ASMAG.com talks to major Chinese DVR players regarding market conditions. These executives candidly discuss the challenges, opportunities and strategies. Many of the companies that flooded into the DVR sector have been gradually winnowed out. Today, a handful of Chinese companies remain, but these have developed well-known, trusted names and vastly improved economies of scale that have delivered strong price performance.
"In the beginning," said James Wei, International Trade Department Manager, at Dali Technology Co. Ltd., "the Chinese market was very chaotic. Everyone was selling everything and no one knew whose products were good and which companies were trustworthy."
Now, he added, that situation has improved considerably with a lot of companies eliminated with the remainder benefiting from improved economies of scale. "This," said Wei, "has given the few good players even better economies of scale, which in turn, is making them even more price-competitive. That means that they are able to invest more in coming out with innovative products and features and this is giving them an even greater competitive edge."
"We went through very fast expansion and now we face great management challenges," said Oliver Zhang, International Business Center, Europe Department Manager at Hikvision, "because of our strong growth. That is a sign of success but it also is the source of difficulties today in coordinating activities."
While Hikvision has good managers, getting the various departments to work effectively together has proved difficult. "There are so many levels of management," said Zhang. "We may have to consider going back to one manager for each project." Even though all Hikvision manufacturing and shipping processes are covered by quality control measures, Zhang admits that, "The bigger the scale of a company's operations, the more likely that defects will occur."
Zhang also observed that the company has had trouble balancing the need to produce products for the Chinese market, while coming up with entirely new ones for overseas markets. "We found that the overseas sales team also has a different mindset from that focused on domestic sales; that makes achieving one common goal somewhat problematic."
According to Zhang, Hikvision had 400 staff in 2006, 800 in 2007 and 1,200 in 2008. The international department grew from three in 2003 to more than 10 in 2004 to 70 or 80 in 2008. The company's current capacity is 2,000 DVRs and 2,000 compression cards per day. "Last year, we had US$162 million in revenue. This year, our target is to achieve growth of 50 percent to 60 percent. That may be somewhat optimistic given the global recession and turbulence in financial markets."
Growth at Dali has been very stable, said Marketing Director Xue Shenyue. "This has enabled us to maintain strict product quality. That is, and always has been, our key objective." This February, the company was listed on the local stock exchange. While overall prices have fluctuated dramatically, its stock price has remained relatively stable. "I think that this is a good indication of the stability that our company enjoys," said Xue. "In fact, our CEO believes that our stock price will go up strongly in the future once financial market conditions stabilize."
Zhang reported that the financial vertical has been a very good source of sales for Hikvision, and the market for standalone DVRs is growing strongly as well. "DIY packages," he continued, are another possible direction."
Looking at the competition, Zhang pointed to Dahua and Dali. "They have their channels and we have ours, so it is a bit difficult to determine to what extent we are really competing." While many major brands like Pelco and Bosch are active in China, Zhang does not think that they have achieved significant market share. "Pelco is not a local product," said Zhang, "and it is quite expensive."
Zhang would not say, however, that Chinese consumers are against buying foreign brands. "In fact, when the market first opened the exact opposite was true," he stressed. "Then, everyone wanted to buy imports. Over time, however, Chinese brands became well-known and accepted and the prices were much better."
Chinese consumers are very savvy, he added. "They are much more aware of what is available on the market and what they should be paying. They know where they can get the same quality or functions, but for a lower price."
Strategies for the Domestic Market
In China, Hikvision markets its products at mostly the mid to high end, said Zhang. "Interestingly, one of the products that we sell at the mid end in China is also selling very well overseas."
It is also, however, active at the low end. "It really depends," said Zhang, "on what the customer wants for functions and pricing. We are also targeting mid-level markets with reasonable prices to achieve greater sales volume."
According to Zhang, the solutions from nearly all Western suppliers actively marketing solutions in China are quite expensive. "This has very much constrained them to the high-end market where sales volume is limited."
