Lexmark 2007 Annual Report Download - page 14

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The distributed printing market is extremely competitive. The distributed laser printing market is dominated
by Hewlett-Packard (“HP”), which has a widely-recognized brand name and has been estimated to hold
approximately 40% of the market as measured in annual units shipped. With the convergence of traditional
printer and copier markets, major laser competitors now include traditional copier companies such as
Canon, Ricoh and Xerox. Other laser competitors include Brother, Konica Minolta, Kyocera Mita, Oki and
Samsung.
Lexmark’s primary competitors in the inkjet product market are HP, Epson and Canon, who together
account for approximately 80% of worldwide inkjet product unit sales. The Company must compete with
these same vendors and other competitors, such as Brother and Kodak, for retail shelf space allocated to
printers and their associated supplies. Lexmark sees other competitors and the potential for new entrants
into the market possibly having an impact on the Company’s growth and market share. The entrance of a
competitor that is also focused on printing solutions could have a material adverse impact on the
Company’s strategy and financial results.
Refill, remanufactured, clones, counterfeits and other compatible alternatives for some of Lexmark’s
cartridges are available and compete with the Company’s supplies business. However, these alternatives
generally offer inconsistent quality and reliability. As the installed base of laser and inkjet products matures,
the Company expects competitive supplies activity to increase. Historically, the Company has not
experienced significant supplies pricing pressure, but if supplies pricing were to come under significant
pressure, the Company’s financial results could be materially adversely affected.
Manufacturing
Lexmark operates manufacturing control centers in Lexington, Kentucky; Shenzhen, China; and Geneva,
Switzerland; and has manufacturing sites in Boulder, Colorado; Juarez and Chihuahua, Mexico; and
Lapu-Lapu City, Philippines. The Company also has customization centers in each of the major
geographies it serves. Lexmark’s manufacturing strategy is to retain control over processes that are
technologically complex, proprietary in nature and central to the Company’s business model, such as the
manufacture of inkjet cartridges, at Lexmark-owned and operated facilities. The Company shares some of
its technical expertise with certain manufacturing partners, many of whom have facilities located in China,
which collectively provide Lexmark with substantially all of its printer production capacity. The Company
continually reviews its manufacturing capabilities and cost structure and makes adjustments as necessary.
Lexmark’s manufacturing operations for toner and photoconductor drums are located in Boulder, Colorado
and Juarez, Mexico. The Company continues to make significant capital investments in its Juarez, Mexico
operation to expand cartridge assembly and selected key component manufacturing capabilities. Laser
printer cartridges are assembled by a combination of in-house and third-party contract manufacturing. The
manufacturing control center for laser printer supplies is located in Geneva, Switzerland.
Lexmark’s manufacturing operations for inkjet printer supplies are located in Juarez and Chihuahua,
Mexico and Lapu-Lapu City, Philippines. The manufacturing control center for inkjet supplies is located in
Geneva, Switzerland.
Materials
Lexmark procures a wide variety of components used in the manufacturing process, including
semiconductors, electro-mechanical components and assemblies, as well as raw materials, such as
plastic resins. Although many of these components are standard off-the-shelf parts that are available from
multiple sources, the Company often utilizes preferred supplier relationships, and in certain cases sole
supplier relationships, to better ensure more consistent quality, cost and delivery. Typically, these preferred
suppliers maintain alternate processes and/or facilities to ensure continuity of supply. Lexmark
occasionally faces capacity constraints when there has been more demand for its products than
initially projected. From time to time, Lexmark may be required to use air shipment to expedite product
flow, which can adversely impact the Company’s operating results. Conversely, in difficult economic times,
the Company’s inventory can grow as market demand declines.
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