Sector Analysis: Imaging supplies

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Running on empties
For the imaging supplies industry, the last year has been a relatively resurgent one with OEMs looking to protect their profits and remanufacturers striving to close the gap amid a shortage of empties and increasing patent protection
For manufacturers and remanufacturers alike, the last 12 months have, in general, seen the hoped-for period of recovery after the economic meltdown came to some sort of fruition in the imaging supplies industry. It’s not quite time to reintroduce those speculative business trips to exotic locations or put champagne back on the menu at the Christmas party, but there’s no question that something resembling normality has returned.
"We’ve seen a big uptake in sales, driven by an economic recovery in the many emerging markets that we cover and by increased acceptance of our colour product portfolio with our Western European customers," says Cornelis Alderlieste, Marketing Manager EMEA at Katun. "We have also steadily expanded the number of colour products we’ve introduced over the past couple of years and have been able to prove that our quality compares well to the OEM product, which has meant an increased rate of acceptance in the market."
Supplies Network has also enjoyed a heartening 12 months although competition has put the squeeze on margins.
President Greg Welchans says: "We’ve been fortunate with a very strong performance, exceeding our forecasts with double-digit sales growth and gains in market share. Maintaining margins is a more difficult challenge in the midst of aggressive competition."
Imation too has seen good growth over the past 12 months, with toner business up 57 percent year on year while OEM Connect has enjoyed a run rate of plus 17 percent year-to-date. Pelikan has also had a resurgent year with even a little help from the global economic woes.
Pelikan’s European Marketing Manager, printer supplies, Erik Andriessen, says: "The last 12 months have been very positive for Pelikan, especially in the field of printer supplies where we increased sales by more than 20 percent in the toner business. A lot of new products have been launched and many successful end-user promotions such as cash pack have been realised. We can say that the economic crisis helped us a little bit in terms of the hardcopy business, as many end-users searched for a less expensive solution in printer supplies than the OEM product."
CTS Toner Supplies has seen 15 percent growth in the same period while organic growth has complemented a busy acquisition period for Clover Technologies.
Clover’s President – North America Sales, Eric Martin, explains: "We have continued to grow both organically and through acquisitions. With the acquisitions of Image1 and West Point Products, we have built the foundation to maximise our efforts across multiple channels. Further, by having focused expertise in each market, we are able to provide every customer with the best-in-class support they need to grow their business and enhance profits."
Over at Hewlett-Packard (HP), sales at the IT giant’s Imaging and Printing Group (IPG) grew 9 percent to $6.2 billion in its third quarter of the year, fuelled by supplies revenue growth of 5 percent and year-over-year unit shipment growth of 16 percent.
Issues
Of course, the last year has not been without its issues for those in the imaging supplies industry. Rising unemployment means reduced print volume although organisations that can produce cost savings and value-added services have had a window of opportunity to flourish here. Welchans says: "Price compression for wholesalers and dealers has been a real dynamic in a tough economic environment, with lower-priced compatible toner also having an impact on OEM prices."
Katun has also seen the rapid economic recovery of markets as an area not without its own difficulties. Alderlieste explains: "A major issue has been the sudden economic recovery of many markets and related strong demand for product in an environment that has just experienced a period of contraction. In many cases, Katun and our suppliers have been quite surprised by the rapid turnaround and have struggled with steep increases in demand for some products. We know our customers have had to be patient in these cases, as back orders have been an industry-wide issue."
Of course, something that hasn’t changed in the last 12 months and remains at the centre of the imaging supplies industry, is the tussle between manufacturers and remanufacturers. In the last year remanufacturers have closed the gap on the OEMs albeit a little slower than they might ideally like.
Imation General Manager of Americas, Tom Lally, says: "The quality remanufactured cartridge companies are getting better with their quality control and in many cases they are sourcing colour pigments from the same manufacturers."
