Hikvision China Government / Business Bubble?

Here's a few questions that has been bugging me for some time regarding Hikvision/Dahua.

  1. It's been mentioned that the Chinese government is subsidizing the cost of cameras. Why? Why not subsidize cell phone production or any number of other industries? Perhaps they already do but it doesn't seem to be having as much of an impact.
  2. Is Hikvision actually making a profit or are they just burning through their funding?
  3. There has to be a limit to how long the subsidy can last, correct?
  4. What happens when the subsidy collapses? Do Hikvision cameras end up costing just as much as other overseas product such as Geovision or Nuuo?
  5. Is the end goal just to buy as much marketshare as possible in order to eventually raise prices once they have captured the majority of the market?

It just seems like a bubble at this point. I appreciate the advances they have made with HD-TVI and other items but they are truly disrupting the industry in a way that seems unhealthy long term.


Interesting questions.

Let me start by answering #1 and #2 together.

Hikvision is making a ton of profits, at least according to their own financial reports. ~75% of their revenue comes from China and far more of their profits come from there. Their net margins, though declining, still came in at ~25% for last year, which is enormous (higher than Google's).

The biggest 'subsidy' is likely the enormous profits they make from their government contracts. It's a government owned company selling back primarily to the government and making tons of money doing this. In this case, Communism literally pays.

There might be some other direct subsidies. I believe historically, the Chinese government gave them a super low tax rate, etc. but the biggest driver is clearly the money from Chinese government project sales.

#3, the 'limit' is really when the Chinese government stops its massive infrastructure spending / lending. Who knows when that stops. The Chinese economy is struggling / in transition (depending on one's perspective) and the the government is pumping a lot of money into the economy to stop further GDP growth declines.

#4, when the Chinese government spending stops or slows, it could have a huge impact on Hikvision but who knows when or how much it will go down. There have been Chinese bears saying China would collapse for years but it has not happened yet. I am not saying it will or won't, but clearly not easy to predict.

#5, the end goal, if not the ultimate end goal, is to make companies like Hikvision (remember the Chinese government owns numerous companies) is to make them global brands that people love.

'Soft power' is an important force for the Chinese government. The thinking, and it makes sense to me, is that if people around the world think highly about Chinese companies, they will think more highly about China the country. This works for Japan (think Sony and Panasonic).

Ultimately, though, the goal is to wipe out almost all competitors. In fairness, the Hikvision perception is that this will naturally happen anyway and they just need to be on of the few companies to survive.

According to Hikvision's chairman, in 5 to 10 years, only a few large companies will remain:

It's been nice knowing the rest of the manufacturers, kidding... sort of...