Even with strong tailwinds from the United States economy, printer and copier manufacturers struggled last year. Office printing—the industry’s lifeblood—is tied directly to regional economies, so it’s no wonder that 2016 wasn’t a banner year for hardware sales. The growth of China’s GDP continues to cool and in regions that once held such promise, like Brazil and Russia, the economies have been in recession for a few years with no signs of recovery in sight. Although increasing, GDP growth in the European Union remains anemic and has been growing at less than 2 percent for the past 10 years. With GDP growing at less than 1 percent for the past several years for the three largest European economies—France, Germany, and the United Kingdom—the economies remain stubbornly stagnant.
While print volumes are growing in certain market segments such as the production space, at my firm, Actionable Intelligence, we see office printing declining—especially monochrome printing. Of course, lackluster economic conditions play a role in declining print volumes but there are other forces at work here too. The biggest factor is that end users simply want to print less. Businesses are looking to generate less hardcopy in order to either keep operating costs down or to be more environmentally-friendly—or both. And people have found that in the age of smart phones and tablets, they don’t need to print as much as they did in the past. Hardware vendors and their channel partners have responded to the move away from printing by offering new programs and services designed to lower hardcopy output and these offerings are popular. However, the industry’s attempts to drive more printing with new mobile and cloud-based solutions have not panned out and vendors have yet to come up with the “killer app” that can meaningfully offset shrinking print volumes.
With such adverse economic and market conditions, the office equipment industry now finds itself with way too much production capacity and it is changing as a result. While some changes since the Great Recession had already occurred to cope with overcapacity issues, the changes we witnessed in 2016 were the most profound that we’ve seen in decades. Last year was truly transformative and you can bet that there will be even more transformation in 2017.
Big Changes in the U.S.
Nowhere has the transformation of the office-imaging industry been more profound than in the United States. After years of difficulties operating in the global down market, all three U.S. OEMs—Hewlett-Packard, Lexmark, and Xerox—have radically changed their respective businesses and operate very differently than they had ten years ago.
After being separated from HP Enterprise in 2015, HP Inc. completed its first fiscal year on October 31, 2016 and the results were not great. Total sales were down 6.3 percent in 2016 as printing revenue slipped 14 percent. At $18.3 billion, HP’s printing business reached a 17 year low during the last fiscal year. The firm announced in 2016 that it will take bold steps to grow its printer business and invest heavily. In September, HP President and CEO Dion Weisler said the firm will spend $1.04 billion to purchase Samsung’s printing assets in an attempt to grab market share in the A3 copier space. In addition to marketing A3 machines based on Samsung technology, HP will also roll out an assortment of A3 inkjet devices this year. The firm also said it will invest what amounts to approximately $450 million to reduce channel inventory of ink and toner cartridges. According to Mr. Weisler, the move allows the firm to transform its supplies business model from “push” to “pull.” Consumables sales suffered last year as a result but they are expected to stabilize by the end of 2017.
Xerox started last year by announcing that like HP it, too, will split and on January 1, 2017, the company was divided into two public companies. As a result, an $11 billion document technology company was launched that retains the Xerox name along with a new $7 billion Business Process Outsourcing company called Conduent. While the move is a radical departure from the path the firm had been on since acquiring Affiliated Computer Services (ACS) in 2009, it really re-establishes Xerox as technology company. Incoming Xerox CEO Jeff Jacobson told investors at the end of 2016 that his firm’s strategy “builds on our solid financial foundation to drive strong cash generation and margin expansion while improving our revenue trajectory over the long term.” Xerox says that it will initiate the largest product launch in the firm’s history in 2017 and expand its channels into what the company terms “the $20 billion multi-brand reseller space.”
Didn’t See that Coming!
In a year full of surprises, I cast my vote for Lexmark as the firm with the most surprising news in 2016. Following months of chin wagging and rumors over potential buyers after Lexmark said late in 2015 that it was exploring the possibility of selling off parts of the company or the entire firm, Lexmark announced last spring that it would be acquired by a group of Chinese investors. We learned after the news broke that several OEMs had expressed interest in the firm. Lexmark, however, opted to accept a generous $3.6 billion all-cash offer from a consortium from China led by Apex Technology, PAG Asia Capital, and Legend Capital.
After being scrutinized by U.S. regulators and their counterparts in the People’s Republic, the deal was finalized on November 29 and shares of its stocks stopped trading on the New York Stock Exchange. Paul Rooke stepped down as president and CEO and was succeeded by David Reeder. The new owners say the company will remain U.S.-based, although many speculate that at least some of Lexmark’s production will move to China. After the deal was completed, Lexmark announced it will be separating its Enterprise Software group and selling it off under the Kofax brand.
