The headquarters of global camera giant Canon Inc. are as unassuming as the company, located in a small town about 40 minutes away by car from the bright lights of downtown Tokyo. Two silver office buildings bearing the company's name in large red letters stand out in the quiet, unremarkable townscape of Shimomaruko in the Tokyo ward of Otaku, located roughly halfway between Tokyo and Yokohama.

"No pictures allowed," says a security guard at one of the buildings the moment a visiting journalist raises a Canon camera to get a shot.

Of the two buildings, the "H" tower is described by the Canon family as the "headquarters within the headquarters," home to the offices of the company's two senior executives, chairman and CEO Fujio Mitarai and president and COO Tsuneji Uchida.

The building's spotless lobby, the seamless snow-white marble tile floor and walls that come together as one, the high-ceilinged atrium, all contribute to a breathtaking first impression, symbolic of the rare success story Canon has become in post-bubble Japan.

In recent years, there has been little good news for Japanese companies. The most common stories have highlighted the country's shrinking domestic economy, mounting problems in export markets because of the appreciating yen, corporate downsizing, the relocation of factories overseas, the struggle to survive, rising unemployment and lower pay. But Canon is an exception. In 2010, the company's sales and net income grew 16 percent and 90 percent, respectively, almost unheard of in stagnant Japan and even miraculous in global terms.

Bucking the Trend to Stay on Top

Over the past 20 years, most large Japanese corporations have either moved their production facilities offshore or contracted their manufacturing to outside suppliers. But Canon, which has been in business for 73 years, insists to this day on producing everything in-house, and what's remarkable is that the company remains profitable.

Then again, bucking the trend has come to be the norm for the camera maker.

During the global economic meltdown that began in September 2008, most companies reduced their investment budgets, laid off workers and cut employee pay. But Canon resisted the impulse to shrink its operations to cope with a weakened economy, opting instead to step up R&D investment. Mitarai saw the crisis as a golden opportunity and aggressively pushed forward. As a result, in 2010 Canon obtained the most patents of any Japanese company for the fifth consecutive year and the fourth-most of any company in the world.

Backed by constant innovation, Canon has led the industry in market share for digital cameras for eight straight years. In 2010, its 20 percent share was 3 percentage points higher than that of its closest rival, Sony Inc.

One of every five digital cameras sold around the world is a Canon, and the company's advantage is even more pronounced in the single-lens reflex (SLR) camera market, where one out of every two or three is a Canon.

Canon was the first company in the world to develop and produce a digital camera and one of only four Japanese companies, along with Nikon, Olympus and Pentax, that has optical lens capabilities. But Canon's unwavering focus on cameras and its stranglehold on market share superiority results from a hard lesson learned two decades ago, when it veered away from its core competence and suffered repeated setbacks that nearly bankrupted the company.

 In the early 1990s, Canon decided to invest heavily in personal computers and LCD monitors, but was not successful in either venture. More costly, however, was that Canon's foray into new business lines diverted its attention from its core competence, causing it to fall behind in the battle for position in the rapidly changing digital camera environment.

In 1995, Fujio Mitarai was thrust to the top of the company after his cousin, then-Canon president Hajime Mitarai, died suddenly. Facing a crisis, Mitarai played the role of cost-cutter, aggressively paring the company's excess branches and leaves and restoring the company's focus on its core products. The moves set the stage for one of Japan's few post-bubble miracles.

Liu Ren-jye, a professor in Tunghai University's Department of Industrial Engineering and Enterprise Information and one of Taiwan's leading experts on Canon after having studied the company closely for more than 10 years, says the key to Mitarai's miracle was the combination of American and Japanese methods.

"Canon under Mitarai was completely different from traditional Japanese corporations like Toyota. He spent more than 20 years in the United States and blended American-style operational practices and Japanese-style management to thoroughly change the company," Liu says.

Canon Lesson No. 1: Think Big, Put Profit First

When Mitarai was sent to Manhattan at the age of 30, Canon was unknown in the U.S. But by the time he returned to Japan in 1989 after a 23-year stay, Canon was the leading office equipment supplier in the country. Mitarai, good friends with legendary General Electric chairman Jack Welch, said the most important lesson he learned there, and something most Japanese companies overlook, was the role of a company's short-term profit.

It was a lesson he learned not long after arriving in the U.S. In his second year there, Mitarai thought his company had turned a profit, but after he filed the company's tax statement, New York tax auditors told him that once advertising expenses were included, Canon's American subsidiary had lost money. The tax officers even suggested to Mitarai that he sell the company and put whatever capital he had left in the bank, where he would at least earn a 5 percent return.

To somebody grounded in Japan's business culture, which stresses long-term development at the expense of short-term earnings, the experience provided an educational jolt and left Mitarai determined to make profits come first.

Immediately after taking the reins as Canon president in 1995, he demonstrated his American business experience when he eliminated seven money-losing businesses, including personal computers. The moves helped the company's cash flow rebound from a negative 50 billion yen in 1990 to 130 billion yen in 2000.

Mitarai followed a simple philosophy: aim to be first in any business the company is involved in. And cameras were Canon's core business, the one in which it had the greatest capabilities and experience and the best chance of becoming No. 1.

