Peter Schiff: A lower dollar isn''t closing the trade deficit


By Ted Butler
Tuesday, April 12, 2005

For the past few years, the main bearish argument against silver has
been the encroachment of the digital process in photography.
Particularly in the amateur consumer category, it has been argued
incessantly that the silver-halide film process would be made
extinct by digital.

It did not matter to the bears that the film process was the main
source of silver recycling and that the demise of film in
photography would greatly reduce the supply of recycled silver. Nor
did the bears care that much of the printing of photographs from
digital cameras was on paper containing silver. All that mattered in
the hundreds and hundreds of articles written over the past few
years was that silver was dead on arrival in photography, thanks to
the explosive growth of digital cameras. People who knew nothing
about the facts in silver knew enough to pronounce that digital
would kill silver photography.

Certainly there was no denying the sales growth of digital cameras.
Even though the first digital camera (Sony's Mavica) was
introduced more than 25 years ago, the same year as IBM's Personal
Computer, sales of digital cameras took hold only in the past few
years. But if there was a delayed reaction by the consumer to
embrace digital photography, it was more than made up in a hurry.
Nowadays it's almost impossible to find even advertisements for
regular film cameras. Digital cameras have been just about the
hottest and most popular consumer electronic item for the past few
years, sporting strong double-digit growth, year after year.

Since we have all become accustomed to the high sales growth rate of
digital cameras, my reaction was nothing short of shock to this
article that appeared on April 4 in the prestigious Financial Times
of London. It's such a bombshell, in my opinion, that I am
reprinting it in its entirety.

* * *

Japanese Exports of Digital Cameras Fall in February

The decline in exports reflects falling global demand and a
saturated market. However, demand is still growing in North America.

By Michiyo Nakamoto
Financial Times, London

Exports of digital cameras from Japan fell for the first time in
February, highlighting the rapid reversal of fortunes in what was
once a fast-growing market.

Japanese digital camera exports in that month totaled 3.29 million
units, a decline of 0.9 percent year-on-year. said the Camera and
Imaging Products Association.

On a value basis, the decline in exports was even steeper, at 11
percent, reflecting the sharp drops in digital camera prices that
have plagued the industry.

The decline in digital camera exports by Japanese manufacturers,
which control about 80 percent of the world market, reflects the
deterioration in the balance of global demand and supply as
manufacturers have increased shipments in spite of market saturation.

Exports to Europe, in particular, declined 10.7 percent, for reasons
not clarified in the CIPA report. The large drop in shipments to
Europe wiped out a 3 percent increase in exports to North America.

The deterioration in the profitability of the digital camera market
was underscored recently when Sanyo Electric said it would make a
bigger-than-expected loss in the year ended in March, due to
declining demand for its digital cameras.

Sanyo is the world's largest maker of digital cameras, most of which
it supplies to third parties that market them under their own brands.

The group had initially forecast digital camera shipments for the
year ending last month of 18 million units but was forced to revise
this figure down to as little as 11 million.

However, Sanyo said the sharpest decline came in the Japanese rather
than overseas market.

Meanwhile, Olympus said it would make an $166 million operating loss
in its imaging division, which is believed to be largely as a result
of losses in its digital camera business.

The pressure has hit Kyocera, which last month said it would wind
down production of current models and not develop new ones.

In spite of the gloomy news elsewhere, the value of digital camera
shipments within Japan rose moderately in February helped by the
shift to more expensive, single-lens reflex cameras.

Both Sanyo and Sony, a major supplier of digital cameras that
expects to have increased shipments from 10 million in fiscal 2003
to 14 million last year, said they expected price trends to
stabilize this year.

* * *

You might want to read that article again; it's that profound.
Let me highlight some of the most important facts in this article
and then give you my analysis.

For the first time, sales of digital camera fell unexpectedly -- "a
rapid reversal of fortunes to what was once a fast-growing market."
It was stated flatly that the digital camera market faced "market
saturation." The Japanese digital camera manufacturers, who control
80 percent of the market, were facing sudden and unexpected losses.
These are the facts.

Now my take.

This should hit you like a ton of bricks. My first observation was
how little distribution and comment this article and these facts
generated. I bet this is the first time you have read about it.
Hundreds and hundreds of articles, maybe thousands, all proclaiming
how digital will just grow and grow, and then zero comment when the
facts suggest otherwise. Remember, proper investment analysis is
about weighing all the known facts. Why are those who raise the
digital camera issue ignoring this report?

I'd like you to put this report in proper perspective. If the
largest world manufacturer of anything -- cars, boats, planes,
computers, anything -- suddenly, without warning, had to revise its
yearly sales forecast down 40 percent in unit volume, could there be
bigger news than that? If General Motors or Toyota, or Dell or IBM,
or Boeing or Airbus, or Microsoft reported, without warning, that
they have sold for the year 40 percent less than they planned on,
what would the reaction be?

