05 December 2012 Asia Pacific/ Equity Research Office Electronics (Precision (Japan)) / MARKET WEIGHT

Precision Sector Research Analysts SECTOR REVIEW Yu Yoshida 81 3 4550 9815 [email protected] remains top pick for 2013 amid ongoing consolidation in office-equipment market

Figure 1: HW / NHW average LC base sales growth rate (2011-12): Relatively positive for Ricoh

Average LC base sales growth rate (2011-2012)

(1) Winners of 8% (3) Limited impact consolidation effect from consolidation 6% Lexmark 4% Brother Ricoh 2%

0% -8% -6% -4% -2% 0% 2% 4% 6% 8% -2% Canon (Laser Fuji ) Canon (Copier)

Non-hardware -4% (Copier) (Laser printer) -6% (4) Unable to offset the (2) Losers of -8% consolidation effect impact from consolidation Hardware Note: × shows copier makers and △ shows laser printer makers Source: Company data, Credit Suisse

■ Summary: The labor equipment ratio ( in force ÷ number of employees) for office equipment (printers + laser printers) is declining, especially the ratio for single-function laser beam printers (LBPs). In this report, we examine the 2013 office-equipment demand outlook and the positioning of individual companies in the current market environment. ■ Focal points: The office labor equipment ratios for the US and Western Europe are diverging as the ratio has been falling in the US since 2010 while holding near peak levels in Western Europe. The divergence is related to regional differences in (1) the number of large enterprises, (2) the speed of tablet PC diffusion, and (3) the ratio of color multifunction printers. However, tablet PC diffusion in Western Europe is likely to pick up in 2013, raising the probability of a change in office environments that should push down the region’s labor equipment ratio. In the US, meanwhile, improving employment figures (i.e., increase in employed workers) will likely stem the decline in the US labor equipment ratio. Overall, we expect to see improving trends in MIF and shipments in 2013, which should at minimum prevent a rise in concerns about structural instability during the year. ■ Stock call: For 2013, we continue to recommend Ricoh (7752, OUTPERFORM, TP ¥1,300) as our top pick among office-equipment makers. Addition to the recent restructuring effect as emphasized in past reports, we believe Ricoh is best positioned to come out on top amid ongoing market consolidation thanks to a steadily growing non-hardware business aided by MPS knowhow secured via the IKON acquisition.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access

05 December 2012 Table of contents

Growing gap in US-Euro labor equipment ratios 3 Regional differences in office environments reflect different speeds in consolidation, paperless trends 3 Calculation of labor equipment ratio 3 US-Euro ratio gaps by printer type: Europe high for color multi-function devices, US ratio dragged down by decline in LBPs 4 Factors behind US trend toward consolidation of office equipment 6 Differences in company size 6 Differences in tablet PC penetration 7 Differences in the ratio for color multi-function devices 8 Emerging-economy’s labor equipment ratios still low 9 Current expansion in MIF should continue 9 Office equipment makers’ positioning in consolidating market 10 Ricoh’s firm underfooting: MPS driving PV growth, IKON acquisition not a mistake 10 Original dependence on large corporates has backfired 11 Little consolidation impact on companies focused more on SMBs 12 2013 outlook for office equipment market 13 US ratio nearing a bottom while Western Europe heads into downtrend 13 Lower unemployment rates could foster easing of consolidation trend 13 2013 should be void of concerns about structural instability 14 Stock calls 15 Ricoh our top pick again in 2013; reiterating OUTPERFORM rating 15 Limited downside in Canon’s office-equipment business 15 , Brother have strong long-term growth prospects but risks outside office equipment 15

Precision Sector 2 05 December 2012 Growing gap in US-Euro labor equipment ratios Regional differences in office environments reflect different speeds in consolidation, paperless trends When forecasting office-equipment demand, we focus on the labor equipment ratio. In the Gap in US-Euro labor US, this ratio has been declining since 2010, especially for single-function LBPs. In equipment ratios has Western Europe, however, it has held rather steady near peak levels. We believe the widened since 2010 owing cause of this rather clear divergence can be explained by regional differences in three to differences in 1) numbers factors: (1) the number of large companies, (2) changes in office environment caused by of large companies, 2) the use of tablet PCs (=paperless trend), and (3) color ratio in multi-function devices, speed of tablet PC diffusion, which could be a hub in office. 3) ratio of color MFPs in use

