The pressure is on. The US is on a hunt to sever the limbs of Chinese tech companies to restrict all movements that the “the U.S. government deems a national security risk”. Huawei in the recent weeks had been made a clear example of. The now isolated Chinese smartphone giant was placed on the U.S. Commerce Department’s so-called ‘Entities List’, effectively blacklisting the company and banning American companies from doing business with the Chinese firm. But it’s not stopping there. The hunt is on.
As the back and forth retaliation brews a cold war in tech between the two economic superpowers, the U.S. next move looks to expand its blacklist to as many as five Chinese companies. Members of Congress have already zeroed in on Hangzhou Hikvision Digital Technology and Dahua Technology Co., world leaders in video surveillance, and have urged the Trump administration to consider sanctions.
While these names aren’t as well known as Huawei in the States, these video surveillance giants are China’s corporate champions, controlling at least one-third of the global market for video surveillance. Hikvision is stated to have sold products to more than 150 countries and territories globally. So there’s a high likelihood that one of their cameras is watching you, with Americans being no exception. With 42% of Hikvision, the world’s largest maker of surveillance cameras, owned by state-backed Chinese government entities, it comes as no surprise that America is now looking to backtrack on it’s deployment of Chinese cameras.
For those who don’t know, Hikvision’s cameras are deployed at French airports, Irish ports and in the States, homes, businesses, schools, streets and it had once kept watch on U.S. government offices and military bases. But now with the Chinese tech clampdown hot on their heels, Hikvision and Dahua have experienced steep losses in shares. The possible ban on Hikvision and Dahua will bring about clear impacts on supply chains as well.
This week, MioTech’s report on the Chinese Clampdown Chronicle, looks into the players in both surveillance companies’ supply chain and analyzes the impacts a broad ban will have on the semiconductor industry as a whole.
Hikvision’s Industry Value Chain and Supply Chain
According to data provided by the "2018 Global Video Surveillance Information Service Report", Hikvision has ruled over the global video surveillance equipment market, with a market share of 37.94%. They haven’t been dethroned in seven consecutive years.
As visualized by AMI’s industry analysis, Hikvision's main business arms includes video monitoring equipment and security system integration, with its upstream and downstream industries highlighted in the image above.
Hikvision’s revenue benefited from a 10.2% or US$18.5 billion increase in the global video surveillance market in 2018. While it’s reports showcase slower growth, the company’s total revenue still rose to 18.9% to the tune of US$7.2 billion in 2018. Notably, since its listing in 2010, the proportion of overseas revenue to total revenue has shown a steady upward trend.
According to 2018Q2 annual report of Hikvision, overseas revenue accounted for about 30% of the company’s total revenue. The U.S. and Canada account for about 20% of overseas revenue, which indicates that Hikvision can afford to lose this market financially, but not without hurting a little.
If we look into Hikvision’s supply chain, AMI’s Knowledge Graph indicates 19 suppliers in its whole supply network, who could fall vulnerable if the surveillance giant gets blacklisted.
When AMI breaks down the supply chain distribution by industry, we find that 11 out of the 19 companies are publicly listed companies, with 6 from the electronic equipment industry and 5 from the semiconductor industry.
In terms of geographical distribution, 11 of the 19 suppliers are from China, 5 are from the U.S. and the remaining 3 are from Japan, South Korea and Pakistan. According to a Hikvision executive, “Even if the U.S. stops selling them to us we can remedy this through other suppliers. The chips Hikvision uses are very commercial and most of the suppliers are actually in China.” So it still remains unclear if the loss of access to Amercian suppliers would prove to be a blow. The company still has access to locally sourced components, with a majority of its chips designed by China’s HiSilicon, a division of Huawei. It’s potential loss - access to higher quality components.
From a financial perspective, AMI’s Financials Analysis identifies state-owned China Electronics Technology Group Corporation as Hikvision’s top supplier by revenue.
AMI’s Shareholding Analysis also highlights China Electronics Technology Group Corporation’s skin in the game, with it being one of Hikvision’s Top 10 shareholders.
While it’s hard to predict if Hikvision, like Huawei, anticipated America turning against them, but from the looks of its inventory, which according to its 2018 financial report, the company has made an US$848 million inventory reserve since the first quarter of 2018, it looks like Hikvision is well prepared to weather the aftershocks of a potential ban in the near term.
Dahua’s Industry Value Chain and Supply Chain
So is Dahua Technology, the second surveillance company targeted to be blacklisted, in a similar situation? Dahua dominates approximately 17% of the market share, the second largest player in the industry. Shortly after the news of the company’s potential blacklisting, Dahua’s board of directors responded swiftly, indicating that the company's business covers 180 countries and regions, with the U.S. market only making up a small proportion of it. Since April of 2018, the company had begun to be cautious about the resources it invests into the U.S. market.
The company’s revenues grew more than 25% in 2018, hitting a total of about US$3.5 billion, according to its latest annual report. Taking a look at Dahua’s overseas revenue specifically which has been on the rise since 2016, it accounted for about 36.25% of the company’s total revenue, according to the firm’s 2018 annual report.
Looking into its supply chain, AMI identified 10 suppliers, with 6 out of 10 suppliers from China, 2 from the U.S. and the remaining from Japan and Taiwan.
Most of Dahua’s suppliers are in the semiconductor and semiconductor equipment sector, but looking specifically into the revenue of these suppliers, those based in the U.S. outstrips Chinese suppliers by more than five fold in terms of revenue. So while Dahua might be trying to wean its supply chain from its dependence of the U.S., judging from revenue alone, Dahua’s American suppliers are still the most mature players supplying the market.
Supply Chain Overlaps
Since both companies have a relatively contained supply chain, it’s safe to assume that there could be some overlap in terms of suppliers. But why assume? Using AMI’s Relationship Analysis powered by her knowledge graph, we run a cross analysis of Hikvision’s and Dahua’s suppliers.
What she found was a couple of companies in for a double whammy if the ban goes full blown. The suppliers of both firms are Ambarella Inc, Changzhou Yunkong Electronic, THine Electronics. Inc., ON Semiconductor who are their direct common suppliers. In addition, Wuhan P&S Information Technology also provides services to these 2 companies through an indirect supply chain. But they’re not the most vulnerable. In our previous report on Huawei’s suppliers, facing a triple whammy are ON Semiconductor and Wuhan P&S Information Technology who are also part of Huawei’s supply chain, making these 2 companies most exposed to the U.S. - China’s tech cold war, especially if the U.S. goes head with its sanctions against the two security surveillance companies.
The 2018 annual report of Wuhan P&S Information Technology shows that its overseas revenue accounts for about 65% of its main business revenue, with its overseas revenue having increased significantly since 2016.
In conclusion, the supply chains of both countries are still greatly intertwined and if the tech divide between the U.S. and China were to cause a severe fissure in tech supply chains, there is no doubt that it will result in a lose-lose situation. If the ban prevails, these two surveillance firms will need to buckle down on localising manufacturing even more and sourcing domestically to serve their main domestic market. But will self reliance mean Chinese suppliers falling short of innovative development and performance? Only time will tell.
Download MioTech’s full report on Hikvision and Dahua Technology Supply Chain below!