Those who watch the markets for office imaging devices and consumables know that both are tied—inextricably—to the economy.
Good news: These days, the economies in North America are looking pretty good and that’s great for the regional office imaging equipment industry and its channels.
In the closing months of last year, the U.S. unemployment rate sat at 4.1 percent—a 17-year low. Hardware manufacturers appear to be benefiting from the good economy and many have indicated that their North American business is doing well.
Last year’s good economic news continues a trend.
For the past several years, vendors have reported that the office imaging equipment markets in North America have been among the world’s strongest. My company’s website, www.Action-Intell.com, featured various posts in 2017 reporting stronger hardware and consumables sales at firms like Canon, Epson, Hewlett-Packard, Konica Minolta, and others. And the good news should continue. It appears that unemployment is on track to remain low in 2018. In a recent poll of 11,500 U.S. employers conducted by the ManpowerGroup, 92 percent said they expected to either add to their payrolls or keep staffing at current levels. The report says that the firm’s Net Employment Outlook for the U.S. is “the strongest reported in the past decade.”
Despite the improved economy, things have not been so good for many of the remanufacturers in North America.
The region’s remanufacturing industry has continued to show signs of stress as it has for some time. Actionable Intelligence recently explored the situation in a 39-page white paper that we released at the close of 2017. “Forces Shaping Today’s Cartridge Remanufacturing Industry,” which is available at no charge on our website, details how the global industry has fared over the past 30-plus years and looks at where it’s heading. We examine some of the challenges that are unique to North American remanufacturers, as well as analyze the competitive forces at play in other key regions including China and Europe.
Relentless Competition
Many of the challenges facing today’s remanufacturing industry reflect trends that have been ongoing for decades. From the start, OEMs have battled with third-party supplies vendors over the consumables market. With supplies that perform almost flawlessly, hardware manufacturers have always had a leg up on non-OEM consumables vendors in terms of quality and the OEMs’ well-established channels and big marketing dollars have added to their competitive advantage. But OEMs have charged a premium for their supplies, which led some customers to seek better deals. Remanufacturers have managed to bring to market consumables with much lower price points. Moreover, as the remanufacturing industry has matured, its products have improved. Today, non-OEM cartridges are popular especially monochrome SKUs, which perform well and deliver pages that can cost a fraction of what it cost to print with an equivalent OEM SKU.
The decades-long battle between OEMs and remans has been well chronicled in court dockets around the world and nowhere have more suits been filed than in the United States. Most hardware vendors have filed at least one lawsuit (some have filed dozens!) in U.S. federal court alleging a third-party supplies vendor has encroached on the OEM’s intellectual property. And most have been successful. The OEMs that have prevailed in U.S. courts against third-party companies marketing cartridges infringing their IP include Canon, Epson, Hewlett-Packard, Lexmark, Ricoh, Toshiba, and Xerox. Although there has been a bit of a lull over the past couple of years, Canon filed suit at the end of 2017, which I’ll discuss later, that may be a harbinger of a big legal battle in near future.
Lawsuits have taken their toll the North American remanufacturers and their channel partners.
Although the amounts awarded are seldom disclosed by the courts, it’s safe to assume that firms determined to be marketing the infringing consumables have paid tens of millions (perhaps hundreds of millions?) of dollars over the years in penalties and awards, not to mention lost product and legal fees.
As fiercely as remanufacturers have fought OEMs, the competition within the ranks of non-OEM supplies vendors has been even more punishing.
Third-party supplies vendors compete almost exclusively on price, and some have demonstrated a willingness to slash prices to grab market share. Ceaseless pricing pressures have resulted in margins that can sustain only a select few non-OEM consumables vendors. Certain remanufacturers have managed to grow large enough to achieve economies of scale that allow them to compete even on razor thin margins. Others have had to make changes to their business models to keep the lights on, while many have opted to exit the industry altogether. While the remanufacturing industry in North America was once made up of more than 4,500 constituents, today that number has dwindled to fewer than 1,000.
Partnering with China
The North American remanufacturing industry’s dealings with China date back to the early 1990s and it has become a love-hate relationship over the years. Initially, office imaging devices were based on a handful of imaging engines that employed a limited number of consumables. The hardware population quickly became more diverse, however.
North American remanufacturers as well as with their cohorts in Europe realized back in the 1990s that they couldn’t cover the entire installed base by marketing only those cartridges that they produced in-house so they began sourcing product from China. As the industry in China matured, it invested to build out its capacity to manufacture the range of products needed to supply the West’s diverse hardware populations.
The almost insatiable needs of Western companies allowed the Chinese industry to grow quickly as it moved into the 21st century.
Over time, Chinese firms captured more and more share of the U.S. market as the region’s domestic non-OEM supplies vendors grew increasingly reliant on imports from China.
