Taiwan's digital camera makers are engaged in a fierce battle to capture a greater share of the global market even as camera prices drop.
It is the best of times and the worst of times for Taiwan's camera makers. First, the good news: Taiwan is shaking up the world of digital photography. Applying the same streamlined manufacturing that brought the world affordable personal computers, local companies are putting high-end digital cameras into the hands of ordinary consumers. They have pushed the retail price for eight megapixel compact cameras down to an unprecedented US$150 (equivalents from foreign brands still cost US$350 or more).
These are not cheap knockoffs, either, but state-of-the-art products from names you have probably never heard of, like Premier Image Technology and Asia Optical. Though the global market still seems to be dominated by foreign names like Fuji, Kodak and Canon, many of these products are actually being made by Taiwanese companies. Increasingly, local companies are handling design, as well as manufacturing, for their foreign partners.
With rapidly expanding production, the value of the global digital camera market is predicted to top US$14 billion this year. Half the forecast 85 million digital cameras sold worldwide in 2006 will be made by Taiwanese companies, but even as this milestone is reached, falling profits are forcing most local companies out of the market. It is a battle where only the fittest survive. How did the winners get to the top, and where do the losers go from here?
Some of the new companies behind Taiwan's digital camera boom started out making something quite different, explains Marty Kung, a senior industry analyst at the Market Intelligence Center (MIC), a Taipei-based research organization. "In the late 1990s there were a lot of keyboard and mouse manufacturers in Taiwan," he explains. These companies wanted to expand their product lines with similar cheap peripherals for desktop computers. At the same time, two disparate technologies came together to make an entirely new product possible: computers were becoming powerful enough to process video, and many were being connected to the Internet for the first time. Manufacturers hit upon the idea of the Web cam, a simple video camera that plugged directly into a computer, and made it possible for users to set up videophone calls over the Internet.
Web cams were cheap to make, and used many of the same techniques of plastic molding and interface design which manufacturers had learned making keyboards and mice. A Web cam is much simpler than a true digital camera. It cannot store pictures or be operated independently from a computer, and the image quality is bad. Despite this, Web cams gave Taiwanese manufacturers a valuable lesson in the basics of digital camera making, and also provided an opportunity for local makers of key camera components like image sensors and digital camera chips to learn their trade.
At around the same time, Japanese companies were experimenting with early digital compact cameras as a replacement for cheap film cameras. Some, seeking to reduce costs, looked to Taiwan for manufacturing partners. "Casio began to produce entry level digital still cameras and started to give orders to Taiwan," says Kung.
Initially, profits in the digital camera business were attractive. Building on Web cam experience and skills picked up from foreign partners like Casio, Taiwanese companies flooded into the market after 2000. Jack Hsieh, vice president for finance at Premier Image Technology, estimates there were at least 30 local firms making digital compact cameras during this period. The companies selling the products ranged from giants like Acer Group spinoff BenQ to smaller players with only a few hundred staff, like Ennyah Technologies.
Hsieh calls this period the "debug era," because digital camera makers were still learning how to ply their trade. Quality was an afterthought for the companies that jumped into the business, he recalls. "Image quality was poor. Optical component quality was poor. But nobody cared, because the whole thing was poor."
However, as time went by, quality began to improve. Cheap digital cameras became cheap enough, and good enough, to grab market share from compact film cameras. At the same time, long-established Japanese film camera companies like Canon and Nikon were finding that the digital camera field that they had begun to move into was an unfamiliar one. Unlike the film camera business, it was subject to rapid improvements in technology, particularly increasing megapixel ratings, which quickly made products obsolete. Film camera life cycles were measured in years, or decades even, digital camera life cycles were measured in months. "The market was no longer a conventional film camera market, it had become an IT products market," says Hsieh.
To cope with this new, competitive environment, more and more Japanese companies began to outsource production of digital cameras to manufacturers who had experience of electronics and the ability to constantly upgrade production facilities to deal with new, improved products. Could Taiwan win these orders?
While they helped spark the digital camera explosion, Web cams certainly were not the first cameras to be made in Taiwan. A handful of companies, including Premier Image Technology and Asia Optical, had actually been making traditional film cam eras since the 1980s. In the late 1990s, as it became increasingly obvious that digital cameras would come to threaten that market, they also began to investigate this new technology, through internal research programs, and by acquiring other companies with relevant skills.
In addition to years of experience in camera making, these older Taiwanese manufacturers had something that PC peripheral makers could not match--connections. "We had a very close relationship with all the Japanese brand names," says Jack Hsieh. This made it much easier for Premier to win orders from Japanese companies. Taiwanese companies that had come to digital camera making from the PC business, on the other hand, might have good connections with Japanese computer firms, but no contacts in the traditional photography sector.
