Despite the fact that the growth of the world’s physical security business has slowed down in the last 2 years it is still in good shape and now prepared for stronger growth over the next 5 years. During this time the geographical distribution of the business will continue to shift towards fast growing Asia and China.
In China, the largest single market in the world, 2 indigenous manufacturers Hikvision and Dahua now dominate the Asian market and between them in 2016 took some 30% of the world’s market for video surveillance products. In the last three years they have established a strong presence in North America and Europe offering good quality products at very competitive prices. This has built up further volume on an already strong home base and has enabled them to continue lowering prices which in the media is euphemistically called “the race to the bottom”.
There is no evidence to show that they are dumping products but taking advantage of a set of benefits that today are virtually unique to them. The first is that they have a protected home market, the largest and fastest growing single market in the world, with some 50% in the public sector. In the case of Hikvision, by far the largest of the 2 companies, it is part owned by the government and has strong financial support and much business from them.
Clearly the strategy of these 2 companies is to go for growth, build up volume to meet the needs of commoditization. This radically increases the minimum economic size for video camera manufacturers to survive. and this has set the bar too high for many of today’s smaller manufacturers. Through Chinese competition this process will speed up. The major concern of western manufacturers in the Video Surveillance industry today is how to hang onto their market share by countering the phenomenal growth of Chinese products without competing on price.
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 this challenge?
Major companies such as Axis, 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 share they need to invest more in innovative products that offer a better TCO metric; but with depleted margins they would need substantial financial backing to ride out the storm. The difference between them now in market share measured by volume is enormous and it would not be a credible strategy for all of them to pursue.
Specialization in a number of vertical markets where "Price is not King" could be a practical strategy to more than 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 to go for brand, even if they have to retreat to a number of vertical applications, where they offer total solutions delivering the best in customer value propositions and forming alliances to share technology and marketing costs, looks to be the only viable option.
This is likely to lead to becoming system suppliers but with the inevitable growth of the Building Internet of Things this could be a strategy worth pursuing for some and let the rest of the manufactures fight on price and lower margins.
The strategy that could work for few of the largest western manufacturers is to go for scale now through merger and acquisition. For the largest companies this would build the kind of scale that could thwart, or at least modify the pricing strategy of the Chinese competitors. We expect a number of opportunities will be opening up here over the next 12 months.
There is one other solution that could be worth considering and that is to offer VSaaS and ACaaS services. A relatively small market today probably worth $1.25 billion but growing at over 20% per annum, but it is guaranteed 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 not the restriction now to achieving fast growth but our new research report shows that there is a blockage in the supply chain.
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