Hikvision - Where Margins Don't Matter?

We have heard this from numerous people with detailed knowledge of Hikvision's American operations.

Normally, manufacturers have set maximum discounts that salespeople are allowed to extend. Then there are reviews for special situations but still fairly hard limits about how low the manufacturer will go.

What we hear about Hikvision is that these standard rules / practices do not apply. How much margin is made is far less relevant than winning the deal, even if it is at an extremely low price / high discount.

To be clear, this is about the Americas. Surely, in China, where they have inside track on massive government projects regularly, this may be different. But it appears to be a key tactic in Hikvision's rapidly expanding overseas operations.

What do you think?


As a factory rep, we are hearing more and more about HikVision "fatigue". Meaning, dealers saying they either can't make much profit or win many jobs where they lead with HikVision and the end user solicits other bids. This due to HikVision being on constantly on sale at any given moment and therefore anyone can underbid anyone given Hik's scorched earth go to market strategy. All this coupled with their multiple OEMs private label buyers being able to compete against each others. The ultimate cake-and-eat-it-too scenario.

I've heard some of this too. Dealers who 1-2 years ago thought Hikvision was a solid lower-cost option and now are just frustrated with the product and looking for something for a lower-cost porduct, but with more channel integrity.

we are hearing more and more about HikVision "fatigue". Meaning, dealers saying they either can't make much profit or win many jobs

In fairness, this is a variation of the same complaint dealers had about Axis (poor margins / low profit) for years yet Axis remained the top choice (debatable only now because of Hikvision).

Fatigued or not, what are the options for a super low cost, quality, well supported alternative?

What I do not understand is why Hikvision wants to price so low. Sure, the Chinese Communist Party could be better at capitalism be better at capitalism. Maybe but I'd love to hear the long term economic theory behind this.

There are certainly reasons to drive price down so aggressively but Hikvision does not fit the standard cases. Many markets have network effects (think Uber or Facebook), so making your product as cheap and easy to get to start is critical so you can reach critical mass, lock in your audience and then profit for years. But video surveillance cameras are not like that. If Hikvision ever expects to raise prices or cut support, there are going to be other companies around willing and able to fill the gap. Yes/no?

Would it not be better to make more some profits per sale now? Hikvision's products clearly have the quality and support to justify much higher pricing. Agree/disagree?

Hence, why the video market is in a race to the bottom.

With HikVision coming down the backstretch and no one else in sight... Lots of longshots already scratched from the race.

It is even more prevalent in the foreign markets where the Dahua/Hikvision war continues the race to the bottom. As low as the prices are in the domestic US - the foreign markets can be 20%-30% lower. Products are sold under different part numbers with similar specifications and yes when there is a project there is no bottom.

Russia, Latin America, Middle East, Africa

Going to be interesting set of circumstances since now they are undercutting the OEM channel partner prices with their branded products, which one knows is not going to sit end well.

yes the same is true in Middle East and India At times they are so low on tenders its incredible. The only reason they fail to win some large tenders is because when it comes to a POC proof of concept demo before award of tender their quality and claims do to match the scrutiny. Their data sheet claims at times are outrageous and this is highlighted during the POC..

You just need to take it to a different level:

City of Industry, California – April 5, 2016 –

Hikvision USA, the North American leader in innovative, award-winning CCTV and IP video surveillance products, is pleased to launch a new level of its Dealer Partner Program—Diamond...

The Diamond level was created to meet the needs of enterprise-level partners via built-in incentives for enhanced profitability, enriched training certification, and specialized support.

Come on, HIK is still making $ even selling a camera for $20. Raw materials are sub $10 and slave labour is almost free. Machining/tooling/R&D has been paid for long ago. Now they just crank em out and ship em off.

6, I am not sure if you are being facetious or not, but it is important to emphasize that even with low production costs, all manufacturers (Hikvision included) have substantial sales, marketing, support and distribution costs. For example, Hikvision in NA has 200+ employees, has multiple facilities (including a new 100k+ sqft warehouse in Miami), spends millions on tradeshows (close to a million just for ISCW), etc., etc.

Every manufacturer has some point far above the cost of production where a sale is not profitable.

Ultimately, what is interesting to me about Hikvision's approach is that are clearly not worried about that (for now, outside of China).