Another important facet of competing successfully in China is localization, said Wei. "Companies that want to sell their products here have to know what the consumer wants and communicate in Chinese."
To achieve such aims, Hikvision has upgraded its marketing efforts. "We used to come up with products first and then do marketing," explained Zhang. "Often, we found to our regret that the market did not accept our product or functions.
We have learned to get market feedback first and incorporate that into initial designs."
In terms of product development, said Zhang, sometimes, Hikvision follows the market, providing what its customers request; at other times, it leads the market by coming up with products that management believes will sell well.
Meanwhile, Tungson, said General Manager Zhu Wuling, is targeting the DIY market. "This year, our main product a USB DVR is selling well. Next, we want to develop a USB DVR with WiFi. Our DVRs have practical default settings and plug play so users know what to do without having to read complicated manuals."
Al though standalone DVR are popular, Zhu noted that the company's 16-channel real-time DVR cards are very popular. "We are targeting the entry-level market." Tungson, however, is holding back on IP cameras due to unclear market prospect.
Hawell General Manager Bob Wang noted that the company has a wide range of products, including DVR boards, embedded DVRs, cameras, video servers and digital products (fiberoptic and network transceivers). He also sees the DIY market as having great potential.
"Our 32-channel DVR card," said Wang, "has three patents. We have also launched embedded DVRs with MPEG-4 compression. H.264 will be our next target."
To win the fierce price wars, Hawell, is relying upon its standardized management system. "In terms of core competitiveness," said Wang, "we have multi-function software that supports mobile phone surveillance. Moreover, our new-generation N9 DVR cards offer high-resolution (D1) image quality."
TVT's strengths, said Maria Xiao, Overseas Market Director at TVT, are still mid and low-end H.264 DVRs. "When it comes to H.264 DVRs, the most stable is Baseline, while products at the higher-end are using Highprofile and Mainprofile. Most digital TVs on the market support Highprofile."
As most of TVT's clients focus on stability and image quality, the company's image quality and easy operation have given it a formidable following. "We are well-known for our easy-to-understand icons and easy upgrade methods," stressed Xiao.
Xiao also noted that there are fewer counterfeit DVR cards this year because buyers are becoming more professional. "They have learned to their great regret that such products come with poor after-sales service and incomplete updating."
Developing Overseas Markets
In 2003, Dali began exporting, mostly to Europe and the U.S., said Wei. "The challenges were that Chinese companies did not understand foreign markets. It has taken time for us to become familiar with conditions in various markets as well as product requirements." Eventually, they reaped rich rewards. Today, 40 percent of the company's products are exported.
Likewise, Hikvision has made strong gains following an initial learning period. "Currently," said Zhang, "we are selling our products in about 70 or 80 countries with 30 percent of our total production exported." Zhang expects that, in a few years, exports will be equal to the company's sales in China.
In the U.S. and Europe, Zhang sees not only opportunities, but also difficulties. "Chinese companies tend to emphasize price and speedy commercialization," said Zhang. "In the U.S., however, big customers look at more than this because they want to feel secure about the products that they are buying. Selling there requires a lot more marketing support." In Europe, especially Germany, he added, it also takes a much longer time to develop relationships to the level of trust required to make a sale.
Dali, explained Xue, deals with agents and so its direct contact with overseas markets is limited. "These companies do not always share information on where the products are being sold or to whom," he pointed out. "They inform Dali only about product specifications and functions that will sell well in the various markets." As Chinese companies focus on individual products, they are often forced to knuckle under when it comes to setting prices. "When you are only selling one device," said Xue, it is harder to avoid the commoditization that drives prices down." These conditions have Chinese companies charting new directions. According to Xue, Dali plans to shift from selling products to selling systems and solutions. "To do that, we will need to have an even greater understanding of languages, cultures, product requirements and overall security needs in various markets."
In addition, most companies will require local support. "While foreign customers are increasingly accepting of Made in China products," observed Xue, "without local support, there is less opportunity to win sales. That is why we view agents as so important. They also provide us with the constant feedback that is needed to continue our product development efforts."
