Memoori's 2017 annual report shows that the total value of physical security products at factory gate prices in 2017 was $29.2 billion, an increase of approximately 5 percent over 2016. This is a decline in growth from its peak in 2014 but an increase over the last two years. Over the last eight years the market has grown by a compound annual growth rate (CAGR) of 6.41 percent and Memoori forecasts the market will reach $41.27 billion in 2022, growing at a CAGR of 7.2 percent.
Access Control
Of the three, still largely independent business segments (video surveillance, access control and intrusion alarms), access control has maintained its average growth of approximately 7 percent over the last three years, and takes a 23.5 share of the overall market.
The drivers that have delivered this growth are increased penetration of IP network systems, further advances into biometric readers, identity management and wireless locking systems. This is the second consecutive year that it has turned in the highest rate of growth of the three business segments. However, there is some evidence that price pressures are starting to bite and this will eventually have a negative effect on growth when measured by value.
There appears to be reluctance by manufacturers to support open standards in order to protect their heritage business. This could damage their long-term future and open the way for Chinese manufactures to take up the initiative and make a strong push into the business they have recently targeted.
Intrusion Alarms
The intruder system business takes a 22 percent share. It is the “father” of the physical security industry and has long since reached maturity, but its increasing use of radar and thermal cameras has contributed to growth edging up to 2.5 percent in 2017.
The use of radar, advances in sensor technologies, wireless technology and integration with video surveillance, access control and outdoor lighting have all contributed to its growth.
Video Surveillance
In 2017, the market for video surveillance products, which comprises 54.5 percent of the overall physical security products business, was $15.87 billion, a growth of 5.9 percent over 2016. This level of growth looks disappointing compared with growth over the previous five years that averaged around 9.7 percent. However, this has been a relief to many suppliers who believed that 2017 would struggle to improve on 2016 if the drastic fall in camera prices over the previous two years continued.
This fall in prices has put a great deal of stress on profitability, particularly for manufacturers in the West. The problem is not going to go away and the majority of manufacturers in the video surveillance industry need to review their business strategies. We expect that the demand for branded products in the enterprise market will run at higher levels due to integration across all three security product segments and other building automation solution (BAS) services and convergence with IT. This should ensure that the market will be worth $22.78 billion in 2022.
Size Can Be Critical
This year has delivered an improved and more stable performance and now all the main drivers for growth are firmly ready to match the performance realized in the Halcyon days of profitable growth between 2010 and 2014. However, there are major technical and commercial challenges ahead that will stress the supply side and the shape and structure of the business, which will change significantly over the next five years. The one that currently preoccupies most companies is how can they operate profitably during the "race to the bottom" and survive.
The gap between the major suppliers and the many hundreds of smaller suppliers gets wider every year, while at the same time profit margins continue to fall, thus increasing the minimum economic size to operate profitably in the industry. This already applies to the video surveillance business and, within the next five years, it will take hold in the access control and intrusion alarm businesses.
In the video surveillance business, two Chinese manufacturers have adopted the strategy of disrupting the industry by undercutting the profit margin of incumbents, while at the same time expanding markets and rapidly growing market share. They have built up volume and the gap in size between them and the next tier of Western companies today is so wide that it looks highly improbable that it can be reversed and certainly not by Western companies competing solely on price. This gives them a dominant hold today on the mainstream business.
Strategies to Meet the Challenge
As commoditization of video surveillance products continues to take hold, it requires a strategy that broadly focuses on either going for volume through the SMB market or brand through the enterprise business. We believe that no more than five companies by 2022 will thrive by operating in both at the same time.
Major companies such as Axis Communications, Avigilon, Bosch, Panasonic and Hanwha are in a position to reduce their margins sufficient to hang on to their share. However, to continue growing their share they need to invest more in innovative products that offer a better TCO metric, but with depleted margins, they would need to increase their financial resources.
A number of these companies have improved their growth and financial performance this year. They have adopted over many years a strategy of developing strong brands with end-to-end solutions focused on a number of vertical markets and having strong alliances with companies in other BAS services. So this is an option that is proving viable for some suppliers to ensure a profitable future.
Merger and acquisition between the leading Western manufacturers is seen as a possible solution to match the size of Chinese suppliers, but at best in the short term, it could only slow down further widening of the gap. Strategic alliances that share the cost of developing and marketing new products could help and there are examples of this taking place today.
Specialization in a number of vertical markets is a practical strategy to more than survive, particularly now that the Building Internet of Things (BIoT) is gaining traction, but this may seduce companies to sell direct to the end-user and, ultimately, become system integrators where the demand for their services is rapidly expanding.
This article has just dealt with one factor. There are other important factors that are changing the business landscape that can either be a threat or an opportunity including; cybersecurity, software services (Deep Learning, Artificial Intelligence and Big Data), integration and IT convergence, and IoT technology. Keeping abreast of all these matters and their interaction is complex but makes this industry both interesting and challenging.
This article has been taken from the 9th edition of Memoori’s Annual Report “The Physical Security Business 2017 – 2022.” Click here for more information.