Figure 2: US & Western European labor equipment ratio: Gap since 2010

Labor equipment ratio - Total office equipment 24.0%

22.0%

20.0%

18.0%

16.0% US Western Europe 14.0%

12.0%

10.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

Source: IDC, Census Bureau, Eurostat, Credit Suisse

Calculation of labor equipment ratio The normal labor equipment ratio is calculated as tangible fixed assets divided by an average figure for employee numbers. In this report, however, our focus is limited to office equipment, which we define even more narrowly as printers and laser printers. We therefore calculate our labor equipment ratio as the number of machines in force (MIF) divided by the number of employees. According to this calculation, an labor equipment ratio of 20% means that 1 is being shared by, on average, five office workers. We calculate an approximate MIF figure using cumulative shipment numbers and assuming a replacement cycle of about five years. In the text and figures in this report, we use the following terms to refer to the various types of printers: copiers are copy machines, including multi-function copiers, which now are nearly 100% of the copier market; MFPs refer to multi-function laser printers; and LBPs refer to single-function laser printers.

Precision Sector 3 05 December 2012

Figure 3: US office equipment pseudo-MIF trend Figure 4: Western Europe office equipment pseudo-MIF trend

35,000 (000) US office equipment MIF 45,000 (000) Western Europe office equipment MIF

30,000 40,000 35,000 25,000 30,000 20,000 25,000 15,000 20,000 15,000 10,000 10,000 5,000 5,000 0 0 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 B/W MFP Color LBP B/W MFP Color MFP B/W Copier Color Copier B/W LBP Color LBP B/W MFP Color MFP B/W Copier Color Copier Source: IDC, Credit Suisse Source: IDC, Credit Suisse

Figure 5: Rest of World office equipment pseudo-MIF Figure 6: Worldwide office equipment pseudo-MIF trend trend

140,000 (000) Rest of World office equipment MIF 200,000 (000) WW office equipment MIF 180,000 120,000 160,000 100,000 140,000 80,000 120,000 100,000 60,000 80,000 40,000 60,000 40,000 20,000 20,000 0 0 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 B/W LBP Color LBP B/W MFP Color MFP B/W Copier Color Copier B/W MFP Color LBP B/W MFP Color MFP B/W Copier Color Copier Source: IDC, Credit Suisse Source: IDC, Credit Suisse

US-Euro ratio gaps by printer type: Europe high for color multi-function devices, US ratio dragged down by decline in LBPs In Figure 2, we have graphed the US and Western Europe labor equipment ratios for all Through 2008: ratios rose printer types based on our approximations of the total employed workforces in the two on increasing information regions. The graph shows the ratios rose steadily in both regions through 2008, as offices volume increased the number of printers in an effort to improve efficiency amid sharply growing 2009: flattening trend as information volumes. Around 2009, however, the ratios in both the US and Europe leveled companies grew more cost- off at 22–23%, most likely because companies in both regions became more cost- conscious following Lehman conscious during the economic crisis following the Lehman Brothers’ collapse. The crisis uptrend for the overall rate thus flattened off. In Figures 7–12, we break down the overall labor equipment ratio into the ratios for each Ratios for color copiers, type of copier/printer. These graphs reveal that the ratios for color copiers, color MFPs and color MFPs, and B/W MFPs black & white (B/W) MFPs continue to rise, despite the maturing of the US and European continue to climb copier/printer markets. On the other hand, after ratios for B/W copiers declined early on, the ratios for color and B/W LBPs entered downturns from around 2010.

Precision Sector 4 05 December 2012

One reason for the widening gap in US and European ratios is a strong uptrend in LBP ratios remain the Western Europe’s ratios for color copiers and color MFPs, which in turn probably reflects highest but sharp drop in US some differences in the two regions’ printing cultures. In addition, the ratios for color and since 2010 has pulled down B/W LBPs, still the highest among the various types of copier/printers, have been falling US’ overall ratio rather noticeably in the US since 2010. We think the decline in US LBP ratios is the major reason for the drop in the region’s overall ratio, as shown in Figure 2.

