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The last two years has seen a slowing down in revenue growth from the world’s video surveillance business, whilst at the same time the supply structure has become unbalanced. Two Chinese companies Hikvivion and Dahua, not regarded as serious competitors by most suppliers only six years ago, now dominate the camera market.
The major concern of western manufacturers in Video Surveillance today is therefore how to counter the phenomenal growth of Chinese products rapidly winning market share, without reducing their prices to a level that will be sufficient to properly recoup their R&D costs and continue to be profitable.
For a least the next two years we are going to see a continuation of existing policy by the major Chinese companies of growing analogue systems in the SMB market where there is little competition; Whilst rapidly increasing market share in the enterprise market with their cheap IP Network cameras. This strategy is working for them; they are winning market share and in the short term will reduce the profitability of western companies.
There is no indication that they will change their pricing strategy. In the first 9 months of 2016 Hikvision ran many price reduction campaigns across their whole range of cameras. At the same time Chinese manufacturers have almost total control of their home market and as more than 50% of this business comes from the public sector, imported equipment has little chance of winning tenders.
Very few western manufacturers of video surveillance equipment have the possibility to fight the Chinese competition by reducing prices and compensating through volume growth. This is not a viable strategy for them. So how will they redefine their business models to meet these new challenges?
American based manufacturers may consider jointly lobbying the incoming Trump Administration to restrict imports on Chinese security products or ban them from being used in government and state buildings for security reasons.
This process could gain momentum with the main stream press starting to ask questions last year about the potential for security risks. Indeed the procurement of HIKVision cameras for the US Embassy in Kabul was cancelled in September 2016 amid similar security concerns.
Major manufacturers such as Axis Communications, Avigilon, Bosch, Panasonic and Samsung are in a position to reduce their margins sufficient to hang on to their share. But to continue growing their business they need to invest more in innovative products that offer a better TCO metric. With depleted margins they would need substantial financial backing to ride out the storm.
Specialisation in a number of vertical markets where cost is not king could be a practical strategy to survive. This would be a compromise at best because it would not properly meet the need to build up volume and fit in with the longer term needs of commoditization of video cameras, which must now be the objective of all those manufacturer that want to supply the mainstream business.
However for the majority of suppliers a retreat to a number of niche applications where they offer total solutions and form alliances to share technology and marketing costs looks to be a viable option. This is likely to lead to companies becoming system suppliers. With the inevitable growth of the Internet of Things in Buildings this could be a strategy worth pursuing for some.
Combining this with building up Video Surveillance-as-a-service (VSaaS) would further strengthen the business model. It is a relatively small business today probably worth $1.25 billion but growing at over 20% per annum. It has a very significant future. The leading western video surveillance manufactures have all taken a position here. The early restriction to fast growth was inadequate technology but that is no longer a restriction.
Capital One, a leading financial institution that that specializes in investing in the Physical Security Industry, is very bullish about the business opportunities to be had in VsaaS. Last year they carried out a survey of security system professionals showing that 85% of respondents expect improved financial performance through Video monitoring and VSaaS. So finding investors should not be a problem, but our report does show that the supply chain needs to be motivated.
The strategy that is most likely to work best for the major western manufacturers is to go for scale now through merger and acquisition. Merger between the largest companies would build the kind of scale that could thwart, or at least modify the pricing strategy of the Chinese competitors making it much more a formidable task to achieve through this crude tool.
Our annual report, which investigates merger and acquisition, does show that there are limited opportunities here. However there are some conglomerates that could be very interested in selling their video surveillance activities. We expect a number of acquisition opportunities will open up over the next twelve months.
Deeper forms of alliance as recently actioned through the partnership of Bosch and Sony could be a part solution but we expect that this ultimately will morph into an acquisition by Bosch.
This article has been taken from Memoori’s Annual Report – The Physical Security Business 2016 to 2021 – Available to purchase now.