A photo a day keeps the doctor away.

Eastman Kodak Co, the world leader in professional imaging solutions, has kept its business alive not by visiting a physician, but by making the crucial shift from its declining traditional film business to the rapidly growing digital market.

Digital photography is a diversified industry, but Kodak is banking on the hope that health-imaging is the most effective prescription to energize its China business, the US-based company's largest foreign market.

"The demand for digital imaging processing has increased much more quickly in healthcare than in civil use," says Liu Jie, general manager of Kodak's health group, Greater China Region.

"We've naturally prioritized health-imaging in our shift towards the digital business," he says.

Health-imaging, which generated US$2.68 billion in sales revenues last year, is Kodak's second largest revenue source after the civilian photography sector.

This segment accounts for approximately 30 per cent of the company's revenues, says Liu.

"We expect it will continue to play a significant role in the company. Kodak as a whole places a lot of importance on the digital business."

Economic prosperity and improved living standards have enabled many large urban hospitals in China to install advanced medical equipment such as MR (magnetic resonance) and CT (computing tomography).

Doctors now find it increasingly necessary to share examination results between computers, necessitating the use of digital photography. Filmless or digital radiology is considered an irreversible trend in the future medical imaging market.

Industry observers say that 50 per cent of hospital radiation departments worldwide will adopt digital imaging solutions by 2008. That portion will rise to 70 per cent over the next decade.

Technology needs to be standardized to avoid incompatibility issues caused by different hardware and software formats, Liu says.

"That's where our opportunity is. As an acknowledged expert in health-imaging, Kodak has participated in setting appropriate standards and ensuring our products work smoothly in connection with other products."

Many digital camera users view and store their photos on computers and tend not to print them, but demand for traditional film development still plays an important role in the civil imaging processing market, Liu adds.

"We can see a swift, obvious shift in our health-imaging business, though. The digital part is contributing an increasing share to our total revenues."

Kodak set up a global manufacturing base last year in Shanghai to promote this shift. The factory produces digital health-imaging equipment, approximately half of which is exported The company previously had two manufacturing centres in Wuxi, Jiangsu Province, and Xiamen, Fujian Province, both in East China. These factories produce traditional film and photo paper for both health-imaging and civilian use in the domestic market.

The country is not just a manufacturing base for Kodak, however.

"China used to rank fourth in Kodak, after Europe, Japan and the United States, but it is now our most strategically important market apart from the United States, and it could well become our top foreign market in the near future," Liu says.

The company opened a global research and development (R&D) centre and a technology and innovation centre (T&IC) last year, both located in Shanghai.

The innovation centre serves Kodak's Asian market, and offers product demonstrations and after-sales service for the health-imaging business. It is the company's only T&IC other than the first one built in Italy. A third one is slated for construction in the United States soon.

The R&D centre, meanwhile, serves not only China, but other markets as well. Focusing also on health-imaging, it works alongside Kodak's R&D centres in North America and Europe.

Kodak globally spends approximately six per cent of its annual revenues on R&D. Many ideas are shared between Kodak's civil-use and health-imaging businesses. Liu adds that Kodak is expanding its health-imaging product lines in China.

"Product is always a must-win issue. We are resorting to both self-development and acquisitions to strengthen our position in the medical health-imaging equipment market," he says.

Kodak has developed more than 20,000 original technologies in its lab, which could bring substantial profits if turned into new products.

"That takes time, though, and we will fail to meet market demand and shareholders' expectations for instant, visible returns if we rely on R&D too much," Liu says.

"That's why we are more geared towards acquisitions at the moment."

Kodak acquired France-based dental-imaging solution provider Trophy last year. The move ensured Kodak's leading position in the world's dental-solutions market.

The company also acquired Israel-based computing radiology (CR) systems manufacturer OREX at the beginning of this year. OREX was the world's leading provider of flexible CR solutions. While most medical equipment providers have only two or three CR models, the deal has netted Kodak a total of seven.

"We are open to acquisitions over the coming years," Liu says. He did not rule out the possibility of acquiring Chinese firms someday.

The company keeps two points in mind when acquiring other businesses.

A target company is supposed to also offer health-imaging solutions, and any deal should make full use of Kodak's brand-awareness and technological reach. Healthcare information platforms are another potential but promising opportunity for acquisition.

"We are providing one-stop service solutions in a 'box-selling' approach to our customers, and an ideal business for acquisition should complement our existing strengths," says Liu.

Kodak is also investing heavily in services for health-imaging solutions in China.

"Service is a vital part, especially since we are changing from a traditional film business to a digital imaging solutions provider."

China's market demand is second only to the United States, and health-imaging solutions are not only about selling products. The country needs a large number of new digital radiology (DR) and CR systems every year. After-sales service, including maintenance, consulting and training, requires huge investment in personnel and infrastructure.

Liu says that Kodak is to open a spare parts centre in China serving the Asian region and call centres to systematically track records for customers.

It will also further expand its maintenance outlets, which are already spread across each of the country's 30 provincial prefectures.

"We are shooting for substantial double-digit growth in China over the coming years," says Liu.

Kodak's global health-imaging business achieved this level of growth last year. Growth rates in China were higher than the global average.

Annual growth for global health-imaging was between three and five per cent in the years before the transition. The shift, however, has not been easy.

"We have had to reject our business model for traditional film operations, mainly by cutting off stock," Liu says.

Kodak's warehouse in China was usually well stocked. Big profits from the traditional film business were able to cover storage costs.

Profit margins have dropped significantly since the company turned to the digital business, however. Kodak has set up a forecast index of itself to ensure sufficient supplies that meet but don't exceed demand. This has helped to minimize warehouse costs.

"The improved business model in the market here surprised us with triple-digit growth. We were actually anticipating double digits for the year," says Liu.

The company must compete with medical equipment giants such as General Electric (GE), Siemens and Philips, all of which provide a wide range of products in China.

"Kodak may not become the biggest, but we are the best in our business," Liu says.

Kodak co-operates with leading medical equipment providers by selling its health-imaging affiliates. Its medical laser cameras, for example, are widely installed in MRs produced worldwide. They command a dominant market share.

The company competes with big names such as GE and Siemens in a few products such as DR and hospital-oriented IT platforms.

"This is not where their core competitiveness lies. They spend only enough to keep the products, but we are investing heavily to give us the edge."

Kodak showcased its RD7500 last year during an annual conference held by the Radiology Society of North America. It was the most advanced RD product in the world, and it surprised an unprepared medical equipment industry, Liu adds.

Kodak's health-imaging products include radiology-imaging systems (RIS), laser imaging, healthcare information systems, X-ray film systems, dental-imaging, CR and DR.

Kodak started its difficult transition about three years ago when traditional photography started becoming less popular.

Antonio Perez, the company's new chief executive officer, says that 2005 is a critical year for Kodak, because for the first time revenue from the digital business will exceed the traditional business.

Kodak plans to finish this year with slightly higher revenues from digital than analogue cameras, but two-thirds of its profits will come from the analogue business.

That will soon change, however, Liu says.

(China Daily 09/05/2005 page6)