As inexpensive Chinese products became increasingly available, more and more smaller third-party supplies vendors in the West turned to importing rather than produce remanufactured cartridges in-house. Over the past 20 years, droves of Western remanufacturers have become distributors and shut down their production lines. In addition, many of the companies that continue to remanufacture today turn to China when needed to supplement their production lines with SKUs that could not be produced profitably in-house.
Chinese entrepreneurs understood that to compete effectively with one another and continue to gain share in Western markets, they must be able to keep production costs down.
Many of China’s leading non-OEM supplies companies invested to become vertically integrated so they could produce essential raw materials in house. The most expensive raw materials for remanufacturers are empty cartridges. So-called empty “cores” must be collected, stored, cleaned, and inspected before they can be refurbished. To avoid the costs associated with remanufacturing cores, some third-party supplies vendors in China began to market cartridges made from brand new cores that were fabricated in-house.
Brand new non-OEM cartridges can be problematic because they have a history of violating OEM patents. This is especially true of “cloned” toner cartridges, which are reverse engineered with no respect for IP. Many toner cartridges feature inventions that OEMs protect with numerous patents, which can be very difficult to design around. But new-build clones are much less expensive to bring to market than remanufactured products or new compatibles that have been painstakingly replicated without violating any OEM IP. The exportation of infringing clone exploded at the time of the economic downturn and they continue to be popular today. The explosion of clones has put more pressure on prices that were already severely compressed.
Industry Transformed
Dealing with price compression and a declining market, the maturing Western remanufacturing industry has been consolidating for years. Today the North American remanufacturing industry is dominated by just a few large players.
The largest, Clover Imaging Group (CIG), grew from a $68 million U.S.-based company in 2003 to an international enterprise boasting over $1 billion in total sales in about 10 years. In 2010, Golden Gate Capital took a position in the company, and since then Clover’s M&A actions have given the firm assets around the world. According to my firm’s research, LMI Solutions is North America’s second-largest remanufacturer. LMI has made several key acquisitions over the past five years including the purchase of two of the largest North American printer remanufacturers, Global Printer Services (GPS) and Printersdirect in 2014, then LMI bought the parts distributor Parts Now in 2015.
Large foreign third-party supplies vendors have been expanding their presence in North America of late through acquisition. Perhaps the most well-known example is the purchase of Lexmark International by Zhuhai, China’s Ninestar Corporation (formerly known as Apex Technology). It’s not clear what has become of Lexmark’s remanufacturing operations, which were once among the world’s largest, but Ninestar is pursuing more of the international cartridge market with its U.S. assets.
Prior to the Lexmark deal, the Chinese company acquired the remanufacturing supplier Static Control Components in 2015. Shortly after being acquired, Static Control expanded its portfolio to included finished cartridges along with the chips, toners, drums, and other cartridge parts it has marketed for years. At its plant in North Carolina, Static Control remanufactures toner cartridges and it now markets finished cartridges supplied by Ninestar.
Germany’s Turbon Group is another non-U.S.-based firm looking to expand its North American business through acquisition. In 2013, the German remanufacturer purchased Clarity Imaging Technologies of Saddle Brook, NJ and also acquired International Laser Group (ILG), which is based in Woodland Hills, CA. The firm has struggled in North America since making its acquisitions, however.
As the larger players in North America continue to further consolidate the industry, several hundred remanufacturers remain.
Although their total revenue is nowhere that of a Clover or a Ninestar, the industry’s second-tier is occupied by companies that have been in operation for between 10 and 20 years such as Diversified Computer Supplies, InkCycle, and Liberty Laser Solutions. According to Actionable Intelligence’s research, companies in the second tier have annual revenue of between $20 and $35 million and most support customers across the United States from their own regional distribution centers.
The third-tier of the North America remanufacturer supply regional markets and support end users at small- to medium-sized companies. Most of the third-tier players have revenue under
$15 million. Perhaps the best example of a regional reman is the Charleston, WV firm, Impression Products. The company, which I estimate has about $10 million in annual sales, grabbed headlines when it challenged a patent infringement lawsuit filed against it by Lexmark. After years of legal wrangling, the case was ultimately heard by the U.S. Supreme Court, which sided with Impression Products and overturned years of case law on patent protections.
The Post-Impression Products World
In addition to its case being a great David-versus-Goliath story, the industry will long remember the modest Charleston remanufacturer for the changes that its victory wrought on U.S. patent laws. Prior to the SCOTUS ruling, remanufacturers risked violating certain U.S. patent protections if they refurbished empties that end users had agreed to return to Lexmark, or remanufactured spent cartridges that were first sold overseas.
The Impression Products, Inc. v. Lexmark International, Inc. ruling eliminated such protections after the first authorized sale of a product freeing companies to remanufacture an empty cartridge regardless of where it was sold or any preconditions placed on its purchaser. As one can imagine, the ruling had a profound impact on the international remanufacturing industry because it opened the U.S. to empties first sold overseas, which should be a boon for U.S. companies because their source of empties was dramatically increased.
