The giant statue of Buddha that overlooks Canon Inc.'s (CAJ ) Ami plant in Ibaraki, north of Tokyo, is hard to miss. Standing 120 meters tall -- higher than the Statue of Liberty -- the Buddha watches over a landscape of verdant fields and the occasional factory. For workers assembling photocopiers in the Canon facility, though, Buddha's stare pales in comparison to Hiroshi Ishii's steely gaze. Plant manager Ishii likes nothing more than to scour the factory for even the tiniest hint of inefficiency. "No matter how small, we have to identify waste and find ways to eliminate it," he says, casting a knowing eye over a young worker wrapping freshly assembled copying machines in plastic.
Ishii may sound obsessive, but it's that sort of passion for improvement that has transformed Canon from a lumbering symbol of debt-ridden post-bubble Japan into one of the country's leading enterprises. Ishii and his colleagues at Ami, for instance, have developed simple but effective systems to make their operation more efficient, such as ropes and pulleys that deliver components in a jiffy, and foot-controlled motors that rotate workstations so workers don't have to step around the copiers they're assembling. And since extending one's arm takes time, Canon is shaving seconds by striving to put all components and tools within 20 centimeters of a worker's hand.
Driving Canon's quest for efficiency has been CEO Fujio Mitarai, who stepped into the top job a decade ago after his predecessor died suddenly of pneumonia. When he took over, Mitarai was dismayed by the debts of $7.5 billion he inherited. Worse, perhaps, was Canon's mishmash of businesses, ranging from liquid crystal displays to typewriters. So, going against years of Canon tradition, he became one of Japan's leading cost-cutters. Mitarai focused only on the profitable products -- mainly copiers, printers, and cameras -- and dumped seven departments, including the personal computer, typewriter, and LCD screen divisions. In the past five years, savings have averaged $800 million annually, even as sales have jumped by 30%.
Mitarai's fixation on cost cutting and financial prudence -- picked up during 23 years at Canon's U.S. operations -- has paid off in profits. On July 27, Canon announced that its operating margin for the first half was 15.4% -- about double that of most printer-and-copier rivals and triple that of leading consumer electronics makers. For the year, Canon expects earnings to grow by 6.9%, to $3.28 billion, on sales of $32.9 billion, up 6.1% from 2004. Today, Canon's market capitalization stands at $45 billion, No.10 in Japan and more than triple what it was when Mitarai took over. "Thanks to the cost reductions we have achieved and the competitiveness of our products, we're making steady progress," Mitarai said in an interview on the top floor of Canon's headquarters in Shimomaruko, the bland Tokyo district where the company has been based since 1951 -- 14 years after its founding as a camera maker.
That's not to say Canon has no worries. Canon's digital camera business, while more resilient than many rival operations, is unlikely to repeat the profit growth of the last five years as camera prices tumble. In a sign of things to come, last year the value of overall digital camera sales in Japan fell for the first time, even as production edged up 1.3%, to 8.5 million units. JPMorgan Chase & Co. (JPM ) projects that margins at Canon's camera division will fall to 12.2% by 2009 from 17% today. Meanwhile, despite better-than-expected sales, Canon's second-quarter operating profit fell short of expectations because of the declining prices. In response, Canon's stock has tumbled by 8% since July 20. "Canon has been one of the few electronics companies able to maintain double-digit margins, but this shows that even Canon isn't immune to price pressure," says John Yang, an equity analyst at Standard & Poor's in Tokyo. Yang cut his Canon rating from "buy" to "hold" after the most recent results.
Another concern is the emergence of new competitors in Canon's mainstay business-machine segment, the printers and copiers that make up 65% of sales. One fear is that Chinese manufacturers that have grabbed sales in their home market for replacement toner cartridges -- which represent the bulk of profits for Canon and virtually all of its printer rivals -- may step up exports and seize share worldwide, says Tomoko Mitani, an analyst at Gartner Dataquest in Tokyo. Challenges could come from the West, too. Hewlett-Packard Co. is both a partner and rival to Canon, buying the guts of its laser printers from the Japanese company, but pushing hard to boost sales of its own ink-jet models. And Dell Inc. last year sold $1 billion worth of printers and, Gartner estimates, has nabbed 13.3% (in units) of the U.S. market for color laser printers since jumping into the fray just over two years ago. Although Dell has so far focused on low-end models, "we could see Dell emerging as a fairly big threat to Canon in the next few years," says Yoshikazu Higurashi, an analyst at Deutsche Securities in Tokyo.