Figure 7: Labor equipment ratio: Color copier Figure 8Labor equipment ratio: B/W copier Labor equipment ratio - Color Copier Labor equipment ratio - B/W Copier 1.4% 4.5% 4.0% 1.2% 3.5% 1.0% 3.0% 0.8% 2.5% 0.6% 2.0% 1.5% 0.4% US Western Europe 1.0% US Western Europe 0.2% 0.5% 0.0% 0.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Source: IDC, Census Bureau, Eurostat, Credit Suisse Source: IDC, Census Bureau, Eurostat, Credit Suisse

Figure 9: Labor equipment ratio: Color MFP Figure 10: Labor equipment ratio: B/W MFP

Labor equipment ratio - Color MFP Labor equipment ratio - B/W MFP 2.0% 4.0% 1.8% 3.5% 1.6% 3.0% 1.4% 1.2% 2.5% 1.0% US Western Europe 2.0% 0.8% 1.5% 0.6% 1.0% 0.4% US Western Europe 0.2% 0.5% 0.0% 0.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Source: IDC, Census Bureau, Eurostat, Credit Suisse Source: IDC, Census Bureau, Eurostat, Credit Suisse

Figure 11: Labor equipment ratio: Color LBP Figure 12: Labor equipment ratio: B/W LBP

Labor equipment ratio - Color LBP Labor equipment ratio - B/W LBP 4.0% 14.0%

3.5% 12.0%

3.0% 10.0% 2.5% 8.0% 2.0% 6.0% 1.5% 4.0% 1.0% US Western Europe US Western Europe 2.0% 0.5% 0.0% 0.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Source: IDC, Census Bureau, Eurostat, Credit Suisse Source: IDC, Census Bureau, Eurostat, Credit Suisse

Precision Sector 5 05 December 2012 Factors behind US trend toward consolidation of office equipment We think the major reason for the widening gap in US and European labor equipment ratios is the differing pace of decline in the use of LBPs. The LBP ratios for the two regions were on similar upward paths until 2010 but have diverged sharply since then. We think this change can be explained by the three factors discussed below.

Differences in company size The first factor is the larger number of large companies in the US than in Western Europe. More than 50% of In the US, workplaces with 500 or more workers account for 51% of all employed workers. Americans work in In Western Europe, meanwhile, workplaces with 250 or more workers account for just 33% companies with 500 or more of total employment. employees The large number of large companies in the US can be attributed to more dynamic Large enterprises with corporate activity in the US and to the pursuit of scale merits, through M&A and other numerous copiers/printers means. Such large companies already had a sizable base of installed office equipment have more room for and therefore had more room to consolidate their equipment positions when the post- consolidation Lehman crisis forced them to become more cost-conscious. Small and medium-sized businesses (SMBs), on the other hand, generally have purchased a minimal amount of office equipment and therefore have little room for cutbacks. A key driver of consolidation in the office-equipment market is the growth of the market for Managed Print Services (MPS). The US MPS market is nearly twice as big as its Western European counterpart (Figure 14). We think this gap is also linked to the difference in company sizes in the US and Europe and has contributed to the differing speeds of office-equipment consolidation in the two regions.

Figure 13: Company size (employee number) as % of labor force: US has many large companies, which speeds consolidation of office equipment

US Western Europe

18% 29% 33%

51% 17%

21% 14% 17% <20 20-99 100-499 500+ <10 <50 <250 250+

Note: US data is as of 2010 and Western Europe data is as of 2007 Source: Census Bureau, Eurostat, Credit Suisse

Precision Sector 6 05 December 2012

Figure 14: Worldwide MPS market size by region in 2011: US market is about twice as big as Western Europe’s Worldwide MPS revenue by region, 2011

US 5.3

Western Europe 3.0

APAC (excl. JPN) 0.7

RoW 2.0 ($bn)

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Source: IDC, Credit Suisse

Differences in tablet PC penetration When discussing printing devices, one must also consider the effect of the paperless office Decline in US ratio from trend. Given that our study shows that the US labor equipment ratio began falling in 2010, 2010 may be partly due to we are inclined to think that the emergence of tablet PCs around this time was a emergence of tablet PCs at contributing factor (the first iPad was launched in the US on 3 April 2010). that time US sales of tablet PCs in 2011 totaled more than 24mn units, while the MIF for printers/copiers was less than 30mn in the same year. Whereas document portability once required that the document be printed out, companies are now exploring various ways to avoid printing out by employing display devices, such as tablet PCs, that are connected to networks. We think this is one reason for the drop in the labor equipment ratio in the US, where the proliferation of tablets has been most prominent.