Clover’s Martin adds: "Aftermarket suppliers that either aren’t vertically-integrated or haven’t invested the resources into their development and manufacturing infrastructure will be challenged in meeting the standards set by the OEMs. At Clover, we ensure that every product that is developed and manufactured meets or exceeds OEM performance. As the largest collector of cores in the world, we can determine the best cores to use to maximise quality while supporting market demand. Also, because of our demand requirements, we are able to inspect and secure raw materials that are a higher grade than other remanufacturers may receive. When it comes to colour, there will always be slight colour differences due to IP adherence, but the quality of the print meets the same high quality standards as the OEM."
Katun believes that the issue of the closing gap between remanufacturers and OEMs is not an easy question to answer, as there are so many aspects involved in addressing the perceived quality gap.
Alderlieste explains: "In some cases, we believe the aftermarket/remanufacturers have indeed made improvements in the overall quality of their colour product portfolios – yet new applications and technologies continue to be challenging. Without a fully developed and high quality array of toner, photoreceptors and critical parts for a particular application, the remanufacturing of a colour cartridge using the correct ‘system’ is quite challenging and quality can suffer as a result."
Steve Clayton from CTS Toner Supplies is still concerned about the effect of remanufactured product. He says: "Poor quality supplied by some remanufacturers in search of the cheapest products has diminished end-user confidence."
One area that has the potential to further affect OEMs is Managed Print Services (MPS). Something of a hot topic and, indeed, a hot potato over the last couple of years, MPS is certainly seen as an increasingly significant factor in the imaging supplies industry (Editor’s note: Look out for OPI’s special MPS series of articles early next year).
Imation’s Lally says: "This is a very big threat to OEMs. Dealers have a much lower cost structure and are more flexible so they can compete effectively with the OEMs."
Welchans at Supplies Network adds: "In an MPS cost-per-page environment, brands are not as important since replenishment and service are outsourced. As always, MPS providers will make decisions based on performance, reliability and price. Several OEMs are offering compelling bundled programmes with attractive pricing to retain customer loyalty."
Protection
Of course, the OEMs are not going to take any nibbling away at profits lightly and along with the familiar mantra of ‘OEMs can’t be beaten on quality’, there is also a concerted effort being put into the protection of patents and incorporation of new technology as a way of making the remanufacturing process as challenging as possible.
Certainly, HP has been leading the charge on patent protection over the last 12 months (see ‘See you in court’ OPI May 2010, page 42) in a tactic that is likely to be further accelerated over the next year and beyond.
Clayton says: "More and more OEMs focus on their patents and also incorporate their tech difficulty level to prevent remanufacturing. But for the remanufacturers, they can avoid conflicting with the OEMs’ patent to the most extent if they try to use the collected empties as well as the spare parts. Even for the new materials, we only choose those famous companies that also have their own patents such as SCC and Mitsubishi. So far, there has been little impact on us."
Alderlieste adds: "Remanufacturers will likely see an increase in market share as new-build compatibles that are IP-compliant become more and more difficult to produce. This is especially true as OEMs become more vigilant about protecting their intellectual property.
"Katun relies heavily on a team of in-house patent lawyers that attempt to safeguard our customers from any IP-unfriendly products. At the moment, we are not involved in any anti-counterfeit prevention scheme. We do, however, find Katun counterfeit product in evolved markets. Although a credit to the strength of our brand, we are looking at ways to prevent this."
The other issue that has got increasingly significant for remanufacturers over the last 12 months is the shortage of empties. Clayton explains: "As there have been more and more factories entering the remanufacturing industry in recent years, the shortage of empties is increasingly a problem. Many factories can’t ensure enough supply of empties. But CTS Toner Supplies has built a very good business relationship with the main remanufacturers that in turn have built relationships with the top empties suppliers in the European Union and the USA."
Martin adds: "For companies such as Clover that remanufacture their product and operate within the legal guidelines, this is definitely a significant issue. However, Clover has developed the infrastructure over the years and is now the largest collector in the world. We continue to develop new and innovative programmes in every country that we operate in to ensure that we are meeting our growth expectations.
"Many companies that don’t have this infrastructure will have challenges in supporting their business needs. Also, with regards to the US market, Clover operates under the First-Sale Doctrine – we collect our own empties and can verify that they were collected in the US and can be remanufactured and resold in that market."