For a frontline view of the coming digital-camera wars, head for Tokyo's teeming, neon-lit Akihabara district. In the world's largest electronics bazaar, hundreds of shops display dozens of new camera models--most of them gaudily labeled "megapixel," the latest geek-speak for "supersharp digital picture." There are plenty of choices from Sony Corp., Olympus, and 18 other manufacturers. But the best-selling brand isn't difficult to spot. Just look for the "Sold Out" tags on the display models, and you'll see that many of them bear the brand Fujifilm.
That's Fuji Photo Film Co., of course. It's the world's second-largest maker of photographic film and paper, known to Americans as the company that has given Eastman Kodak Co. a harrowing run for its money. But to Japanese gadget fanatics, who snap up about 40% of all the consumer digital-cameras sold worldwide, Fujifilm's kelly-green packaging goes deep into the digital subconscious. Faster than you can smile and say "chee-zu," Fujifilm has been cranking out new digital cameras--averaging one every two months since March, 1998. That helped it win a leading 28% share of Japan's market, according to a Business Computer News poll of 218 top retailers.
FRESH GOODIES. Fujifilm has staged a remarkable makeover on its home turf. But the world of digital photography is still new. It will be years before any company is declared victor on this virgin territory. And Japan is just one market, albeit a key one. Long term, Fujifilm's digital gamble will depend on the U.S., where Sony, Eastman Kodak, and Olympus are the market leaders.
So in the next two years, as Fujifilm courts Americans with a whole new bag of digital goodies, it will confront the most confusing obstacle course in its 65-year history. The global market for photo film and paper, however cutthroat, is a tidy duopoly with clearly defined rules. The digital-camera market, by contrast, is uncharted, chaotic, and already crowded with newcomers. Profits are as uncertain in this world as they are for makers of calculators, cell phones, notebook computers, and almost all other digital gewgaws.
In this topsy-turvy universe of digital imaging, all bids are up in the air. Talk to camera strategists at Hewlett-Packard Co., and you'll hear about the eternal appeal of paper: HP has built its digital strategy around its world-beating printer business. Visit Nikon, Olympus, Konica, or Canon, and the digital cameras may look surprisingly similar to today's beguiling compact models. But don't limit your sights to such players. Sony and Toshiba already sell laptops featuring digital cameras. Nokia wants to put them in cell phones: Kyocera already has. In one scenario, the biggest winners could be dot.com Web-site operators who store consumers' picture libraries, giving access to their friends and families.
Perhaps most perplexing for Fujifilm is that, in digital cameras, it will be selling the equivalent of the razors, not the razor blades. Instead of film, most of these gizmos store images on memory chips, which Fujifilm doesn't make. "Fujifilm must cannibalize its main source of cash flow, which is film," says longtime Asia watcher Thomas Murtha, an analyst and investment manager at Rowe Price-Fleming International Inc. in Baltimore. "Will the margins on digital come anywhere close to Fujifilm's silver-halide consumables?"
That's the crux of Fujifilm's dilemma. Some conservative managers in the company want to stick their heads in the silver-halide sand and ignore the digital hurricane. But the chairman and CEO of Fujifilm has been a convert to digital since the early 1980s and is personally forcing the company forward. Says Minoru Ohnishi, 74: "We've reached a major turning point. The new technology poses a challenge for the entire industry, and we're ready for it."
Ohnishi is coming from a position of strength. Despite currency fluctuations and the Asian crisis, the company has remained a strong performer. With 1998 sales of $13.7 billion--up 4.3% from the previous year--Fujifilm is one- fifth the size of Sony or Matsushita. And yet it posted a hefty $1.6 billion in operating profits, compared with $3.2 billion for Sony and $1.8 billion for Matsushita. Its average operating profit margin of 12.4% nearly matches Kodak's and is far above the usual margin for Japanese manufacturers.
Digital gear, to be sure, is still a tiny franchise within the company. In the year ended in March, 1999, Fujifilm's sales of digital cameras were worth about $400 million. But that's up 80% from the previous year. "Fujifilm is very aggressive," says Nicholas Smith, a senior analyst at Jardine Fleming Securities Ltd. in Tokyo. "Looking at sales, growth, or returns, it leaves the others in the dust."
SINGLE-MINDED. Driven by one overriding aim, to be No. 1, Fujifilm has pounded away at its competitors. On its home turf in traditional film, Fujifilm has nearly demolished Konica and overtaken Kodak, whose yellow-and-black boxes once dominated Japanese store shelves. Fujifilm now controls 70% of Japan's $3.6 billion photo-film-and-paper market. Even in the U.S., Fujifilm expects soon to account for about 25% of photo-related sales, up from around 10% a decade ago.