Figure 15: Tablet PC shipment volume in 2011: Penetration in US was faster than Western Europe Tablet PC shipment in 2011 30,000 (000)

25,000

20,000

15,000

10,000

5,000

0 US Western Europe

Source: Garther, Credit Suisse

Precision Sector 7 05 December 2012

Differences in the ratio for color multi-function devices One plausible reason for US companies’ aggressive posture on use of display devices Convenience of tablet PCs such as tablet PCs is the low proliferation in the US of color copiers and color MFPs. In the as color display device in US, the use of color digital display devices is probably seen as one way to enhance user US may have been convenience. On the other hand, Western Europe’s switchover to color copiers and MFPs, enhanced by low which has some cultural context, has probably muted the impact of color display devices. penetration rate for color Even with the diffusion of tablet PCs in Western Europe now gaining momentum, it still multi-function devices does not appear to be having a negative impact on color copiers and MFPs.

Figure 16: Color MIF ratio of Copier / MFP by region

Color MIF ratio (3Q12) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Western US RoW Western US RoW Europe Europe Copier MFP

Source: IDC, Credit Suisse

Precision Sector 8 05 December 2012 Emerging-economy’s labor equipment ratios still low Current expansion in MIF should continue To this point, our discussion of the trends in labor equipment ratios has focused on the US and Europe, for which we have ample data. But what about the ratios in emerging economies? According to International Labour Organization (ILO) statistics, the global workforce MIF should continue included more than 2bn people in 2008 (with the most recent previous data used for expanding in emerging countries for which 2008 data was not available). Excluding workers in the US and Europe economies, where the labor lowers the number to about 1.7bn. Applying this number to available MIF data for the rest equipment ratio is just 7% of the world (RoW) in 3Q 2012, we derive a RoW office labor equipment ratio of just 7%. However, this RoW figure includes Japan and is therefore not a pure emerging country figure, which would be even lower. Considering the US and Western Europe ratios peaked at 22–23%, the RoW figure clearly indicates a low level of copier/printer usage in the rest of the world. We therefore expect to see continued growth in RoW MIF, as in Figure 5. However, if preparation of network environments advances at a quicker pace than office However, emerging equipment diffusion in the emerging economies, the office environment in these countries economies’ ratio could well could evolve into one that makes even greater use of digital display devices than we are stabilize below levels seen seeing in advanced economies. In that case, the stability level for the labor equipment in advanced economies ratio in emerging economies could well be fixed at a lower level than that of the advanced economies.

Figure 17: Labor equipment ratio in Rest of World (≒Emerging economies) is only 7%.

Labor equipment ratio - Rest of World office equipment

Color Copier B/W Copier Color MFP B/W MFP Color LBP B/W LBP

0.0% 2.0% 4.0% 6.0% 8.0%

Source: ILO, IDC, Census Bureau, Eurostat, Credit Suisse

Precision Sector 9 05 December 2012 Office equipment makers’ positioning in consolidating market In this section, we look at the impact of market consolidation on the office equipment makers’ sales of consumables, a key source of profits. In Figures 18–19, we have created matrices showing the sales growth rates on local currency bases (Fuji Xerox on a yen basis and Lexmark on dollar basis) for office equipment makers’ hardware (HW) and non- hardware (NHW) sales for the four and a half year period from 2008 up to 3Q 2012 and for the one and a half year period of 2011–2Q 2012. The matrices in these figures include four quadrants and show the industry players that fall into each, as explained below. 1. NHW rising as HW falls: Makers in this quadrant are raising the value of their non- hardware business even as hardware sales shrink amid overall market consolidation. 2. HW and NHW both falling: Makers in this quadrant are seeing non-hardware sales fall as market consolidation cuts into their hardware sales. 3. HW and NHW both increasing: Makers in this quadrant have been little affected by market consolidation and continue to expand their sales of hardware and non- hardware products. 4. NHW falling as HW increases: Makers in this quadrant have pursued aggressive hardware sales strategies but have been unable to offset the negative impact of market consolidation.

