CSST - China Video Surveillance Offerings ExaminedAuthor: John Honovich, Published on Aug 11, 2009
CSST is one of the biggest and fastest growing security companies in the world. Founded in 2001, last year CSST generated over $400 M USD revenue. Not only is CSST one of the largest players in one of the fastest growing markets, CSST is expanding its export business for sale and competition with manufacturers around the world.
This raises 2 important questions:
- How dominant can CSST become in the Chinese market?
- How strong can CSST become in the world market?
For background on CSST, the following 4 items were the best resources I found:
- Powerpoint presentation on the company's financial position and market strategy
- ASMAG survey article on CSST product strategy
- CSST Product website (cataloging their security products)
- Jeff Kessler's 2008 analysis of CSST
For Western readers, the most well known comparable for CSST is Tyco Security. Like Tyco, CSST is a combination of many different organizations who perform different roles in the security business. For instance, Tyco has ADT for monitoring and integration, Sensormatic for retail, American Dynamics for video surveillance, Software House for access control, etc. CSST has similar components including subsidiaries for installation, service, distribution, manufacturing, software development, etc. A major difference is that CSST is focused on deeply integrating their subsidiaries to deliver a "mega" turn-key solution from making the products to selling them to end users, installing and servicing them over the complete product lifecycle.
Direct Comparisons to Axis, Pelco, etc. misleading
CSST should not be compared to most well known manufacturers. For instance, companies like Axis, Pelco, HikVision are almost entirely focused on manufacturing products. Comparing these companies to CSST on a revenue or strategic basis can be quite misleading. One, the business strategy is different - CSST as a total solution provider, these other companies as manufacturing specialists. Secondly, only a fraction of CSST's revenue (16%) comes from manufacturing. As such, CSST's total 2008 revenue of $428 M USD cannot be directly compared to Axis or Pelco. CSST's manufacturing 2008 revenue is closer to $70 M USD (with the majority of revenue coming from installation). CSST also has access control and intrusion detection products offerings. This too, should be factored in when determining CSST's relative power and size specifically in video surveillance.
Role in the China Market
In China, CSST's strategy of providing total solutions is most apparent and well-developed. As they state:
"We manufactured the products, we installed the system . . . who else is better than us to manage it for you . . . Capitalize on system integration customer base"
CSST's revenue is heavily driven by government projects with almost half of sales from the government (46%). The Chinese Safe City projects are cited as a major driver of projects and revenue by CSST.
CSST is in the process of integrating dozens of acquistions (manufacturing companies, system integrators, etc.) as they attempt to quickly scale and deliver their total solution.
Role in the Global Market
CSST has established a division, called CSST Products, to focus on marketing their manufactured products to the global market. They report having a 12 building, 80,000 square meter complex where they are aggregating all of their product subsidiaries. Their value proposition is to provide one-stop shopping for international buyers that are looking to source a range of security products.
In their international plan overview, CSST seeks to increase the quality standards of their products to international levels. They list the Middle East, Asia, India and Africa as markets for expansion.
CSST Financial Performance
CSST is a publicly traded company on the NYSE (see quote). Their current market cap is $423M USD; which is less than their 2008 annual revenue (Price to Sales Ratio under 1). Despite the relatively low market capitalization, the company is fairly profitable with Net Income hovering about 15%, providing a low P/E ratio of about 13.
CSST's revenue growth was strong in Q2 2009 but profitability weakened. CSST cited price pressure in the corporate sector and the desire to grow market share.
Tradeoff of CSST's Corporate Strategy
CSST's veritical integration of manufacturing, installation, service and distribution has some important tradeoffs. While this is common in the oil industry, it is an increasingly rarely attempted strategy in the security market.
The benefits of vertical integration include tighter coordination amongst subsidiaries, higher revenue and greater margins as 'middleman' are cut out. The downside is a lack of flexibility and incentives to advocate one's own products even if better products are provided by 3rd party providers.
