TOKYO (Reuters) - If 2003 was close to picture perfect for the world's top digital camera makers, 2004 will be trickier.

A combination of size, technology, brand power and the ability to procure key parts will be needed to sustain long-term profitability, analysts say.

"I have a feeling that digital camera manufacturers are now enjoying and passing through the market's sweetest stage," said UBS analyst Ryohei Takahashi. "It may be that only the industry's biggest players will have what it takes to survive."

Nearly a decade has passed since Casio Computer Co Ltd pioneered the consumer digital camera market by launching a compact model that sported a liquid crystal display monitor and retailed at a price the middle class could afford.

That market has since ballooned thanks to the spread of the home computer, falling prices and the development of cameras with resolutions high enough for quality prints, attracting buyers who want to do more than just e-mail images to their friends.

Japan's four top brands -- Sony, Canon, Olympus and Fuji Photo Film -- dominate the global market, but an array of smaller players such as PC maker Gateway Inc are also scrapping for a piece of the pie, which will be worth around $10 billion this year.

UBS estimates that global shipments of digital cameras will double from the previous year to 50 million units in 2003, including the five million cameras made by original equipment manufacturers (OEM) in Taiwan. That will likely jump to 65 million units next year, UBS said.

Assuming that consumers replace their cameras every four years and that the household penetration rate will hit 70 percent in the main markets of Europe, North America and Japan, digital cameras will peak at 73 million units in 2005 in volume terms.

But if prices decline at a 15 percent clip, UBS reckons the industry will reach its zenith in value terms next year.

Against that backdrop, analysts agree that lowering production costs and shortening development times will be among the key challenges for camera makers over the medium-term.

Daiwa Institute of Research analyst Hiroyasu Sato said Olympus and Canon should be held up as role models due to their relatively high profit margins this year, outperforming the camera divisions of Nikon Corp and Fuji Photo Film.

"Olympus beat its peers to boosting production in China, giving it a distinct cost advantage. Canon meanwhile has leveraged its strong brand and popular designs to sell lots of cameras while minimising price deterioration," he said.

Takashi Oshiyama, group executive of Canon's digital imaging business group, told Reuters on Thursday they were looking to launch about twice as many compact digital camera models in 2004 as the nine they rolled-out this year.

Oshiyama is notably more bullish than industry analysts, predicting that strong growth in China will help drive the overall digital camera market to a peak of around 100 million units, possibly in 2008 when Beijing will host the Olympic Games.

"In terms of potential, there is no country like China with its 1.3 billion people and seven percent annual rate of economic growth," Oshiyama said.

CHINA SHIFT, KEY PARTS

Sato said it was inevitable that Japanese makers would increase their production in Asia over the coming years while also looking to outsource more production to Taiwanese firms, which would benefit the likes of Premier Image and Altek Corp.

Sony, which already makes cameras for the Chinese market at a factory in Shanghai, said it saw merit in producing more in China although most of its production would remain in Japan for now.

"Costs are much lower in China so there is the possibility in the future (some more) production would be shifted there," said Shigeki Ishizuka, president of Sony's personal imaging company.

"But the product life cycle is so short and industry changes are swift, making the supply chain and lead times vital. Right now there is more merit to producing in Japan."

Another sticking point is the timely procurement of parts such as advanced lenses and charge-coupled devices (CCD), a semiconductor that serves as a digital camera's "electronic film".

Supplies of the chip were tight earlier this year, forcing Fuji Photo Film, which produces all of its CCDs in-house, to delay the launch of two of its models. Other camera makers also postponed camera launches due to a shortage of CCDs.

Both Sony, the world's top maker of CCDs, and Fuji have taken steps to boost production capacity, but Sony's Ishizuka would not rule out the possibility of another shortage next year.

"There is a high chance that supplies will come up short again next year," said Ishizuka. "Sony's overall strategy calls for boosting in-house design of key devices and by strengthening this area, we look to differentiate ourselves from rival firms."

Besides the supply of parts, analysts say camera makers face another hurdle in the development of camera-equipped mobile phones with higher pixel counts and more advanced functions, which are eating into the digital camera market at the low-end.

This phenomenon underscores the need for manufacturers to create models that offer a distinct advantage to cell phones in terms of both function and price. It also highlights the attractiveness of the high-end of the market where traditional camera makers like Canon and Nikon are having their way.

Nikon is planning to launch a digital single-lens reflex (SLR) camera in March next year, hoping to emulate the success of Canon's "EOS Kiss Digital" model that was a big hit with the serious camera user at a price of around 120,000 yen ($1,117).

"I expect Nikon to make big gains in market share next year. This new camera will sell very well," said Yukihiko Shimada, analyst at UFJ Tsubasa Securities. "From here on out I believe the conventional camera firms will prove the strongest in digital cameras as well."
source : http://www.reuters.com/locales/newsA...toryID=4013049
By Nathan Layne