(commentary)
Ricoh owners have been wondering recently whether a new GR is coming down the pike. (Coolpix A owners might be thinking similarly, will there be a Coolpix B?) That got me to thinking about the state of the camera industry again. Simply put: is there enough volume in speciality cameras to make a strong profit any more?
Camera makers piled on in the digital age because within only a few years the digital camera market became bigger than the film camera market had ever gotten (film market peaked about at a bit under 40m units and digital hit that by 2003, eventually peaking at nearly 120m). The nice thing about lots of volume like that is that parts costs go down. There’s a big difference in price when you buy 20m+ LCDs as Nikon has been doing versus buying only a few hundred thousand.
While Canon, Nikon, and Sony still have large volumes of parts purchases measured in the tens of millions, the other makers, not so much. Olympus is stalled in about the 500k m4/3 production range a year, for instance, and Ricoh’s Pentax DSLRs are in the low hundreds of thousands of units, too.
Let’s take some arbitrary prices and see what happens when they change 20%. For example, let’s pretend that we have a volume camera that has these parts:
- Sensor: US$35
- LCD: US$10
- Other Digital: US$25
- Body, Knobs, Frame: US$25
- Assembly: US$15
- Packaging, manuals, CDs, miscellany: US$10
(I told you it would be arbitrary ;~)
Our total cost of goods is US$120. We’ll sell that to our subsidiary at a 50% GPM, or US$180. The subsidiary will sell it to dealers at a 50% GPM, or US$270. The discount the dealer gets is 20%, so the retail price to a customer is about US$340.
What happens if our parts costs are 20% higher due to a much lower volume? Our costs are now US$144, we sell it to subsidiaries for US$216, we sell it to dealers for US$324, therefore we sell it to customers for US$405.
The lower the volume of our products, the more we pay for parts, thus the more we have to sell the product for.
As a manufacturer, we have three choices of how to deal with the declining volume problem:
- Just say “that’s the way it is, prices are going up” to our customers.
- Do everything we can to cut our costs (using fewer parts, using cheaper parts, finding ways to cut manufacturing time/costs, etc.).
- Build the camera in volume and sell it for a longer period of time.
Nikon has been a bit trickier than that. They reuse the same parts across multiple cameras. FX cameras are of course more expensive than DX, but if they can get DX users to move to FX they can get around more of their cost problems, too. A 3.2” LCD works fine on both DX and FX models, for instance. Note also that Nikon has said #2 pretty much at every financial reveal for the last couple of years, and it seems that some of their cameras are indeed getting longer sell cycles now (#3). On top of all that, if you build a camera cost in yen and sell it in dollars, at least in the current environment that’s saved you some money too as the yen slid downward. At least as long as you can hold prices stable and the yen continues to slide.
But for cameras that were already low volume (Ricoh GR, Pentax 645D, Coolpix A, Nikon V3, and so on), I wonder if we’re now at the edge of what can really be managed profitably. Can you really make a camera that only sells in the low hundreds of thousands of units lifetime with a strong gross product margin? Maybe, if it shares parts with lots of other cameras you make or you’ve already committed to buying/stocking those parts.
This is one of the tyrannies of market share. Canon and Nikon (and to a slightly lesser degree Sony) have a far larger volume of products to share parts across than do Fujifilm, Olympus, Panasonic, Pentax, and Sigma. (It’s possible that a few parts can be shared across non-camera products at those companies.)
Note that I haven’t said anything about R&D costs yet. If it costs you US$1m to develop a new product and you have to spread that over 1m units, that’s a dollar a unit, but if you have to spread it over only a hundred thousand cameras, it’s now ten dollars a unit.
All the economies of scale are going the wrong direction right now for the camera makers. Rapidly. While we DSLR users have always mostly looked down on all those cheap compact cameras, we have to realize that they were providing economies of scale that benefited us for quite some time. And now those compact cameras are disappearing at the rate of 30-50% in unit volume each year. Ouch.
The good news is that the Japanese tend to take a much longer view of the market than do us Westerners. Shareholders in American companies would be pounding down the doors asking for more ROI. In Japan, not so much; zero or even negative ROI is tolerated for longish periods of time. But rarely tolerated forever.
I believe at Fujifilm and Ricoh the camera gear is mostly looked at as a hobby business. A business they want to be in, but it’s not driven by corporate growth and profitability needs. Moreover, it’s a small part of the overall business, and thus somewhat problematic ROI really doesn’t impact the bottom line of the overall business enough to worry about. Olympus and Panasonic would also fall into this category if they hadn’t had overall corporate scares recently that make even hobby businesses look like cashflow risks.
Nikon has no choice in the matter: since they’re 70% a camera company, any failure to sustain sales means they become a smaller company. A less profitable company. A less desirable company to shareholders. Canon and Sony have large enough camera/imaging groups that they also need them to perform, though they’re not in the same vulnerable category as Nikon is at the moment.
Right now, things in the camera business are tight. Real tight. Costs need to go down but they might go up if the companies can’t sustain volume production. R&D cost recovery is getting tougher on smaller volumes. Customer demand is low, so price pressures are downwards. About the only bright spot has been the decline in value of the yen versus the dollar and Euro, which reduced that pricing pressure a bit.
So you’re asking, what’s the solution? Or maybe you’re asking is there a solution?
Sure, and I outlined it over 7 years ago on this site. Digital camera sales peaked and then plummeted for a bunch of intersecting reasons, but the steepness of the decline is mostly due to one thing: not solving any new user problems. Improving autofocus speed 10% isn’t solving a new user problem. Gaining a stop of dynamic range is not solving a new user problem. Adding fifteen new menu commands and a half dozen new image processing options is not solving a new user demand.
The biggest new user demands not being met? Convenience. Connection. Workflow Control. Configuration.
Build it and they will buy. But “it” has to be something different than the current definition of “camera."
