The big news of the past few days has been that Kodak has filed for Chapter 11 bankruptcy protection in the USA. Chapter 11 in the USA is different from filing for bankruptcy in most other countries when a company is declared insolvent. In the USA that situation is Chapter 7. Chapter 11 is a process used by companies with financial problems to allow them to operate in a restructuring mode while receiving protection from creditors. In this the Kodak situation differs from that of manroland where an administrator was appointed to run the company while looking at different approaches to sell of the company, break it up, sell of the assets, or close it down completely.
The announcement from Kodak was not unexpected as the company has been having financial problems for some time, and had appointed a specialist consultancy company late last year to evaluate bankruptcy protection options.
The reason that Kodak has reached this situation is not that it is not trading successfully in selling its products. It is that it is weighed down by huge debt generated in the past by a fundamental change in its business. In terms of sales Kodak is a major player in the graphics communication industry with annual sales in excess of $5 billion. That is larger than companies like Heidelberg, the world’s largest press manufacturer. The debt has come about in the switch away from being a film-based business. Since 2003 Kodak has had to close down 13 film manufacturing plants and 130 processing laboratories around the world and reduce its workforce by 47,000 people. This generated massive redundancy costs and huge pensions liabilities.
This change from a film-based business had been predictable for some time as the world switched from film based solutions to digital solutions. However in the late 1990s film continued to grow, and to my understanding 2001 was the biggest year ever for Kodak in film sales. Unfortunately for Kodak the fall in film revenues was incredibly rapid from 2002 onwards.
Much of the highly uninformed analysis of the Kodak situation in recent days has concentrated on the glorious days of the past when Kodak dominated the photographic world, and has failed totally to understand the current Kodak business. Most of this analysis states that Kodak failed to change and that it misunderstood the switch to digital photography, despite inventing the technology. That is not true, however Kodak did not move fast enough allowing major competitors from Japan and other far Eastern countries to take control of this market. Kodak did have a good range of digital cameras but it spent too much time and effort in protecting its still significant film business. This analysis failed to understand that Kodak has been transitioning its business to new areas for the past decade.
What most analysis fails to understand is Kodak has transitioned from being a business-to-consumer (B2C) organisation to a business-to-business (B2B) organisation. It still has a significant B2C operation in digital cameras and desktop inkjet printers, but it is a relatively small player in this market. It is still the world market leader in photo processing with kiosk and business operations around the world for printing of digital photographs. The major business however for Kodak today is aimed at the printing and publishing industries and major enterprise companies. One problem with this switch of business from B2C to B2B is the huge costs of the transition in both R&D and acquisitions. This is particularly seen in the costs of bringing the STREAM inkjet technology used in the Kodak Prosper presses to market. In the graphic communications markets Kodak is a market leader in printing plates, digital workflow and high-speed inkjet printing, and is a major player in sheet fed digital printing. It is also rapidly building a major presence in packaging workflow and consumables. In the enterprise markets it is the world leader in image capture of commercial documents, and it a major player is document outsourcing and consultancy.
What therefore is the future for Kodak? Much will depend upon how it works in the next year. Kodak has a major holding of intellectual property (IP) for which it currently obtains licensing revenues of around $300 million, and it is endeavouring to sell some of this IP. It is speculated that this could be worth in the region of $3 billion. If it can realise this sum it should be able to manage its huge debt and move forward and exit bankruptcy as a stronger company with a range of growing businesses. If it fails to sell this IP then the possibilities are the company perhaps being broken up or taken over.
For Kodak’s customers and prospects I believe that the future is good. Without the debt that is dragging the company down, Kodak has a very strong product and services portfolio. This will certainly continue whatever happens to the company. Kodak is not like manroland, a company with a diminishing share of a diminishing market, and few future oriented products that is in the process being broken up. I believe that subject to clearing its debt situation that Kodak will emerge as one of the core players in the growth of the digital graphic communications market.
