Thursday, December 19, 2019

Inside perspective on the Fuiji-film Hitachi acquisition.

It was about 30 years ago that I first visited Hitachi in Kashiwa, which is about one hour from Tokyo,
as a young CT product manager to discuss the implementation of a DICOM interface in their CT scanners.

Philips had just closed down their CT manufacturing in the Netherlands and were relying on Hitachi to provide them with a low cost, reliable and robust CT scanner, initially for the US market and then for worldwide distribution. This turned out to be a costly mistake for Philips as its management at that time underestimated the Japanese mentality of “Business is war.” It killed the CT market for Philips as Hitachi was slow to implement innovations and used the Philips channel to learn about the US market, which they promptly entered under their own name, not only to sell CT but also MRI’s.

I was amazed at that time with the Hitachi modular approach. Philips modalities, such as their CT and MRI would have completely different architectures, including the backend and even OS (MRI DEC based VAX and CT using the Philips minicomputer). Hitachi cloned their backend and connected a different modality, CT, MR or whatever frontend they needed thus achieving a great economy of scale. Philips eventually had to buy CT technology back by purchasing first Picker and then Elscint but never totally recovered in the CT marketplace where GE and Siemens (as well as Toshiba/Canon) have been dominant.

Hitachi always made pretty good ultrasounds, that is what Japanese companies do well. I visited the ultrasound manufacturing facility at that time and I was amazed by the cleanliness of their manufacturing. As a visitor,  we had to wear a yellow cap to distinguish ourselves, and before we entered the manufacturing floor, we left our shoes outside and put on slippers (way too small for my large Western feet of course) and I saw the most spotless manufacturing I had ever seen, despite the fact that we at Philips had a pretty clean shop as well.

Fast forward 10 years, I had moved from Philips to Kodak and was project manager for computed radiology (CR). Kodak had some of the smartest scientists in Rochester New York and had patented the CR technology several years prior. We referred to this as the “Lucky” patent after the person who filed it. However, Kodak was so fixated on analogue film, which eventually led to their demise, that they had sold the CR patent to Fuji, who promptly commercialized it and in addition applied for many patents around it to lock down this technology. When Kodak woke up and saw its potential ten years later, it had to get those patents back. I am sure it paid more for it than it sold them for. This was so embarrassing for Kodak that Kodak management told me to strip out all references to the original patent in my presentations as I was telling the world that “Kodak invented CR.” Kodak had some serious catching up to do and to speed up the CR commercialization, Kodak found a manufacturer in California, Lumisys, that made a small tabletop CR, which it bought the rights to.

Fast forward 20 years to the 90s and Kodak sells off everything in its portfolio to avoid bankruptcy, including their imaging business that included CR, which was bought by a private investment group that still owns it and rebrands it as Carestream. Fuji has maintained its market position as one of the premier CR providers and also became a pioneer in the PACS business as one of the first companies offering a software-only PACS and viewer. Interestingly enough, the software was mainly developed in the US, as Japan is a very good place to make hardware, but they don’t really know how to develop software well while the opposite is the case in the US. Just think about their motorcycles and look at the sophistication and refinement of a Honda Goldwing vs a Harley.  Hitachi still makes pretty good ultrasounds but never quite made a big dent in the CT/MR market.

As of today, the Fuji PACS business has matured, they have a good market share in some regions, e.g. in my own area, which is the Dallas metroplex, where they are number one. They also have some large contracts especially with the US government, although they seem to lag in innovation in this market. However, they are without any question number one in digital detector technology: CR’s are replaced with DR plates and they just introduced at RSNA 2019 the first super lightweight DR detector without glass (silicon) using a thin layered flexible semiconductor carrier.

Hitachi never quite made a big dent into the US market with its “big iron” devices, i.e. CT and MR compared with the big four (GE, Philips, Siemens, Canon/Toshiba), except for selling to outpatient imaging centers. In my opinion, they were managing their business too much from Japan with a Japanese mindset. If they would have taken their car manufacturing counterparts as an example, which design and manufacture their cars in the US to meet local market preferences, it could have been a different picture. Their ultrasounds are still pretty good; however, it will be hard to compete with a $2,000 Butterfly or $6,000 Philips Lumify. In contrast, fuji has a nice complement with its Sonosite product line of low cost portable Ultraosunds and just announced a handheld called the iViz air. But the main issue for Hitachi is their bottom line, as they are planning to lift operating margins to 10 percent or above by 2021 and their medical business does not meet that objective.

Fuji needs economy of scale. It missed out on the Toshiba deal which was bought by Canon, and it apparently missed out on the AGFA deal, which was just bought out by a European holding company called Dedalus, and I bet that the Carestream private investors wanted too much money. So they were looking for new opportunities, which Hitachi provides. Samsung is also preying as they need to diversify beyond their electronics and mobile business and healthcare is one of their growth initiatives, however it is funny how culture and politics sometimes dominate business and South Koreans just don’t play well with Japanese.

The Hitachi acquisition will get Fuji to a market share of close to 10 percent in the medical device and IT market, still about half that of the big four, so it might be looking for other potential targets. GE seems to have changed its mind about selling off their healthcare division, but who knows, maybe Watson-IBM is next? We’ll see what happens.

In the meantime, maybe it is time that FUJI changes its name from FUjIFILM to FUJI-DIGITAL or take Kodak as an example and call themselves FUJI-STREAM. Regardless, there will be hundreds if not thousands of employees changing their emails and business cards, while others, including myself, their address books, but we are used to that in this fast changing and interesting business of healthcare.