Our recent article “Are Western Manufacturers of Video Surveillance Cameras Ready for Commoditization?”, explained why we think Western companies are running out of options in meeting the Chinese "Video Surveillance threat" and that unless they find a quick solution many will struggle over the next five years.
The two major Chinese manufacturers Dahua and Hikvision are pursuing a strategy of going for volume. This was initially based on their home market but now they are building up their market share in North America and Europe. They have over the last thee years improved the performance of their products and customer service, whilst selling at significantly lower prices than western manufacturers. Western manufacturers have lowered their margins only to find that Chinese competitors have reduced their prices further.
Western manufacturers simply do not have the capacity to reduce prices much further. Whilst Chinese manufacturers have the benefit of a well protected and large home market to feed off; which overseas suppliers cannot penetrate to any significant extent.
So this has changed the competitive landscape and whist there are solutions to combat the threat in the short term the real crux of the issue is that scale is now becoming critical in the video camera market as commoditization takes hold. This will give those with the highest volumes the opportunity to buy components at the lowest price.
At this time western manufacturers have sophisticated products and know-how that they have built in to their cameras. In the enterprise market this is valued by the end user. However much of this will over the next five years be built into the silicon chipsets and much of this specialization will be lost.
“Siliconization” of surveillance cameras has been taking place over the last few years with the functionality of complex megapixel cameras becoming integrated onto chips. Chipset providers, such as Ambarella and Hisilicon, are able to deliver their customers megapixel and sophisticated camera functionality in silicon today and you can expect them to move this forward.
IHS recently commented in an article “Make or break - the next chapter in the video surveillance market” that "despite the increase in merger and acquisition activity, increased supply concentration has been caused by companies taking market share from competitors, rather than by acquiring it through mergers."
This is correct, but sadly many western manufactures are now losing share and the only way they can change this in the short term is through acquisition and merger. Only then will they be in a position to compete with the Chinese manufacturers and benefits from commoditisation. Time is not on their side. HIKVision is recently reported to have secured another $3 Billion Credit Facility with the Export-Import Bank of China.
A recent corollary can be found in the LED business, where Chinese manufacturers’ aggressive pricing strategies, and large production volume have become a threat to many international LED manufacturers. As a result a number of major western companies have been acquired with some selling to Chinese companies.