Lexmark 2011 Annual Report Download - page 16

In recent years, ISS and its principal competitors, many of which have significantly greater financial,
marketing and/or technological resources than the Company, have regularly lowered prices on
hardware products and are expected to continue to do so. ISS has experienced and remains
vulnerable to these pricing pressures. ISS’ ability to grow or maintain market share has been and may
continue to be affected, resulting in lower profitability. Lexmark expects that as it competes with larger
competitors, ISS’ increased market presence may attract more frequent challenges, both legal and
commercial, including claims of possible intellectual property infringement.
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
identified as the market leader 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,
Okidata and Samsung.
ISS’ primary competitors in the inkjet product market are HP, Canon and Epson, who together account
for approximately 90% of worldwide inkjet product unit sales. Lexmark sees other competitors and the
potential for new entrants into the market possibly having an impact on ISS’ 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 ISS’ toner
and ink cartridges are available and compete with ISS’ supplies business. However, these alternatives
may result in inconsistent quality and reliability. As the installed base of laser and inkjet products
matures, the Company expects competitive supplies activity to increase.
• Manufacturing and Materials — ISS
ISS operates manufacturing control centers in Lexington, Kentucky; Shenzhen, China; and Geneva,
Switzerland; and has manufacturing sites in Boulder, Colorado; Juarez, Mexico; and Lapu-Lapu City,
Philippines. ISS also has customization centers in each of the major geographies it serves. ISS retains
control over manufacturing processes that are technologically complex, proprietary in nature and
central to ISS’ business model, such as the manufacture of toner and photoconductors. ISS shares
some of its technical expertise with certain manufacturing partners, many of whom have facilities
located in China, which collectively provide ISS with substantially all of its printer production capacity.
ISS continually reviews its manufacturing capabilities and cost structure and makes adjustments as
necessary.
Manufacturing operations for laser printer supplies are located in Boulder, Colorado; Juarez, Mexico;
and Shenzhen, China. 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.
Manufacturing operations for inkjet printer supplies are located in Lapu-Lapu City, Philippines and
Juarez, Mexico. The manufacturing control center for inkjet printer supplies is located in Geneva,
Switzerland.
ISS 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, ISS often utilizes preferred supplier relationships, and in certain cases sole
supplier relationships, to better ensure more consistent quality, cost and delivery. Typically, these
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