Security industry heats up, as China tries to catch up
Editor / Provider: a&s Editorial Team | Updated: 6/25/2015 | Article type: Hot Topics
From the beginning of this decade there has been much talk about the growth of Chinese physical security manufacturers and how they had begun to hurt the market-shares of Western and other Asian companies with extremely low-cost products. Analysts and media have repeatedly highlighted the pressure that Chinese manufacturers exert on their foreign counterparts and how this is changing the global physical security business landscape.
Two major Chinese manufacturers, Hikvision and Dahua, had aggressively expanded their presence in global markets by 2014, moving up the value chain but continuing to maintain low prices. Research firm, Memoori Business Intelligence, had also warned that some very misleading figures are being published about their dominant size by basing their revenues on total system compared against product sales for Western companies.
Needless to say, with such strong opinions from industry-observers, distributors and systems integrators (SI) are considering how they should move forward in terms of partnerships and purchases, without having to compromise too much on their margins.
Persisting Quality and Durability Concerns
Despite a general uplift in outlook for some Chinese manufacturers, certain concerns still exist on their performance and these have prompted some distributers and SIs to take a wait and watch attitude. They believe that the quality has improved, but not to their level of satisfaction.
Nigel Hamley, Director of IPTV Division at the US-based Marshall Electronics, whose company has significant experience in multiple verticals including medical, government, education, AV market, and enterprise security, had come to Secutech 2015 in search of expanding its involvement with IP vendors that his company could partner with to diversify its product offerings. He feels that over the past five years, the major change he has seen in the industry is the growth of China.
As of now, his company has not purchased Chinese products as they have relied on the technological and advanced quality levels seen in Taiwanese and Korean products, but he admitted that Chinese manufacturers are improving and that in the future they might decide to purchase components such as parts for dome camera, mechanical and electronic parts, and chipsets, and may look to integrate those parts into finished goods.
Some SIs, while acknowledging that the quality of Chinese products have improved, pointed out that there are still concerns on their durability. Jignesh Shah, MD of India-based SI, Dots Info Systems, which has been in the video surveillance industry for the past eight years, stressed this point.
He said that the Indian market is flooded with Chinese products and that they are exerting strong pressure on the other brands, but added “if you are looking at a product to last from a year to three, then Chinese products are okay, if looking at a longer period, you have to look for other options.”
Roshan Punnilath, Head of Operations at Mega Security Systems in Saudi Arabia, too agreed that although the quality of Chinese products has improved, their durability is still a concern in the market. Distributors compensate this by providing extended warranties and replacement offers for damaged goods, but such haphazard solutions cannot be accepted for crucial installations like government projects.
Some distributors attribute these quality and durability issues to the Chinese manufacturers' lack of understanding of the industry. According to Johan Haryanto, MD of distributer, Hotware, that began business in Indonesia eight years ago as VIVOTEK's sole dealer for the country, Taiwanese brands stand out in comparison due to their knowledge of the field.
“It's because of the experience. Even though some [Chinese] companies are growing, they lack experience in the field,” Haryanto said. “So when compared within the same field, non-Chinese brands are better. Even though Chinese products are selling more, their Return Merchandise Authorization (RMA) levels and number of defective pieces are still high.”
Margins, specialized requirements and service drive buyers to Taiwan
As the global economy tightens and businesses look to cut corners and remain profitable, it is inevitable that distributors and SIs give adequate focus to their income margins. This, in itself, is a difficult task when customers become more reluctant to spend money. But things become even more complicated when manufacturers themselves place their products at the lower end of the price chart.
Although a low-price product might look attractive to an end user, it's hardly the same for distributors and SIs who are forced to squeeze their profit margins.
Michael Grek, from Metro Global Technology Solutions in Australia said that he was looking to purchase Taiwanese products to offset the weak margins offered by Chinese manufacturers. He added that at present the Australian market is flooded with Chinese products, and as everyone begins to sell the same product, distributors are forced undercut each other constantly, a practice that hurts not just individual businesses but also the whole industry.
M Kumaraguru, MD of Malaysia-based SI, Maha Asia Sdn Bhd, took this point further, as he said that the lower prices of Chinese products are killing the market indirectly. “You need to maintain a certain standard and not try to keep taking the prices lower and lower until the margins become extremely narrow for us,” he said.
This concern is seen in other developed markets as well, according to Jonathan Okina, CEO of Okiusa, a US-based distributor of surveillance and alarm equipment with about 18 years of experience. Okina said that with Chinese brands like Hikvision becoming popular, distributors' work has doubled and tripled from before and they are forced to lower prices to stay competitive. Moises Faroy, President and CEO of another US-based distributor, CCTV Core, agreed to this, adding that low-price products from China and the price wars they have brought with them are the biggest market challenges at present.
Yet another key reason that prompts buyers to look to Taiwan is that Taiwanese manufacturers are able to provide solutions to various specific needs. Syed Jawed Ali Zaidi, President of GSS-Japan, a company that does systems integration for solar power plants, said that he comes to Taiwan for his purchases because Taiwanese manufacturers are able to provide him better customized services, which help him integrate different brands easily. Masahiko Yamamoto, President of another Japanese installer, Safety & Security, agrees that Taiwanese products are better and are improving every year, meeting Japanese quality requirements.
