To 1's point, I would add making jokes about Hikvision like this makes it easy for Hikvision and their supporters to dismiss the critical problem for Hikvision - the underlying China bubble that has driven their growth and that will eventually implode.
Why would a company that sells as many cameras as Hik need additional funding already? Since Hik sells through distribution, integrators are given up to 90 days to pay for the products they install. End users that need financing, have a number of areas that they can quickly and easily get a loan for a security system...it takes 5 minutes with an accredited bank. Certainly , seems to back up the theory that they are selling at a loss only to gain market share, but also that their business model is unsustainable.
...there is an expression "sticks out like dog's balls"... But "dog's balls" just isn't used.
Actually this compact usage is to be expected as familiarity grows. Technically, it's the evolution from simile to metaphor. For instance, "she's as thin as a toothpick" becomes "she's a toothpick", etc.
Just to be clear. What Guangfa Development Bank provided is essentially the Chinese way of ABL (asset based lending) in a supply chain environment.
The recipients of ABL financing are small and medium dealers/resellers. The goal of such lending practice is to increase Hik's sales and push more stuff down the channel.
This is how it works:
1. Hik would create credit profiles for dealers / integrators based on data gathered from past working partnership;
2. The bank would assess credit worthiness of the dealers based on these credit profiles, and provide these dealers with credit facility backed by assets collateral;
Why the bank need credit profiles generated by Hik? Because these dealers are too small to get any money from the bank. The only way for them to get anything is to have Hik back them up, since Hik knows them well.
3. The collateral would be Hik's products that become inventory sitting in the dealers' warehouse. The face value discount on the collateral is often 20-40%.
4. When the dealer sell any of the inventory, the proceed from the sales will locked and automatically wired to the bank as a repayment of the debt.
5. Normally, there will be a recourse agreement that requires Hik to buy back the inventory from the dealers, if the dealers can not sell the inventory within a period of time.
Thus, this recourse agreement will add huge off-balance-sheet liability to Hik. Obviously, Hik will never want its investors to know about that.
The other side of the news is that Hik will also provide banking solutions to Guang Fa Development Bank. Looks like Hik is entering the vertical segments..
Good thought. The Hik's finance arrangement is slightly different from channel stuffing.
Channel stuffing, as you know, refers to the delivery of inventory to dealers without actually receiving payments from the dealers and the booking the delivery as sales.
In this trade finance or supply chain finance arrangement, Hik actually gets paid. The payment is essentially the bank loan.
Give you a simple sample of how this works:
1. Tyrion is an awesome dealer for Hik who lacks money to expand his business.
2. Tywen is the bank who provides a loan to Tyrion with the approval from Hik. Hik has been doing business with Tyrion for a long time and knows he would always pay his debt. So Hik gives the bank a green light.
3. Now, Tyrion gets the loan and uses the loan to purchase the products from Hik.
4. So, essentially Hik gets the money from the bank Tywen.
5. If Tyrion can sell the products, then the proceeds will be used to pay for the loan;
5. If, however, after 6 months when the loan matures, Tyrion can not sell the products, then to avoid loan default, Hik has to pay for it by returning the original sales proceed to Tyrion, and then Tyrion gives it to the bank.
Channel stuffing could happen at anytime regardless this financing arrangement. And yes, this closer relationship between dealers and Hik could give Hik some leverage to force dealers to collude in channel stuffing.
I am not saying it is channel stuffing, I asked if it would "make channel stuffing easier".
So, yes, channel stuffing can happen at anytime but if the money is flowing much more freely to channel partners (like with this loan), then the channel partners can buy more product up front (even if they don't know they need it immediately), knowing that they have a recourse agreement. Yes/no?
Ok, i see what you mean. From my past experience, the answer to your question is "no".
Practically speaking, the Hik dealers have little incentive to stock up unless they know the products could sell. Well, the dealer could gamble knowing that the recourse agreement would cover his ass.
However, the recourse agreement is not a safe net but a last resort. If the dealer can not sell and keeps relying on the recourse agreement, he becomes the boy who cries wolf. His credit worthiness, in the eyes of the bank and Hik, will deteriorate. Soon, Hik will stop signing the recourse agreement with him; and no more financing from the bank.
But you are somewhat right that the actions that the dealer takes depend on his personal judgment of the market, which can be biased or overly optimistic. Blind optimism in a bull market would fuel a bubble.
If the end user market stops buying cameras from Hik, then bad things will escalate very quickly in this system. Massive recourse actions will drain the cash from Hik, while Hik's inventory will skyrocket simultaneously. All these dealers' problems will become Hik's problem over night.
That's why Hik must disclose these massive amount of potential recourse as contingent liability in its annual report, if the accounting rules are strictly followed.
However, I don't think Hik will. In fact, none of the Chinese enterprises in such financing agreement has ever disclosed any of these potential liabilities.
The described above is a big component of the shadow banking in China, which only a few know. Now you know it.
A great friend of mine once said: If everyone is chasing the bottom of a market with low priced, low quality product, go the other way!
And that is what I intend to do, sell better quality at a fair price and back it up. Let the bottom feeders feed, make next to nothing on selling cameras at no or little margins, and let the installers become just a guy on a ladder as your competition. We need to focus on what is best about the business.... Quality, Tech Support, and Customer Satisfaction after the install. Instead of all this competing for the bottom.
Good Luck with that! I for one am going to the high road and be apart of being a true consultant and add value to my business and my customers, and stop competing with a guy on a ladder.