Everyone is aware of the current financial mess, and this is going to have a major impact on the price of electronic goods, including DSLR's in the coming months. First of all, we'll look at the driving forces in the markets that will impact pricing, then at what we should expect in terms of price increases, and how manufacturers like Nikon and Canon may respond.
The current economic mess is massively complex, the purpose of this article is not to go into the intricacies of the problem, but rather we'll start with a very high-level view explanation (we are not even talking the 30,000 ft view here, we are talking the view from space with a mediocre pair of binoculars).
The top five economies in 2007 according to the IMF (International Monetary Fund) were:
- USA ($13.8 trillion)
- Japan ($4.3 trillion)
- Germany ($3.3 trillion)
- China ($3.2 trillion)
- United Kingdom ($2.8 trillion)
Out of these, USA has the Dollar, Japan has the Yen, Germany uses the Euro, China does not have an openly traded currency, and Britain has the Pound. Traditionally the dollar has been the first choice for currency reserves (China currently has approximately $2 trillion cash on hand for example), followed by the Yen – the larger the economy behind the currency, and the more committed to free markets the government is behind the economy, the safer that currency is perceived. However with the introduction of the Euro a few years ago, which is backed by Germany (the 3rd biggest economy), France, Italy and Spain (6th, 7th and 8th respectively), and a number of other European countries, managed centrally though the European Central Bank (ECB), the Euro started to be taken seriously.
With of the advent of the Euro, and strain showing on the US economy over the past year or more, the Euro has been increasingly used as a reserve currency, giving countries and organizations with vast currency reserves some diversification against dollar risk, with a currency backed by some serious economies. This flow of cash from dollars to Euros has been one of the primary causes of the week dollar in recent years.
The current crisis did start in the US, but the problem has spread globally, and this has been the first hard test for the Euro. The fundamental problem with the Euro is that given centuries of history, European governments will almost always put nationalistic interests ahead of European interests. A few weeks ago, Ireland moved to guarantee all bank deposits in its national banks. The ECB had already stated their policy against this, and Germany sharply criticized the move. However the move led to a massive movement of deposits, out of German and other European banks into Irelands banks. This put Germany in a very difficult position, and in an effort to stop the flow of money out of their system, went against the ECB and guaranteed bank deposits like Ireland.
This signaled a fundamental weakness with the Euro, and in particular demonstrated the lack of control or even influence of the ECB over its members. From Germany's perspective, your country is in trouble and your voters are in pain, which is more important – acting in the best interests of Europe (and as the biggest economy in the Euro, potentially having to help prop up the weaker countries in the Euro), or put nationalistic interests first and take care of your country and your voter base first – not a difficult decision for an elected politician.
The net effect of this makes the Euro a lot less appealing for cash reserves – the combination of the lack of control of the ECB and the actions of nation states makes the Euro less predictable, so money flows out and into other currencies.
So where does the money go? A lot of it is going into the Dollar, making the Dollar stronger against the Euro. The US may have started the current mess, but they are still the biggest economy and with a pro-active government, expecting the US to recover first is still a reasonable bet. However Japan is the second biggest economy, and despite the volatility in their stock market, fundamentally they aren't in as bad a shape as the US, so they too look like a safe haven. Proportionally even more money is flowing into the Yen, making the Yen stronger still against the Euro, as well as against the Dollar. Where else are you going to keep your cash reserves? Certainly not smaller countries like Iceland.
So how is this going to impact electronic goods? Nikon, Canon and Sony are all Japanese companies, a strong Yen means unless they can significantly cut costs, their goods will become more expensive to countries importing them, which means ultimately prices in those countries will have to be raised to maintain profitability. Some companies use currency futures to protect the value of contracts for a period of time, basically paying a fee to lock in the exchange rate against a contract, and these will offer some short-term protection against exchange rates on existing contracts. However the futures can only protect against short term volatility in exchange rates, ultimately any new contracts will be at the new exchange rates.
It also means sales in foreign countries, when converted back to Yen for their financial reporting, will lower their gross sales numbers – if Nikon USA reports $10m in sales for example, with a stronger yen, that means less sales (in Yen) when converted to Yen and reported to the Tokyo stock market.
The other issue we are seeing is decreased demand – everyone is feeling the pinch, especially the American consumer. This means sales will drop, many people will either forego purchases, or buy a lower spec model. This puts a large, negative pressure on price increases, so if you are a Japanese electronics manufacturer, you are seeing the costs to export increase, and demand decrease, hitting both your top and bottom lines. So what do you do?
The first thing you do is get your costs and inventory under control. The last thing you want is to have to pay to warehouse more inventory that isn't selling, and have production exceed demand which will just increase your inventory.
Production lines are notoriously expensive to stop start – you have a huge ongoing fixed cost just by owning the factory (mortgage, taxes, insurance, maintenance etc) whether it's used or not. Halting production means laying off people, severance packages etc, then restarting means the huge added expense of hiring, training and getting a production line up to speed again. It's far better to cut back hours/shifts, and keep as much stability in the production line as possible rather than have the enormous expenses to turn it off/on.
So the first thing you do is clear out your current inventory, and this is exactly what we are seeing with the current rebates from Canon and Nikon. They are dropping prices of already manufactured goods by around 10% to get them out the door, so you can reduce your inventory costs and get a short term boost to sales (if not profits).
Then you adjust your production line – maybe cut a shift, reduce hours, decrease volume, shift from higher end and lower margin products to more affordable and higher margin products to protect sales and margins the best you can. You know your prices around the world will have to go up, and demand is going to drop, you need to stay ahead of the curve if you can.
That said, you also have to factor in your competition. Right now DSLR bodies are being replaced very frequently – less than every two years. An obvious step would be to slow down your release cycle – maybe stretch that out to 3 years but make a bigger step to give you bigger and more profitable production runs. However you can't do that if your competition doesn't play ball and goes aggressive to gain market share using newer technologies, even if they make a loss. If you can afford it and feel your competitor can't, you can take a loss for a period of time to gain market share, so when things recover you'll be in a much stronger market position. However that is a very risky move in uncertain times.
Looking at recent releases from the big DSLR manufactures, In the past year or so Sony has been very aggressive, with a lot of options for entry level DSLR's, and the new 24.6 megapixel A900. Canon has released the 15 megapixel 50D, and the 21 megapixel 5D Mark II this year, one new sensor, and a greatly improved version of the sensor from the 1Ds Mark III. Nikon have not released a new Sensor since the D300/D3 a year ago, this year has seen the D700 using the D3's sensor, and the D90 using the D300's sensor, but nothing new. There are rumors of something “BIG” coming, suspected to be either a 20+ megapixel D3X or an MX medium format system, but this will be an expensive, top of the line camera, that won't be a huge volume driver (Nikon D3 production started at 8,000 bodies per month, the D300 started at 60,000 per month). This potentially puts Nikon in a more difficult position than their main rival Canon – do they slow down their release cycle to cut costs and weather the storm, and risk losing market share to Canon's newer, higher spec mid range bodies, or do you respond with new bodies in the next few months and risk profits/cash reserves to maintain or build market share?
What we do know for sure is there is no quick fix for the current economic problems. The Yen is strengthening, and looks like it will continue to do so. This means, that once the current inventory has been moved and the current rebates expired, prices of electronics goods will go up. By how much, and for how long, remains to be seen, but if you are eyeing a major electronics purchase in the next few months from a Japanese manufacturer, now might just be a good time. I may be wrong, no one can predict the future, but there is plenty of pressure to move prices upwards on Japanese goods going into 2009, especially on the lower volume goods like pro lenses and bodies.
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