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.