China to Block Out Western Manufacturers?

Fueled by massive Chinese government spending, Chinese video surveillance is one of the fastest growing markets in our industry. With its already formidable size and potential rapid growth, many manufacturers woud love to get a piece of that action. Alas, new reports warn that China is working on blocking out western surveillance manufacturers. In this note, we analyze these claims.

Background

China Daily, the leading English langauge news, reports that:

• Government officials worry that, "China's reliance on foreign surveillance equipment, standards and software may threaten the country's security"
• 80% of surveillance equipment used in China is sold by Western companies (citing Frost & Sullivan) [Editor's note: we do not believe this]
• "Sales in the Chinese surveillance market are forecast to reach 500 billion yuan ($78 billion) by 2015" [Editor's note: this is impossible and an insane number]
• "Almost all of the security cameras used in the Safety City project were made in foreign countries. According to a report in the Wall Street Journal in May, Cisco Systems has sold half a million cameras to Southwest China's Chongqing municipality to help the city bolster its security." [Editor's note: If true, this makes Cisco one of the top 3 global camera manufacturers in the world; ergo, it's not true]
• "Overseas video-compression formats aren't suited to China's situation. China requires products that are meant for large-scale use, since all security cameras will be brought into a unified system in the future under the Safety City project" says Chinese government official.
• The government is advocating a, "Chinese-developed standard for compressing video surveillance footage" - A brand new CODEC / standard, called SVAC
• "SVAC aims to promote the orderly development of the surveillance industry in China, while enabling greater interconnectivity and providing more intelligent data analysis through the use of digital technologies and rules-based processes. SVAC is also the first fundamental technology that will enable surveillance's transition from the analog world to a fully digital, high definition, open and intelligent surveillance network" claims Vimicro [link no longer available], the Chinese semiconductor manufacturer leading this effort.
• The NYTimes did a follow up story on the China Daily report, affirming these concerns and plans while noting that foreign comanies like Cantronic [link no longer available] are still signing deals for Chinese projects

Analysis

This is an initial report. We plan to do more research and follow up reporting. That noted, some immediate thoughts:

The 80% foreign claim is highly suspicious to us:

• Local companies like Hikvision and CSST are doing huge business inside of China - just those two alone do nearly $1 Billion in annual revenue domestically. With a huge number of home grown manufacturers, Chinese domestic manufacturers have clear advantages on accessibility, price and political connections.
• Western manufacturers public financial reports show little success in Asia with the Asian market being the smallest for pretty much all American and European manufacturers.
• The Cisco example is likely wrong on the claim about providing cameras. Multiple reports from Cisco claim that they are providing networking and computer hardware, not surveillance products. Furthermore, if Cisco was selling 500,000 cameras that would create a huge shock throughout the global industry. Given Cisco's physec ongoing implosion, we doubt that.
• Cantronic is really no longer a Canadian company. Cantronic used to focus on North America but gave up a few years ago. Now, Cantronic has various Chinese subsidiaries and acts more like a domestic player than a foreigner. Also, the contract that Cantronic signed, cited by the NY Times, is with a Chinese domestic giant - Hikvision.

We suspect foreign share of the Chinese surveillance market is closer to 20% - the opposite of what is being claimed.

The H.264 codec replacement initiative is bizarre on a technical level but sensible on a political one. Using a Panasonic instead of a Dahua camera hardly creates a security risk. However, if Chinese industry wants to create more barriers to foreign companies, a strange, home grown 'standard' would be an effective way to do so.

Update:

One Chinese website [link no longer available] says the following about SVAC: "Relative to the industry's popular mpeg-4, h.264 standard, svac standard with eight technical innovation: support for high-definition video data, to achieve better image quality and a higher coding efficiency balance, support the region of interest (roi) variable quality coding to support scalable video coding (svc), dedicated to support and monitor network traffic information, support data security, dual-core support for audio encoding, support for voice recognition feature parameters coding."

While there is some speculation that SVAC is just SVC (Scalable Video Codec), this description indicates SVC is just a part of this codec/standard.

From a financial report of Vimicro: "As a co-founder of SVAC Working Group, we [Vimicro] initiated and participated in the establishment of core algorithm for the SVAC standard. The proprietary intelligent video analysis algorithm could fulfill functions such as image quality diagnosis, overstepping analysis, face snapshot and recognition and statistic collection on the number of people. We also have developed the first high-precision face snapshot technology in the industry."

This comment indicates that SVAC is attemptig to incorporate video analytics as well.

UPDATE 2: We spoke with a number of insiders who confirmed the following points:

• SVAC exists and is not simply a misspelling nor version of SVC
• SVAC is being used in production by some users in China
• However, most are overwhelming use 'regular' standard CODECs like H.264
• Even within China, there appears to be a debate over the future and positioning of SVAC as well as the power of Vimicro to push it.