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Canon carefully cultivates critical new ventures

Electronics giant seeks synergy, cost cutting as core fields mature

New ventures, such as in medical technology and OLED components, are a critical part of Canon's business portfolio.

TOKYO -- "Consider me part of this family," Canon Chairman and CEO Fujio Mitarai urged management at the newly acquired Toshiba Medical Systems in January.

Canon takes synergy with its new businesses seriously. It has to. Old core businesses such as camera and office equipment have matured, and the company has leaned into mergers and acquisitions in new fields. Canon's future growth depends largely on how well the company can raise the seeds it has planted, and they have been slow to bear fruit.

Aggressive expansion

Canon elevated medical operations to core status this month and installed Toshiba Medical President Toshio Takiguchi at the helm. Takiguchi also received swift appointment as a senior managing executive officer at Canon -- unusual treatment for the head of an acquired company.

The electronics giant aims to couple its technology in fields such as genetic testing with Toshiba Medical's product-making experience and sales channels. The parent also seeks to expand into new territory in which Toshiba Medical has worked, including in-vitro diagnostics. Mitarai has gone so far as to say control of Canon's medical wing could pass to Toshiba Medical if necessary.

Combined with Toshiba Medical, for which Canon spent 665.5 billion yen ($6 billion at current rates), recent acquisitions have run the company over 1 trillion yen. They include Dutch industrial printer maker Oce in 2010 and Swedish surveillance camera manufacturer Axis Communications in 2015.

New operations now produce nearly 30% of sales. Canon forecasts sales recovering to the 4 trillion-yen range for the fiscal year through December, approaching the company's record set in 2007. But operating profit is projected to stop around 255 billion yen, far short of 2007's peak of 756.6 billion yen. Most importantly, new fields are seen contributing only around 20 billion yen to this profit.

Success stories

Yet some newer ventures have been rewarding. Officials from renowned display makers globally have stopped by the Niigata Prefecture headquarters of Canon Tokki, which joined the group in 2007 and holds the world's top share in vacuum deposition systems for organic light-emitting diode displays. Canon Tokki plans to double production capacity this year to meet ballooning demand.

The group's support system has served Canon Tokki well. Other Canon companies bear part of its production load and let the unit use their available clean rooms. Canon sent production technicians there, pouring the parent's efficiency-boosting know-how into the unit. Canon Tokki posted its first operating profit last year and expects a sharp increase this year.

"Our growth capability has become something wholly new, thanks to abundant management resources," said Teruhisa Tsugami, Canon Tokki chairman and CEO. Many see great latent value in Canon's new businesses. Operating profit from them could reach 100 billion yen in the next few years, said Hisashi Moriyama of JPMorgan Securities Japan.

Cutting costs

Canon is progressing in its specialty of production technology. An Oita Prefecture plant for single-lens reflex cameras features a manufacturing line cramped with automated production apparatus made in-house that allow the cameras to be assembled with few humans in sight. Since Canon introduced the model equipment, a process that took around 40 staffers at the start of this century now requires just three or four people.

The company's proportion of manufacturing costs to sales has averaged 50% for the past three years, beating the 70-80% at other manufacturers such as Toyota Motor and Hitachi. Automation has lowered this ratio beyond the level seen when the company set profit records, and camera manufacturing costs are expected to be reduced by over 20%. Canon aims to cut the cost-to-sales ratio to 45% by 2020 through automating other fields, raising profit to new heights.

Seeking share growth

Canon has no intention of decreasing dividend payouts this year, Mitarai said. Dividend yield stands in the 4% range, surpassing the Tokyo Stock Exchange first section average in the mid-1% range.

"Its status as a high-dividend stock is what supports [Canon's] share prices, not a sense of growth," said Masahiro Shibano of Citigroup Global Markets Japan. Canon's price-earnings ratio stands at roughly 22.

Dissatisfied investors long for the company's former growth-stock glory. Whether Canon's shares can advance in the mid- to long term depends on how well the company cultivates its newer operations.

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