The Effects of Japan's Crisis Will Be with Us for Awhile
On March 28, Forbes.com ran an article indicating that printer manufacturers are experiencing parts and toner shortages as a result of the disaster in Japan. The post was based largely on a research report written by Barclays Capital analyst Ben Reitzes, who contends that Canon and Fuji Xerox are facing shortages and these kinks in the supplies chain will impact two of their largest technology customers, Hewlett-Packard and Xerox, respectively. I agree with Mr. Reitzes. However, I'd like to expand beyond the four companies he focused on, because the earthquake and tsunami in Japan will adversely impact almost all of the hardware manufacturers and the many supplies vendors that have ties to Japan.
Most Japanese OEMs have issued several damage reports at this point, and it appears that Canon and Ricoh have been hit the hardest by the disaster. Canon reported that it closed its inkjet operations at Fukushima Canon and I've seen no indication it has reopened. Canon Chemicals, which makes toner cartridges and advanced functional polymer components, was temporarily closed along with Canon's Toride plant, which makes office imaging products and chemical products. As of this writing, I had not heard these facilities had reopened. I also understand that Canon Precision, which produces toner cartridges and sensors, and Canon Mold are offline.
Although it said that sales from Japan represent only 3 to 4 percent of its total revenue, Hewlett-Packard filed an 8-K report with the Security and Exchange Commission (SEC) on March 22 related to the quake. The OEM told the commission its employees were safe and its offices in Tokyo sustained no "major structural damage," but its Sendai office had been damaged and was closed. It didn't name Canon, but HP said components like LaserJet printer engines and toner come from an unnamed Japanese provider. It added, "This [earthquake aftermath] is an evolving situation; we are in contact with our partners, suppliers and customers and are continuing to assess the impact to HP's business." This quote seems to make clear that Mr. Reitzes (and I) are correct in asserting there's a real risk of shortages.
The impact on Ricoh has been dramatic. The firm reported it closed five of its subsidiaries including Ricoh Optical Industries, Hasama Ricoh, Tohoku Ricoh, Ricoh Printing Systems, and Ricoh Unitechno. It appears that the Tohoku Ricoh was hardest hit, which could mean serious problems for the firm. Located approximately 15 miles south of Sendai, the operation manufactures printers, MFPs, and toner. It remained closed two weeks after the earthquake. A recent damage report from the firm said that while its Atsugi, Gotemba, and Numazu plants were operating after the quake, rolling blackouts still limited production.
As Mr. Reitzes indicated, Fuji Xerox has suffered some production problems. About a week after the earthquake, the company indicated that while it hadn't sustained much physical damage, production had slowed. Work at factories in Niigata and Suzuka had been temporally curtailed because of part shortages. On March 29, Xerox President Global Customer Operations Armando Zagalo de Lima issued a prepared statement saying, "Since all of Fuji Xerox's key sites and manufacturing operations are in the Tokyo area or regions south and west from where the earthquake hit the hardest, our facilities were not damaged."
Konica Minolta's warehouse and domestic sales subsidiary in Sendai was damaged, but its production site in the Kanto region, which includes Tokyo, were operating after the quake. After a brief initial damage report indicating things were okay, Konica Minolta reported it had concerns regarding "raw material procurement and electric power supply." On March 28, the firm reported that it was exploring the possibility of moving some hardware production to China while realigning supplies manufacturing within Japan. Specifically, the firm was looking to move some toner production from its Kofu factory to its Tatsuno facility because of blackouts at the Kofu plant.
Oki Data announced on March 17 that its operations were suspended at its production facility in Fukushima, which manufactures certain printers and consumables for the Japanese market. Operations were suspended after the earthquake but partially resumed on March 16; no further information from Oki has been forthcoming.
So far, I have not heard anything from Brother or the copier groups at Sharp and Toshiba. Kyocera Mita had issued a group statement but nothing specific to its printer and copier division.
In addition to all the hardware, a significant amount of the world's toner and toner components come from Japan. There's a strong risk that toner supplies will feel the affects of the quake. Kao Corporation, Mitsubishi Chemical, Mitsui and Co., Nippon Carbide, and Sanyo Chemical are some of the giant Japanese firms that make toner resins or other components such as waxes, charge-control agents, and more. Some also make the finished toners as well. Various well-known foreign chemical companies including Cabot, Dow, and DuPont also make fine chemicals for use in digital imaging devices in Japan. And, of course, there are numerous large Japanese companies that market finished toners including IMEX, Mitsubishi Kagaku Imaging, and Tomoegowa.
Mr. Reitzes noted the dependency of the industry on these chemical producers in his report. "While office equipment companies keep inventories of resin at toner plants and also have inventories of end-product toner cartridges," he said, "we believe makers of copiers and printers may
consider curtailing production to avoid an interruption in toner cartridge supply." He also said that there are additional components that he left unnamed that could cause problems for certain hardware manufacturers.
While I agree largely with Mr. Reitzes's predictions, I am skeptical of his sanguine conclusion that this is a "short-term" blip that "will be sorted out over the next quarter or two." This crisis will be much more long-lived for the industry. Of course, Mr. Reitzes is only analyzing the impact of the quake on the four companies I noted earlier—Canon and HP, Fuji Xerox and Xerox—and perhaps they'll be clear of the mess by the fall. But I doubt it. Canon has taken a very serious hit and it will be reeling from the earthquake well into next year. You can bet there will be LaserJet shortages like we saw in 2009. Moreover, Canon's inkjet business has been dealt a body blow. Its inkjet facility in Fukushima manufacturers heads, tanks, and machines. Who knows when that plant will be back on line? Fuji Xerox is in much better shape, but nothing is clear about the fate of Japanese firms with important manufacturing in the affected region. It will take more that a quarter or two the get things back to normal.
I hope I'm wrong, but I think this will be a tough year for the industry. Printer and copier dealers are destined to struggle to meet a demand that's starting to grow as the economy improves. There will be shortages and delays of hardware deliveries and supplies will be scarcer as we move into Q2. Finding non-OEM supplies will also be a problem because remanufacturers get many of their toners and components from Japan. The good news is customers will be aware of the situation so perhaps they won't grumble.
Posted by Charlie Brewer on 03/31/2011