Discussion
By Drew Court on Jan 23, 2012
Having cut my teeth in professional and consumer photography before sensibly switching to graphic arts, I have a great deal of affection for Kodak, but I must disagree with Andy's assertion that they did not misunderstand the shift to digital photography. the late 80s and 1990s was like watching a slow-motion train wreck where Kodak was concerned. Disc camera; Photo CD;Encad; buying Chinon Camera Company in 2004 - a third-tier manufacturer struggling against Canon, Nikon, Olympus etc. With the exception of the Nikon-OEM'd DCS 13 megapixel DSLR, discontinued in 2005, Kodak's digital cameras were not that great and not well marketed outside of the USA.Kodak also once owned the Leaf high-resolution camera back range which they could have built on, but let that go. Canon, Nikon and later Sony and Panasonic always had digital cameras with better features and value...Kodak's dependenece on a run-down Japanese former film camera manufacturer was uncompetetive and found wanting. They failed to appreciate that capturing images morphed into the Consumer Electronics industry in the late 1990s.
Following the Chapter 11 restructure, my biggest fear is that Kodak will neither keep nor attract the creative brain-power to come up with new innovations. I already know of some of their finest who have left and joined exciting start-ups. Today, a company that does not have new products every 18 months or so is a company on the slide. What's around the corner for Kodak? What's the next 'big thing' we can expect?
Sorry Andy, there were thousands of people who could have saved Kodak back in 1994 after the Eastman Chemical split-off, but their voices were never heard. Management stuck to outmoded thinking and charted the course back then that caused the good ship Kodak to flounder on the rocks 17 years later. Over on the right of this page is an ad for Fujifilm "Total Wide Format Solution Provider" - where is/was Kodak's Flatbed UV tech? That's just one example, and it happens to have sustained the highest CAGR of all sectors of the graphic arts for the past few years.
Like I said, great affection for the Kodak brand and I've had some very successful and good times with Kodak people; but what is - is, and what ain't - ain't, as The Duke once said.
By greg goldman on Jan 24, 2012
Kodak in the short term will remain in the game, disappearing in some segments, limping along in others and is still a strong player in the traditional plate business. When reading Andy's analysis he mentions the huge layoffs that have happened overtime, and then the huge pension liabilities. This may be the single piece of the puzzle that is the demise to the company and now the thousands of retirees.It is the "legacy post-employment benefits that continue to consume a substantial amount of the debtors’ cash". To the tune of supporting roughly 65,000 retirees worldwide with legacy liabilities that include $1.2 billion in non-U.S. pension liabilities, and $1.3 billion in other post-employment benefit liabilities.
Perhaps this is the weight Kodak plans to minimize through the chapter 11 bankruptcy route? Overtime unfunded pension liabilities eventually catch up to industry giants. A sad but true reality in today's world.
By Gerhard Maertterer on Jan 24, 2012
Yes Andy, it's true, that Kodak had to close down worldwide 130 processing laboratories. But do you know, how they did it?
In Germany they sold all 10 Kodak laboratories to a company called BHG Color&Print Group. That was in December 2003. The price was 1 EURO.
In May 2004 BHG failed for bankruptcy. 2,500 employees lost their jobs - but not at Kodak.
By Gerard Rich on Jan 25, 2012
Kodak faced similar challenges to its main competitors. This is not an excuse.
The main difference is that Asian competitors and European competitors have put more emphasis on excellence in production with massive plant investments.
US companies usually spend a lot in R&D as Finance people like it (You can win big as in the casino) but Finance people don’t like big investments in plants with lo,g amortization schedule. They explains the disappearance of industry.
In Graphic Arts, Kodak has made stupid decisions of discontinuation of good products opening boulevards for competition and, whereas management announces price increases, sales people continue to lower prices in the field to undermine competitors with stupid deals involving FOC equipments deals.
Selling patents is a one way route and no substitute for a solid P&L statement.
G Rich
By Rossitza Sardjeva on Jan 25, 2012
For example: Kodak has made an obvious stupid decision to buy Heidelbeg Nexpress toner digital press, which for was known at that time it is not prosperous....
By Raymond Prince on Jan 25, 2012
Great article Andy. In is easy for many to look back and tell what was done wrong but at the time of change it is most difficult to predict the speed of that change.
In looking forward the Graphic Communication products that Kodak has are excellent products and have performed well. They have embraced wide format commercial inkjet very well with the Prosper 5000 press and likewise have in many product groups the #1 or #2 products in those groups. Kodak as a Grapic Commication industry company will continue to be a great company.
For Kodak as a whole selling patents is a very difficlut businnes and usally takes the threat of legal action to bring a buyer to the table. A long process indeed.
May Kodak live a long life.
Discussion
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