Figure 18: HW / NHW average LC base sales growth rate Figure 19: HW / NHW average LC base sales growth rate (2008-12) (2011-12)

Average LC base sales growth rate (2008-2012) Average LC base sales growth rate (2011-2012)

(1) Winners of 8% (1) Winners of 8% (3) Limited impact consolidation effect (3) Limited impact from consolidation effect from consolidation 6% Brother consolidation 6% Lexmark Konica Minolta Ricoh 4% 4% Lexmark Konica Minolta Brother Canon (Laser 2% Ricoh 2% printer) 0% 0% -8% -6% -4% -2% 0% 2% 4% 6% 8% -8% -6% -4% -2% 0% 2% 4% 6% 8% Fuji Xerox -2% -2% Canon (Laser (Laser printer) Fuji Xerox Fuji Xerox printer) Canon (Copier)

-4% Non-hardware -4% Non-hardware (Copier) (Copier) Fuji Xerox (Laser printer) Canon (Copier) -6% -6% (4) ) Unable to offset the (4) Unable to offset the (2) Losers of (2) Losers of -8% impact from consolidation -8% impact from consolidation consolidation effect consolidation effect Hardware Hardware Note: × shows copier makers and △ shows laser printer makers Note: × shows copier makers and △ shows laser printer makers Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Ricoh’s firm underfooting: MPS driving PV growth, IKON acquisition not a mistake Ricoh’s most distinguishing achievement of recent years has been its ability to expand its Ricoh secured MPS know- non-hardware business during both of our study’s two reference time spans (2008 to how through its IKON present and 2011 to present) despite seeing its hardware sales shrink along with those of acquisition, and is using it to other major office equipment makers. We think this success was secured by Ricoh’s grow its non-hardware acquisition of IKON, which gave the Japanese company the third largest MPS business in business by taking PV from the world. This acquisition has enabled Ricoh to expand its share of print volume (PV) LBPs as hardware sales fall even as the office-equipment market consolidates by picking up the share lost by LBPs as their labor equipment ratio falls. More recently, according to average values since 2011, Ricoh has managed to keep its non-hardware sales growing even as management’s new emphasis on profits over

Precision Sector 10 05 December 2012 volumes causes its hardware business to shrink in contrast with the hardware-centered approach of more aggressive competitors. Because the non-hardware business generates higher gross margins, Ricoh’s strategy of eliminating its dependence on expanding hardware sales and raising the value-added of its non-hardware offerings has helped it improve profitability.

Figure 20: MPS sales comparison: Ricoh rose to 3rd place in worldwide market share due to IKON acquisition. MPS sales comparison (2011)

Xerox / Fuji Xerox

HP

Ricoh

Lexmark

Canon / Oce

Konica Minolta ($mn)

0 1,000 2,000 3,000 4,000

Source: IDC, Credit Suisse

Original dependence on large corporates has backfired The Xerox–Fuji Xerox group has risen to the top of the MPS share rankings, thanks in no Xerox Group & HP have small part to its historical strong position in hardware sales to large companies. taken large shares of MPS Nonetheless, we think the amount of MPS business gained because of past relations with market but not enough to large customers has not been enough to offset the damage suffered by the group’s office offset erosion of previously equipment business. Fuji Xerox’s copier and laser printer businesses have both suffered high shares of hardware in during the office-equipment market consolidation since 2008. The company has large companies successfully endeavored to boost hardware sales since 2011, especially sales of mainstay copiers. However, sales growth has come mostly from low-speed copiers targeted at SMBs, previously a largely overlooked market segment for Fuji Xerox. Conversely, the non-hardware business has not kept pace with hardware sales. The story is similar at the company with the second largest share of the global MPS market, Hewlett-Packard (which sells laser printers made by Canon). HP commands a large share of the market for single-function laser printers, which as noted earlier have seen their labor equipment ratio fall sharply. This market position made HP highly vulnerable to volume declines when large companies began consolidating their office equipment. Considering Canon’s average sales growth for laser printers since 2008 and HP’s aggressive move into the MPS market, the US maker appears to be one of the beneficiaries of the consolidation effect. However, if we look at the matrix for 2011 onwards, when Japanese copier makers such as Ricoh and Konica Minolta stepped up MPS sales efforts, sales of non-hardware have declined as its hardware sales also fell.

