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Fujifilm Rearranges The Picture

Photo giant bets big on R&D in the face of a rapid decline in its core film business

by Jean-François Tremblay
July 2, 2007 | A version of this story appeared in Volume 85, Issue 27

Human Touch
Credit: Fujifilm
An operator at a Fujifilm plant in Japan helps make triacetate cellulose film to improve the viewing angles of liquid-crystal displays.
Credit: Fujifilm
An operator at a Fujifilm plant in Japan helps make triacetate cellulose film to improve the viewing angles of liquid-crystal displays.

IMAGINE GENERAL MOTORS not making cars or Dow Chemical getting out of chemicals, and you get a pretty good idea of Fujifilm's predicament. The company, one of Japan's best known brands, is in the process of remaking itself as its core photographic film business goes down faster than anyone had predicted.

It's not a pleasant experience. Fujifilm has laid off thousands of people and closed plants. Yet the firm is confidently looking ahead. A few months ago, it moved its headquarters to Tokyo Midtown, a spanking new office and shopping complex that has already become one of Tokyo's trendiest landmarks. And in April 2006, the company inaugurated an R&D center staffed with about 1,000 people working to invent the new products Fujifilm will need to start selling soon.

"We're establishing our Second Foundation," says Shinpei Ikenoue, a Fujifilm senior vice president who also heads R&D and is a board director. "We have the people, the technology portfolio, and the financial resources to set up a new foundation."

In 2000, Fujifilm generated about 50% of its profit from photographic films. Now, these films barely contribute to the bottom line and are actually a burden, considering the disruption and expenses the company has incurred to lay off people and close facilities. The worldwide photographic film market has shrunk in size from a peak of about $17 billion in 2001 to a bare $7 billion last year.

Despite a name that still suggests photography, Fujifilm now defines itself as a company devoted broadly to "improving the quality of life of people worldwide." Other film firms have also rethought themselves. Taking a more modest approach, Kodak now says it's mainly a supplier of digital cameras, printers, and camera accessories. Unlike Fujifilm, which has managed to remain profitable, Kodak posted nearly $2 billion in total losses in the past two years.

Beyond redefining its corporate mission, Fujifilm has taken drastic steps to cope with the demise of photographic film. For starters, it has laid off 5,000 people since last year. It is also overhauling its research efforts. The new R&D center, in the countryside near Mount Fuji, in the prefecture of Kanagawa, will consume as much as one-third of the company's R&D resources and will focus mostly on long-term basic research. Between 2005 and 2010, the facility will spend about $400 million.

Ikenoue says many of the projects undertaken at the new facility will not pay off for five to 10 years. But there are limits to how basic the research will be.

Credit: Jean-François Tremblay/C&EN (both)
Credit: Jean-François Tremblay/C&EN (both)

"We try to think about what technologies will be important in 10 years, what the market applications will be," Ikenoue says. "Our goal is not to win a Nobel Prize." He adds that he constantly challenges researchers to see whether they are thinking of market implications. And if a technology appears interesting but has no clear real-world applications, he tells researchers to focus their efforts in the direction that appears most promising. "I tell them not to swim west if they're going to America," he says.

For quicker paybacks, Fujifilm aims to simply modify some of its existing technologies. Its study of photography, Ikenoue explains, has provided the firm with insights in numerous areas. For example, the oxidation control mechanisms that Fujifilm invented to prevent photos from deteriorating over time can be modified to produce creams that protect human skin. Vitamin C, which is used in many health care products, is one of the antioxidants Fujifilm has studied in depth while developing ways to preserve photos, Ikenoue says.

Although Fujifilm's main source of profits in the past was photographic film, the company has long supplied a wide range of products, directly or through its subsidiaries. For example, Fuji Xerox is one of the world's top producers of photocopiers. And Fuji makes a broad range of cameras, both digital and traditional. The company also makes medical equipment such as endoscopes and radiography systems.

Science and Wisdom
Credit: Jean-François Tremblay/C&EN
The mascot of Fujifilm's new R&D center near Mount Fuji.
Credit: Jean-François Tremblay/C&EN
The mascot of Fujifilm's new R&D center near Mount Fuji.

THE PRODUCTS of the future, Ikenoue says, will make use of multiple technologies. In the past, he says, one new idea might have yielded one new product. In the future, scientists who aren't used to each other's ways will have to cooperate. Some projects may require that an organic chemist work closely with a mechanical engineer, something that is easier said than done. "Even when they are both Japanese, they still don't speak the same language," he notes.

One major reason Fujifilm built its new R&D center was to encourage cooperation between groups. Whereas most researchers at Fujifilm have been chemists, the company recently has been hiring specialists from fields as varied as software engineering and antibody medicine. Fujifilm, Ikenoue notes, remains one of Japan's most desirable employers among recent graduates.

Called the Fujifilm Advanced Research Laboratories, the Kanagawa center is an architecturally pleasing facility with a majestic outdoor staircase and a vast lobby. There is a statue of an owl on the facility's facade and one of the Roman goddess Minerva just inside the entrance.