John is on point. If a camera cost you $10 and you sell it for $20 but your overhead is $15 somehow there is a math problem. The Chinese are smart in math in school but somehow it gets lost in business. I have heard it over the years from numerous manufacturers make a statement saying "profit isn't important" which my question is why are you in business. We also have to remember these aren't iPhones you replace every year or two. One topic not mentioned much is "market saturation." Prices are falling faster than unit count growth not taking into consideration at some point flattening. When the marketing plan is simply be the cheapest and sell at any price it has repercussions.

The Chinese are smart in math in school but somehow it gets lost in business.

Seriously?

Even if every camera is losing them $10 per unit, they must be making it up (and then some) in some other industry, right?

Or is the whole country running at a loss for decades?

Do the math.

The method of winning here is clear... Hikvision has great amount of resources... first world economy support by now. They can wait virtually forever getting investment from the government and the point is to wait long enough to watch all major competitors death from starvation. Then they will have situation close to monopoly and trust me they will regain everything they have spent 10 times.

Even now while most of vendors are thinking about how to handle Hikvision low prices, Hikvision is thinking about technology and where to invest money... They will keep market unbalanced to the death of major competitors and then their own development will be so strong that any new emerging company will be bought or will not be a threat cause of great technology advantage and customers loyalty.

The exact same situation was several decades ago with operating systems... While IBM was selling OS/2 for $200, Bill Gates has decided to sell MS-DOS for $40, and now we all know where is Microsoft in client operating system market position and OS/2 is dead... Novell Suse desktop - in agony... other OS? Mac? You know the share...

And the most extraordinary example is Microsoft Office which cost considerable amount of money (Pro versions up to $800 here) compared to FREE OpenOffice. And vast majority is ready to pay money compared to free usage... because of MS infrastructure, updates, management, knowledge, simplicity and everybody just used to. Any other competitors?

China knows good the Art of War, this book was published in ancient times, like in chess you make "stupid move" and your opponent is happy taking your queen and next move you put the opponent in checkmate with a pawn. Pricing and profits are now tactics for Hikvision a local battle they can loose to win the strategy.

Agree 100%

The same happen to North American TV industry killed by Japanise

The difference is the thinking we sell at a loss and after everyone goes out of business we raise prices is a fantasy - and well that's never happened or can someone cite a case in history where it has worked

Next let's not forget also we are not talking about "consumer electronics" or other industries that "dwarf" this industry by 100x and are in the 100s of billions.

Samsung just one company as an example does nearly $200B of "real" revenues.

Hikvision revenues excluding Chinese government revenues?

How big is the CCTV market?

I personally think HIK do not sell at loss

Once they destroy as much as they can competition, they simply will sell even more IMO

As undisclosed 3 puts it, the discount until everyone is out of business and then raise prices IS a fantasy. That leaves one possibility - HIK is making money.

I know it seems hard to believe, but HIK is making money. It literally costs them nothing to produce a camera - if Walmart is selling $30 cameras after marking it up from manufacturer, that says a lot about production costs of cameras.

Yes HIK has to pay for rent, employees, advertising etc, but when you are the #1 camera producer worldwide and you make $$ on each camera sold (even if it's not a lot of $$) - these expenses are covered.

It's pretty simple - low profit, high volume. The convenience store model. Or the dollar-store model. Except in this case, HIK products are not cheap dollar store crap, they work as well as any other expensive IP camera, Axis, Panasonic etc. So the people buying cheap HIK are not being penalized, they enjoy a quality product that works well.

The market is expanding like crazy - everyone has camera now everywhere you go, they are no longer a luxury item but a necessity for any business. HIK is grabbing all that expanding market, while the old boys club is whining and gouging where they still can - but they are in a major decline. There will always be the luxury market, you'll still be able to find a $2000 IP camera from Axis, but for every one of those you sell, you're gonna sell 50 HIK cameras. So you've got Versace and Old Navy. Both can co-exist, and both can make money.

As for me, Hik do kill competitors, and even if they are spending now more than gaining, market monopoly will allow to sell with minimum effort for the same price... sales strategy will be switched from aggressively pushing equipment to just process large number of incoming queries. Such change will lead to marketing and sales people reduction and subsequent expenditures making business profitable. Then they surely will try to grab hi-end segment too using the same strategy.

