Market Beats

The U.S. has Eyes on Chinese Surveillance Companies

MioTech Team 2019-05-31

In this article, we look into the ramifications of an impending ban will have on the supply chains of two of the world’s biggest security surveillance firms from China.

Firstly published on May 31 and updated on Oct 14

Hikvision knew what was coming for them when rumours of being potentially blacklisted appeared 5 months ago. But now, the rumours are finally being put to rest and the ban is now official law.

On October 7, the U.S. Commerce Department announced that eight Chinese technology companies were included in the "Entity List", including video surveillance giant Hikvision, Zhejiang Dahua Technology and AI companies like IFLYTEK Co., Sensetime, Kuangshi Technology and Yitu Technology, etc. It is said that the entities on the list are not allowed to do business with American companies without permission from the U.S. government.

This is the fourth batch of Chinese companies to be named to the U.S. economic blacklist so far. In May, the U.S government targeted Huawei first and 70 affiliated companies in the entity list, and added more in June and August respectively.

According to people familiar with the matter, the U.S government had long considered cutting off technological supplies to a range of Chinese companies, including Hikvision and Zhejiang Dahua Technology. When the list finally came out in October, these two mysterious companies were once again pulled back into the spotlight. Although not as well-known as Huawei or DJI, Hikvision, with a market value of about $42 billion, calls itself the world’s largest maker of video surveillance gear and controls at least one-third of the global market.

As early as May this year, MioTech has kept an eye on these two companies, providing an analysis from the perspective of industry and supply chain. This week, based on newly released data, 

we continue to focus on the impact of the entity listings on both companies and their suppliers.

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!

Download the Hikvision and Dahua Technology Supply Chain report.

Get a free deepdive into the supply chain of two of the biggest surveillance firms in the world.

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