KODAK'S BAD MOMENT

By JOHN GREENWALD/ROCHESTER

What's wrong with this picture? When George Fisher became the head shutterbug at Eastman Kodak four years ago, things instantly looked brighter for Big Yellow, the world's largest photographic filmmaker. Fisher, who dialed up a triumphant turnaround at cellular-phone and microchip giant Motorola, planned to re-vitalize stodgy Kodak (1996 sales: $15.97 billion) with a burst of digital-age products. Instead of bloody downsizings, Fisher would restore Kodak's faded glory through the magic of growth.

Zoom forward to last week, when Fisher's strategy seemed to be coming a cropper--to say nothing of being in need of cropping. With the company's new computerized camera systems running up hundreds of millions of dollars in losses, and its mainstay 35-mm color film under attack from lower-priced Fuji Photo Film in the U.S. and a strong dollar abroad, Kodak said its 1997 operating earnings could fall as much as 25% below the results for last year. That marked the third distress flag on Kodak earnings this year and caused the company's stock to plunge $8.25 per share in two days. Kodak, which hit a record high of $94.75 in February, finished trading at $59.63 last week.

For Fisher and legions of increasingly frustrated Kodak investors, the setbacks brought the need for a course correction into painfully sharp focus. Declaring that "we can't live with a continuing deterioration of our profits," Fisher vowed to embark later this year on cost cuts that he had hoped to spare the company. The prospect must have sent chills through the ranks of Kodak's 94,800 workers--including 34,000 in the company town of Rochester, N.Y., which has already weathered past layoffs. "Earlier in the year we thought we could wait out the price situation and the dollar," Fisher says. "But we can't wait any longer."

To analysts, that only shows the difficulty of rebuilding the 118-year-old house of Kodak at a time when its back end is ablaze from the heat of Fuji's relentless assault. The Japanese company (fiscal 1996 sales: $10.11 billion) hotly denies it is a price-cutter, but nevertheless its prices are as much as a third below Kodak's on some products. B. Alexander Henderson, the head of technology research at Prudential Securities, says Kodak will have to cut prices to narrow the gap with Fuji. Kodak has charged, via a closely watched U.S. complaint before the World Trade Organization, that the playing field isn't level, because Japan maintains barriers to trade that limit Kodak's access to Japanese markets.

Kodak's bind is that lowering prices will hurt its most profitable business. Kodak's piece of the U.S. market for amateur film for consumers is estimated to have brought in $3.4 billion in revenues last year at deep green profit margins of 70%. But if it doesn't do something, its market share will continue to erode. From a near monopoly position in the U.S., it now has less than 75%. Its market share in August of this year compared with the previous year dropped a staggering 5 points.

Fuji has also conducted a textbook brand-building campaign designed to raise its awareness among consumers and retailers. For instance, the company sponsored soccer's World Cup, which is beamed to hundreds of millions. At this year's U.S. Open, a Fuji blimp ceaselessly circled the Arthur Ashe Stadium. At the same time, the company has cut deals with retailers to gain shelf space and displays. There's no question about quality: both companies make excellent products. But given comparable quality, the price gap between the two becomes telling.

Losing isn't supposed to happen under the charismatic Fisher, 56, a native of Anna, Ill., who holds a Ph.D. in applied mathematics from Brown University and is one of corporate America's highest-profile executives. For leading once sleepy Motorola into the digital age, Fisher is on the short list for many high-profile ceo jobs that become available. He spurned an offer to head IBM before Louis Gerstner took that turnaround job in 1993. More recently, Fisher was widely viewed as a possible successor to AT&T chairman Robert Allen. Perhaps partly to scotch speculation that he might be leaving, Fisher agreed to lead Kodak until December 2000 and was rewarded with options to buy 2 million shares at an exercise price of some $90 per share--now far under water. "My job here is only half done," he acknowledges.

Fisher has had plenty to brag about since his arrival. He shook up Kodak with rigorous pay-for-performance standards and refocused the company by selling off ill-advised acquisitions like drugmaker Sterling Winthrop, thereby cutting Kodak's $8 billion debt burden to a comfortable $1 billion. At the same time, he has greatly accelerated Kodak's once sluggish product-development cycles. "There is no self-doubt as to where the opportunities lie," says company president Daniel Carp, a 27-year Kodak veteran and Fisher's presumed heir. Nor, Carp adds, is there any lack of confidence in Kodak's ability to cash in on those opportunities or to meet Fisher's goal of increasing the company's per share profits an average of 10% annually.

Yet Kodak's bets on the future have so far brought more problems than profits. After investing billions of dollars to create the industry's most extensive line of digital cameras, Kodak could pile up losses of more than $100 million this year, and some analysts doubt that the effort will ever pay off. The devices (price range: $200 to $900) record images on microchips for computer users. But the field is already glutted with dozens of rivals, from traditional camera makers such as Canon and Nikon to Silicon Valley giants like Hewlett-Packard. Fisher counters that naysayers saw few profits in the 1980s in the business of cellular phones and pagers, which have grown into two of Motorola's most lucrative products. Says he of his record for confounding such doubters: "Been there. Done that."

Nonetheless, Fisher readily admits that Kodak botched the launch last year of its 24-mm Advantix camera (price range: $50 to $250), the company's other major new high-tech consumer product. Kodak figured that shoppers would snap up a camera that loaded film in snafu-proof cassettes and produced high-quality photos that could be captured on film, filed easily and transferred to computers. But the launch, estimated to have cost $100 million, faltered for a lack of sufficient cameras in stores and a shortage of processors equipped with gear to develop the images. Now, for a fresh $100 million that includes a new ad campaign, the company is relaunching Advantix. Most of the action, though, is at the low-tech end of the business. In the $600 million market for hot-selling single-use cameras, the company remains under attack not only from Fuji but also from swarms of private-label manufacturers that are eating into Kodak's lead. Still other Kodak products--like medical X rays and writable CD-ROMs, storage devices that can hold images and data--have come under heavy price pressure.

Fisher launched the trade case in part to get Kodak on the offensive and force Fuji to raise prices. He took a similar tack at Motorola, using U.S. government negotiators to open the Japanese market for microchips. Last week House Speaker Newt Gingrich and minority leader Dick Gephardt urged President Clinton to use "all available means" to pry open Japan's market. Fuji denies any wrongdoing, and it is preparing to make the issue moot in the future by adding a 35-mm color-film plant, part of a $200 million investment, to its existing manufacturing complex in Greenwood, S.C. The new facility will have the capacity to turn out 100 million cost-competitive rolls a year when it opens in November.

"We're the heart and soul of the picture business," says Fisher, as if to rally the home team. That's certainly true. But even if Kodak wins its case, undoing Fuji's market inroads will be difficult. Indeed, the bitter rivalry with Fuji revives memories of epic U.S.-Japanese clashes over products such as steel, televisions and autos. All Fisher needs to do is look at the auto nameplates in the parking lot to judge the staying power of determined rivals.

--With reporting by Frank Gibney/Tokyo, Valerie Marchant/Rochester, Aixa M. Pascual/New York and Adam Zagorin/Washington

With reporting by FRANK GIBNEY/TOKYO, VALERIE MARCHANT/ROCHESTER, AIXA M. PASCUAL/NEW YORK AND ADAM ZAGORIN/WASHINGTON