Issue 0916/3 – While a global market analyst firm warns against the dangers of cutting research budgets at a time when a clear understanding of changing market trends is vital, financial results from printer manufacturers demonstrate that they are doing just that! And, it is the largest companies that are cutting budgets and reducing costs hardest – and it shows in the profit returns!
This article relies heavily on the accompanying charts, which should be viewed in close association with the text and requires some comparison between charts. The trigger for the article was the clear correlation between the revenue of the manufacturer and the levels of operating profit being posted – see charts 2 and 3.
But first, we should consider the overbearing trend in the industry that revenues are decreasing across the board.
We have researched financials for as many relevant criteria, for as many of the major manufacturers as possible and present comparative data in US Dollars in accordance with the following notes:
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Note 1: Not every manufacturer provides a breakdown by technology. For Epson, SIDM/POS segment sales are not shown but are included in the total revenue.
Note 2: Inkjet and Laser segment revenue includes supplies in instances where no supplies revenue data is provided
Note 3: Results quoted in Japanese Yen have been converted to US Dollars at the average quoted rate for calendar Q1, 2009: Yen to USD = 93.6
Note 4: In all charts, data is for the business unit that includes printers and MFPs
| Brother | Communications and Printing Equipment |
| Epson | Printers within Information Equipment |
| Hewlett-Packard | Printing and Imaging Group |
| Kyocera | Information Equipment Group |
| Lexmark | Whole company |
| Oki | Printers |
| Xerox | Xerox Office |
Revenue Growth
Indications are that companies are not only conserving their cash by not investing in new or replacement hardware but are also printing less. Xerox says that page volumes are falling even though its installed base is continuing to grow. The reasons for this are difficult to determine but could be down to a combination of companies being forced out of business combined with a recognition by survivors that a paperless (or reduced paper) administrative system offers significant benefits. There may also be instances where a budget freeze has resulted in a directive being made simply to ‘stop printing’!
Some comparisons can be made here with the automotive industry, where a similar balance of hardware and supplies exists.
Universally, hardware (capital) sales have been hit very hard, none more-so than in the automotive industry – where workers have been laid off for months because there is no demand for the vehicles and the world’s largest manufacturers are filing for bankruptcy despite having already been bailed out with government money.
Vehicles already out in the installed base, however, may or may not actually be driven! At the point when fuel prices were at their highest, in the summer of 2008 (end of July), a survey of its members by the UK’s Automobile Association indicates that:
- “77% of members had made a conscious decision to drive less by car or had cut back on other areas of spending, or had done both (up from 64% in April)”
- “55% of the entire sample had cut back on car journeys (up from 37% in April)”
Source: UK Automobile Association
So it is with printer consumables – it is just that actual or perceived lack of funds has different causes. It is surprising that supplies revenues are falling when the assumption would be that there is limited scope for reducing print because letters and memos still need to be written, data published and records kept. What it may mean is that users are turning to third party supplies in their attempts to save money.
In fact, from the manufacturers’ point of view, this causes a somewhat bizarre situation. At Hewlett-Packard, for instance, even though supplies revenue fell by 14% for the quarter compared to the same quarter last year, falling unit sales (27% overall) meant that the proportion of IPG’s total revenue that was contributed by supplies has risen higher than ever, to almost 70% – this figure used to be in the mid 50’s!
Fuel guage lower than expectedInterestingly, the higher fuel prices resulted in more drivers actually running out of fuel during their journey (especially when rationing is imposed), either because they were taken by surprise that the £40-worth of fuel they were used to putting in their tank had given them one-third fewer miles or because they were so intent on shopping around for a bargain that they never actually made it! The AA noted that there had been an 11% increase in callouts to assist members who had run out of fuel. Similarly, it was noted that drivers were conserving fuel by driving closer to the speed limits (i.e. cutting back on speed).
Perhaps printer users are switching to another printer (equivalent to switching to another mode of transport) when the supplies run out on their primary device in order to avoid having to buy replacements at that time?
On a more disturbing note, the survey found that 10% of members had cut back on car maintenance – clearly compromising safety. Printer maintenance tends to be performed as a result of a drop-dead trigger from the printer – new drum, maintenance kit, etc. – but this means that the easiest and quickest response is to find another way to print rather than buy the maintenance item.
A survey of commuters in California found that one-third of drivers had changed their car for a more fuel-efficient model. This is certainly a realistic option in the printer environment, although there is little or no evidence that organisations or individuals are actively making this choice and changing their printers for less costly models – remember, in the right circumstances there is a 50%-60% saving to be made!!