One of the Canon Group's managing directors, Masaya Maeda, remembers Mitarai's strong support for the imaging business in the early 2000s, which resulted in the development of the Canon IXY series of digital cameras in 2003 and the establishment of an R&D center. The new line helped Canon edge past Sony as the world's digital camera leader, a position it has not relinquished to this day. 

"Canon's biggest advantage is that it has the most complete range of models and lenses in the industry, and because of that, users can be tied to the brand for a long time," observers Hsu Hua-kuo, the owner of eWhat Camera Store, Taiwan's biggest vendor of gray-market digital cameras.

Mitarai also overhauled Canon's production process, without which the company would not have ascended to its present heights. In the case of manufacturing, he clearly understood that trying to transfer American practices to Canon had its limits.

"In Japan, that was simply not feasible," Mitarai says. "I am an advocate of the lifetime employment system."

Relying on the stabilizing force created by the shared loyalty and stability between the company and its employees, Mitarai put through a huge change in the manufacturing process that provided a pillar of support to Canon.

Canon Lesson No. 2: Cell Production System

Canon's insistence on keeping its manufacturing in-house runs counter to the trend among most Japanese brands of outsourcing production to improve their competitiveness. Yet Canon's profitability has continued to grow. What does it know that its rivals don't?

"Its ‘cell production' system of mobile production lines that are flexible, maneuverable and composed of multifunctional teams is Canon's most important core competitiveness. This method has enabled it to keep costs low," says Nicky Tseng, an industry analyst with the Institute for Information Industry's Market Intelligence & Consulting Institute.

The philosophy is best seen 800 kilometers southwest of Tokyo in Oita Prefecture on the island of Kyushu. The region, best known as the home of hot spring resort towns Yufuin and Beppu, also hosts Canon's core production facility in Japan. Nearly 30 percent of the site has been set aside for greenery, including more than 1,000 flowering cherry trees, but inside the factory building, it's all business. The plant produces 80 percent of the company's SLR digital cameras, including the most recent model, the EOS600D, and it is the source of the cameras' key components, technology and talent. Heavily guarded, the facility is only rarely opened to journalists, and taking pictures is strictly forbidden.

Inside the factory, there are no windows facing outside, and 10 connecting corridors are used to prevent any external dust or particles from contaminating the sensitive optical components on the factory floor. Long conveyor belt assembly lines usually associated with big factories are nowhere to be seen, replaced by 14-person units working on U-shaped assembly lines that quickly piece together finished cameras.

The 25,000 square-meter plant does not have a single pillar, and all of the piping and wiring is below the floor. In this spotless environment, the assembly lines, workers and machines can be shifted around and reorganized at any time, providing maximum efficiency.

"This is cell production. Production lines can be adjusted at any time. The amount of materials we prepare matches the sizes of the orders we receive. That gives us the ability to make small quantities of many types of products at a high quality level," explains 30-year Canon veteran Toshihiro Urabe, the general manager of the Oita facility's Manufacturing Division. Canon truly believes its cell production model provides the optimal harmonization of man and machine.

The Oita factory currently has 25 "cells" or "units" that operate independently of each other. Working in two shifts, the 25 cells can produce 25,000 cameras per day, which breaks down to 500 cameras per cell per shift, or roughly one camera per minute. To one side is a board noting the target production volume and the volume actually produced, letting cells know if they are ahead of schedule or falling behind.  

As rivals gradually adopt the cell production model, Canon continues to innovate to keep its edge, introducing machinery to the units and mechanical arms to the assembly process.

"This is an important technology. Applying mechanical arms to assembling cameras is not easy. Because of relatively short product life cycles, the cameras' small sizes, and the high density of components, automated mechanical arm production is extremely difficult. The variables have to be adjusted every six months," Urabe says.  

The yen's appreciation has made manufacturing conditions inside Japan increasingly unfavorable, but Canon's determination to manufacture its products in-house and differentiate itself from others has not wavered. By constantly improving its products and processes, the company has, in effect, turned "Made in Canon" into a golden brand. 

Canon Lesson No. 3: Choosing Locations that Create Value

"Actually, another factor behind Canon's success is that each production site creates value," says Tunghai University's Liu.

Canon, which steadfastly refuses to outsource its production, has seven fully owned and operated digital camera manufacturing plants in Oita in Japan, Tanzih in central Taiwan, Zhuhai in China, and Malaysia.

Many multinational companies set up production facilities overseas to replace their flagship plant simply out of cost-cutting considerations. "But Canon's philosophy is to use these outside resources not only to cut costs but also to create value," Liu says.

Canon's first overseas plant, its facility in Taiwan set up in 1970, is a case in point. During the heydays of the 1980s, the Tanzih plant had 1,900 employees. But the operation was not downsized after Canon began producing digital cameras in southern China. Instead, it expanded its Taiwan digital camera operation to 2,400 people.

Canon even took advantage of Taiwan's mold-making capabilities to make the Tanzih plant Canon's molding center. The company has gradually moved its SLR mechanisms and its lenses from its Oita plant to Taiwan, while the Zhuhai unit has begun assembling cameras. This redistribution of production has compelled the Oita plant to upgrade its technology and enabled the positive rotation of Canon's different locations.

Today, Taiwan's manufacturers are facing transitions amid a new wave of rising costs. Maybe they could learn something from the Canon way.

Translated from the Chinese by Luke Sabatier