While U.S. remanufacturers rejoiced at Impression Products win, they also realized that there was a downside to the ruling. Under the old rules, offshore remanufacturers were required to gather their empties from the United States if they were to sell them here. Most foreign firms without U.S. plants had exited the market because they couldn’t profitably acquire cores in the U.S., ship them to an offshore factory for refurbishing, and then return the finished cartridges to the U.S. for marketing. After the Impression Products decision, however, there are no restrictions on foreign firms exporting remanufactured cartridges to the U.S., so reman cartridges produced in factories around the world are increasingly available here.
The Impression Products ruling has also allowed for more new-build cartridges to be imported into the United States. Over the past couple of decades, various OEMs have obtained protections from federal agencies that have prevented both non-infringing and infringing compatibles from entering the U.S. Some of the orders restricting compatible imports were based on patent protections that were eliminated by SCOTUS’s Impression Products decision. Although I suspect that in time new barriers will be erected to limit the importation of clones, for the foreseeable future some of the gates that once protected the U.S. market from such bogus products are up and will remain so.
Unwanted Competition
Regardless if the cartridge is legitimate or if it’s infringing, more overseas competition will be tough for U.S. remans to handle. As I alluded to at the beginning of this piece, even as the U.S. economy has improved, remanufacturers have struggled.
In late October, Moody’s Investor Service downgraded the debt ratings of Clover’s parent company, 4L Technologies because of weakness in the firm’s reman business. Moody’s revised its outlook for the 4L’s debt from stable to negative citing what it termed “uncertainties related to the timing of a stabilization in 4L Tech’s business after a multi-year contraction in sales and profitability.”
Clover is not the only company with sagging sales.
The Turbon Group’s top line got a nice boost after it made its 2013 U.S. acquisitions but those gains were quickly erased. After watching its revenue decline almost 10 percent in fiscal 2016, the publicly-traded German firm told investors in September that sales were expected to drop another couple points in FY 2017 despite improvements in its European sales. During the first six months of last year, Turbon sales in North America were down 28 percent.
There are a number of challenges that remanufacturers in the U.S. are currently dealing with including more aggressive OEM consumables pricing and a glut of capacity as end users in the home and office continue to print less.
In addition to these now perennial issues, remanufacturers are facing increasing competition from newly manufactured compatible cartridges. Although freshly minted compatible cartridges are not new, in the past these products were viewed largely as infringing and relegated for sale on the Internet. Over the past couple of years, however, more and more companies have been marketing new compatible toner cartridges as non-infringing products and they have moved into the mainstream. Representatives from Ninestar have told me that including ink SKUs, about 80 percent of the firm’s portfolio is currently non-infringing new build cartridges. Ninestar is not alone and we heard from many companies last year that are marketing new-build compatibles.
Notably, as 2017 ended, one of North America’s largest independent online cartridge merchants, LD Products, announced that it will market premium, new-build compatibles to dealers and resellers.
It’s hard to say what’s behind the growing number of non-infringing cartridges.
The fact that many patents on older HP LaserJet cartridges have now expired undoubtedly explains some of the growth. It is also likely that some of today’s larger third-party supplies manufacturers now have the technical expertise to reverse-engineer OEM technologies and perfect patent work-arounds that may have alluded them in the past. And, who knows, some firms may have quietly negotiated cross-licensing deals. After all, anything is possible in today’s hardcopy industry!
Still, I doubt that all the claims of “non-infringing” will go unchallenged.
While OEMs have been active in courts in other countries, the U.S. courts have only seen a handful of infringement cases over the past couple of years. Just as last year was wrapping up, however, Canon filed a case in U.S. federal court that bears watching. The suit accuses the Amazon merchant Kostland, Inc. of violating a new U.S. patent (9,581,958 B2) issued in 2017. The patent covers gears and other technologies used in certain new JetIntelligence cartridges used in such devices as the HP Color LaserJet Enterprise M553dn, M553n, M553x and HP Color LaserJet Enterprise MFP M577dn and M577f as well as the HP Color LaserJet Enterprise Flow MFP M577c and M577z, which were released in 2015. So far, only Kostland has been named as a defendant but others seem likely. For months, rumors have been circulating that a major legal battle is brewing so perhaps the Kostland filing is just the opening salvo.
I expect to see some shake ups in the North American remanufacturing industry over the next several years. The industry dynamics are changing as more products enter the North American market from overseas and the established regional players brace themselves for stiffer competition. While further consolidation is inevitable, what’s less predictable is which firms will be acquired next and who will be writing the check. We’ll follow it all at Actionable Intelligence and on www.Action-Intell.com so stay tuned!
