Canon says digital camera market may shrink in 2009

TOKYO (Reuters) - The global digital camera market may contract next year, the president of industry leader Canon Inc 7751.T warned, as sluggish economic conditions dampen consumer demand.

Tsuneji Uchida also told Reuters that Canon was aiming to cut $1 billion in costs with a new computer system to be completed by 2010 and that he was in no rush to join an acquisition spree by other cash-rich Japanese firms.

The economic slowdown has started to hit sales of digital single-lens reflex (SLR) cameras -- high-end models that use interchangeable lenses -- but overall Canon’s camera sales are solid ahead of the year-end shopping season, Uchida said.

The outlook, however, has become increasingly murky and the $40 billion digital camera market may shrink next year in unit terms, Uchida said, a development that would heighten the risk that Canon’s earnings downturn stretches into 2009.

“We hope we will see the same level of demand next year as this year,” Uchida said in an interview conducted on Friday and embargoed from publication until Tuesday. “Whether or not that will become reality is up to economic conditions.”

Global digital camera demand grew 24 percent to 130.7 million units in 2007, according to research firm IDC, and Canon and its top rivals, which include Sony Corp 6758.T and Nikon Corp 7731.T, are still forecasting sales growth this year.

Canon last month cut its 2008 compact digital camera sales forecast by 6 percent to 23.5 million units, though that would still mark a year-on-year jump of 10 percent. It stood by its estimate for SLR sales to rise 38 percent to 4.4 million units.

Demand for SLR cameras has grown strongly over the past few years, spurred on by a drop in prices that has expanded the customer base beyond professional and advanced amateurs.

That has meant big profits for Canon and Nikon, which dominate the high-margin segment of the market.

Uchida said SLR demand was starting to show signs of “stagnation” but that it was not enough to knock its overall camera sales forecasts off track.

“According to our internal data, recent sales appear to have been fairly good ... no worse than we had thought,” he said. “In fact, we saw our products gain some market share last week.”

HOLDING ON TO CASH

Canon was founded 71 years ago with the goal of overtaking Leica and other German camera makers to become the global leader.

Uchida joined the company in 1965 and has played a key role in Canon attaining and keeping the industry’s top spot, first as an engineer developing cameras and then as head of the camera division before he became president in 2006.

It diversified during the 1960s into copiers and other office equipment, creating a new growth driver that now accounts for about two-thirds of its revenues. Its rivals in the copier market include Ricoh Co 7752.T and Xerox Corp XRX.N.

Last month Canon slashed its earnings forecast to predict its first profit fall in nine years in 2008, hit by slowing spending by corporations on copiers and printers, weaker-than-expected sales of digital cameras and the recent surge in the yen.

As part of its efforts to become more efficient, Canon is planning to complete a new central computer system by 2010 to control information across the company, including data on its development, production and sales activities.

Uchida said the system will cost about 20 billion yen to implement but will generate cost savings of about 100 billion yen. Canon did not specify the period over which those cost savings would be generated.

“It will speed up our business, eliminate human errors and allow us to get our jobs done with fewer people,” Uchida said.

Canon’s office machine business suffered a setback in late August when Ricoh agreed to buy U.S. office equipment distributor Ikon Office Solutions for $1.6 billion, placing a key sales channel for Canon products into rival hands.

Shares of Canon have tumbled 47 percent since the Ikon deal was announced, underperforming a 38 percent drop in the benchmark Nikkei average, as analysts warned the loss of Ikon could mean a significant fall in Canon’s market share in the United States.

For a graphic on the stock performance of Canon and its rivals, click here

Canon has since purchased a small distributor based in San Francisco and has said it would look to use acquisitions to beef up its sales network in the wake of the Ikon deal.

But Uchida suggested that Canon was just as keen to hold on to its cash pile, which has been whittled down to 737 billion yen from more than 1 trillion yen two years ago due in large part to a series of share buybacks.

Canon has for the most part sat on the sidelines as other Japanese firms went on a shopping spree overseas, spurred on by a fall in stock prices and a stronger yen. Outbound acquisitions have reached a record high of about $70 billion so far this year.

“Some people ask us why Canon does not get more aggressive in M&As with all this cash,” Uchida said. “But a company without cash in this business environment could get itself into big trouble.”