Then there is also the issue of service. Daniel Brami, Head of Business Development in Building Department at Mecalectro in France said that his company prefers products that are made in Taiwan, not just because of the quality but also because of the prompt response that they get from Taiwanese companies.
“China usually doesn't answer to customers,” he said. “I don't know if it's because China so big they don't care? We ask questions to both China and Taiwan [companies]. Taiwan answers on same day but China takes four to five days.”
Dean Klobucar, Export Director of Alarm Automatika, a SI and distributor based in Croatia, sums this up as Taiwanese companies being professionally stronger, despite having to compete with the large quantities of products that are produced in China. He added that from an SI's point of view, such a strong professional support is crucial to the business.
Chinese Attempt to outgrow the ‘cheap' label
Chinese products evidently struggle when it comes to matching up to the required quality standards. But perhaps the biggest challenge that Chinese manufacturers face may not be the quality of their products itself, but the perception that Chinese products are low in quality. Years of exporting low-quality products at extremely low prices have created a general opinion that Chinese manufacturers cannot be trusted. Listening to views from some distributors and SIs, it was evident that consistent efforts from some major Chinese vendors to change this label have had some effect.
Harry Chang, from the Singapore-based SI, King Island, hinted that the perception of Chinese products in his local market is improving, as he elaborated on his recent experience of buying a Dahua product. Chang said in the past the company used low-quality material, like plastic casing for an IR camera, and their R&D was not sufficient. Now he found that only the base of the product is made of plastic, which is an improvement over the past.
Echoing similar sentiments, Somchai Prajaksoot, MD of Digital Focus, an exclusive distributor for Hikvision in Thailand, said that SIs in his country are increasingly interested in the Chinese brand, compared to the past. With a strong local presence, Prajaksoot's company has managed to expand Hikvision products, especially in large government projects in the country. Recently Digital Focus won many government projects, which could never have happened five years ago.
Alberto Antinucci from the Italy-based Home Defender considers this a global trend, adding that it is no longer possible to generalize products from China as of low-quality. All countries have producers that are good and bad and eventually the demand depends on the buyer's needs.
“Today, you can't put a label such that if it's made in China, it's poor quality,” he said, adding that some of the Chinese companies that he had encountered were producing good-quality products.
Such thoughts have prompted some distributors and SIs to focus more on the product and not where it comes from. Edo Pribadi, MD of SI Adhivian Mitrakarsa in Indonesia said that he does not care where the product comes from as long as the quality is good.
“I'm not looking at where the products come from, what I need to know is what functions the products provide,” Pribadi said, adding that if the products from China can come with a guarantee of longer durability, he will go for it. Joni Iswanto, Director of another Indonesia-based SI and distributor, Lintastama Jelajah Informatika, was of the same opinion.
But this cannot be seen as a general trend, as several markets still hold a cautious approach to Chinese products. According to Kumaraguru, most of Malaysian market still considers Chinese manufacturers as of low price and low quality. Mario Sergio L. Machado, from the Brazilian distributor Telematica, also said that clients in his local market believe Taiwan products have a better image compared to their Chinese counterparts.
Ahmed Faiz, GM of Khonaini Computer Technologies in Saudi Arabia, had similar comments about his local market. He said that Chinese products have only managed to penetrate the low-end consumer market, while large projects are still handled by US, European and Taiwanese products.
Increased competition to aid the industry
As a general market observation though, some SIs are of the opinion that the rise of Chinese products may help the overall industry because it will boost competition. Theoretically, competition would limit complacency and force manufacturers to improve themselves. Daniel Ananthan, Head of Enterprise Business at VS Information Systems, one of the largest SIs in Sri Lanka, concurs to this idea.
“I personally believe that arrival of Chinese products is good for the market,” Ananthan said. “Once they improve themselves, other major manufacturers are also forced to change themselves and perhaps look for competitive prices.”
Such a thought does make sense, but not exactly in the sense that Chinese manufacturers are now viewing the market. Creating perfect competition does regulate the market to set realistic product prices, but Chinese manufacturers, with their ultra-low prices, do not seem to be looking for this.
Compete to Innovate, not to lower prices
Regardless of the discussions on the quality of manufacturers, industry players believe that given the sheer number of companies involved, the Chinese manufacturing sector might soon consolidate. This would inevitably remove the weaker manufacturers and let the good-quality brands survive. Some believe that at present, there are just a few Chinese manufacturers that can stand the test of time.
But regardless of improving quality, Chinese manufacturers continue to focus on low-pricing as their differentiating factor. Market analysts, while acknowledging that non-Chinese brands might need to compromise on margins while competing with China, warn against making price the sole factor for competition.
“Shaving off some margin may be necessary but to compete on price would be a disastrous policy for the Chinese will continue to lower their price if they have to,” noted Memoori Business Intelligence, indicating that the inevitable answer is, and has always been, innovation.
This is in line with opinions from some of the distributors and SIs as well. Golan Wishniya, CEO of Worldshop, a distributor from U.S., believes that Taiwanese products have better quality but said that he would like to see them focus more on smart solutions, and make more complex products like the stone camera, which are different, but are easy to use.
In the end, it is evident that distributors and SIs believe quality is of utmost priority, especially in the longer term. There is an instant attraction to lower prices, but such a consistent push to keep the costs down will not only harm product-quality, but is also a destructive business practice that crunches earnings. Going forward, the only constructive option is to invest more in R&D, understand customer requirements and proactively provide innovative solutions.