With Intel in a slump and camera sales slowing, where will Nikon go in the future?

According to Nikkei Asian Review, Nikon plans to lay off 2,000 employees, or 10% of its total workforce, mainly due to the downturn in its main camera business and structural changes in the global semiconductor industry, especially Intel's sluggish performance.

Industry officials said Nikon is currently launching a price-cutting offensive in the semiconductor manufacturing equipment market.

Intel's thighs can't hold

Nikon was once the world's largest semiconductor manufacturing equipment manufacturer, but its market share has fallen to 7% due to structural changes in the market. A securities analyst said that although Nikon provides 70%-90% of Intel's chip manufacturing equipment, Nikon is currently looking for new customers through a price reduction strategy to reduce its over-reliance on Intel.

Nikon is reportedly selling equipment to chipmakers in China and other countries. However, earlier in November, Nikon President Toshikazu Umatate admitted that the coronavirus pandemic had hampered its efforts to tap new customers.

Nikon expanded its semiconductor production machinery business early on, keeping pace with domestic electrical and electronic equipment makers involved in computer chip production. But in the decade starting in 2000, as those companies exited or cut back on chipmaking, Nikon increased its supply of products to Intel.

When Nikon ran into financial trouble in 2002, Intel provided Nikon with 10 billion yen ($96.33 million) in research and development costs by accepting convertible bonds issued by Nikon.

The two companies' long-standing interdependence appears to be starting to backfire.

Nikon said at its earnings conference in November last year that it sold a total of 9 chip manufacturing machines in the April-September period, half of the sales in the same period last year. Nikon said: "Sales of semiconductor exposure machines have dropped significantly, partly due to the end of investment in this product by a major customer." Nikon is referring to Intel.

"As the chip business has entered a difficult phase, we may need to flexibly evaluate depending on the situation of major customers," Umatate said.

But more worrying is that Nikon has a small share of the market for extreme ultraviolet lithography (EUV) equipment. Although demand for this cutting-edge technology is expected to grow, Nikon has reportedly abandoned the development of such equipment due to high costs. Nikon said at the time that management believed that this way of doing business did not make economic sense and decided to withdraw.

ASML of the Netherlands is the world's largest supplier of semiconductor manufacturing equipment, providing lithography systems for the manufacture of integrated circuits. It is the only company that has successfully achieved commercial production of EUV equipment. Intel has purchased equipment from ASML, but it will take time to build a new production line. At the same time, industry analysts say Intel is losing its competitiveness.

Intel CEO Swan said at the end of July that the company would consider outsourcing production to a large foundry manufacturer.

Business architecture transformation

If Intel cuts back on its own semiconductor production, Nikon could be directly hit by a drop in sales of its chipmaking equipment.

Nikon's consolidated sales for fiscal 2020, which ends March 31, 2021, are expected to reach 430 billion yen, a sharp drop from 840 billion yen in fiscal 2015. Sales at the camera and other imaging equipment division are expected to fall from 520 billion yen to 140 billion yen, accounting for much of the decline.

The imaging equipment division is expected to post an operating loss of 45 billion yen this fiscal year. Of Nikon's four divisions, only the semiconductor and liquid crystal display panel production equipment divisions are expected to have an operating profit, but that may be as little as 1 billion yen.

Nikon is also at a disadvantage compared with domestic rival Canon in the market for steppers, which transfer circuit patterns onto silicon wafers during chip production. While the two companies share the market for exposure equipment for flat-panel displays, Nikon does not make deposition equipment used in subsequent processes to make organic electroluminescent panels. A Canon subsidiary is believed to have the largest share of the global market for these products.

As China works to boost domestic semiconductor production following U.S. sanctions on chip exports, industry officials said Nikon has an opportunity to snatch customers from Chinese chipmakers. In addition to plans to find new customers, the company is also actively expanding its chip business to maintain production of existing equipment and peripherals, including test equipment suitable for EUV technology and various other chip manufacturing production lines.

According to a structural reform plan announced on November 5, Nikon will reduce the unit's operating expenses by 63 billion yen by transferring camera production from Japan to Thailand and cutting jobs. Nikon will focus on producing cameras for professionals or photography enthusiasts, and although it will reduce the scale of operations, Nikon also seeks to achieve a turnaround in fiscal 2021.

The radical transformation plan could ultimately frustrate Nikon if it fails to turn around its chipmaking equipment business and expand into new areas of business.