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INSIGHTS

Market consolidation brings opportunities

Market consolidation brings opportunities
Slow economic growth and squeezing margins have frustrated the industry for a little while. However, from recent market consolidation efforts, we see opportunities in the market, which will bring the industry to further organic development and growth in the future. The market is restructuring, and so are the major security companies ready for reengineering.

2014 has been quite a special year with many significant corporate acquisitions, such as Canon Europe and Milestone, Anixter and Tri-Ed, and Vanderbilt and Siemens Security Products. This year is probably not a fast-growing year but has been quite meaningful for all the industry professionals, who can give us more understanding toward the pressure over margins in the channels and new customer's requirements for a product supplier. From reviewing the world market demand in 2014, we can clearly see how the industry and market move toward year 2015.

QUICK GLANCE AT GLOBAL MARKET DEMAND
The world economy is improving slowly. The global market for security products and systems was predicted to grow 8 to 10 % in 2014, according to current market researchers. However, in the real world, if we look at the actual revenue from multinationals covering all different product lines and geographic regions, frankly speaking, it should be around 2 to 3% growth, without mentioning the squeezing margins of the small- to medium-sized companies in all different tiers of the sales channels.

The security industry indeed is affected by the world economic market status. If looking into the security industry of a country, it is often strongly related to its financial status quo. An industry expert provides a quite close-to-reality statement and said, “There are some markets in the world that are financially troubled. A large part of this industry lives for big projects, projects which are funded by the states, the government, and authorities. If they already have systems that are working — old legacy systems — they are not going to finance those systems. They are not going to rip them out if it's working when they are financially troubled.” This pointed out why a financial crisis still influenced greatly the growth of some markets, such as South Europe now.

BEYOND GROWTH, SQUEEZING MARGINS IN CHANNELS
Even though we see certain growth remains in the global security industry, the companies in sales channels still try very hard to keep a good balance between growth and profit margin, which is the key issue that the security industry is currently facing. The industry expert continued and said, “Even though some market researcher said the market will grow by 20 or 22% (in the IP video surveillance) now and in the future, in reality it's very difficult for some companies to grow by 20 to 22% with their desired margins. You either can grow, but you have to sacrifice your margin because you need to fight with the prices, or you will keep your margin, and you will have a lower growth rate. Very few companies will have both.”

According to the recent and also past reports of a&s Security 50, some leading suppliers have migrated from offering devices only into providing systems as solutions for different types of projects, in order to stay profitable and competitive in the market. Some regions like Eastern Europe, Latin America, and Southeast Asia really feel more pressure due to Chinese products, since they are mostly box moving markets. To keep away from the price competition, developing systems/solutions has become a major movement for most channels since IP technologies were introduced to the security industry around early 2000.

SYSTEMS INTEGRATORS ARE SUFFERING FROM INTEGRATION
Suppliers including distributors, resellers, and wholesalers evolve toward solutions not only for survival but also for offering best-of-breed products for systems integrators. End users now are more educated and care more about return on investment (ROI). Not only security, they want more extra benefits and functionalities from security devices. Another industry expert also pointed out that for a large-scale project, big systems integrators usually have enough knowledge in designing systems and solving problems in integration matters, so there won't be any problems.

However, for small- to medium-scale projects, systems integrators still experience a certain level of challenges in compatibility and interoperability among products from different brands, which might hinder the completion of a project. It also pushes some of the second-tier suppliers to offer solutions instead of devices. The advantage that it brought to systems integrators is the guarantee of completing a project. Via the cooperation and communication with the suppliers, systems integrators may find new applications and demand over these solutions too.

When suppliers mostly roll out their solutions and systems, systems integrators also need to go through a certain learning curve of a new sales model. For example, in the past, it was all about the quantity of products. Now, when selling solutions, systems Integrators also have to learn how to sell service, with professional consulting servicing too, in order to provide a real solution to end users.

TRANSFORMATION OF DISTRIBUTORS
Mergers and acquisitions on the manufacturers' side seem pretty normal, which usually aim to complement the acquirer's product lines and international presence. The most significant example should be Canon Europe acquiring Milestone Systems. In the distribution channels, Anixter merged with Tri-Ed, highlighting the current problems of a distributor.

According to several industry experts, the distribution business today undergoes huge problems in keeping margins and providing specific products and services to customers, since the box-moving business couldn't satisfy most systems integrators' demand. A consultant suggests that to be a good distributor, there are only two ways: first, you are a great logistical company. You buy in bulk, put it in stock, and ship it out. You might make 5 to 6% margin. Since you are an excellent logistical company, naturally you don't have to add any intelligence into it; the intelligence is made by the installer. Otherwise, the distributor should be really focused, having a focus on certain verticals, some geographic areas, and some customers.

