The escalation of coronavirus cases in China has reminded technology markets around the world that the supply chain challenges of recent years may last longer than expected. The pandemic is not the only disruption and many in the smart buildings and physical security industries are being forced to reconsider their approach to supply chain resilience and how they can future-proof their organizations against unknown disruptions. While supply chain challenges have always existed, the impact of the pandemic left supply chains off-balance while playing catch up on increasing demand.
“When the pandemic hit, it kicked off a series of events that created a major ripple effect across global supply chains, sparking several new challenges that continue to plague many industries today,” reads our latest research study. “When the first waves of the pandemic arrived and lockdowns began in nations across the globe, manufacturers that use semiconductors reigned in their spending, and semiconductor producers idled some of their capacity in response.”
Although most semiconductor producers quickly ramped up production as economies started to re-open, the pent-up demand created a surge of orders and lag in supply which is still being resolved. Beyond semiconductors, physical security firms have felt the impact of price rises in raw materials, such as steel, zinc, brass, and other non-ferrous metals, which also impact the cost of cases, cables, lenses, and packing materials. These costs are passed on down the supply chain, each adding price of the final product, which then reduces sales and slows market growth.
“We estimate that the average price for physical security products such as surveillance cameras and access control panels rose more has risen around 8% since the start of the pandemic, halting a long term trend in falling prices across the industry, and further price increases in 2023 remain a possibility,” our new research report states. “These rising prices naturally have a dampening effect on market growth. The impact of rising prices in 2022 (with further increases also forecast for 2023) have been factored into our market growth projections for the physical security industry.”
Other major disruptions have also created new challenges for supply chains. Labor shortages have proved a major issue around the world, partly due to knock-on impacts of COVID. The pandemic also changed demand patterns, such as increased technology demand for work-from-home applications and smart home products, straining the wider technology market. Severe weather also played its part, especially floods and droughts in China that caused power outages and restricted energy supplies to key manufacturing regions. While the War in Ukraine, Brexit, and the US-China relations have had more geographically defined effects.
Chinese semiconductors are the single biggest supply issue facing the physical security systems market, supplying 90% of global video surveillance, for example. Attempts to find alternative sources of components have been possible for some major camera and access control manufacturers but this often adds cost from re-design, integration, re-certification, and new logistics pathways, in addition to new price negotiations in a sellers market. This raises the question of supply chain resilience in the physical security industry and is driving executives across the sector to revisit their future proofing strategies.
“Recent disruptions have shone a light on one of the downsides of an economy where various aspects of product development, manufacturing, inventory and delivery are dispersed across the globe, and the knock-on effects of bottlenecks or delays at one link in the chain,” our comprehensive report explains. “This has highlighted the need for manufacturers to strengthen their supply chain resilience, and encourage businesses to be less dependent on individual suppliers.”
Moving Physical Security Production Away from China
Many firms, in physical security and beyond, have stated their intention to move a portion of production away from China, including tech giants; Intel, Apple, Google, and Microsoft. This is part of a bigger trend of companies moving away from a single-source supplier strategy to a multiple-source strategy, providing more flexibility to adapt to future disruptions. Governments in Europe and North America are also recognising the issue and investing significant amounts to support the re-structure of supply chains through diversification policies and reshoring funds. Meanwhile, competitive regions like South and Southeast Asia try to seize the greater share of the manufacturing pie with incentives and infrastructural development.
“Shifting entire supply chains from one region to another is no easy feat. Companies have spent years or decades building relationships, manufacturing facilities, and logistics operations to support their legacy supply chain networks. Many are dependent not only on Chinese manufacturing expertise, but also on raw materials and intermediate components,” reads our new Physical Security market report. “While other nations such as India and Thailand do not boast the same levels of skilled labor support infrastructure and scale as the Chinese, so any supply chain changes at scale will need both investment and time to occur.”
Many in the physical security sector will feel that by the time they take the time and money to shift their production to another country, the disruptions in China will be over and will still represent the best business case for their supply chain needs. It can be difficult for many firms to find the value of resilience to unknown future challenges, but by diversifying you can spread risk, reducing the chance of major incidents, while creating the agility to survive and thrive in the unknown. Recent challenges have underlined the importance of future-proofing supply chains, and knowledge is power for those responsible for building resilience in their organizations.