It's clear, however, that Fujifilm needs a new source of profits. In Japan, declining prices have dragged the total value of film and paper shipments down 27% from a peak of $4.9 billion in 1992. So Chairman Ohnishi is applying the same single-mindedness to digital cameras that the company has brought to film. And he has just taken the wraps off some heavy-duty artillery. Its first-of-a-kind PrinCam, a $950 digital camera with a built-in printer to produce instant photos, will hit Japanese shops in November and overseas outlets next year.
On Oct. 20, Fujifilm also unveiled a groundbreaking image sensor, the Super CCD (supercharged coupled device). This honeycomb-patterned feature is the electronic "eye" of the digital camera. The new, half-inch-size chip uses octagonal pixels (picture elements), instead of rectangular ones. These pixels are packed more closely together than in regular CCDs--and pixels per square inch is the measure that defines the sharpness of a digital image. Fuji says its new, 1.9 million pixel Super CCD prototype has a resolution equivalent to a conventional 3 million pixel sensor. Next year, Fujifilm will unleash a new arsenal of digital products, from supercompact digital still/video cameras to video cell phones, that incorporate its new device. Others will unveil similar chips, predicts International Data Corp analyst Kevin Kane. "But Fujifilm is the pioneer of this movement."
Ohnishi has invested hundreds of millions of dollars in CCD research and development. But he expects returns to dwarf those sums. Certainly, it's a dazzling technology. Born in 1969 at Bell Telephone Laboratories, CCDs convert light into digital data that are then rendered into images. Sony was the first to commercialize the chips: In 1985, it built them into camcorders.
But Fujifilm caught up by poaching engineers from Toshiba Corp. and other high-tech companies and enlisting the help of semiconductor ace Junichi Nishizawa, former president of Tohoku University. In 1988, Fujifilm developed its first CCD sensor and in 1991 launched the world's first commercial digital camera, aimed at professionals.
MYSTICAL. None of this expertise came cheap. Tally up research and manufacturing budgets reaching all the way back to the early 1980s, and Fujifilm's commitment to digital products easily tops $2 billion. Within company ranks, belief in this investment borders on the mystical. "We're not going to quit, and we're not going to lose this battle," swears the company's chief scientist and senior adviser, Hirozo Ueda.
Fujifilm's dread of depending upon larger competitors inspires its strategy in key components. In addition to CCDs, the company makes its own lenses, image processors, and signal-processing chips. Norihiko Katoh, director of Fujifilm Microdevices Co., the CCD plant in Sendai, calls this a survival strategy and draws a parallel with camcorders: "In the beginning, many companies made them," he notes. "The handful left are those whose technological edge enabled them to stay ahead with superior products."
Fujifilm's CCDs and image-processing chips aren't a cash cow for the company. But that day could come. Last year, the company earned about $10 million selling such chips to other companies, including Sony. And the chips keep getting more powerful. Soon, Fujifilm will begin producing CCD sensors with a resolution exceeding 3 million pixels per square inch. Among its rivals, only Sony has announced plans to make a half-inch CCD exceeding 3 million pixels per square inch.
Fujifilm strategists estimate that the Japanese will snap six times as many pictures this year as last, thanks to the digital craze. Users are starting to send favorite shots over the Net to digital processing centers, so they can receive high-quality prints, which use Fuji-made photographic paper. Tens of thousands of consumers print their own pictures out on home printers. Owners of the new PrinCam create instant prints directly off the camera in 35 seconds or so.
PANOPLY. Fujifilm hopes to expand this type of service. Today, its photo centers cater to owners of its digital cameras by preparing prints or postcards, creating photo indexes, or loading customers' images onto compact disks. In November, Fujifilm teamed up with Japan's largest Internet service provider, Nifty, to let subscribers store images online or e-mail them to friends. And in the U.S., Fujifilm has partnered with Wal-Mart Stores Inc. to store and transmit pictures. The service kicks off on Jan. 1 and will compete with a service called You've Got Mail that is offered by America Online Inc. in a partnership with Kodak.
In other words, in the digital domain, as in the world of film, Kodak is squarely in Fujifilm's sights. Kodak says that all of its digital products and services will reach $3.5 billion to $4 billion in sales by 2004, up from $400 million last year. It's adding new digital products every few months and luring customers with Picture Maker kiosks in 20,000 locations that turn digital images into quality prints.
In partnership with printer maker Lexmark, Kodak has just unveiled for the U.S. market a printer that functions as a home photo-processing unit. The device eliminates the need for digital photographers to fuss with a personal computer. You just pop out a memory card from a Kodak camera and plug it directly into the printer.
