CEO Yasuo Takeuchi is leading Olympus’ transformation into a medical technology company after selling off its lauded, but money-losing, camera business.
Japan’s Olympus Corp. is synonymous with cameras. From its earliest camera in 1936, Olympus built a reputation for quality and innovation, such as its 1971 model 35DC, the world’s first camera with an automatic flash. Yet that storied legacy came to an end in January, when Olympus finalized the sale of its camera and voice recorder businesses to Tokyo-based private equity firm Japan Industrial Partners for an undisclosed amount. “I have [had] a longtime ambition to really change this company,” says president and CEO Yasuo Takeuchi in an interview at the company’s Tokyo headquarters.
It was a bold shedding of a signature business built up over eight decades. Without cameras, what’s next for Olympus? Takeuchi’s answer: “We have a very good business on the medical side.” Takeuchi is now overseeing Olympus’ most extensive corporate makeover in its 102-year history, with the aim to create a pure-play medical technology (medtech) giant.
This pivot takes Olympus back to its roots. While renowned for its cameras, Olympus has a long and parallel history in medical technology, using its optical expertise to make microscopes and endoscopes. In fact, the first product released by Olympus was a microscope, launched just six months after the company’s founding in 1919. Then came endoscopes—Olympus created in 1950 what it dubbed a “gastrocamera,” a device, while rudimentary, laid the basis for modern endoscopes.
Building on that expertise, Olympus says it is the world’s largest maker of gastrointestinal endoscopes, commanding 70% of the $3.3 billion global market for this technology. In the last fiscal year that included cameras (ended March 2020), the company’s two medtech divisions contributed 80% of ¥797 billion ($7.3 billion) in total revenues. The imaging division, which holds cameras, represented just 6% in sales and lost over $1 billion over the previous decade. Now that Takeuchi has jettisoned cameras, the microscope division may be next—as it will be transferred into a wholly owned subsidiary in 2022. All told, Takeuchi is on track to complete Olympus’ realignment to a company focused on endoscopes, therapeutic treatments and surgical technologies by the end of next year.
The reason for this transformation is simple—smartphone cameras have decimated the consumer camera market, negating demand for stand-alone cameras. As for microscopes, now that imaging is gone, this division has become the company’s smallest business, representing 13% of total ¥731 billion in revenues in the latest fiscal year (ended March 31).
Takeuchi, 64, has followed a tradition of many Japanese to pursue lifetime employment in a single company. He joined Olympus in 1980 as a fresh 23-year-old business graduate from Japan’s Chuo University. He rose up through the ranks, spending 16 years outside Japan, helping run Olympus’ operations in Europe and the U.S. He then returned to Japan in 2015 to head the corporate management office, becoming chief financial officer a year later. From there he moved into the CEO spot in April 2019—taking the post just months before the 100th anniversary of the company’s founding in October 1919. Now his challenge will be to lead Olympus into its second century, helming a company much different from the one at which he spent four decades.
The results of Olympus’ restructuring are bearing fruit. Since Takeuchi unveiled the company’s “Transform Olympus” restructuring plan in January 2019, its Tokyo-listed stock has doubled to recent levels around ¥2,200. In the first quarter of the current financial year that began April 1, revenue jumped 40% from a year earlier to ¥191.5 billion ($1.8 billion). Olympus swung to an ¥18.7 billion net profit from a ¥2.7 billion loss a year earlier, prompting the management to forecast a full-year profit of ¥101 billion—which, if achieved, would be the largest in its history.
While the pandemic had little effect on Olympus’ restructuring process, it did hurt demand for its medical equipment amid slowing economic growth in many of its markets and people putting off non-emergency medical procedures like checkups (its products aren’t used in treating Covid-19). Olympus now sees signs of rebound. In the fiscal year through March, “we faced unprecedented challenges caused by Covid-19. Despite these, revenue recovered significantly toward the second half of the year,” said Takeuchi in a conference call in May with analysts.
A brief history of Olympus’ corporate milestones and notable products.
The catalyst for Olympus’ restructuring is said to have come from U.S. activist fund ValueAct Capital, a San Francisco-based firm with a reported $16 billion under management and which has initiated actions against companies such as Microsoft and Rolls-Royce. When ValueAct emerged as the owner of a 5% stake in 2018, alarm bells went off at Olympus. In response, the company hired consultants who advised Takeuchi, then chief financial officer, not to talk to the hedge fund. Takeuchi balked at that advice. “I felt instinctively that they might be able to become a very good partner,” he says.
