Axis Communications recently reported a very positive Q1 2017 performance with net sales increasing by 29% and profit increasing by 53% with operating margin growing to 11.6%. Of course "one swallow does not make a summer" but Axis sales in two of their three main regions, the Americas and Asia have shown consistent growth since the first quarter of 2016. The exception is in EMEA where sales have fallen in the last quarter but this reflects a general fall in growth in this region.
Another encouraging benchmark is that R&D spending grew 30%, showing that they are continuing to invest in product developments and advancements. This would suggest that it has not yet been adversely affected by Hikvision’s strategy of going for volume through relentless price reductions and seemingly little concern for profitability.
There is no doubt that that this strategy has rapidly increased Hikvision’s share of the world market and reduced the share of many Western and Asian suppliers. Some of these companies have decided that they have no alternative but to join ‘the race to the bottom’.
Hikvision’s latest 2016 financial report would suggest that they had a share of around 30% of the world market in 2016 at least three times larger than the next largest competitor. However we believe that their sales figures may include design and installation costs on their Chinese Safe City business and these numbers could be very significant possibly as much as 30% of their Chinese business.
Therefore their market share based on product could be a lot less than 30% and growth over 2016 was for them rather modest at 26%, not surprising given that they had drastically reduced product prices over the year. So the drive for market share and dominance could be slowing down. However one thing is clear, that they are capable of sustaining their strategy for as long as they continue to get the financial support of the Chinese government and their safe city business. Under these circumstances it is not feasible for any western manufacturer to compete long term on price in the SMB (Small and Midsize Business) market which some analysts believe has the greatest opportunity for growth. So what are the solutions for western manufacturers to take a profitable share of the market?
Axis Communications have over 20 years built up a reputation for quality products at the leading edge of technology. They have a staff of over 2,700 employees and have increased the share of employees related to R&D and global sales. They have built up a brand that is now sustaining them but is unlikely to increase their market share at the growth levels they enjoined before Hikvision came into prominence; Particularly now that this will need to be achieved in the SMB sector.
Both Hikvision and Dahua products have recently fallen foul of Cyber Security attacks and there is now concern at a political level that becoming dependent on these products could have serious reprecussions. At the recent ASIS 2017 Summit Andrew McCabe the US FBI Deputy Director remarked “the Chinese are attacking us from every direction”. This should confirm that Governments are intent on taking appropriate action.
Ultimately it is the buyer who will decide whether price or security is the most important buying proposition. It would be wishful thinking to expect that Hikvision or Dahua will sometime soon revert to realistic pricing. But the security issue will not go away and surely will have a negative impact on their US business, perhaps hampering their growth, unless they improve their cyber security performance.
The Axis Communications Brand has good reason to feel more confident about their ability to maintain their position. Their latest recent results show that the market may be feeling more buoyant about how Axis will fare, for at least the immediate future.
However there are only a handful of other companies that are in the same position to replicate this performance. For the vast majority, the solution cannot be to continue fighting on price, they either have to quickly command status through focusing on a few vertical markets or build up scale immediately through M&A.
For more details on the Global Market for Physical Security, check out our recent report - The Physical Security Business 2016 to 2021.
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