Thom Hogan was linked to and quoted (by reader Globules) in the Comments to our post "Olympus Disappearing" yesterday. Today he responds to clarify:
Since I'm being quoted all over the place on this, I need to set a few things straight.
First, while Olympus CEO has said they'll post a profit next year, immediately after he publicly stated that, Olympus executives went around to analysts and said "no, we won't." If true, this would be the fourth year in a row that Olympus has said they'll post a profit in cameras yet lost money. Significant money.
As for why Olympus is at risk, it all has to do with that corruption scandal. We haven't seen the end of it yet, as there are lawsuits still pending and being filed. No one knows how much cash will eventually drain out of Olympus because of it. And despite the Sony investment, the company is still undercapitalized. They simply can't keep losing money in large amounts in imaging without it impacting the firm overall.
But here's the story you're not hearing: virtually all of the camera operations in Japan outside of Canon and Nikon (and maybe Sony) would be essentially bankrupt if we used Western accounting methods. The good news is that all but Nikon have other healthy businesses that can absorb losses. However, Panasonic has woken up to the fact that these negative ROI appendages are killing the overall company slowly. I suspect that Panasonic will fold their independent camera group, get out of the P&S business, and merge the remaining Micro 4/3 stuff into the pro video group as a temporary solution.
Note that Sony did that recently, and Samsung has merged cameras into the smartphone group. The problem with this is that long-term it means that camera groups don't act independently any more, and it's more likely that failures would get folded completely.
The bottom line is the bottom line. With no growth visible in the camera market, none of the Japanese camera companies can sustain their overbuilt structure and inventories, not even Canon or Nikon. They built for continued growth above 20%. Now they're paying the price.
I know Pentax folk are still mad at me for writing way back at the turn of the century that Pentax was dead in the water and non-viable. As it turned out, I was right. Hoya bought and stripped the company, then later sold the camera remains to Ricoh. If you add up all the losses Pentax made, all the costs of acquisitions, Pentax has no chance of ever making all that lost cash back up, even under perfect Ricoh guidance.
What we're really seeing is the Japanese business culture, where you can't really lay anyone off, you can't close down unprofitable businesses, and where banks arrange marriages to preserve entities. I don't know that this environment is long-term sustainable in a country that has over 200% to GDP debt, is trying to reinstate inflation in the market, and is actively devaluing its currency. Something's going to eventually give.
That said, short term we're not going to see any real changes, I think. It's business status quo in Japan at the moment, which means that money-losing businesses stay afloat by various propped-up means.
©2014 by Thom Hogan, all rights reserved
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Featured Comments from:
Bob: "Thank you for posting this! As a financial analyst myself, Thom is the only photography market commentator that I read who actually 'gets it' about Japanese camera/electronics companies. Financially, Japan vs. the U.S. is night and day—it's why big banks and brokerage houses have separate teams just for Japan. And yes, it's really that bad over there...."
jean-louis salvignol: Thom has certainly properly identified the problem for all these small businesses in the photo industry. But whether it's widespread throughout Japan is questionable to say the least. Look at Toyota with and its mountain of cash. More generally, the future of Japan—Abenomics—is very well analyzed by Barry Eichengreen."
Thom replies to jean-louis: You caught me. I meant widespread through the consumer electronics industry in Japan. Sony's a great example of that: the half of the company that is involved in consumer electronics is a terrible performer (except perhaps for sensor sales), while the other half that is in non-tech businesses is doing fine.
Eichengreen's article is a good one, but it mostly raises questions, not actually offering a projection on how things will proceed. That's a problem. There seems to be a growing belief amongst analysts that Japan may have gone well over the top of the debt hill given their demographics, so getting back may be very difficult and very painful. Moreover, Eichengreen doesn't get to some fundamental issues that are still unresolved, such as how Japan plans to actually generate power at reasonable cost and impact in the future or whether it would be able to sustain another large quake.