2019 Starts Badly

The CIPA numbers for the first half of the year are available, and they're not very positive. DSLRs are selling at only two-thirds the rate of 2018, and even mirrorless unit volume is down 14% (though dollars taken in for mirrorless is up slightly, basically due to all the activity with full frame). Lens sales are down, compact sales are down, everything's down. 

So much so that the pattern suggests that interchangeable lens camera unit volume may drop to somewhere around 8m units or less this year (last year was almost 10.8m units). 

Which brings us to a segue: Nikon's CEO was quoted by Nikkei as saying that Nikon's camera unit volume now is less than one-sixth what their peak volume was in 2012 (that includes compacts, of which Nikon had many more models then than they do now). 

Somehow, though, Nikon has managed to stay profitable throughout that long contraction. Which brings us to Nikon's first fiscal quarter results.

Nikon is making some quiet noise that indicates that they think they've begun to turn a corner. The first interesting point in their results was that they're making no changes to their fiscal year forecasts. In other words, they see nothing in the next nine months that would cause a further slump in their camera sales or lower their profit further from the 6.5% level they're currently predicting (note: that's down from 11.4% last year, though).

Indeed, now that we can see some specifics in their full forecast data, they're expecting the second half of their fiscal year—October through March—to be clearly better than the first half. They're predicting a 17% increase in sales and 200% increase in profits in the second half over the first half. That means that there is significant new product in the pipeline destined for that period, and that Nikon thinks it will perform decently.

Meanwhile, camera/lens inventory has come down a bit (5%) and is projected to come down further (16%). Cameras will still make up 47% of Nikon's sales for the year (same as last year) according to Nikon's forecasts. Market share is expected to be 19% in ILC (down from 20%).

Nikon has been managing to contraction for some time now. That started in the semiconductor equipment business, then expanded to the camera business. Even Nikon's "growth" initiative, healthcare, is not growing at the moment. In many businesses you'd think that this would result in the business being less than healthy. In Nikon's instance, they've done a good job of staying ahead of lots of problem areas that arise from getting smaller. Cash flow is still quite positive, liabilities have been in good control, and R&D expenses have been going down slightly (while increasing as a percentage of sales, an indication that they're controlling those expenses, but still trying to push forward with new product). 

I'm sure it's humbling for Nikon to go from a strong #2 in cameras to fighting for that position with Sony. Still, in terms of business health, they appear to have done all the right things short term. The question now shifts to longer term: are we really at the bottom of their contraction within the overall market, and how much more will the overall market itself contract? 

While Nikon's CEO Umatate-san says that they still have efficiencies they can gain through rebuilding their sales structures and overhauling procurement costs, I suspect we're nearing the limit in terms of what such changes can do for profitability as long as the camera market itself keeps getting smaller. 

Put another way, Nikon has some new product coming. How well that product is received will go a long way towards further stabilizing their situation and perhaps even improving it. 

Meanwhile, Canon's chairman Fujio Mitarai is out talking with the Japanese business press and saying that the number of compact cameras and the number of ILC cameras will each drop to between 5 and 6 million units in 2020 (that's down from 8 (compact) and 10.8m (ILC) units in 2018. Best case scenario according to Canon is that we go from 19.4m total digital cameras in 2018 to 12m in 2020, or another 38% drop. The drop from peak cameras is attributed to "market structure caused by advent of smartphones."

Uh, yeah. I'm going to get back up on the soap box I've been on since 2007 and say this: exactly what have the camera companies done to make dedicated cameras as convenient for image sharing as phones? Of course sales are down and continue to go down when you don't actually solve the biggest user problem. The camera makers haven't actually embraced the new era of how images are shared. Simple as that. 

So let's look at how things will play out if Canon is right about how far the ILC market will contract and market shares stay about the same. 2020 unit volume:

  • Canon 3m units
  • Nikon 1.2m units
  • Sony 1.2m units
  • Everyone else: 400k units

I think Nikon/Sony are fairly locked in with about 40% of the market between them. And staying above 1m units/year gives them enough ramp to stay profitable, though there will be great stress in doing so. The real question in my mind is Canon versus everyone else. Can Canon really hold 50% market share in ILC. Certainly not with their current products. Everyone else—that's Fujifilm, Olympus, Sigma, and Panasonic basically—actually needs to grab share from Canon, I think. I can't imagine building 100k units a year being a profitable ILC operation. 

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