Ricoh and Toshiba Tec to Merge MFP Development & Manufacturing

Years of declining unit placements and page counts in the printer and copier industry has predictably spawned speculation and interest in which company would be the next to merge – and now we know. On May 11, Ricoh and Toshiba Tec announced that the companies had agreed to form a new joint venture in which each company’s printer/copier manufacturing and related research and development operations will be moved to the joint venture, with Ricoh owning an 85% share of the new venture, and Toshiba Tec 15%. Notably, the sales/marketing operations of Toshiba’s printer/copier operations (such as Toshiba America Business Solutions, or TABS) are not included in the transaction. Both brands are expected to continue to market and service their products, with each incorporating its notable features and other differentiating assets in new models but using the same jointly developed hardware platforms.

In this manner, the Ricoh move looks similar to the company’s decades-long history of acquiring competitive makers (Savin, Gestetner, Lanier, Rex-Rotary, Monroe, Nashuatec, IKON, Danka in Europe (now Infotec), and recently, IBM Printing System Division/InforPrint Solutions Company) and their respective market shares, technologies, and channels, to grow its overall market share and leverage its investments in R&D, tooling, and manufacturing for those products and markets. In addition to the MFP operations, Toshiba Tec’s thermal bar code and thermal POS product line will also be brought in – a business that may have an upside for the new JV, as TABS president & CEO Larry White commented the thermal bar code/POS line is growing at “high double-digit rates” during a briefing for analysts hosted by TABS to discuss the announcement.

The joint venture will make Ricoh combined with Toshiba the number one printer/copier maker worldwide with a market share of 22.5%, said White, citing overall unit placement numbers from IDC. Ricoh, with 15.2%, was previously second only to Canon,  at 18%.

Indicating that the normal product cycle takes about three years, White pointed to the 2026 timeframe for when he expects a new generation of hardware developed by the JV. The Ricoh announcement stated that the JV will begin operations somewhere between April 1 and June 30, 2024, as the operating units split from their parents.

Why?

Why Toshiba as a partner for research/development and manufacturing? A number of factors likely drove the decision:

Research/development costs: For smaller market players with smaller revenues and R&D budgets, keeping up with the likes of Canon, HP, Kyocera, and Konica Minolta regarding new hardware and other capabilities is a monumental task. The investment in engineering and development/tooling for a new MFP platform family and its options is daunting even for the major players. Such a venture includes product plastics/covers, machine tooling for frames/paper feed mechanisms, materials qualification, lifecycle and environmental testing, agency compliance testing and applications, software creation/testing, PCBs/wiring/connectors, and power supplies, to name just a few – without including manpower support. The issue for smaller makers is that while many of these costs are similar regardless of the manufacturer’s size, the bigger players can amortize the costs over a larger sales base. The bottom line is that the costs (mainly in cash) to develop, tool up, qualify, and produce a new generation platform/family of MFPs can be many millions of dollars – which can only be supported if the product line is profitable. Our guess is that Toshiba Tec was facing a new design cycle for a family of MFPs to keep up with the Joneses and recognized it didn’t have the money – tens of millions – to fund that development. Which brings us to …

Toshiba Corp.’s financial concerns. The same week that the JV was announced, Toshiba Corp. said it was working with private equity firm Japan Industrial Partners (JIP) to quickly complete a US$15 billion buyout as Toshiba forecasted another year of weak earnings.

Toshiba Tec’s 2023 financial statement for the fiscal year ending March 1, 2023, reveals some motivations for the JV move:

• Sales for the FY were ¥510,767 million ($3,652,699,124), up 15% Y/Y
• Operating profit was ¥16,078 million ($114,980,209), up 39% Y/Y
• But “Profit attributable to the Parent” [Toshiba Tec corporate, not subsidiaries and factories] – a loss of ¥13,745 million ($ 98,295,993), down from a profit of ¥5,381 million in FY22 – a crash of ¥19,126 million ($136,777,676), and a loss of ¥248 ($1.70) per share. Recently, Toshiba Tec’s stock has hovered around $15.

What caused the $130M loss? Sifting through the financial statements, these line items stand out:

• A “Loss on Litigation” related to a patent dispute with Teraoka Seiko Ltd. about semi-self checkout for POS systems cost ¥6,900 million, or about $50 million
• Profit before income taxes tallied ¥4,710 million (about $33.7 million)

But a partial reversal of deferred tax assets and other costs was ¥9,848 million (about $70.4 million) on top of current year taxes of ¥8,141 million (about $58 million)

• That’s a total loss of $178.4 million for these extraordinary items – that is real money, folks

If the above numbers are seen in the light of a steadily declining page volume future, and a predicted stiff decline in the sales of profitable A3 machines, Toshiba Tec management may have concluded that future profitability was going to be very difficult to achieve with its existing cost structure, and that the shrinking pool of available development dollars wouldn’t sustain a complete MFP design and development cycle. White said that TABS/Toshiba Tec will retain its own R&D for development of UI and IP interfaces, and the Document Solutions Engineering group at TABS remains – it is not part of the JV deal.