With its new owners, new Asian markets are expected to open to Lexmark including China, where the firm had little or no access prior to the acquisition. Moody’s Investor Services and Fitch Rating lowered their ratings on Lexmark’s debt suggesting some are a bit skeptical of the newlywed’s ultimate success. Chinese investors seem a little leery too. The share price of Apex stocks, which are traded on the Shenzhen bourse, declined about 10 percent in the weeks after the deal closed. Although they have not regained all their lost ground, Apex shares rallied in the ensuing weeks and were trading at CNY28.81—about $4.20—at the time of this writing, which is considerably lower than the price Lexmark shares traded at on the NYSE. After flirting with the $50 mark in 2014, shares carrying the LXK ticker symbol had a 52-week price range between $24.11 and $40.50.
Japan’s Industry Sputters
The industry in the U.S. has experienced the biggest changes because it has been the most stressed. In Japan, conditions have been better. With the yen weakening for the past few years, Japanese manufacturers had managed to grow revenue even in the down market and so avoided the pain their American competitors were feeling. This changed in 2016, however, as the yen strengthened.
Although the yen-dollar exchange was about the same at the start of 2016 as it was at the end of the year, there were times during 2016 when the yen’s value was up 20 percent compared to the dollar. The yen also strengthened against the euro, although it slipped in the closing weeks of 2016 as it did against the dollar.
With the exception of Canon, the Japanese companies that we follow have a fiscal year that begins in April and closes at the end of March. Because the yen strengthened for most of the first part of the Japanese fiscal year, all the firms that we cover attributed their declining revenue to adverse exchange rates during the first part of their fiscal year, although some managed to improve their profitability.
Canon’s fiscal year runs from January until December and the company reported that it was adversely impacted by the stronger yen. During the first nine months of 2016, Toshizo Tanaka, executive vice president and CFO of Canon, said that compared with the year prior, the yen’s appreciation negatively impacted net sales by ¥330.3 billion and operating profit by ¥129.1 billion.
Macroeconomic conditions also contributed to Canon’s declining business and the firm expressed concern about the European economy following Brexit. Demand for cameras continued to decline in the third quarter of last year along with sales of products in various hardware categories including inkjet printers, laser printers, and monochrome multifunction devices (MFDs). Although unit shipments were up in the third quarter, revenue from copier MFDs dropped, indicating that sales prices are slipping on Canon color copiers. Laser printer consumables sales also slumped because end users printed less and Canon lost sales to third-party supplies vendors. It is possible that some of the decline in laser printer consumables revenue was due to its partner HP’s move to reduce excess inventory in the channel.
After reporting its third-quarter results, Canon lowered its financial guidance for the third time in as many quarters. While the company’s performance may benefit from the weakening of the yen at the close of the year, we expect its total revenue will be down at least 10 percent. At the end of the third quarter, Canon estimated that its laser printer revenue would be down more than 24 percent with sales of monochrome and color copiers dropping 12.7 percent and 7.6 percent, respectively. With such significant declines expected, it seems that Canon’s office-equipment sales will be down in 2016 even if the numbers improve some because of the weakening of the yen at the end of the year.
Other Japanese Vendors Struggle
Ricoh also lowered its forecasts for the fiscal year, which ends on March 31, 2017. The firm blamed its poor performance on the yen strengthening during 2016 and on drooping sales in Ricoh’s Imaging and Solutions group and Industrial Products segment. During the first six months of its current fiscal year, the firm reported that its Imaging and Solutions business declined 14.4 percent year-over-year. The firm blamed the falling revenue on declining sales of MFPs in the Americas. At the beginning of the fiscal year, the firm projected that net sales would be down 1.8 percent year-over-year, operating profit would decrease 24.7 percent, and net profits would decline 30.1 percent. Ricoh, however, has been forced to lower its forecast twice during the current fiscal year, the most recent revision coming after its poor Q2 performance. If the firm hits its revised targets for the year, it would represent a 9.0 percent year-over-year decline in total sales, a 60.9 percent drop in operating profit, and a 71.4 percent net profit decrease.
With revenue down almost 11 percent during the six months between April 1 and September 30, OKI Electric Industry Co. is another Japanese firm that had trouble coping with market conditions and exchange rates in 2016. In addition, OKI was impacted by an extraordinary loss of ¥2.5 billion during the second quarter stemming from an investigation by the Japan Fair Trade Commission into whether sales of firefighting wireless systems violated the country’s Antimonopoly Act. The company missed all the targets that it had set for the first half of the year and lowered its outlook for the full fiscal year ending in March 2017. For the first half, OKI’s Printers group sales were down 8.1 percent from the year prior and well shy of the ¥64.0 billion OKI had expected in Printers revenue. The firm has slashed its full-year forecast and now expects net sales to decrease 5.2 percent compared with the year prior, while operating and net income is expected to shrink 19.4 percent and 54.5 percent, respectively. Printer revenue is predicted to fall nearly 8 percent and produce an operating income of ¥0.