As for the history... Can anybody tell if China government has bought any other company in a security field this big and forced sales so aggressively? 30 years old China with food problems and nowadays China with first economy is just completely another country. I think US businessmen are surprised how quickly China is moving to the lead position in the world producing almost everything starting from cutlery and ending with heavy machinery. That is why history can not be applied here, cause we have two much global factors which appeared first time.

And what will stop Hik to make equal Axis $2000 IP camera and start selling it for $500?

And what will stop Hik to make equal Axis $2000 IP camera and start selling it for $500?

A time machine?

Hi

I agree with Oleksiy Zayonchkovskyy.

This is an interesting discussion. We are at that juncture where Hikvision cameras perform as well as any camera on the market for most applications. there will be some applications where specific and much more expensive cameras might do a better job. To repeat: For the vast majority of applications jobs, we are called for or are biding for, you can bet Hikvision has a camera/solution.

We have been in IT integration before going into IP Security. This could be a little bit of exaggeration but from the top of my head I believe that some SOHO Router costing less than $100 surpass or match $40K routers of 15 years ago. The same is happening in cameras there is no stopping it if it weren't for Hik it would be someone else.

Xenophobia is part of human nature and we see it here. The same happened with Japan. At one point their products were deemed inferior and they were regularly accused of dumping. Now they are the Gold standard.

Now it is Chinese cameras we are discussing about. Hik has the economies of scale, They have the R&D muscle and more they have performance: Their darn products are good to superior and they sell for less. Taking the example of Cars: Did Japanese cars kill all local /autochthon manufacturers? No. Did they dominate in local markets? yes! It means however that the other manufacturers had to adapt and become better. Provide better products and services at a competitive price. Will Axis and other survive? I don't know for specific brands but the market doesn't seem to be willing to accept just one brand to rule them all thus I believe some will survive but I am also certain the days of $500 IP for a basic IP Cameras are over.

It is very easy to speculate about a manufacturer real costs but assuming that Hik is clueless is the surest way for other companies to lose the battle and for integrators to be run over. My hunch is that they're aren't losing money. This is part of a long term plan with pocket deep enough to allow for changing tactics and some mistakes along the way.

I agree with Oleksiy Zayonchkovskyy.

I wasn't disagreeing. I was only joking because Hik already makes $500 cameras that compete with $2000 Axis ones.

This is the sheer stupidity of the Chinese approach. Even if you talk to "retail" customers it is marketing 101, even if the product is a Mercedes if you sell something at Hyundai prices the first thought on someone's mind is it is inferior or cannot be up to the same standard. So what marketing manager says, hey the market for this product is $2,000 and we can make the same if not better and we will sell it for $500 and thinks the public isn't thinking what is wrong with it or what is not included. Rather than, hey the market from competitors is $2,000 and we are going to sell it for $1,500.

It is just a psychological difference of marketing. Ultimately, Axis and others have to decide whether they want to enter that rat race or just maintain their brand and margins. If you look at Cisco, there are plenty of other Chinese options out there to buy switches at a fraction of the cost, but most IT managers are afraid to take any risks since it could be their job on the line.

Similarly, customers have confidence in Axis (which has a value) and do not have to worry about security issues or buying from the Chinese government. You also don't read about Axis competing with their customers.

One more small story to proove China abilities

About 7 or so years ago China has bought brand 2 new speed trains from Siemens (Germany). Trains were bought for very low price compared to standard pricelist as a pilot project assuming that China will try and buy more in several years. After pilot project was done, Siemens asked about results and of course China has said that trains are good but we will think about greater deal for some time. Next year Siemens local representatives have registered the fact that there are about 16 new "Siemens" like trains on the rails... The questions were asked... And China said that that was their native products... Patents scandal appeared and courts and so on, but Chinese government has analyzed Siemens all product market in China and conducted a meeting with Siemens. They just have threatened Germany that Siemens and other brands will not be able to sell a single kettle on China territory if Siemens continues to blame in patent abuse. The result? Siemens has surrendered...

And Russia had the exact same story with tanks T-90 which were disassembled down to screws 3-D scanned and reverse engineered...

Comparing to this, to make a copy of a camera is a piece-of-cake job.