“Systems integrators and resellers have become more and more knowledgeable. When they understand more, they need a distributor, more than a box mover (in the long past). They need products, availability of the products, and financing, because of course, if you have projects, you might say, for now we need payment terms … instead of 30 days, I need 90 days, 120 days, or 150 days, because that's what the end users are saying. Can distributors help them with that? They need logistic possibilities because customers may give the order one day and want the product the next day. However, not all distributors can do that. Therefore, here comes the consolidation in distribution,” he elaborated.

So, distributors need to make choices to be successful either in the aspects of financing and better logistic ability or in certain vertical approaches and keeping good relationships with people who specify the projects. However, this is also varied by the markets, too. If a major distributor doesn't believe the market needs to have the best solutions, they just reply to some clever installers, who have a higher expertise in technologies. On the other side, installers need to have distributors who have the products in stock and are financially stable.

2015: YEAR TO BECOME VALUE-ADDED
After the recent market consolidations, many industry professionals also even predicted that there would be more coming up in 2015. However, we are still positive about the security industry in the near future due to the emergence of more value-added players in this market. The whole industry continues to enjoy the growth from the IP migration.

Americas
The performance in mature countries versus emerging countries is still quite varied by regions and countries. The mature market, such as the U.S., continues to recover. According to Karl Erik Traberg, Head of Corporate Communications and Business Development of Milestone Systems, even though the US market performed a little weak in the first half, both consumer and government spending in the U.S. is doing well in the second half of 2014. We can expect to see how it will drive higher growth in the economy and the physical security industry into 2015. South America, on the contrary, is cited by many companies for its strong demand, such as Bosch and Assa Abloy. “The sales trends for the private residential market and in South America were strong. High-security products, electromechanical products, security doors, and traditional lock products showed good growth. However, the growth was slightly negative in Canada and Mexico,” stated in Assa Abloy's half-year review of 2014.

Europe
Europe is more uncertain since the region has been weaker than expected in the second and third quarter of 2014. Overall, the European economic situation will be more stabilized. “The markets in Finland, Britain, Africa, and Eastern Europe showed strong growth. Scandinavia, Germany, and Benelux showed good growth. Sales were stable in Iberia and France but the trend was negative in Italy and Israel,” Assa Abloy's report also said.

IDIS also confirmed the recovering economy in the U.K. Brian Song, MD of IDIS Europe said, “If we take the U.K., for instance, there is an incredibly large legacy analog installed base. The recession impacted many upgrade projects and the improved economy is now enabling customers to reignite and in most cases extend those projects. So taking IP together with HD, we're seeing continued demand as end users continue to struggle with the poor performance and inefficiencies of analog. So for IDIS, we are seeing the adoption of IP increasing through retrofit projects as well as new infrastructure investment.” With the stabilized economy, Europe can be ready to enjoy the demand from new geographic territories and lifestyle. Bernhard Sommer, CEO of SimonsVoss Technologies said, “The security requirements of businesses, organizations, and private persons is increasing considerably. Borders are shifting and are opening up, for Europe in particular; this results in an entirely new security situation. People are more mobile, more flexible, and make use of mobile communication everywhere. This changes lifestyle and usage habits, also in the area of security. Mobility and security are melting together.”

Russia is a problem area in this region due to the current problems with Ukraine. “Parts of Eastern Europe continued to be negatively impacted by the ongoing political turbulence in the region,” also observed by Axis' half year report.

Emerging Regions in MEA and APAC
The Middle East continues to show strong growth and increasing demand toward IP video surveillance and access control systems. The region remains the most important for growth momentum of multinationals, pointed out by almost every single company in a&s interviews. Although some areas in the Middle East region are experiencing political upheaval and economic instability, the oil exporting countries, especially GCC countries, will continue to impress the industry with the largest projects and most tech-savvy installations. Africa is also a region that couldn't be ignored by its growth force. Bosch especially pointed out South Africa for a positive market trend.

Asia, on the other side, has been performing as expected in 2014, and growth is set for 2015. Southern Asia, especially ASEAN countries, recovered somewhat after a weak first quarter of 2014 while Northern Asia showed stable growth, such as China and South Korea. “The markets in Australia, Southeast Asia, and South Korea showed strong growth. China showed a good sales trend in traditional lock products, while fire and security doors grew strongly. New Zealand showed good growth,” Assa Abloy provided a good explanation here.



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