Precision Sector 11 05 December 2012

Little consolidation impact on companies focused more on SMBs Konica Minolta and Brother Industries, on the other hand, have customer portfolios Konica Minolta and Brother weighted more toward SMBs. Consequently, their hardware sales have been less affected Industries, with customer by the advent of MPS than the hardware sales of office-equipment makers catering bases more focused on primarily to large corporations. Whether looking at the matrix based on data from 2008 or SMBs, are less affected by the one from 2011, these companies’ hardware sales have continued to grow or generally consolidation and retain hold steady, and their non-hardware sales have increased as a result. These makers’ high potential growth rates potential growth rates will likely remain relatively high, in our view.

Precision Sector 12 05 December 2012 2013 outlook for office equipment market US ratio nearing a bottom while Western Europe heads into downtrend We think the 2013 trends in labor equipment ratios will include a bottoming out of the US Expect US labor equipment ratio. We think improving employment numbers in the US could lead to a softening of the ratio to level off in 2013 as recent trend for companies to back on office equipment. In Western Europe, however, consolidation softens amid we think the ratio is likely to enter a downward phase as the increase of tablet PCs in use improving employment in Europe is likely to promote changes in the office environment similar to those already numbers seen in the US. Taking a more long-term view, we think it would be unrealistic to expect a future rise in the Western Europe ratio US labor equipment ratio given the changes in office environments being brought about by expected to fall in 2013 but the use of tablet PCs and other devices. Consequently, if the ratio finds a bottom in 2013, eventual long-term stability we would expect it to flatten out thereafter and enter a stable, flat trend. In Western level should be higher than Europe, we expect the ratio to decline for a while but, taking into consideration company that in US sizes and Europe’s higher use of color MFPs, we expect Western Europe’s labor equipment ratio to eventually stabilize at a higher level than the US ratio.

Figure 21: US & European labor equipment ratio: future outlook

Labor equipment ratio - Total office equipment 24.0%

22.0%

20.0%

18.0%

16.0% US Western Europe 14.0%

12.0%

10.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

1Q13e 3Q13e Source: IDC, Census Bureau, Eurostat, Credit Suisse

Lower unemployment rates could foster easing of consolidation trend Comparisons of the number of employed workers and office equipment MIF indicate that employment numbers may be useful as a leading indicator for MIF. Forecasting a recovery in office-equipment demand on the basis of improving US employment figures (i.e., increasing numbers of employed workers) is probably a bit simplistic if we keep in mind the irreversible changes in office environments. However, we do think that higher employment could lead to some easing in the trend toward consolidation of office equipment.

Precision Sector 13 05 December 2012

Figure 22: US – Relationship between office equipment Figure 23: Western Europe – Relationship between office MIF & employment equipment MIF & employment US - relationship b/w office equipment MIF & employment WE - relationship b/w office equipment MIF & employment

35,000 (000) (000) 150,000 45,000 (000) (000) 185,000 30,000 145,000 40,000 180,000 35,000 25,000 140,000 175,000 30,000 20,000 135,000 25,000 170,000 15,000 130,000 20,000 165,000 15,000 10,000 Office equipment MIF 125,000 Office equipment MIF 160,000 10,000 Employment (RHS) 5,000 Employment (RHS) 120,000 5,000 155,000 0 115,000 0 150,000 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Source: IDC, Census Bureau, Credit Suisse Source: IDC, Eurostat, Credit Suisse

2013 should be void of concerns about structural instability Given the views expressed above, we expect to see some overall improvement in the Unlike 2012, 2013 should office equipment market in 2013, with the trends in new shipments and MIF both improving not give rise to major from 2012. More specifically, we forecast a 2% rise in MIF and a 5% increase in annual concerns about increased shipments. We do not expect 2013 to present any major concerns about the office use of paperless office equipment market’s structural stability, as we saw during 2012, when the large drop in equipment orders raised concerns about an accelerating move to paperless office environments.

