China - The Great Hope Or Hype For Surveillance?

Inside of essentially all analyst projections for the global surveillance market is bullish growth for China. In fact, the world's growth projections excluding China, is typically significantly lower (e.g., 10 - 14% globally with China, 5-7% excluding China). This is because China is expected to continue to deliver massive growth rates of 20%+. This is very big considering it includes all surveillance, not just the IP segment.

Of course, all of this presumes China is not a bubble that will burst in the next few years. To the contrary, new stories have increased in the last few years with this frightening story:

I do not know if it is a hope or hype but I think at least for analog survailance they have almost closed the market since their prices can not be beaten. We have tried hard to find european vendors for our small projects analog survaillance needs (cameras and DVRs) - we deal direct as distributors since we are on a small island - but somehow no one can beat on pricing the Chinese companies - even Hong Kong and Taiwan companies are more expensive. I hate to look for the cheapest in something and personally I am of exactly the opposite philosophy but for analog survailance it seems the Chinese have found a way to offer more than acceptacle quality and performance products - sometimes even same or better performance cameras - at unbeatable prices. They still have a lot to learn on support, documentation, RMAs and so on though.

The big problem is that it seems they are trying to do this for IP surveillance as well which is a much more complicated subject - I guess we will know soon.

To be clear, my question and focus for this discussion is whether China can continue its overall economic growth / domestic consumption of surveillance, not whether their products / companies are good or bad for the rest of the world.

Wow. The two responses so far kind of missed what I believe John is asking, namely if China is a bubble when it comes to its own securities market. There is no question the Chinese economy in and of itself has obvious signs of bubble, whether their securities industry is the byproduct of this very bubble is a fair question to ask. I believe the answer is somewhat nuanced. There is no question when it comes to access control and fire, a huge part of the demand comes from the boom in residential construction; and the video from 60 minutes shows plenty of examples of a bubble in that sector of the Chinese economy. So if and when that bubble bursts, you have to ask yourself just how many of the companies riding that boom will be standing.

When it comes to video surveillance, the real demand comes from all aspect of the government. Let's not forget China is an authoritarian state, by that definition, it is paranoid about security. If you look at the biggest and fastest growing companies in Chinese security, companies like Hikvision, Dahua, Dali, Bluestar and so on, they are all on the receiving end of that massive growth. And of all of those companies have one thing in common, whilst they would like to pursue more sales outside of China, their real focus for the past 5 years and near term will still be inside China, where they get almost 90% of their revenue. Not only China is their biggest source of revenue, it is also where they find the fastest growth. Unless there is some massive change in the political climate in China, video surveillance will continue to grow strongly.

The massive growth in video surveillance demand inside China has created a strange split very few people outside China understands. Due to the massive size and complexity of some of these projects inside China (9 figure projects are common), companies like Hikvision has enjoyed massive profits. This has enabled them to reinvest in engineering and products and fast climbing the value chain, all the while left the export oriented companies (mostly from Shenzhen) wither and die due to the fact they mostly compete on price. To put it simply, it would be a grave mistake for us to lump all Chinese securities companies together. Yes, Shenzhen based companies mostly sell on little or no value added analog products that competes strictly on price, and these are the companies you constantly get spammed on. But these are fast dying companies because of rising labor costs and the increasingly expensive Chinese currency. The irony is, companies like Hikvision and others actually develop and manufacture some of the more advanced surveillance products but only sell them inside China. Sure, a lot of people would like to believe all of these guys are good at just making some tin cans and sell them cheap, that is simply not the case.

Hangzhou,where Hikvision, Dahua, Dali and several other significant security companies are based probably has more than 10,000 engineers working on video surveillance products. This is perhaps the largest hub of security surveillance in the world. The average salary of these engineers are already at $3,000 a month. You simply cannot be selling cheap crap at no margin to sustain this kind of hub. If anything, Hangzhou is fast turning into the Silicon Valley of security surveillance. For now, due to disparity in user work flow and infrastructure, you are seeing products that are clearly mismatched for US markets. But with their massive engineering base and healthy corporate cash hoard, I fear in the coming years China won't be competing in price but in sophistication instead.

In my mind, China is neither hype or hope for surveillance; depending on your place in the industry, you might need to worry, a lot.

Undisclosed, thanks for the insightful feedback. A few thoughts/questions:

  • "Due to the massive size and complexity of some of these projects inside China (9 figure projects are common), companies like Hikvision have enjoyed massive profits." The profits are amazingly high. What I find weird about this is that since the Chinese government is such a heavy investor in many of these companies, it's as if the government is essentially paying itself? You would think the government could bargain harder with itself :)
  • "The irony is, companies like Hikvision and others actually develop and manufacture some of the more advanced surveillance products but only sell them inside China." Can you share any examples of this? I know they have some higher end products that they don't sell internationally, I just don't know how good they are. For example, do they secretly have a VMS/PSIM that blows away Genetec but that they simply won't show outside of China?
  • I think it's good to distinguish the construction boom from the authoritarian state 'boom'. What happens though if the construction / mainstream economy boom bursts? Does that impact spending on authoritarian / government camera deployments? Does the government then spend more on cameras or less?

John, China is a massive country with huge complexities. When you say "government" I assume you are thinking it is somehow all of the same. Fact is, it is not. Today, despite the authoritarian rule, the central government has very little control when it comes to local projects. Yes, it levies heavy taxation to pay for a lot of the initiatives (China has far higher personal income tax). Security has a higher priority than national defense. That statement alone will tell you just how much and how far China is willing to spend on surveillance in the future. The central government can mandate how much the local government must spend to beef up their security infrastructure, but it won't get into who to buy it from and so on. The so-called "safe city" initiative who gave birth to all these massive 9 figure (in dollar) projects all over the country is the single biggest driver for the boom for companies like Hikvision. But they also do sell to large banks and so on.

These same 9 figure projects are hugely complex. They often take on the look of PSIM with things like GIS integration. But due to the reporting and compliance requirements that is somewhat unique to China, these hardware/software combinations cannot be sold outside China asis. But it doesn't mean they won't trickle down eventually. Blowing away Genetec? In terms of scale and complexity, yes for some of them. Even Hikvision has some highly complex VMS, of course you would expect that when you are the prime contractor for some of the biggest projects and you have thousands of programmers at your disposal. But are they polished and user friendly? No. Think complex ERP software vs. Salesforce. In terms of hardware, especially highly scalable massive enterprise level stuff, I don't believe there is anyone in the world that is more advanced than Hikvision. But some of those goes for 6 figures and they don't sell them here.

The boom needs to be put in perspective. It is precisely the construction boom that has the authorities worried. Even the 60 minutes segment pointed out that if and when the boom ends, there will be 50 million plus idle hands. These idle hands can cause huge social instability. Chinese authorities, even predates the current communists have always worried about the mass of idle hands. So surveillance is their counter measure. That's why a lot of the "safe city" projects focus on things like crowd control, crowd detection and so on. In so many words, no matter what happens to the construction boom, surveillance will continue to boom for a long time to come.