Its digital strides aren't the only thing making Kodak smile. In 1997 the company launched a $2 billion cost-cutting program, and it is now reaping the benefits. Kodak's return on equity of 35% dwarfs Fujifilm's 5%. In conventional film, Kodak claims that it has stopped the loss of market share to Fujifilm.
Kodak may even be getting a lift in Japan. A recent survey done by a competitor shows Kodak is the hip brand among Tokyo's young crowd. And Kodak executives are ready for Fuji in the digital arena. Kodak's president of digital and applied imaging, Willy C. Shih, says Kodak recently began beefing up its push into the Japanese markets with a more diverse line of cameras. And he says Kodak is battling hard to remain a leader in the U.S., where Sony and Olympus are Kodak's top competitors and Fuji is back in the pack.
In America, this focus makes sense. According to International Data, Sony accounted for 35% of all digital camera shipments in the U.S. for the most recent quarter, compared with 20% for Kodak. Sony's top-selling product, the Mavica, stores images on 3.5-inch floppy disks that are more familiar to Americans than image-storage chips used by most Japanese vendors. Even Sony expresses surprise at the success of the Mavica, which trails the flashy megapixel models in terms of image quality: "We thought consumers would shift to smaller, chip-based products by now," says Teruaki Aoki, president and COO of Sony Electronics Inc., the U.S. hardware subsidiary.
Ohnishi is determined to get into the race before Sony and Kodak build up unbeatable leads. Growth in digital-camera use in both North America and Europe is expected to follow the Japanese pattern, say U.S. analysts, shifting from low-end to top-quality devices that can produce image quality that is comparable to regular photos. But even then, conventional film won't totally disappear, analysts say. As a backup, Fujifilm still innovates in traditional film. It is improving a new thin-film coating process for use in high-density tapes that store data for most of the large corporations.
And while traditional 35mm film consists of three color-sensing layers, Fujifilm has developed a fourth-layer film, its new Superia, to control the color red and render more natural hues. Fujifilm also sparked the boom in single-use cameras--effectively shifting clout in consumer photography from camera makers to filmmakers. The latest throwaways, 70% of which are recycled in Japan, now offer panoramic shots and zoom lenses.
NEW VISTAS. As Fujifilm's first digital advocate, Ohnishi gets credit for reacting quickly to early warning signals. First there was the "silver shock" of 1979, when sky-high silver prices forced manufacturers to curtail production of all types of silver-halide film, for X-ray, movie, and photographic use. In 1984, Sony triggered a shock wave with its first Mavica test model. "That's when I realized filmless technology was possible," recalls Ohnishi, who had taken over as president in 1980. A penny-pincher who over the years has amassed a $5.5 billion pile of cash for Fujifilm, Ohnishi nevertheless spared no expense in building up the company's electronic-imaging division.
What it has not demonstrated, however, is the ability to keep pace with digital vistas that are unfolding at Internet speed. Fujifilm's global film triumph was built on thousands of measured steps. "We never tried to grab a big chunk of the American market all at once," says James L. Chung, director of finance at Fujifilm's U.S. subsidiary. Now, the company is launching its biggest-ever U.S. ad campaign to promote awareness of its brand. And it is introducing digital cameras geared to Americans, who demand such features as a zoom lens and a PC interface and who insist on a reasonable price.
Yet Fujifilm may have to pick up the pace further: Restraint is a luxury no dot.com company can afford. In the U.S., the company inhabits a world of startups, stock options, and wacky business models. While middle-aged Japanese parents are still pasting Fujifilm photos into family albums, teenagers are shooting "GIFs" and "TIFs" (compressed image files) across the globe and loading photos with attached sound clips up onto their personal home pages on Yahoo! Inc.'s GeoCities. Fuji needs to be more aggressive in these areas, says Rebecca Runkle, an imaging analyst at Morgan Stanley in New York. "There is no reason why this company cannot be leading the charge into digital photography," she says.
Ohnishi feels that his company's strengths in the home market will tide him over the learning curve--and keep it ticking when he steps down to make way for a new generation of senior managers. Fujifilm has already mastered lightning-speed manufacturing. At its main digital-camera assembly plant in Sendai, young men and women, some sporting locks dyed blond or orange, work side-by-side in efficient teams. On average, each person assembles a digital camera in 1 1/2 minutes. With everyone motivated to cut costs, productivity has risen 50% since 1997.
At the same time, Fujifilm has kept to its core strengths. Says Toshihiko Ginbayashi, Morgan Stanley's director of research in Tokyo: "Many Japanese companies have gone astray by speculating in land and stocks, but not Fujifilm. It never wavered." Today, outside Japan, the name Fujifilm may not be associated with much more than those neat stacks of green film boxes. But in Japan, its digital future has already come into focus. And the rest of the world is only a click away.