Yasutomo Sasaki, operations manager for the R&D center, says Minerva was revered for her thirst for knowledge. She had a pet owl to assist her in her discoveries. Fujifilm chose her as a patron of the center, Sasaki says, because "we need to find new markets and fight our competitors."

While leading a tour of the lab, Sasaki repeatedly points out that it was designed to maximize interactions among groups of researchers. Shaped like a cube with a hollow center, the lab has internal walls made of glass, making it easy to see what other people are doing. Sasaki says the center currently employs 800 researchers and could eventually accommodate 1,200. Most researchers moved to the site from other Fujifilm labs.

The research center is home to four labs focused on life sciences research, synthetic organic chemistry, advanced marking research, and frontier core technology. The marking center seeks to develop new marking technologies such as jet inks, and the core technology center conducts basic research.

When a new product begins to emerge, managers integrate the researchers into multidisciplinary teams that work together until the envisioned product's basic concept is established and its core technologies discovered. Sasaki says these teams become cohesive units that eventually move out of the central research lab together to perform product development work at other Fujifilm R&D facilities. These facilities include the company's life sciences lab, flat-panel display materials lab, electronic materials research lab, and medical systems development center.

Fujifilm At A Glance

Headquarters: Tokyo

Sales: $23.7 billion

Net income: $293 million

R&D spending: $1.5 billion

Capital spending: $1.4 billion

Employees: 76,358

BUSINESSES (% of total sales):

Imaging (22%): Color films, digital cameras, photofinishing equipment and paper, photographic chemicals, photofinishing services

Information (37%): Equipment and materials for the life sciences and graphic arts industries, flat-panel display materials, recording media, optical devices, electronic and ink-jet materials

Document solutions (41%): Photocopiers, printers, paper, consumables

In recent years, one of Fujifilm's most striking achievements has been to establish itself as the world's top producer of triacetate cellulose (TAC) films used in the manufacturing of polarizers for flat liquid-crystal displays. Fujifilm controls about 80% of this market, with KonicaMinolta standing in a distant second place.

Joel Scheiman, a Tokyo-based analyst covering the Japanese chemical industry at the brokerage firm KBC Securities, estimates that, in the current fiscal year, TAC film for flat displays will contribute about one-quarter of Fujifilm's earnings, even though it will account for less than 10% of sales. The business has been growing at about 35% per year.

Katsumi Makino, general manager of Fujifilm's flat-panel display materials division, says Fujifilm's expertise in TAC derives directly from its knowledge of photographic films. Before heading the display-materials business, Makino spent 25 years conducting photographic film R&D.

Although the TAC films used in displays are the same basic substance found in a roll of camera film, there is an important difference. "The TAC films used in displays are flawless," Makino says with pride. "Even under the microscope, they are very even, and there are no foreign particles." He notes that making TAC film of such high grade gets more difficult as the surface area of the film increases.

Fujifilm learned to produce higher grades of TAC films by working closely with local display manufacturers and polarizer makers in the early days of the flat-panel display business, when all players were Japanese, Makino says. Now, the know-how Fujifilm has accumulated is such that it would be very difficult for a competitor to seriously challenge the company's position.

And whereas TAC film was at first used only as the protective layer of a polarizer, Fujifilm later came up with a "wide view" TAC film that increases the viewing angles of flat-panel displays. Before the invention of wide-view films, the displays could not be watched from a position off to the side.

A VISIT to Fujifilm's Kanagawa factory, the company's oldest, revealed surprising things about the manufacturing of wide-view film. One would think that human intervention would be minimized in the production of a film that is free from impurities and perfectly even. But about a dozen operators roamed around the clean-room shop floor.

The production line on which the film is made is able to turn out a flawless material, but the tools that make up the production line do not look very different from the equipment used to make more ordinary products. Rather than inventing fancy new robots, Fujifilm appears to have made intelligent use of rather simple machinery to mass-produce an advanced material that almost no one else is yet able to make.

Scheiman, the KBC Securities analyst, believes Fujifilm may be correct in claiming that its TAC film know-how is so developed that it's unlikely to face heated competition. But he's less confident that Fujifilm will be able to bring out other products that will enjoy similar market success.

"You look at some of the things they're working on, and creativity is definitely not a problem at Fujifilm," he says. "The problem I have is that a lot of them sound so futuristic, or are such basic research, that in terms of getting a return, it's probably a long way off." If investors have confidence in Fujifilm, he says, it is largely because it has been aggressive in restructuring its ailing imaging business.

Scheiman has been pleasantly surprised by Fujifilm's increased openness in recent years. He says the company's chief executive officer, Shigetaka Komori, has been meeting with analysts about twice a year since he rose to the helm in 2003. In the past, he says, "the president never showed up."

Back at headquarters, R&D head Ikenoue recognizes that one of Fujifilm's key challenges is to raise the productivity of its R&D efforts. But he sees no reason the company would not be up to the task given that, over the years, it has come up with new endoscopes, radiography systems, and more recently, the wide-view film.

For Ikenoue, innovation is a way of life. In the past, R&D resources were largely directed at inventing new photographic films and improving existing ones. Now, the company is aimed in many new directions. Fujifilm is not quite sure where it is headed, but it is sure it will get there.


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