So, which of the manufacturers have performed best and worst? In the chart below, we see that Hewlett-Packard’s Imaging and Printing Division is by far the largest printer manufacturer, followed by Xerox with a revenue only about one-third that of Hewlett-Packard. The Pacific Rim manufacturers are generally the smaller ones in the industry. Note that printer/MFP group data is not available from Samsung, so, although the company claims to be the number two manufacturer in terms of units sold, how the financials stack up is unknown.
In the middle ground, Lexmark’s fortunes have been so negatively impacted over the past several years that it can be found in the number four position behind Epson. With this slight proviso, it means that the US manufacturers are at the forefront of the industry in terms of revenue.
Revenue
Each of these US manufacturers can be seen to have lost operating profit in the quarter to a significantly lesser degree than most of the Pacific Rim manufacturers. The one glaring exception to this is Oki, which has managed to hang on to its profit and is the only one of the Pacific Rim manufactures to have returned an actual profit in the spring quarter (seen here as ‘operating profit as percentage of revenue’), whereas each of the US manufacturers (including Lexmark!) returned a clear profit.
Operating Profit/Income
This is entirely the result of massive cost-cutting and short term financial remedies. US companies are under much higher short-term pressure from their investors, and Wall Street, than are Pacific Rim companies, where a much longer-term view of performance and profitability is cultural.
It is this Wall Street culture that forces US companies to take an exceptionally short-term view: shedding workers; closing facilities and cutting costs to a degree that can cripple the company for the future. For instance, by this time next year Lexmark will have closed five of its original seven inkjet cartridge factories, leaving only two facilities in the Philippines. This completely strips Europe and the Americas of their cartridge production factories and massively increases the transportation required to ship cartridges to markets around the world.
All companies are attempting to cut costs by a variety of means. The one overriding area of commonality, however, is the determination to reduce inventory. Like automotive manufacturers that are shutting down production, printer manufacturers have been successful in reducing the volume of stock sitting unsold in warehouses.
Hewlett-Packard is certainly taking a short-term view, making radical cuts in its research and development labs and in its marketing activities.
Xerox, likewise, is hitting hard with restructuring and what it describes as “incremental cost action” (terminology that sounds as meaningless as ‘quantitative easing’!). What Xerox means is that it is making drastic cuts. For instance: the restructuring of 2008 is expected to yield $250m in savings in 2009 by the realignment of business support activities, consolidation of sites and integration of R&D and engineering functions; while the incremental cost action targets a $100m saving in each of three areas – transportation and product; freezing recruitment and salaries; and clamping down on travel, facilities and other non labour-related costs.
Some manufacturers, however, are facing the future with a positive outlook. Brother, for instance, has increased its R&D budget even though it has suffered a severe fall in operating profit, returned a loss for the quarter and is reckoning to cut costs and expenses in all areas.
In fact, it appears that the others with a positive outlook are all Pacific Rim manufacturers! Epson, Kyocera and Oki are all making increased efforts to get new models to market and Kyocera is set to leverage its purchase of Triumph Adler in Europe with the expectation of increased market coverage from the dealer network. In addition, Oki is planning to leverage shared use of print engines between printers and MFPs and will develop more low-cost products, while Kyocera is set to reduce manufacturing costs as a way of making its products even more attractive to buyers.
Unfortunately, Pacific Rim manufacturers do not report movements in unit shipments. For the full year, although its financial results have shown such a brutal drop in revenue, Brother says that local revenues from hardware sales increased, implying that unit sales have not been as heavily hit as the US manufacturers are reporting.
We see from the chart below that the US manufacturers have all suffered badly, all losing more than a quarter of their hardware sales compared to the same quarter of last year.
Note 1: Not all companies quote changes in unit shipment
Note 2: Xerox hardware unit growth estimated from segment figures quoted
Note 3: Lexmark total hardware unit growth estimated from segment figures quoted
Hardware Unit Growth
In conclusion, while we cannot compare movements in unit sales between the US and Pacific Rim manufacturers, it is clear that savage cost-cutting by the US manufacturers is paying dividends, literally, by ensuring that the companies continue to return a profit for Wall Street, albeit significantly reduced.
By contrast, while Pacific Rim manufacturers have taken the hit in their profits, it may just be that some of them will be better placed for rapid recovery than their US counterparts.
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