The past 5 year's financial results certainly indicate that the model is working well inside of the Chinese market. I would speculate that this is a function of China's politic/economic structure and CSST's abilities to navigate it.
In most Western economies, this strategy applied to the security industry has more negative trade-offs than positive. ADT's integration division is a classic example of this. A vertically integrated strategy would seek ADT to favor and push the sale of Tyco products (Intellex DVRs, etc.). However, ADT sells a broad array of security products and is strongly pushed by customers to provide non-Tyco products. If ADT did not do this, they would lose significant business. By ADT doing this, it reduces the benefits of a vertically integrated strategy.
CSST's approach may prove to be successful in the long term inside of China. However, with so many competitive video surveillance products available in the market, CSST may increasingly have difficulty stopping demand for 3rd party products. Certainly, though, CSST has little to no realistic opportunity to expand their vertical integration strategy to Western markets. In these markets, CSST will likely be another manufacture offering products for OEM or direct branded sale through traditional security sales channels.
Surveillance Product Offerings
While CSST offers a quite range of video surveillance products, not many of the products stand out. CSST is also, not surprisingly, not strong in IP camera and VMS software. However, CSST recently joined the HDcctv Alliance and plans to release HDcctv cameras and recorders in the next year.
Information on CSST's products can be found primarily on their CSST products website and additionally on a few of their subsidiary sites including cameras on the HTS site, monitors on the StoneSonic site, and recorders on the HighEasy site.
CSST admits that they are stilling working on improving their quality and catching up to the level of Taiwan and Korean manufacturers.
With a lack of innovative products for the Western market and admitted limitations on product quality, CSST has 2 major drawbacks.
Comparison to Other Asian Manufacturers
The Asian video surveillance manufacturing sector is quite mature and diverse in the number of manufacturers and the products offered. Additionally, in terms of video surveillance products sales, a large number of competitors are likely larger than CSST including HikVision, Dahua, Everfocus, Samsung, Vivotek, etc (see our overview of HikVision and of EverFocus). To give a sense of the size of competitors, HikVision reports 2008 revenue of $260M USD with 70% of revenue from China. They claim to have 50% market share in China as well.
For Western companies seeking Asian manufacturing partners, CSST suffers from a number of weaknesses.
- Western companies prefer manufacturers that are large enough to provide quality manufacturing but not too large to have leverage over the Western companies. Western OEMs value the control and pressure they can put on their Asian manufacturer. With CSST, rapidly approaching $1 B USD in revenue, this will be harder to accomplish.
- Western companies prefer manufacturers who do not have strong brands of their own. CSST may not be well known for its products in the West but it is far better known than most Asian manufacturers because of CSST's publicly traded stock in the US. Furthermore, given CSST's size and strength in the Chinese market, CSST will certainly continue to grow its marketing and branding efforts. These are negatives to most Western companies who do not want the products or the identity of their manufacturer known.
- Most of the larger Western companies do not need one stop shopping for their OEM purchases. To the extent that this is valuable in reducing negotiation and search costs, this may be offset by increases in price or decreases in customization (as a larger company with a profitable internal business, CSST has much less incentive to aggressively met Western companies requests/demands).
Strength as OEM/Branded Manufacturer in the West
Unlike many Asian manufacturers who are uncertain or split in their approach to branding their own products, CSST's focused strategy of winning the Chinese end user market will help them build their own brand in the West. In markets with similar level of performance/price requirements as China (India, Africa), CSST has the potential to do well in the short term. However, in markets like the US and Western Europe, it will be extremely difficult until CSST significantly increases the quality and feature sets of their product offering. This could happen but it is likely to take 5 years or more.
On the other hand, CSST's stength in the Chinese market may minimize the motivation to expand internationally. Unlike many Taiwanese or Korean manufacturers who have to sell globally because their home markets are small, CSST may find much higher margins and acceptable revenue levels, minimizing the focus and priority of global expansion.
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