Figure 24: WW office equipment MIF / shipment volume trend: structural risks unlikely to emerge in 2013

Worldwide MIF & shipment YoY growth rate 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% MIF -10.0% Shipment -15.0% -20.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013E

Source: IDC, Credit Suisse estimates

Precision Sector 14 05 December 2012 Stock calls Ricoh our top pick again in 2013; reiterating OUTPERFORM rating Our top pick for 2013 is the same as for 2012—Ricoh, and we strongly recommend the Ricoh remains our top pick stock. As we have stated in the past, we expect Ricoh to achieve its target in FY3/13 on a among office-equipment net restructuring benefit and then continue to expand earnings in FY3/14. In addition, we stocks in 2013 think it has positioned itself to prosper during the consolidation of the office-equipment market as it steadily grows its non-hardware business and takes PV share away from LBPs. As a result, Ricoh’s profits should be little affected by any decrease in hardware sales. Ricoh’s acquisition of IKON has long been criticized because of the increase in expenses. If staff cuts at IKON bring However, we think the acquisition should be more favorably recognized as a sound expenses to normal levels, strategy to gain IKON’s MPS knowhow and leverage that to build Ricoh’s non-hardware investor focus could turn to business as a hedge against ongoing consolidation in the office-equipment market. If positive of MPS knowhow ongoing staff reductions, primarily in the US, lead to a more efficient operating structure, gained via IKON acquisition we think investors will come to see the real advantages of the IKON acquisition and forget about impairment losses and other current negatives. We therefore reiterate our OUTPERFORM rating and our ¥1,300 target price. Limited downside in Canon’s office-equipment business We expect business conditions to improve in 2013. The improvement should benefit Downside share price risk Canon (7751, NEUTRAL, TP ¥2,500), which supplies engines and consumables for laser stemming from laser printers printers sold by Hewlett-Packard, the world’s largest supplier of laser printers. has subsided Consequently, we think 2013 will be void of the structural uncertainties caused by a large drop in shipments in 2012. We therefore see limited downside for Canon’s office- equipment business, which in turn should limit downside for the share price. Konica Minolta, Brother have strong long-term growth prospects but risks outside office equipment Konica Minolta Holdings (4902, NEUTRAL, TP ¥500) and Brother Industries (6448, Konica Minolta, Brother NEUTRAL, TP ¥780) both have customer portfolios centered on SMBs. They are therefore Industries have strong less likely to be affected by the consolidation trend for office equipment. We also continue growth potential in office to see relatively strong growth prospects for both companies. That said, both face the risk equipment but other of declining profits in non-office equipment business segments in 2013. In particular, businesses present risks Konica Minolta’s TAC film business and Brother’s machine tools business could struggle in 2013 after supporting earnings growth in 2012. We therefore maintain NEUTRAL ratings on both stocks.

Precision Sector 15 05 December 2012

Companies Mentioned (Price as of 01-Dec-2012) FUJIFILM Holdings Corp (4901.T, ¥1,511) Konica Minolta Holdings (4902.T, ¥588) Brother Industries (6448.T, ¥799) Canon Inc. (7751.T, ¥2,883) Ricoh Company, Ltd. (7752.T, ¥765) Hewlett Packard (HPQ.N, $12.99) Lexmark International (LXK.N, $24.33) Xerox (XRX.N, $6.81)

Disclosure Appendix

Important Global Disclosures I, Yu Yoshida, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of October 2, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% or more, (depending on perceived risk) over the next 12 months. Neutral (N) : The stock's total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U) : The stock's total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts' sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst's expectation for the sector's fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst's expectation for the sector's fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst's expectation for the sector's fundamentals and/or valuation is cautious over the next 12 months. *An analyst's coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 39% (47% banking clients) Underperform/Sell* 15% (41% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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