Canon's Cutting Edge

By trimming down to four product lines, it's making record profits

Walk through the gates of Canon Inc.'s (CAJ ) headquarters, perched on a riverbank overlooking the industrial hub of Kawasaki, and you might think you're back in Japan's boom days of the late '80s. Instead of an empty reception area, all too common at other technology companies these days, Canon's lobby is swarming with visitors. Elsewhere on the grounds, an army of workers is putting the finishing touches on Canon's new 18-story central command. And don't look for long faces at HQ: Unlike many Japanese workers, Canon employees are resolutely upbeat.

With good reason. While much of Japan Inc. is stuck in yesteryear, Canon is busy reinventing itself as a globally focused 21st-century company. Much of the credit goes to President and Chief Executive Fujio Mitarai, who is at the vanguard of a new breed of CEO bent on combining Japanese quality and attention to detail with the U.S. focus on cash flow and shareholder value. Mitarai also puts a premium on providing job security as a way of keeping staff hard-working and loyal. In Japan, at least, he has managed to avoid layoffs.

That doesn't mean Mitarai, 66, shies away from the hard choices, however. He has hacked spending, closed plants, and refocused Canon on four main product lines: copiers, printers, digital cameras, and chipmaking equipment. With the exception of digital photography, these are hardly hot-growth sectors. But Mitarai knows how to squeeze out profits. Instead of building stand-alone fax machines, copiers, and printers, Canon is making network devices that, among other things, would allow a manager in one office to print multiple copies of a presentation at another. At the same time, Mitarai is pushing into lucrative consulting work, helping corporations plan and maintain their office machine networks. "Canon is the exception in Japan," says Satomi Ushioda, industry analyst at Nikko Salomon Smith Barney. "It's on the growth track even though its core business is mature."

The proof is in the numbers. The company was set to announce record earnings for fiscal 2001 on Jan. 31. Operating profits were expected to rise 20%, to $2.2 billion, on sales of $21.6 billion for fiscal 2001, compared with 2000. Net profit is also expected to grow 20%, to $1.2 billion. And despite what many predict to be an even tougher 2002, analysts expect Canon's profits to increase 8% this year. Compare that with Fujitsu Ltd. (FJTSY ) and Toshiba Corp. (TOSBF ), which forecast net losses of $2.8 billion and $2 billion, respectively, for the year to March 30.

Can Canon keep up the momentum? There are some concerns. For starters, it can't expect much growth in the near- and midterm in Japan, which accounts for one-third of sales. Furthermore, the global recession deepens, orders for Canon copiers and printers could tank. Then there are Canon's multimillion-dollar "steppers," the big, complex machines used to fabricate semiconductors. Steppers are risky, since they're vulnerable to the vagaries of the chip industry.

But Mitarai, a golf fanatic who spent 23 years at Canon USA Inc., says he's ready for any eventuality. In fact, he has been preparing for tough times ever since taking Canon's helm in 1995. Back then, the company appeared to be on a roll after chalking up record sales and profits. But Mitarai saw trouble lurking in the divisions making PCs, liquid-crystal displays, electric typewriters, and optical memory cards. Although these businesses generated combined sales of $225 million in the mid-'90s, they lost $75 million. Moreover, Canon stood little chance of becoming No. 1 or 2 in any of the lines. So one of Mitarai's first acts was to order the closure of the four divisions. "I changed the mindset at Canon," he recalls, "by getting people to realize that profits come first."

That marked the start of Canon's transformation to a more global enterprise. It became one of the first major Japanese companies to report its earnings on a consolidated basis and to emphasize shareholder value. The stock has tripled in value since Mitarai took over. He also introduced cash-flow management through better budget planning and inventory reductions. Instead of borrowing money for capital investment, as many Japanese companies do, Canon used its own cash. "Thanks to Mitarai's reforms, we've been able to reduce debt," says Toshizo Tanaka, Canon's chief financial officer. He estimates the current debt-to-assets ratio at 10.7%, down from 34% in 1995.

Mitarai's reforms extended to Canon's factories, 70% of which are based in Japan. The company improved just-in-time manufacturing, and introduced other production changes to eliminate waste, while tweaking supply chain management to increase efficiency. This enabled Canon to reduce parts inventory by a third and to cut the number of warehouses from 34 to 14 between 1998 and 2000.

Mitarai has stinted on every expense except product development. Canon is a trailblazer in digital copiers: One compact model can process 105 pages a minute. Xerox Corp.'s top-of-the-line models can handle 180 pages a minute but tend to be the length of a car. Canon is also turning heads with its digital cameras, including the popular IXY, the smallest on the market. Such hot sellers helped Canon win a 15% global market share in the last three months of the year.

Mitarai believes a company should own the market in its main product lines. And in copiers and printers, Canon rules. It holds top market share, at 30%, for copiers after overtaking pioneer Xerox. And Canon's share of the laser-printer market is a steady 70%, if one includes the machines it makes for Hewlett-Packard Co.

To maintain growth, Mitarai aims to become a leader in digital cameras, ink-jet printers, and steppers. Given their dependence on optical and image-processing technology, these businesses make sense for Canon. The strategy is hardly risk-free, though. To dominate in digital cameras and ink-jet printers, Canon will have to come out with a string of hit products, not easy in an increasingly crowded field. As for steppers, Canon is probably too far behind Nikon Corp. and ASML Holding of the Netherlands to catch up. And while margins remain good, they are likely to fall along with new orders this year. So why not abandon the business? Because, say Canon execs, the technology gleaned from making steppers allows Canon to build better printers, copiers, and cameras. "This is how we keep our edge," says CFO Tanaka. "Even if we lose money some years, the payoff in technology is much more valuable."

Mitarai is now embarking on Stage Two of Canon's makeover: the shift to overseas production, much of it in China. By the end of 2002, Canon plans to reduce Japan-based manufacturing from 70% to 60% of the total. Last December, Canon opened a laser printer plant in Zhongshan, southern China, and will soon open three copier factories in Suzhou, near Shanghai. The new facilities will gradually take over the production of low and midrange copiers currently made in Japan. At the same time, Canon's president is on the prowl for acquisitions in the U.S. and Europe. "As a rapidly aging society, Japan is no longer the place to start new businesses," says Mitarai.

While Mitarai is a nephew of one of Canon's founders, he has had to work hard to prove himself. And he has a sufficiently impressive track record to impress employees and investors alike. As president of Canon USA from 1979-89, Mitarai boosted revenue sixfold, to $2.6 billion, or 35% of global sales. Since taking over global operations, he has more than doubled Canon's net profits. "Whatever field we enter," says Mitarai, "we'll emerge as the front-runner." That may sound like hubris. But Mitarai is one of the few Japanese execs who can afford to boast these days.

By Irene M. Kunii in Tokyo

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