Nikon's Financial Issues Persist

Long ago I pointed out that there was a fan "over there" and that mildly iterating the same old thing and not paying attention to your key customers was the equivalent of fecal matter. You probably shouldn't throw the one at the other. For Nikon, as I expected, those two things have now clearly met.

Things with Nikon aren't quite what others are writing. Nikon's actual unit volume forecasts have only dropped 5% or so overall from previous forecasts, so it isn't sales collapse specifically that's the problem. 

The problem shows up in the forecast of a 10b Yen loss for the year in Imaging. That number clearly shows that Nikon is going to restructure again (it has previously closed a Chinese plant). Nikon also says it will take another write down in their next fiscal year. Put pointedly, Nikon overbuilt infrastructure to support sales that would never be there given their execution. Not that they were alone in that. Olympus clearly did that, too. Canon, Panasonic, and Sony have probably done it, but it hasn't shown up yet as a clear number in their Imaging group financials because of their broad product lines and some internal ability to repurpose plants and materials.

The key number in Nikon's 2020 1H financials isn't actually a number that Nikon controls. It's the drop in "market scale" from 8.5m units to 7.8m units. That's a big adjustment on the CIPA forecasts, and it shows that the overall industry is smaller than anyone expected at the start of the year. Nikon claims they'll hold a 19% share of the ILC market through the entire fiscal year, which is actually a bit better than I was predicting. The problem is that the market is getting smaller much faster than the camera makers thought it would, which is something I also have been writing about.

To put that in perspective, the overall market size for ILC is now predicted to shrink 22% in one year (and that's with the camera companies pushing some excess inventory into the sales channel). Five years of that and the market hits my 4m unit "bottom" within a year of my prediction. That would be about 760k units a year for Nikon at the current market share. Compare that to the production capacity of somewhere over 6m units, and you see why Nikon is going to have to take a write-down of existing facilities soon. According to the current forecast, that'll happen probably in the first calendar quarter of 2020. And that will produce a loss for Imaging.

bythom nikon financials

Meanwhile, Nikon is holding the dividend unchanged and still buying back stock (about 5.5% of the company this year). As I've said before, Nikon is being run for the benefit of the primary shareholders, who are almost all Japanese banks and financial institutions. Nikon stock is a better bet than loaning money at a negative interest rate in Tokyo at the moment, though barely so.

Nikon was somewhat candid in the challenges they face:

  • Market deterioration is worse than expected
  • Mirrorless camera sales were overestimated
  • Both planning and execution have been too slow

Nikon produced charts indicating how the market rolls out to them. Basically, they claim strength in what I call the pro/enthusiast part of the market, which is holding steady (and by the way, is running at about 3m units a year). Nikon claims the decline is solely in the consumer/amateur side of the market.

Okay, Nikon, you didn't listen to me for years, so listen up closely now

Nikon in their presentation said they will "focus on the professional and hobbyists segment [and] strengthen marketing focused on loyal customers." That includes "enhancing customer satisfaction [and] lens lineup expansions."

Yeah, what have I been writing you should do for two decades now? You didn't do that, Nikon. Customer support and service got worse, far worse. You didn't come out with a D500 until it was too late, and then you didn't support it with lenses (buzz, buzz). You took features out of a key product (D7500) from its predecessor. Actually, you did that with the Z7, too. You failed to predict which products would actually resonate with your professional/hobbyist users and produce them in appropriate volume (e.g. D850, 500mm f/5.6E PF, etc.). 

Thing is, my books sell exactly to the market Nikon now claims they want to concentrate on. I have the names of well over a hundred thousand of those customers (no: I don't share or market them to others). When I survey my user base, I see all the things that Nikon isn't doing right (according to their best customers, not my guesses). It was actually easy being right about things that had to change, because I probably saw that better than Nikon's product management team.

Now we have the Nikon "plan":

  • Enhance customer satisfaction
  • Expand lens lineups
  • Reconstruct the Imaging Business Unit
  • Be more selective in product development
  • Drastically revise sales strategy

Yeah, I've written about every one of those things in the past 20 years, many more than once. One problem with Nikon's plan? That third bullet also includes "enhance Board of Directors' governance" of the Imaging group. Uh, right. The Board includes only one person with three years' experience in the Imaging group a decade ago. The rest are people from the semiconductor equipment side of the company, plus bankers and others with financial institution background. 

The problem in the Imaging Business Unit is simple: it's a consumer business that's disconnected from its customers now. It's a Japanese culture paternalistic business, at that. I see no one on the board with the experience to fix that. Which makes me doubt that the directors will actually see the problem correctly, let alone apply the appropriate fixes. 

I'll have more to say on this later this year. Putting together a plan for a business under this much stress takes some time to generate and get all the details lined up. But it's time for me to do just that, and do it publicly. Maybe one of the non-consumer product board members can read or understand English...

Lest people panic. I didn't write that Nikon was going to get out of the camera business. It hasn't come close to that yet, and Nikon is actually doing one thing very right: they're trying to get ahead of their upcoming financial problem, essentially by downsizing and repurposing plants while they have the chance to do so. Cameras were 41% of their entire business in the first half of the year (down from 45%) and profitable. They've clearly identified that they can't continue to execute the same and stay profitable, which is what all the restructuring and upcoming write-down loss is all about. 

Moreover, those of you with other brand loyalties should not get any joy over what Nikon disclosed today. One reason why the Black Friday sales and huge discounts started so early this year is the belief by every camera maker that this could be a terrible holiday season in terms of unit volume, and thus overall revenue. Despite lower production during the first half of the year, inventories still built up. Every camera maker has the same problem, with maybe one or two models not showing real decline. 

Every camera maker needs a plan of how it could live in a market where there's only 4m or so cameras sold each year. Nikon has indicated that they're aware of the issue and working on that. You'll see the same thing from other camera makers as their results don't add up, either. 

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