I'll tell you what the reaction would be: How could that happen?
Especially, how could that happen considering there was no obvious
macroeconomic cause?

Let's face it; there have been no shocks to the world economy. No
sudden recession or depression, no world war, no giant meteor wiping
out a continent or two. The world's largest manufacturers of
autos, airplanes, ships, computers, or any other broad class of
manufactured good have not seen their sales fall 40 percent in
expected annual unit volume production. So why did the world's
largest digital camera manufacturer see its expected sales fall that

Most importantly, why is the very word, "saturation," being applied
to the digital camera market? After all, this is a very new
technology that was growing by leaps and bounds. This was a new
technology that was universally proclaimed to replace the silver-
halide photographic process. What went wrong?

I've been observing the digital camera phenomenon closely over
the past few years, and I'd like to share with you some of my
thoughts. Long-time readers should remember that I had always
thought that digital photography was a great technology that would
coexist with but not replace silver-halide film photography. I still
feel that way.

My first observation is that digital photography itself has changed
greatly since its introduction. I'm not talking about the
improved picture quality at ever-decreasing prices, as that was
fully expected. I'm talking about the high expectations and popular
perceptions that surrounded digital cameras; that's what has

For instance, it was always assumed that by freeing consumers from
the necessity of buying and developing film, digital would be much
cheaper than the film process. The opposite has occurred.
Considering the expensive papers and inks, software, and hardware
needed in the digital process, film photography has become a
downright bargain in comparison. This, in spite of the glaring
advantage of digital -- the ability to erase unwanted shots.

Additionally, for the average person the digital photographic
process is infinitely more complicated than film. And because
storing and archiving digital images has become so burdensome (for
most people, once you put them in your computer, you can't find
them again), we have seen the ultimate and ironic change in digital
photography. More and more folks now schlep to the store to get high-
quality prints produced from their digital images, just as is done
with film. It has become clear that the ideal way to record and
store a photographic image was the very same way we were doing it
for more than a hundred years: on a print you could hold in your
hand or put in a photo album, to share with someone else.

This is why I think the digital camera market has become saturated:
It's just not that revolutionary. How successful do you think any
new technology will be if it basically does the same thing as an
older technology but more expensively and with more complications?
If you're only going to end up with the same result, a
photographic print, why pay through the nose and aggravate yourself
to boot?

Compare the digital camera introduction to the introduction of
photography itself 150 years ago. Then the world was introduced to a
process dreamed about for thousands of years. All digital
photography has done is provide a different mechanism, more
expensive and more complicated, for an existing and firmly
established process.

When George Eastman introduced the Brownie camera for Kodak 100
years ago, that set off a growth pattern that lasted a century, as
the average person was exposed to an affordable and simple way to
record memories. That was a world-altering event. Compared to that,
the digital camera doesn't even register.

I want to be clear that I am not trying to bash digital photography.
My interest is analyzing its potential impact on the use of silver
in photography. But over the course of the past few years I have
seen many wild claims being made about digital and I am taking the
opportunity to try and balance the story, particularly in light of
this report showing a sharp fall off in the growth of digital

I've long felt that the digital camera market would get
saturated, for a number of reasons. For one, consumer digital
photography is still a rich man's and rich country's game. The
article mentioned Europe, the United States, and Japan for good
reason. Digital cameras are not making big inroads in the high-
growth and heavily populated countries like India and China. A
reader recently sent me a news clip from Brazil, where film
photographic growth was on fire. It won't take long to saturate a
market that excludes most of the world's population.

Another phenomenon that I had noticed was that many digital camera
buyers had previously owned older digital cameras and were upgrading
to enjoy new features. I'm not being judgmental about those who
must have the latest gadgets, just observing that this type of
market can be saturated more quickly than a market of massive
numbers of new customers.

What I am suggesting is that the bloom may be off of the digital
camera rose phenomenon. I am not suggesting that digital cameras are
going to disappear but rather that the preceding report was no
fluke. It may take time for people to recognize that the new
technology may not be that much of an improvement over the older
technology, but if the older technology remains much cheaper and
easier, that will be realized in time.

My main conclusion, of course, is how this digital camera sales fall-
off relates to silver. Here, I think the impact could come sooner.
For years we have been conditioned to assume that digital will
replace film. This is a slap in the face to that way of thinking. I
think there are many people who will be shocked by this new
information. The main bear argument has been dashed in an instant,
by the facts. With all the bullish arguments for silver still
intact, who would have thought that the main bearish argument would
be seriously challenged?

The most ironic aspect to this digital camera debate is that the
very time of maximum sales and recognition of digital's penetration
in the market, over the past two years, has occurred precisely at
the same time silver has acted better in price than any time in the
past two decades. If digital was making film obsolete, why would the
price of silver behave so well? Now we may have an answer: The
future doesn't bode so well for digital cameras.


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