But initially, this distinction did not matter much, because the old Japanese film camera makers turned their noses up at Taiwan's lower quality products when they began to outsource digital camera production. Instead, they looked to other Japanese firms like Sanyo and Funai for help. "Before 2004, outsourcing from Japanese brand names to non-Japanese manufacturers was probably only 5 percent [of Japan's total digital camera output]," says Hsieh.
During the past two years, however, the digital camera industry has reached a turning point. "The growth rate of the global market is slowing down," says Kung, "in Japan, more than 60 percent of households already has a digital camera, and in the United States and Europe it probably already exceeds 50 percent. So the market is already saturated. Growth is decelerating."
The ability to make a reasonable-quality, low-end digital camera had become commonplace. A full-scale price war broke out in 2004 as companies in the crowded low end of the market battled for customers. Cutthroat pricing hurt even the biggest players, and began to drive smaller companies out of the market. Insiders say that cheap digital camera manufacturers are now making profits as low as one dollar per unit. "We think we have great quality products, and good marketing, but the profits are terrible," says Patrick Peng, marketing manager at Ennyah Technologies Corp., a small Taiwanese camera developer, which has begun cutting back on its digital still camera product range. "The Japanese companies would like to make their cameras themselves," says Kung, "but the price war has forced more outsourcing. Who can accept those orders? The first is Sanyo, and also Funai. But at Sanyo, for example, production costs are a bit higher than Taiwan. So many orders have moved from those companies to Taiwan's top manufacturers."
"In 2005, because the quality of Taiwanese manufacturers is getting closer to [Japanese companies'] quality, the outsourcing ratio increased to maybe 30 or 35 percent of Japan's production," says Premier's Hsieh. Because many smaller manufacturers have already been driven out of the market by pricing pressure, the lion's share of that business has been concentrated in the hands of Taiwan's four largest manufacturers. In the opinion of most observers, those top four manufacturers are Premier, Altek, Asia Optical and Ability Enterprise, with Nucam and DXG sometimes also mentioned. The largest of these, Premier, is expected to account for around 12 percent of all global digital still camera production in 2005. The company generated consolidated sales revenue of about US$850 million in the first 10 months of 2005.
Meanwhile, the companies that were on the losing side in the digital camera price war swiftly turned to more profitable new products, like video cameras and projectors, that could take advantage of the expertise they had built up in optics and digital imaging. For example, Aiptek, once prominent in the digital still camera market, has switched almost entirely to digital video cameras, which now account for 85 percent of production, according to spokeswoman, Julia Lin.
However, they have only earned themselves a short breathing space, predicts MIC's Marty Kung. He points out that many digital still cameras already have some kind of video recording ability, so technically, there is not much difference between them and the basic video cameras Taiwanese companies are now marketing. "And at the moment we're seeing many Japanese companies like Panasonic and Sony beginning to push low-cost digital video cameras. So, in fact, the competitive environment there is the same as digital still cameras."
Further innovation is called for if the smaller players hope to survive. Ennyah, for example, is experimenting with a hybrid product, to be launched at the end of 2005, with a large screen, large memory and the ability to play back common movie file formats, Patrick Peng says. Together, these features make it part video camera and part personal media player.
It seems incongruous that Taiwanese manufacturers, who will make almost half the digital cameras sold in the world in 2006, remain unknown to most consumers. Although store shelves worldwide are lined with Taiwanese-made cameras, they bear other, more famous, brand names, like Canon, Sony, Nikon, Hewlett-Packard and so on. Only about 4 percent of the cameras made in 2005 by Taiwanese companies was sold under their own brands, says Kung. The percentage of Taiwan's output devoted to own brand production actually fell significantly as the competition intensified and local companies dropped out of the market.
It is common to see new brand names breaking into markets like PCs or digital audio players, but cameras are slightly different from these consumer electronics products, Hsieh believes. "Cameras have existed for over 100 years," he says. In spite of the switch from film to digital, consumers do not see cameras as new products, Hsieh explains. So the old brands built up over decades still have tremendous power in this new market. Only a few new names have managed to force their way into the market, Hsieh says, notably firms like Sony and Hewlett-Packard, which have substantial marketing resources and a very strong existing brand identity.
In addition, Kung says, "Japanese companies offer a complete product line, from cheap compacts up to sophisticated DSLR [Digital Single Lens Reflex] models, but most Taiwanese companies can only compete at entry level. So if competition makes everyone's prices the same, those Taiwanese companies will probably get pushed out of the market."
So, for the time being at least, Taiwan's digital camera kings will have to remain out of the picture.
Simon Burns is a science and technology
writer based in Taipei. He has contributed
to Forbes, the Wall Street Journal, the
Financial Times and other leading publications.
Copyright (c) 2006 by Simon Burns.