On a weekday afternoon, the digital camera corner at Bic Camera in central Tokyo is so crowded it takes elbow work to get near any of the popular models on display. Men in suits mill around, comparing resolution, storage capacity and price.

After years of waning popularity, cameras have once again become a hot item - provided they are digital.

Last year, shipments of digital cameras made in Japan surged 77 per cent, to 43.4 million units while the value of shipments rose 54 per cent, to 1,225 billion yen (€9.1 million). Japan's Camera and Imaging Products Association expects total shipments by Japanese manufacturers this year to rise another 40 per cent, to 60.9 million units.

As the benefits of digital cameras have become more widely known and prices have fallen, more consumers are opting to trade in their film cameras for a digital version. And manufacturers are scrambling to take advantage of the craze.

Sanyo, which manufactured more digital stills cameras (DSCs) than any other maker but sells them mainly under other brands, expects to raise shipments from 11 million units last year to 18 million this year. Canon is equally bullish and plans to ship 80 per cent more digital cameras this year, or 15.2 million units, while Sony is raising its shipments from 10 million last year to between 14 million and 15 million units.

Although there are still more conventional film cameras in use worldwide, shipments of new Japanese-made digital cameras have overtaken those of film cameras. Even Fuji Photo Film, the world's second-largest photographic film manufacturer, concedes: "In the not-so-distant future, digital still cameras will make up the majority of cameras in use."

Demand for digital cameras in Japan is so strong that they are considered one of the three products that helped lift the Japanese economy out of its doldrums (the other two being DVD recorders and flat-screen TVs).

The problem is that, with everyone jumping on to the bandwagon, it has become increasingly difficult for digital-camera makers to generate profits.

"The number of market players is increasing even though growth is slowing," says Hiroshi Moriyama, analyst at JP Morgan in Tokyo.

Three years ago, there were three big players - Fujifilm, Canon and Sony. Last year, there were eight, and this year there will probably be 14 to 15, he says.

Meanwhile, camera-equipped mobile phones are eating into the lower end of the market. With so many players scrabbling for market share, companies must compete on price, Mr Moriyama notes. Prices have fallen about 15 per cent a year.

Konica Minolta Holdings posted a 2.9 billion yen (€20 million) operating loss in the first nine months of the last financial year because of price competition in the digital-camera market, particularly in Europe. The group's loss in digital cameras came even though it expects shipments to have doubled last year.

The outlook is gloomy. "All the major digital-camera makers will see margins fall this year," Mr Moriyama says.

Canon, Japan's most profitable maker of digital cameras - it makes more than 108 billion yen (€0.8 billion) in operating profits from digital cameras alone - is expected to suffer a drop in margins from an estimated 27.1 per cent to 26.6 per cent, Mr Moriyama adds. Even Sony is believed to be undergoing a drop in digital-camera profitability.

Mr Moriyama says: "This is probably the last year in which manufacturers will be able to make strong profits in digital still cameras."

Against this backdrop, a shakeout is inevitable. Companies that can offer value-added products, such as a digital single-lens reflex camera, will have a better chance of staying profitable, analysts say.

Size and brand value will also play an important part. "If you are a top-tier company, you are more likely to be a survivor," says Shin Horie, analyst at Goldman Sachs. On that basis, Canon is expected to be a winner in this market, given its premium brand. Sony, Matsushita and Nikon are also expected perform well.

But for some of the smaller players, the rest of the year will prove to be a test of their resolve and could determine who throws in the towel first. - (Financial Times Service)