A greater potential issue for investors is the retirement of Canon's dynamic 69-year-old boss. Currently, no hand-off plan has been publicly discussed, and the company declines to comment on potential successors. "I'm very concerned about what happens after Mr. Mitarai," says Hisashi Moriyama, an analyst at JPMorgan Chase in Tokyo. Despite his age, though, Mitarai doesn't sound like someone with one eye on the exit door. "I won't say in how many years I will quit or how many years I'll be president. I don't think about it that way," he says. "I set myself a goal and make sure I achieve it."
The goal now is profits, and Mitarai says Canon's current run in that department is far from over. The company is the world's No.1 digital camera maker, with 23.6% of the global market, just ahead of Sony Corp.'s (SNE ) 23.2%. Despite the slowdown in digital camera sales growth, Canon's digital SLR cameras and smaller models -- known variously as IXY, ELPH, and IXUS in different markets -- are still delivering healthy earnings at a time when some big rivals are losing money. And Canon is likely to ride the transition from monochrome printers and copiers to more profitable color models for the rest of this decade. "Color will be the big earnings drivers for Canon," says Satomi Ushioda, an analyst at brokerage Nikko Citigroup Ltd. in Tokyo. Ushioda reckons that by 2009 color printers will make up more than 40% of Canon's sales, compared with 25% in Japan today and 20% in the U.S. and Europe. That should also drive cartridge replacement sales, since color printers typically use 30% more toner ink than black-and-white models do.
Some analysts fret that the company may not be able to come up with the kind of new products necessary to keep growing and achieving double-digit margins, but Mitarai is devoting piles of yen to research. Over the years, that has paid off in lots of ideas: Canon has filed more than 17,000 patents in the U.S. since 1995 -- second only to IBM (IBM ). Most of Canon's products rely on patented core technologies developed in-house, such as photosensitive drums in laser printers or imaging engines used in digital cameras. This year, Canon will spend 8% of sales on research and development, compared with 6% to 7.5% at many large rivals. "We have to plant the seeds for the next decade and beyond," says Mitarai.
Some of those seeds, Canon hopes, will grow into three video display technologies: SED TV panels, which are a new kind of flat-screen television that Canon plans to build with Toshiba; rear-projection TVs; and OLEDs (short for organic light-emitting displays). Canon has announced plans to begin selling the SED TVs next year, arguing that they offer better picture quality than plasma or LCD screens. Skeptics, however, say it may not be enough to bring down costs fast enough to seriously challenge the other flat-screen technologies. OLEDs, meanwhile, use less power and are brighter than LCDs. Starting in 2007, Canon hopes to begin swapping them for some of the 20 million small LCD screens it currently buys annually for use in its printers, cameras, and camcorders. "Displays could create a new pillar for our business," says Mitarai.
Canon is also looking to boost productivity. Already, the company has seen great gains from "cell assembly," where small teams build products from start to finish rather than each worker repeatedly performing a single task on a long assembly line. Canon now has no assembly lines; it ditched the last of its 20 kilometers of conveyor belts in 2002, when a line making ink-jet printers in Thailand was shut down. Today, cell workers get to know their jobs so well that they often find ways of boosting efficiency: Many of the improvements at the Ami plant and elsewhere were suggested by them. The best are an elite group of about 30 employees called Super-Grade Experts, who have memorized 1,000-page assembly manuals and can build entire products alone. Their reward: a modest bonus and a dinner with Mitarai. "Working on the assembly line, we only knew about part of the process, but now we have to know all of the various aspects of production," says Kiyomi Onda, who became one of the first Super-Grade Experts in 2000 and now oversees production of a color copier model at the Ami plant. "It's more interesting, and it has improved our work ethic."
Canon isn't finished with its cost cutting, either. Last year, the company announced plans to trim an additional 10%, or $1.1 billion, from procurement costs by 2006. To do that it will increase in-house production -- for instance, by replacing LCDs from outside suppliers with Canon-made OLEDs. And executives expect more savings from increased automation. "We have to start thinking of a new production method that will be more efficient than cell production," says Mitarai, who aims to triple the number of robots used at Canon by 2008. At one hyperautomated toner cartridge plant on the southern island of Kyushu, Canon has reduced the number of assembly workers by 85%, with most production now done by machines. By the end of 2007, Canon hopes to retool five more plants to see similar gains in efficiency. Attention to detail. Relentless cost cutting. Lavish spending on research. It's a formula that has served Canon well.
By Ian Rowley, with Hiroko Tashiro, in Tokyo, and Louise Lee in San Mateo