Unfortunately, other imaging industry OEMs will likely face these same challenges over the next several years. But Ricoh may be well positioned to benefit from this.

A new TABS

When the new JV gets underway, TABS’ status will shift – they are no longer buying/sourcing their hardware from Toshiba Tec, but essentially from Ricoh. Seen in that light, what does TABS become then? Most likely is that TABS will operate in a muddled space – part distributor, part VAR, part value-added distributor (Larry White noted that TABS is Ricoh’s largest seller of DocuWare products), part dealer. Take your pick. This would not be too dissimilar from the structure we see in Xerox. TABS printer management services offer clients single-source capabilities for equipment, service, supplies and solutions across multiple brands including HP, Lexmark, and Brother.

TABS remains a significant player in the MFP market, and the move to establish a JV with Ricoh likely saves the Toshiba brand in that market by offering continued new platform/product development that the JV will develop and produce.

A two-edged sword

Ricoh has reached its position as a market leader in placements through buying competitive brands and their market shares, and with them, broader channels and a retained client base. The strategy works. Of course, the increased product volumes derived by selling similar Ricoh and Toshiba brand devices can deliver manufacturing scale cost reductions as well as increased leverage with suppliers. White noted the “incredible economies of scale,” which could result in improved overall profitability for Ricoh. In addition, the increased volumes come with no additional sales and marketing expenses – the only “cost” being the lower sale price levels and factory margins needed to enable an OEM client (Toshiba) to succeed in the market. Buttressing the validity of a JV strategy, White commented that “JVs are often overlooked,” and cited a research report from Deloitte in which “the average JV participant’s return on equity increased significantly from 1% to 7% above the industry average for a period of four to five years.” White also noted the success of the JV between Lockheed Martin and Boeing, United Launch Alliance, which was formed to compete in the space launch business versus SpaceX, delivering 148 satellites into orbit.

Sounds good, right? However, let’s not forget that when mature markets enter an era of secular decline (Keypoint Intelligence predicts an 8.2% decline in A3 placements between now and 2026) and as unit volumes shrink, most market participants end up with excess manufacturing capacity. Ricoh acquires significant MFP production facilities and capacity in this move, so driving manufacturing efficiencies will no doubt be a balancing act for the new joint venture.

Lastly, let’s not forget that in this move, Ricoh has doubled down on the future of laser/toner-based technology during a period in which the overall share of units and pages printed by lasers has been losing ground to inkjets in both the office and with consumers, and from a revenue/profitability standpoint, higher revenue and profit A3 machine shipments are forecasted to cede unit volumes to lower priced A4 machines in coming years. The focus on laser technology and toner as a base technology may come from Toshiba Tec’s rich manufacturing base for those products:

• Shizuoka Business Center (Mishima), Japan – inkjet heads, MFP toner
• Shizuoka Business Center (Ohito), Japan – POS systems, computing scale
• Mitchell, South Dakota, USA – MFP toner
• Puteaux, France – MFP toner
• Singapore – kiosk, MFP, EFT payment terminals
• Penang, Malaysia – options for MFPs (finishers, fax kits, etc.)
• Shenzhen, China – MFP, POS systems
• Batam, Indonesia – Printer, POS terminals, POS peripherals, barcode printers and options

In addition to contract hardware manufacturing, these toner plants could supply other OEM needs, or even the aftermarket. It is notable that the Toshiba Tec Malaysia plant makes optional parts for MFPs and it was also noted in the announcement that Ricoh has been producing some MFP options for Toshiba Tec. The status of these Toshiba Tec plants post-JV is unknown at this time.

Our take

That one of the industry’s smaller market share players decided to join forces with one of its biggest isn’t really a surprise considering the evolution of the industry – the only unknowns were the details of who is joining who, how, when, and maybe the how much (not announced in this process). Will it be the last such announcement? Probably not, though there may not be another until 2024 or later. Ricoh’s apparent strategy of trying to become the “Foxconn” of the printer/copier industry may have some merit as the middle-tier players will be squeezed by the growing cost and financial advantages enjoyed by the industry’s two biggest players – Canon and Ricoh. Again, for this move to make sense, Ricoh has to be right that there is a solid future for laser-based engines in the face of rapidly growing acceptance of inkjet-based machines across several important market categories – driven primarily by lower CPPs and cheaper color capabilities. The outlook isn’t bright on major business metrics — user page volumes, unit placements, and A3 sales for example — metrics that every OEM has to face and overcome to remain in this business.  Innovative partnerships may provide a new pathway for the industry players.