From the Olympus Website--A little better translation than DPReview

Started Feb 14, 2013 | Discussions thread
John King
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Re: Cost accounting and reality.
In reply to Craig from Nevada, Feb 17, 2013

Gidday again Craig

Craig from Nevada wrote:

John King wrote:

Craig from Nevada wrote:

John King wrote:

Craig from Nevada wrote:

Lets assume world digital camera sales are above 115 million cameras

Let's assume Olympus has market share of about 10 percent or about sales of 11.5 million

Lets assume Olympus Imaging loses $170 million this year on cameras only, but breaks even on lenses and accessories.

Olympus is losing almost $15 on each camera it sells.

Let's assume a ladder ... (very old joke about the chief financial controller and the managing director)

Sorry, but you would not even passthe first unit of cost accounting on that analysis ...

AND there are two units in that subject that you have to pass in order to obtain a professionally recognised accounting qualification ...


Bird Control Officers on active service.

LOL, John

I am an economist, not an accountant.

Micro economics is a science; economics is ...

It was just for illustrative purposes to highlight the depth of the problem. $170 million is a pretty steep loss.

Anyone can illustrate anything using that kind of example, Craig.

We have a federal treasurer here who really believes that moving a $22Bn deficit from 2012/13 FY backwards into the (closed ... ) 2011/12 FY translates into being a surplus for 2012/13FY. BTW, that made the federal deficit some $44Bn for 2011/12FY ...

If I had ever prepared books of account for any of my clients in that way, the tax office (ATO) and companies office (ASIC) would have had to stand behind my professional body to take their turn to put me in jail for fraudulent accounting.

It's not just Olympus that have been involved in dishonest accounting practices .

BTW, who would have thought that the average Australian buys a new mobile phone every 6 months? I wouldn't have, but the statistics show that it is something like that. My last one was 4 years old when retired (still works for emergency numbers ... ); and the CEOoDO's last phone was about 10 y.o. when the battery started to die. Her current one is now about 3~4 y.o.

With 7Bn+ people on this planet now, why do you think that world wide digital camera sales might be 115 million p.a.?

If the camera companies combined had the imagination of the wheel nuts on a truck, they could probably move a lot of their stocks of digi-cams in the third world.

It would certainly make a "contribution margin". This is money earned from selling stock at a loss that would otherwise be scrapped. This then makes a contribution to defraying sunk costs. i.e. far better to make a loss of (say) $100M from running at a loss, than it is to shut down operations when fixed costs are (say) $300M.
In the first case, one makes a loss of $100M. In the second case, the loss is $300M ...


John, I am an agreement with everything you have said.

Actually, I looked up the number for camera sales may be on the low side. Some numbers point to 140million by 2015. I did find a number with 115 million and I can't relocated the cite, so let's use another number. Numbers are all over the place. So let's call world wide digital camera production 140 million.

These forward estimates (LOVE that term! on a par with "forward planning". I assume that by these terms the people using them are using them in contrast to "backward estimates" and "backward planning") are ignoring the developing world, and the huge increase in market size this necessarily implies.

http://www.isuppli.com/Home-and-Consumer-Electronics/News/Pages/Digital-Still-Cameras-Market-to-Grow-in-2010-But-Decline-Soon-to-Follow.aspx

http://www.imaging-resource.com/NEWS/1297728975.html

However, Olympus, had about 6 percent of the market share for all digital cameras in 2010-at least according to this source: http://www.fredmiranda.com/forum/topic/1000532/0

I would be surprised if it were as high as that, given the well-ventilated issues with corporate governance at Olympus - using the term extremely loosely ...

So lets say 7 percent world market share or 10 million units per year and losses of $170

million come in at $17 per unit. So $15 was a bit low. This was a back of the envelope estimate and still is.

The sunk cost question is interesting. It appears that as is the case of automobiles, the unit cost drops per unit of production From a loss minimization standpoint, it would make sense to keep producing so long as you cover your variable costs plus one dollar or Yen (in the short run).

I am not on an expert on camera production. Again, how much of the production is actually Olympus owned versus third party manufacturing Olympus products is another question. I do know that parts for cameras are manufactured by third-parties and assembled at the point of production.

How much of the $170 million is cash versus, let's say depreciation expense is another question. Cash is a problem at Olympus.

Agreed.

However the injection of some $500M into the company by Sony as part of their mutual technology sharing agreement will have helped dramatically. This amount is not (as I understand things) reflected in the books of Olympus, as it is a separate joint venture company. Having such a relationship with such a huge company as Sony cannot but help current cash flow problems.

Further, the cash flow problems are caused by a one-off event (hopefully!!), so are not properly brought to account on the P&L as any kind of recurrent expenditure. One could also raise a very good argument that depreciation should remain in a "Provision" account on the balance sheet; not be amortised into the P&L account. One can also raise valid arguments that the current arrangement is also correct. Accounting is far trickier than most people assume ...

The question is how much of this loss is sustainable in the short-run versus the long-run. I would point out the problem that Olympus has is similar to other manufacturers. The market for cameras mature--the cellphone camera is now driving the market. This is not a short-term cyclical thing, such as a recession, but a long-term market development. This has to factored in as well.

Agreed. As I have said for many years, how many 10x8 or even 5x4 cameras does one see in use? There is an optimum size for most things also. Mobile phones that were too small to use were all the rage for a couple of years. This trend has largely reversed. Fashion can be a fickle master ...
Translating this into the Olympus camera world, many are not prepared to give up the optical excellence of their 4/3rds lenses for the size of the µFT cameras. Equally, many people my age (many of whom have the readies required to buy really very expensive cameras), are opting for smaller and lighter kit that will do the job "adequately".
Canon & Nikon are also trying to prise their way into the smaller MILC market. Time will tell as to their success. ATM, it seems that Olympus and Panasonic are well ahead of the rest of the pack there.

The problem Olympus has it that the market for the types of products it produces is getting tougher. Too many cameras chasing too few customers.

Many (most?) keep on forgetting that Olympus practically own the medical imaging market outright. They took it away from Leitz and Nikon, amongst the big players.

One has to take out the provisions for fraudulent and corrupt behaviour from the accounts, IMNSHO. If one predicates one's crystal ball gazing with them in the picture, one is assuming that the fraudulent and corrupt conduct will remain as part of on-going operations. This assumption is fatally flawed ab initio, IMNSHO.

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Regards, john from Melbourne, Australia.
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