New research from Memoori demonstrates that the geographic distribution of sales of security products is clearly changing with Asia becoming the dominant region.
A major change in the geographic distribution of sales is taking place, with Asia delivering the highest rate of growth and increasing its market share. This is set to continue because there is still a massive latent demand waiting to be exploited. In China penetration is almost an order of magnitude smaller than North America. Well before this has been mined the Chinese market will be larger than the US.
In the rest of Asia (including India) the penetration chart shows that this area has a lower level of penetration than China. There are a number of countries in this group that have large populations such as India, Indonesia, the Philippines, and Vietnam. These countries have dragged down the penetration to $1.9 per capita. However Japan, Australia, South Korea, and Singapore have much higher penetration of security, on parallel with Western countries.
Click here to view Figure 1.
Asia in general and China particularly are markets that Western companies need to take a long-term approach to, because they are difficult markets to penetrate. Despite a fall in GDP growth in the last few years, demand for physical security in China has forged ahead, delivering a CAGR of some 25-30% over the last five years.
That’s the highest growth recorded in our industry, and there is no indication that growth will fall off in the near future.
One of the reasons for this is that the penetration of security systems in China is still remarkably low and that the more expensive IP networking products only account for a small proportion of sales. The GDP per capita in 2012 was projected at $6,120, and sales were $3.34 per capita — showing that the potential for future growth is enormous. It could grow six times, to equal the current penetration level in North America.
East does not meet West
Why is it that US and European manufacturers are not making a better job of exploiting the Chinese market? Conversely, why is it that Chinese manufacturers are having difficulty in establishing a solid presence in the developed markets of the world, with the exception of delivering through OEM (Own Equipment Manufacturers) channels.
Could these problems be solved by M&A and alliance between the new breed of public companies in China and the leading-edge companies of the West? Both have strengths to offer that compensate each other’s weaknesses. Therefore together they are stronger than the sum of their parts.
To achieve such a union requires complete trust, but unfortunately in the past some companies have shown little regard for respecting patents and protected technology. However, recently Ubiquity has won a case in China to stop the pirating of its technology. A precedent has now been set that patents and technology can be protected.
Hikvision
Whilst China is mostly dominated by indigenous manufacturers, it does not yet have a company that strides the international stage comfortably with products right on the bleeding edge. Hikvision come closest when in August last year a rumor surfaced that it was in talks with Schneider Electric (Pelco) to discuss how they could work together. Nothing was officially announced, but the rumor returned in February.
China is developing a strong indigenous manufacturing supply industry. In particular Hikvision and Dahua are growing fast, increasing their shares of the local market. They have also been taking product business away from Taiwanese and Korean manufacturers in Western markets.
Hikvision sales in 2012 were somewhere around $1.2 billion, a growth of 40% over 2011. Of this, export product sales of DVR and camera equipment were around 35%. Hikvision’s latest first quarter to third-quarter report showed total assets around US$2 billion. At per share value of about RMB$32 and about 2 billion shares available (2,008,611,611 at the end of Sept 2012) this gives the company a valuation of US$10 billion.
The majority of growth has come from domestic acquisitions of access control, guarding services, and specialist vertical market systems integration companies. They are developing a similar model to Honeywell and Schneider Electric of developing their systems and product businesses separately.
Fire detection systems
Some 15 years ago fire detection systems in China moved almost overnight to analogue addressable systems that cost double the price of conventional technology. No local manufactures could supply them. Imported products flooded in, and the local system installers quickly learned how to install them.
Although moving from analogue to IP requires more skill, it will happen, and in China it will come quickly. Price is no longer king in Western markets, but cost of ownership made up of many factors is. This will also apply in China as IP takes hold and offers many different and improved solutions.
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Economic and trade relevance of Asia once led by Japan, is now taken over by China in almost every arena except some very high tech things in which South Korea and some other South East Asian Nations are still dominant. India on the other hand is most seen as a consumer market instead of trading giant like China.
“Although moving from analogue to IP requires more skill, it will happen, and in China it will come quickly.” Chinese are really good and very quick at adopting things; they are good at copying someone else’s things as well by the way. But it is good to see that things are changing. Ubiquity’s victory in piracy case seems to be an indication of a positive change.
Western Manufacturers have to work hard to get success in the Chinese market. We have seen how China has taken over the World market so if some one wants to get something in Chinese market then they have to make some changes in their approach like They have to adapt their offerings to better befit the social habits of Chinese consumers. Chinese customers are avid content providers. In fact, Chinese consumers are more social online than U.S. consumers. Thus, companies have to make customer service a top priority, as any bad word of mouth can spread like wildfire and cause… Read more »
Western Manufacrurers ahve to speed up their decision making processes , act fast and react faster. In China, local market conditions change rapidly. A long reporting chain with personnel at Western headquarters controlling everything is simply not feasible. Decisions have to be made quickly. They also have to consider other forms of market entry. No where is it etched in stone that American organizations must launch Chinese divisions. Given how difficult the competition is, organizations would be wise to consider forming strategic partnerships with local competitors. Another form of entry is investing in local companies. Walmart, as part of its… Read more »
Special measurements have to be taken if Western Manufacturers like to make something from the Chinese Market. Otherwise it will only be a nice dream to have a great business in Chinese Market.
I think it is a good thing that manufacturers are having to rethink strategies and get out of their comfort zones in order to make a dent in a new market. The lessons learned will no doubt benefit their Western operations too.