Konica Minolta’s total revenue was down almost 9 percent during the first half of the current fiscal year. The firm revised its guidance downward after the first quarter but it maintained the revised numbers as the first half of the year ended. Sales of office imaging devices, supplies, and services along with production hardware and other printing products marketed by its Business Technology unit are forecast to fall more than 9 percent. The company blames the slumping revenue solely on currency fluctuations and said its revenue and profits would have actually improved during the first half compared to last year if the FOREX impact were excluded. Konica Minolta reported growing sales in China and other emerging countries and said sales volumes were up in all four of its regions (Japan, the United States, Europe, and others). The firm credited sustained demand for its midrange and higher segment color devices for growing unit sales, higher print volumes, and sales growth for consumables. The company indicated that by combining sales of MFP equipment with IT services, it is seeing gross profits improve and higher sales than with conventional MFP sales. The firm claims to have successfully driven color print volume growth, which in turn led to growth of non-hardware sales.
Like the other vendors, Brother was impacted adversely by the stronger yen and both total revenue and revenue from its Printing and Solutions business declined. However, Brother’s efforts to cut costs and improve efficiencies in its Printing and Solutions unit bore fruit. Profits were up significantly from this business group, which resulted in an upturn in profits for the entire company. For the first half of the year, Brother’s revenue experienced a 9.2 percent decline from a year ago and revenue from the Printing and Solutions unit was down 9.7 percent. Brother reported that sales of printing equipment remained robust, especially in the United States and China. The firm saw unit sales of monochrome and color laser devices grow year-over-year. While Brother’s inkjet unit sales were down compared with the year prior, the firm said that product mix improved to shift toward machines with super high-yield ink tanks, which also contributed to the firm’s improved profitability.
For the six months of its fiscal year, Toshiba Tec Corp., the publicly-traded subsidiary of Toshiba Corp. that markets office and retail equipment, saw its total revenue slip 8 percent. Like its Japanese rivals, the firm said revenue suffered as the yen strengthened but its operating income soared over 98 percent thanks to gains the company made in its Retail Solutions Business Group in overseas markets. Sales for the Printing Solutions Business Group dropped just over 22 percent during the six-month period from April to September as compared to the same period in 2015. After closing the books on its tough first half, the firm revised its outlook for the year downward, which was the second time that Toshiba Tec was forced to cut its forecast during the current fiscal year. For the year ending on March 31, 2017, the company now expects total revenue to drop 8.7 percent as sales from the Printing Solutions Business Group fall 16.5 percent.
So What About 2017?
With 2016 now in our rear-view mirror, the focus is on the New Year. Unfortunately, we don’t see a huge turnaround in the world markets this year but things may get a little better. Japanese firms should have a better time of it as they close out the current fiscal year and move into the next. While the yen may not weaken as it did a few years ago, it now seems unlikely it will strengthen like it did last year, especially if the Japanese government has its way. Japan’s monetary policy under its current prime mister Shinzo Abe has relied on a weaker yen to grow the economy and Mr. Abe is expected to remain in office until next year. Economists now forecast the yen-dollar exchange rate will stay at about its current level through the summer.
With the Dow soaring, more than six years of constant employment growth, and wages up modestly, the U.S. market should continue to be the industry’s best performer this year. Although after the U.S. presidential elections many economists said they expected to lower their GDP forecast for 2017, most have continued to say the U.S. economy will grow at between 2 and 2.5 percent. Consumer spending is also expected to rise.
On the employment front, things look good. According to the most recent ManpowerGroup Employment Outlook Survey, which is based on interviews of more than 11,000 U.S. employers, 19 percent of those surveyed expected to increase staffing while 73 percent expected no change in their hiring activity. Only 6 percent of those surveyed said they would cut employment levels during the opening months of 2017. The rosy outlook was shared across industries and the percentage of U.S. employers looking to add jobs during Q1 2017 was in the double digits for the majority of industrial sectors. For printer and copier vendors, the survey held particularly good news because a healthy percentage of employers from industries associated with high print volumes expected to add staffing this year including Professional & Business Services (20% to add staff), Leisure & Hospitality (30% to add staff) and Financial Activities (19% to add staff).
But there is plenty of uncertainty both at home and abroad. Surprising events like the election of Donald Trump and Brexit have left economists puzzled as to how GDP will grow in the established markets this year. Some say that the new Trump administration and Britain’s exit from the E.U. will spell trouble with regional economies. The European Commission warned that the E.U. would slip into recession this year but better-than-expected economic news out of the region after the Brexit vote suggests otherwise. In the U.S., some on Wall Street predicted a Trump election would stymie economic growth. Forecasts have yet to be cut, however, suggesting that Mr. Trump’s election may not cause big trouble for the domestic economy, an opinion that seems to be borne out by the employers participating in the ManpowerGroup survey noted above.
We’ll be following all the news closely and providing industry analysis in real time. Honestly, who knows what will happen next? What will happen to Canon now that HP has purchased Samsung? Will Lexmark be able to thrive in Asia? Will Xerox be successful in its attempt to push further into the reseller channel? For the answers to such vexing questions and more, all I can say is: “Stay tuned!”
