International. This study, conducted by analyst memoori, reviews the 3 main product categories that make up the physical security business. It compares its structures and analyzes the technology trends and demand drivers that will generate further growth in this dynamic business. This analysis highlights what we believe are the 5 most important factors that will determine future strategies.
The gap between major suppliers and the many hundreds of smaller suppliers is widening every year and this is rapidly increasing the minimum economic size to operate profitably in this industry. We have now reached the stage where the video surveillance business requires a strategy that focuses on volume through the SMB (small and medium-sized businesses) market or on branding through the enterprise business. We believe that no more than 5 companies will thrive in 2023 operating in both at the same time.
In the video surveillance business, 2 Chinese manufacturers (Hikvison and Dahua) have increased the volume, initially through the focus on the business of SMEs and the gap between them today and the next level of Western companies is so wide that it seems very unlikely that it can be reversed and certainly not by Western companies that compete solely on price. These 2 Chinese companies have adopted the strategy of revolutionizing the industry by undermining the profit margin of their competitors, while expanding markets and rapidly increasing market share. This is crucial for our industry at a time when volume is becoming a critical factor and the commodification of video cameras is taking hold.
Some leading Western manufacturers, while having to cut their margins, have improved their financial performance this year by continuing to invest in delivering better-performing products more resistant to cyberattacks, which has increased their share. Building Brand has shown that it has a very important role to play, but in the current circumstances it is not enough to change the dominance of the 2 Chinese manufacturers.
The merger and acquisition between major Western manufacturers is seen as a possible solution to match its size, but at best we believe it could only further bridge the gap. Strong brands with end-to-end solutions possibly focused on a number of vertical markets and having strong partnerships with companies in other building automation services is the only other option for hardware vendors to ensure a profitable future.
The region that has the highest growth and the largest share in the physical security market is China and Asia. This region has the lowest penetration of physical security equipment when measured by sales/capita and yet today occupies more than 28% of the global market, but more than 40% of the video surveillance business. Therefore, it should provide the best future growth opportunity for Western manufacturers. To be among the top 10 suppliers in the world by 2023, you will probably need to have a reasonable share of this market.
It is ironic that physical security protection, which provides the security of people and assets in buildings and public places, is often perceived as the highest risk of cyberattack. This must be the biggest threat to the industry, especially video surveillance. Those vendors that can demonstrate a high level of cybersecurity meet the most important purchasing criteria today in the enterprise business. Those who sell vulnerable products will find, at best, a decline in their market share and will likely face large financial damages that could ruin their business.
Software services in all their forms have achieved the highest growth rate of all components in the physical security business. Achieving growth of almost double that of hardware sales in the last 5 years, but still does not represent more than 12% of the business. It will rapidly increase its share and continue to benefit from higher growth rates for many years to come.
Much of this will come from manipulating the vast amount of information that will be generated from physical security sensors, especially video cameras. We recently published a report on AI Video Analytics which showed that the technical potential of the market to apply AI video analytics in existing facilities is huge. We estimate that by 2022, AI video analytics could account for about 13% of all businesses, as long as the routes to market are fully developed and demand is not constrained by the poor performance of AI software.
The integration and convergence of IT have impacted for almost 10 years the 3 branches of the industry and, in particular, video surveillance, but only in the last 3 years through IP networks and ONVIF that integration in all sectors has provided more elegant and cost-effective solutions. Integration is still advancing and the Building Internet of Things, (uniting all BAS services in the building) should create a more open and intelligent solution. This will require strategic alliances to be formed between companies across bas services and will have a major impact on routes to market.
Source: Memoori.
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