Such support centers around repair and maintenance often at great cost.
"We were not very good at this before," said Zhang. "Now, we are relying more on our distributors to handle this efficiently and effectively." Hikvision has also opened a new maintenance center in Hong Kong. "This will give us an edge in providing better service to our customers worldwide. We are also looking to establish local maintenance offices in different regions and countries."
Other headwinds, noted both Xue and Wei, stem from the fact that the global recession is affecting all aspects of consumer behavior and this is hurting export sales.
In addition, China's currency, the yuan or renminbi (RMB) has appreciated by 17 percent against the U.S. dollar, going from roughly CY$8.25 to the U.S. dollar to CY$6.85.
Not all aspects of the appreciation, however, have been negative. "The RMB appreciation has not really had a major effect on us," said William Zhou, Regional Manager of Overseas Market at Dahua Technology Co. Ltd., "because we import a lot of materials and components; a higher RMB, therefore, means that we have stronger buying power and that our production costs are cheaper." Fu Liquan, Presdient of Dahua agreed, "even though the recent turmoil in financial markets has few effect on our overseas sales and customers keep purchasing the security products, Dahua is still well-prepared for the global recession."
Focus on Technology
In three to five years, Wei predicted that Dali will specialize even more in high-end, high-tech, sensitive electronic security, including in the following fields: satellite, defense and electronic security. "This, along with consumer markets, is what we will depend on for continued growth," said Wei. "We have the technology; we have the vision. I am sure that we will continue to move ahead."
Dali, said Xue, is also very strong in infrared technology and product commercialization. "We know how to incorporate this into electronic security applications; other companies do not. Really, there are only about four or five companies that can deliver the same kind of products as this is a very sensitive technology, one where we have 20 years or more of expertise."
The fact that electronic security is using more and more infrared is a trend that is right up Dali's alley, said Xue. "BMW, for example, now uses infrared technology in every one of its cars so you can see the level of demand that is coming," he emphasized. "The fact that we can use infrared technology in DVRs has given us a huge opportunity."
H.264 is another area of expertise for Chinese companies.
"As far as I know," said Zhang, "Hikvision was the earliest to develop and promote the H.264 compression algorithm in video surveillance. At that time, it was quite new and so most people were unfamiliar with it. This was a challenge when it came to bidding on projects as a great deal of education was involved before the clients were interested."
Zhou also sees China as being strong in terms of H.264. "I think that H.264 will win out in the next several years because of its improved transmission accessibility. That becomes very useful when you are discussing IP applications."
The only drawback, he said, is that it is a bit more complicated and so less attractive to some customers. "Over the next few years, however, developments should make it much more user-friendly."
Besides H.264, Hikvision is setting up R&D teams to come up with cutting-edge products. "We have developed well in the domestic market, but international markets require a lot of research, constant contact to get feedback and coordination with overseas sales departments. It also involves a lot of working together with third parties, particularly when software is required.
Overseas, this takes a lot longer to develop than in China," he said.
Xiao also sees potential. "While H.264 products did not get a lot of attention at SecuTech or IFSEC, customers at the Essen show were much more interested."
Currently, Hikvision is working with major video management software suppliers, such as Milestone, to complete whole-product infrastructure. "We are working with Milestone on integrating our IP surveillance products (IP cameras and digital video servers) and video management software."
While TVT has IP cameras (CMOS, CCD, wired, WiFi and dome) as well as video servers, "The salability of IP products," said Xiao, "really depends on the infrastructure in the various markets and the cost of networks."
In addition to its main focus DVRs Dahua will also develop front-end products and IP cameras. "We are really revving up our R&D efforts to develop high-resolution IP cameras," said Fu. "We also intend to come out with five-megapixel cameras designed for e-cop as well as 1.35-megapixel and three-megapixel cameras that are suitable for tollgates and traffic surveillance."