has fallen into a long slump recently.
As a business, Nikon is conservative; however, given the current performance of Imaging, this is proving counterproductive to developing the business on two levels. Firstly, marketing attracts new photographers into the Nikon fold and depicts them as a progressive and exciting camera company. Secondly, it is to vaunt the breadth of their manufacturing and particularly their business-to-business activities. Their "Manufacturing Makes It Happen" video is an attempt to address the latter through the long-term investment areas.
Umatate concludes with what could be a mission statement:
Nikon is pressed to improve its reliability and fully exercise its creativity, backed by sophisticated technologies, in an earnest attempt to address the issues and needs of society and customers.
Has the Medium-Term Plan Paid Off?
The core of Nikon's management plan is to... generate profit! Perhaps that sounds a little obvious, but the problems with their business stem from the Imaging Division, which has long generated revenue and made up the bulk of earnings. However, with the decline of the camera sector, it now accounts for just 33% of revenue. This is still significant but is forcing Nikon to expand its manufacturing prowess into new areas while restructuring Imaging to make it profitable in the long-term and, in particular, with revenue of less than ¥150 billion. Part of its development into new product areas has been a focus upon "Monodzukuri," which will enable it to move back to its foundation in manufacturing prowess and then diversify into related fields. It sees this as a cross-fertilization of areas linked to precision manufacturing and optoelectronics (and "vision" more broadly) that links across to sub-specialisms in image processing and software.
In short, Nikon knows that Imaging is a declining business and needs tight cost control. At the same time, it must expand into other fields and grow them. The Precision Equipment Division (41% of revenue) is well placed for immediate expansion, but its Industrial Metrology (12% of revenue) and Healthcare Divisions (14% of revenue) need to grow, alongside the new Components business. Interestingly, China and the USA account for about a quarter of revenue each, with Europe, Japan, and "Elsewhere" equally splitting the remainder.
So, how is Imaging doing? Perhaps unsurprisingly, Nikon flags the declining market and intense competition as key risks, alongside more recent component shortages that are a continuing headache for manufacturers. It is the last of these that could cause significant problems and is further linked to energy shortages, labor problems, and significant logistics problems across the globe. Add into the mix pent-up consumer demand and a surplus of cash globally (yes, there is!), and you have rising prices and inflation. For any manufacturing business, this is going to be a difficult time. Beyond this, Nikon gives little away, although their relatively short roadmap of achievements in Imaging shows that they aren't moving particularly quickly. Still, this should be viewed in relation to their competitors rather than in isolation.
The last financial year — 2020-21 — was always going to be a difficult one for Nikon, as it completed its restructuring of Imaging. COVID has simply exacerbated issues related to supply and sales, which means that all eyes will be on its performance in the current financial year. If it can make Imaging mildly profitable (and not a drain on income) while growing its emergent star performers, then 2022 could will be foundational for a new, refocused, Nikon.
That, however, doesn't say too much about Imaging. Like Fuji, Nikon sees its camera business as part of its DNA; there is no debate over its future. However, the poor performance during COVID was seen across other camera manufacturers, but in Nikon's case, this has masked (and possibly excused) the weak performance shown by its market share. This remains a continuing concern as it loses DSLR sales, which aren't being completely replaced by its mirrorless cameras. All eyes are on Nikon, Canon, and Sony over the next year as the new market shapes out.
Lead image composite courtesy of Free-Photos via Pixabay, used under Creative Commons.