Panasonic's Restructuring

At the end of last month Panasonic presented more detail on how they would be restructuring the company moving forward, and that has revealed more about what's happening with their camera efforts. In addition, the Japanese business press has been running interviews with executives subsequent to that presentation, which has given us a few more details to ponder.

Short version: Panasonic will drop the simplest compact cameras from their lineup and grow the mirrorless camera sales.

The longer version reveals some problems. As with Olympus, Panasonic is predicting a serious increase in unit shipments of mirrorless cameras this year, despite the fact that mirrorless camera sales have stalled in the marketplace so far. Overall, Panasonic thinks they'll sell nearly the same dollar amount of cameras in the current fiscal year as they did in their previous fiscal year, despite significantly reducing their reliance upon compact cameras. One primary way they think they'll reduce losses is by reducing fixed costs.

As others have pointed out, the SG&A costs at many of these money-losing camera divisions are way out of line with those at Canon and Nikon. At Olympus, the number is nearly double Canon's. At Panasonic, we can't get to the SG&A solely devoted to cameras due to the way they report their financials with the reorganization, but the group that the camera business is now in has very high SG&A costs, too.

Reading between the lines of the Panasonic presentation and interviews I note two things that were repeated over and over: Panasonic believes that much of the uniqueness of their mirrorless product is linked to video with compression being one of their key technologies; and that in the group that cameras are in they are still saying they will eliminate any "business" not returning an operating profit of 5% by 2016. Mirrorless cameras does not seem to be one of the businesses they are talking about here, but I have to wonder if compact cameras are. As with Olympus, losing a big chunk of compact camera sales puts a huge pressure on the remaining camera sales. Canon and Nikon have stronger DSLR sales to fall back on; mirrorless is still only about 20% of the interchangeable camera marketplace, and the Olympus/Panasonic pair don't claim as much of that 20% as Canon and Nikon do of the remaining 80%.

The implication in all this is that Panasonic will have to cut back on headcount in support of camera products. We've already seen Olympus quietly cutting down repair, marketing, and support staff for cameras in the US, for example. Panasonic will likely be doing the same.

Meanwhile, Panasonic also had a few things to say about their sensor business (which is in another group). With the sensor business now moved into a new Automotive and Industrial Systems division, they appear to be targeting mostly medical, automotive, and security applications for image sensors moving forward. While others have reported that Panasonic won't be making m4/3 or other camera sensors in the future, I can't find any statement from the company or one of its executives that confirms that. The best I can find is that they want to reduce the "audio/visual" portion of their semiconductor businesses considerably as a percentage of the overall business. AV sensor usage is also conspicuously missing in virtually all discussions of future products and strategies. They certainly don't see image sensors in still photography cameras as being a growth opportunity.

Panasonic is in a worse position than most of the camera companies. Canon, Fujifilm, Olympus, Ricoh, and Sony all have other highly profitable groups to rely on while they deal with the camera slowdown. Nikon is still profitable in cameras, so they're basically just trying to keep the camera sales decline from eroding their sales and profit too much. Panasonic, however, is a different case. By their own admission, they have four big problems: weak overall financial condition, poor cash generation, high business volatility, and a poor return on investment. The last three of those make it harder to fix the first.

Panasonic's CEO seems dead set on sticking by his "5% profitability" line in the sand. He's already begun closing down businesses that don't meet that goal and have no possibility of doing so any time soon. It seems clear that more businesses will be shut down at Panasonic if they can't get to that 5% number within the next 12-18 months. More so than any other camera company, I worry about Panasonic's ability to come out of the camera sales slump intact. No, that doesn't mean I think they'll drop mirrorless cameras. But I do suspect that they're moving their target within mirrorless. All the talk about videoabilities overwhelms the talk about stillcapabilities in their presentations and interviews. Moreover, the compact camera side of the business seems highly likely to be downsized considerably and maybe even shut down fully.

Bottom line is this: Panasonic is the company to watch carefully, as they're the canary in the coal mine. They're the only one of the Japanese camera companies that currently appears to be trying to fully address years of slothful organizational bloat and are actively closing down businesses that underperform. If they keep their still camera group going, all the Japanese companies will, I think. If Panasonic takes an ax to that group (or even just the compact camera part), others may follow.

Note, however, that Panasonic has a reasonably healthy pro video group, and like Sony, that group has slowly started to use some of the mirrorless bits in their offerings. The Panasonic AG-AF100, which is a m4/3 professional video camera, is getting a little long in the tooth, but with Blackmagic Design now using the m4/3 mount, I suspect that we'll see Panasonic make additional offerings in the pro lineup that align with their mirrorless offerings. As they noted in their presentations, they definitely have the video-capable lenses for that (e.g. silent while focusing, and tuned for continuous video focusing). That's one reason why I don't think the mirrorless group within Panasonic is in any immediate danger: they have a strong basis from which to build on there, unlike what's happening with their compact cameras.

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