By Sophie Knight and Reiji Murai
TOKYO (Reuters) - Canon Inc is shifting capacity back to Japan in an apparent vindication of Prime Minister Shinzo Abe's yen-weakening policies, which have made it more profitable for some Japanese manufacturers to produce and export from home.
In the wake of the 2008 financial crisis, the world's largest camera maker was caught out by its reliance on domestic production by a soaring yen - which devalued its overseas earnings and increased labor costs - forcing the company to produce more overseas.
It is now set to reverse that shift, boosting jobs and factory operations in Japan in a move that will delight proponents of Abe's economic policies and erode the competitive advantage enjoyed by rivals such as Nikon Corp, which has long made the majority of its cameras overseas.
Canon will raise the proportion of products made in Japan to 50 percent within the next three years from 42 percent now, Chief Executive Fujio Mitarai told Reuters in an interview on Thursday, after saying he was "looking forward" to a further slide in the yen.
"Right now we have spare capacity at home because we gradually moved production overseas," said Mitarai, referring primarily to cameras and photocopiers. Canon cut back production at home from over 60 percent before the 2008 crisis to 40 percent in 2009.
The move is designed to make manufacturing more flexible and Canon will leave the option open to push production back overseas should the yen strengthen again, Mitarai said, adding that the company has no plans to build new factories in Japan.
The impact of Canon's strategy will be reflected in the company's balance sheet in the months ahead. For the financial year ended December 31, Mitarai sees operating profit as likely flat against a forecast of 11.2 percent growth, and sales up around 7 percent versus guidance of 7.8 percent. The company reports its results for fiscal 2013 on January 29.
Last year, the yen fell 21.4 percent against the dollar and 26.4 percent against the euro as the Bank of Japan launched an aggressive monetary easing program.
Canon is also continuing its push to automate much of its production and replace humans with robots. Mitarai said he hoped to hike the proportion of automation at Canon's lens factory in Utsunomiya, a city near Tokyo, to 50 percent at the end of 2014 from 10 percent to 20 percent now.
The company expects gradual progress in partial automation at its other factories, including Japan's Oita, Nagasaki and Toride, to boost its gross profit margin by almost 1 percent to 48.3 percent in 2013.
Innovation in robotic production also means Canon can have factories in developed markets and remain immune to the high wages while keeping distribution costs low. But its plans for an automated printer cartridge factory in the Netherlands have been stalled by the prolonged chill in the European economy, with construction yet to start.
"We've bought the land but demand in Europe isn't strong enough yet," Mitarai said, adding that Canon had been too optimistic about a recovery in its biggest market, where it gets around a third of its revenue.
"Our forecasts for Europe at the beginning of last year were way off."
Initially buoyed by a weakening yen, the company hiked its operating profit forecast in the first quarter of 2013 by almost 10 percent, saying that each yen that the Japanese currency slid against the dollar would boost revenue by 19.7 billion yen ($187.91 million) and operating profit by 7.7 billion yen.
However, the dramatic shrinkage of the compact camera market last year - estimated at 40.2 percent by researcher IDC - and an unforeseen weakening in high-end camera sales forced Canon to cut its profit forecast at the following two earnings announcements.
The CEO said he was optimistic that Canon can increase both revenue and profit by more than 5 percent in 2014, and could far surpass that level if the yen weakened beyond the company's "conservative" estimates of 100 yen to the dollar and 135 against the euro.
On Thursday, the Japanese currency was 105 against its U.S. counterpart and 142.89 against the single currency. A weaker yen means it is cheaper to make goods in Japan, and boosts the value of overseas revenue once repatriated.
Mitarai said sales of digital single-lens reflex cameras likely came in under 8 million units in 2013 to mark the first annual decline since Canon introduced its first model in 2004.
Some analysts say that consumers are increasingly prioritizing connectivity and mobility over picture quality, finding themselves slipping their smartphones out of their pocket instead of hauling out their SLRs. Mitarai disagrees.
"There isn't any impact from smartphones on SLRs. They're a different genre. You can send your (SLR) pictures out to the world now with WiFi, to the cloud. The only difference is that you can't make calls with your camera," he said.
"We don't have any plans to make a camera that you can phone someone with... But we will continue to put in more connectivity features into SLRs."
Canon says that digital SLR sales softened this year due to the prolonged chill in the European economy and slowing growth in China.
Canon's global shipments of interchangeable lens cameras accounted for 45.1 percent of global shipments in July-September, according to IDC, a 5 percent drop in share from the year prior and a 25.7 percent drop in unit sales.
However, Mitarai said Canon had increased its share of the SLR market by a few percent over the whole year and would aim to increase unit sales in 2014, hoping to reach 9 million units in the short-term thereafter.
($1 = 104.8350 Japanese yen)
(Editing by Christopher Cushing)