Over the past two years, China-made products have become more popular in global markets, a phenomenon that not only impacted Asia's manufacturing landscape but also the whole distribution channel. All players across the supply chain are faced with eroding profits and are looking for ways to find new revenue streams. Many traditional players who were unable to respond to this change have been pushed out of the market. International brand suppliers facing China's price competition are also looking for ways to increase their products' cost-performance ratios. Despite all this, China should still be given credit for driving this price reduction that has led to more affordable products, a fast growth of the SMB market, and increased security awareness among the general public.
Changing Asia's Manufacturing Landscape
In 2007, we interviewed several Secutech Expo visitors, most of whom were importers coming to Asia to purchase security equipment. Taiwan products were their favorite, for no other reason than Taiwan's ability to manufacture, customize, and offer excellent service and technical support. At that time, the general impression was that China-made products were of inferior quality. Some importers who went to China to work with local companies eventually returned to their Taiwan and Korean partners. Yet, few importers voiced the opinion that China still had good manufacturers — you just have to dig them out.
In but a few years, things have changed. Thanks to the emergence of CMOS sensors and SoCs used for IP cameras, which significantly lowered the threshold for entering the camera business, Chinese manufacturers seized this opportunity and entered the camera market. With the already huge share in the DVR sector, the Chinese were able to complete their product lines covering both frontend and backend devices. Also, with quality control enhancement, China has significantly improved quality and reliability issues that once drew criticism.
Besides the aforementioned factors, China manufacturers hold another key advantage: its vast domestic market, which provides all the necessary elements for ensuring their further growth. China's domestic market that is the world's largest not only provides a stable source of revenue but also offers a training ground for manufacturers to test their products and create more applications. Within years of development in its local market, Chinese manufacturers now are able to compete with or even take huge market share from the multinationals in China.
Another thing that is unique about Chinese manufacturers is that they're not satisfied just with their domestic market; they also embrace the world. Among them, Hikvision and ZKTech not only see high revenues but also vaunt a host of overseas branches that have infiltrated into local markets.
China's growing influence in the world has led to a decline for both Korea and Taiwan manufacturing over the past years. Manufacturers from both regions couldn't directly compete with the Chinese heavyweights and therefore had to reposition themselves to find their own market niches. An example was IDIS, the Korean DVR manufacturer. Years ago, I interviewed its CEO and asked him about the choice between OEM and “own brand name.” Without hesitation, he said he would never think about the latter option, as it may lead to direct competition with clients. Yet, with China's growing expansion, IDIS last year completely repositioned itself and began to launch its own brand in Europe. How the future Asian manufacturing landscape will evolve is something worth observing.
Growing Market Acceptance for Chinese Products
Besides improving the quality of their products, Chinese manufacturers have also raised their English proficiency and learned ways of doing business internationally in the midst of globalization. Products' outstanding cost-performance ratios have helped vendors win more customers and business. Among these companies, some have accelerated their internationalization efforts and set up branches or offices overseas to face clients directly. With more competitive products, aggressive sales teams, and large-scale marketing campaigns, Chinese manufacturers have forced people to look at them differently. In the past, Chinese products were mostly used in the private or commercial sector. Over the past year, the trend has been that Chinese products are increasingly found in the government sector for some markets, too. With this, China manufacturers' market influence in different regions is set to grow exponentially. As two examples, China's Hikvision and Dahua had 2013 revenues of US$1.8 billion and $882.6 million, respectively. It's expected both will see their sales figures double by 2016. It can be imagined many firms will see their revenue eaten away by this kind of growth.
China's fast growth will sure expedite a reshuffling of the global security industry. We are wondering how many firms will survive in three years' time.
China Pushes Channels to Transform
Three years ago at an expo, I ran into one of the top three Russian importers. The company had focused primarily on European, U.S., Taiwan, and Korean products yet was now forced to bring in Chinese products. With the influx of Chinese imports in Russia, he had to sell Chinese products or face the prospect of losing all his customers. Yet, according to him, Chinese products had short lifecycles. Once new shipments came in, old ones were put in inventories. Profits were already low, and keeping things in inventories caused importers to lose money. All this for what, he asked.
For systems integrators, things aren't easier, either. With unit price fast falling, projects of the same scope may see price drop by half. That means, to keep revenue on par with last year's, you must get twice as many projects. Yet labor and operation costs haven't gone down an inch. For integrators, their challenge now is how to survive.
Amidst this revolutionary change, to understand what customers want and how technologies will evolve is key to security channel players' survival. Channel players must also change their original “box-moving” mentality that was prevalent during the traditional CCTV era. Maybe they can learn from the example of their IT counterparts: instead of just selling products, they should reposition themselves as “value-added distributors/ resellers” via offering integrated systems and extra services — from getting the right products to pre-sale testing to post-sale service.
Expecting a new order
Besides the influence from China, another troubling trend has emerged. Years ago, people had already raised this question: with surveillance moving into IP, hardware, firmware, and operating systems need to be upgraded constantly. Then, what would become of after-sale service? How would you service systems five years from now? In case an unprofitable integrator goes under in the midst of the price competition, who will maintain systems built by this SI? In Asia, it has come to the point where even maintenance fees are subject to a price war. Whoever gets the order would just do a sloppy job — as long as something doesn't go wrong. In my view, with clearer market differentiation, there are still plenty of market opportunities for many players. The security market will become more specialized in the future. Companies or industries attaching greater importance to security will realize the difference between price and reliability, and they will naturally choose reliability over price. For those who are not so demanding about where video streams are transmitted to during critical moments, they will rely more on the cost-performance ratio. When will the new order arrive? In three years? Five years? I would say it all depends on the expansion of Chinese manufacturing, the speed with which other security manufacturers reposition themselves, and how the Internet of Things is going to greatly influence the security industry.