Canon's share of the global chip stepper market has stayed at about 20 percent in unit terms for the past three years, down sharply from 35 percent in 2001. Nikon held 37 percent of the market in 2004 and ASML claimed the top position with 41 percent.
"To be honest, we haven't been able to keep up with the competition. There is a simple explanation -- we were late to develop the most advanced machines," Mitarai told reporters at a gathering of business executives. "It will take one or 2 years for us to really regain our strength."
Canon counts on steppers, which are also used in the production of liquid crystal displays (LCD), for less than 10 percent of its group revenues. Most of its sales and profits come from printers, copiers and digital cameras.
Mitarai said overall revenues in its stepper division were not falling, however, thanks to strong demand for LCD steppers.
He said Canon was on track to hit its targets for a group operating profit of 132.7 billion yen ($1.23 billion) on sales of 901.6 billion yen in the current quarter to June, up 10.7 percent and 6 percent, respectively, from the same quarter last year.
Canon has been well positioned to benefit from a shift in the copier market to color machines, which tend to be more profitable than black-and-white models because they use more toner and other high-margin "consumables."
"Our printer business is doing well and color copiers are selling well. The market for monochrome copiers is tough but we have been able to offer various solutions to our customers and are making pretty good money on them," he said.
Mitarai said demand for Canon digital cameras remained strong but acknowledged that market conditions would only get tougher and predicted that many makers would have to quit the business as prices continue to fall and growth slows.
Intense price competition has pushed several digital camera makers into the red. Olympus Corp. and Pentax Corp have both recently announced plans to slash jobs in their camera divisions to lower production costs.
"There are about 30 players now and I would guess we will see that number eventually cut in half," Mitarai said. "But that (weeding out) process could take some time. Managers will find it difficult to make the decision to pull out."
Canon runs neck-and-neck with Sony Corp. for top spot in digital camera market share and is by far the industry's most profitable maker, boasting a production process that is unmatched in terms of efficiency or scale.
The Tokyo-based company is currently developing complementary metal oxide semiconductors (CMOS) for use in its compact digital cameras, part of efforts to bring more component production in-house and lower procurement costs.
Canon makes its own CMOS chips for its digital single lens reflex (SLR) models, but buys charge-coupled devices (CCDs) from Sony and other chip makers for compact models, part of the reason they fetch lower margins than digital SLRs.
"It will be another 2 years before we make our own CMOS and use them in our cameras," Mitarai said.
CMOS and CCDs both perform the same basic function of converting light into a digital signal. CCDs have been the norm for high resolution compact cameras but CMOS chips have recently emerged as a simpler, lower-cost rival to CCDs.