Ignoring the consultants, Takeuchi became the company’s liaison with ValueAct. According to a media report, ValueAct in December 2018 threatened to call an extraordinary shareholder meeting to replace the directors unless the company inducted three non-Japanese onto its board. While the fund at the time denied making this threat, in January 2019 Olympus announced ValueAct partner Robert Hale would sit on its board and be joined by ValueAct advisor Jimmy Beasley. Today they are two of the three Olympus directors who aren’t Japanese nationals. (ValueAct declined to comment for this article.)
Takeuchi downplays questions about external pressure, saying that ValueAct’s advice complemented the blueprint that he had started hammering out about five years ago with other executives, including the former CEO Hiroyuki Sasa. “I don’t think that’s exactly true,” he says, when asked about pressure for a board revamp. But if there was any nuance like that, he says, it was at the beginning of the relationship. “They didn’t know who we were, how we were going to manage this company and how we [would] react to their approaches,” he says. In January 2021, two years after Olympus announced its transformation plan, the fund sold down its investment. It now holds a 4% stake.
Masahiro Nakanomyo, a Tokyo-based analyst at U.S. financial group Jefferies, feels the changes would have occurred even without ValueAct because Takeuchi had already decided to focus on the medical business, unlike his predecessors who were more cautious in letting go of the legacy camera business. “Even if there was no gaiatsu [foreign pressure], they would have done the spinoff of the camera business,” Nakanomyo says. “What Takeuchi-san and ValueAct were thinking was in the same direction, so there’s no conflict.”
Takeuchi also instituted board changes, increasing the number of outside directors to nine out of 12 from six in the previous 11-member board, and setting up committees for nomination, compensation and compliance chaired by an external director. The “Transform Olympus” drive also led to the creation of a five-member global executive committee headed by Takeuchi and including Stefan Kaufmann, chief administrative officer for Olympus. A German citizen who has worked at Olympus since 2003, Kaufmann has been given responsibility to oversee the implementation of the plan.
Takeuchi has also streamlined decision-making. Previously, any major corporate decision could involve as many as 15 people, including directors and senior executives, causing bottlenecks and delays in getting things done. Take the company’s X1 endoscope launched last year. The product took eight years to develop, double the time taken by industry rivals to create new endoscopes. Eight years is too long, Kaufmann says.
Olympus says it is the world’s largest maker of gastrointestinal endscopes, commanding 70% of the $3.3 billion global market.
But now more authority is delegated to product and divisional heads, according to Takeuchi. Instead of overseas executives having to route decisions through a counterpart in Japan, divisions are now organized by function rather than regions. “This has improved agility by multiple times,” says Kaufmann. Olympus also encourages a “two in a box” decision-making process that teams up one Japanese and one foreign national, says chief operating officer Nacho Abia, who hails from Spain. He is based not in Tokyo but Marlborough, Massachusetts. “The quality of the decisions was much better than before,” he says.
Another change is in the research and development process. Rather than focus just on in-house research, says Kaufmann, the company is more open to acquisitions to speed up development—and has made a string of purchases in the last few years, including firms in France, Israel and the U.S.
With the restructuring, more analysts have upgraded their ratings. Vaccination progress in the U.S., Europe and China is leading to a sharp recovery in medical equipment sales, wrote Daiwa Securities analyst Tomoko Yoshihara in a May note. The Tokyo-based brokerage expects Olympus’ net profit to climb to ¥143 billion in the year ending March 2025, up 42% from the company’s forecast for the current fiscal year, on nearly ¥959 billion revenue. “As it continues to pursue business model improvements through the ‘Transform Olympus’ plan, the firm should be able to achieve sustained improvement in profitability going forward,” she wrote.
China is also a source of new demand and could soon displace Europe as the company’s second-largest market (North America remains its largest). “China has been growing by more than double digits in the past several years and that will continue,” Takeuchi says. “A country like India, like many Asian countries that have big populations, is totally underdeveloped” in terms of healthcare and as a market, he adds.
Kaufmann offers his personal perspective on the company’s evolution: “We now have a chance to focus much more on becoming the leading global medtech company that we want to be.”