A Deep Dive into Hikvision
A Deep Dive into Hikvision
China’s Surveillance Tech Titan
Author’s note: If you want to watch the video, you can do that below
Fewer people watched this video than others, which I think is kind of a tragic thing. Hikvision cameras are everywhere in the world, especially in developing nations with smaller budgets. The United Kingdom has some of the most security cameras per-capita in the world today. Almost all of their installed security cameras are from Hikvision or Dahua. If you are walking down the street and happen to see a security camera installed up on the ceiling or at the top of a wall, it is most likely a Hikvision.
The thing is that Hikvision makes good products, and that is what makes them so hard to compete with. Their product line is vast and varied. There is a line for almost anything that you can possibly think of. Line crossing. Animal detection. Facial detection. They got servers. They got cloud services. They got swiveling cameras. They got fish eye lens. They got everything and at dead-low prices.
American and Western companies (Axis still hangs around, but is owned by Canon, which is Japanese) simply lost the battle for this market, subsidies or not. It sucks, but that is the truth.
These deep dives into Chinese and Asian companies are fun and I hope to able to do more of them. If you want to support the channel, I recommend you check out the Patreon. I am moving the Newsletter to a weekly cadence, partly because so much of my recent writing has not been made public yet. It is available to Early Access Tiers until it finally comes up on the release schedule.
Most people don't think about the surveillance cameras they see throughout their everyday life. They are everywhere. The United Kingdom for example has some of the most surveillance cameras in the world. For this video, I want to talk about the companies making those cameras.
Hangzhou Hikvision Digital Technology (海康威视数字技术公司) is a Chinese state owned company. The name is pronounced Hike-vision in the US, but I have also heard Hick-vision abroad, though doing so might inadvertently offend people.
The company dominates the surveillance technology market in both its native China and abroad. It is notorious for its close state ties, for being sanctioned by the American government and for some shoddy security hacks of its hardware.
But there’s another angle about Hikvision’s rise to prominence that interests me. And that is how did it get to be so big in the first place?
What is Hikvision?
Hikvision is China's leading video surveillance manufacturer. It is based in Hangzhou of the Zhejiang Province, one of China's richest and most beautiful cities.
In 2019, the company generated $8.8 billion in revenue and made roughly $1.9 billion in profit. They employed over 40,000 people in over 150 countries around the world.
When you think of Hikvision you think of cameras. And they offer cameras in every conceivable form and function you can possibly think of. They got A.I.-equipped cameras suitable for monitoring cars on highways, industrial locations, and recognizing individuals by their faces.
For clients in emerging markets and small budgets, they offer Accusense cameras at all sorts of price ranges. These have such excellent AI that they’ve been replacing human guards entirely. For higher end clients who want the best, they got chunky-sized dome cameras that swivel and are supposedly "bomb-resistant".
They got a line of cameras with AI for seeing far in the dark (their Darkfighter series). AI cameras for catching traffic violations. So on. You get the point, right?
But wait, there's more! The company calls itself an IoT company, expanding its product range far beyond just the surveillance cameras you see out on the street. Their assortment is stunning and is part of their competitive advantage. Hikvision also makes intercoms, storage servers (for storing the video footage recorded by their cameras), and A.I.-equipped cloud servers.
## The Hikvision Story
Hikvision is a global giant with hundreds of product lines and leading market share in the video surveillance market. With video surveillance cameras having been around for decades, you might be surprised to find that Hikvision the company is younger than Google.
In 2001, a young, baby-faced Hong Kong immigrant named Gong Hongjia bought a 49% or 51% stake of a government-backed lab - depending on what source you consult. This lab would be privatized and turn into today's Hikvision.
This privatization arrangement means that the company has direct ties to the Chinese central government. China Electronics Technology Group is a state-owned enterprise under the central government. It and another affiliate collectively own 42% of Hikvision shares. While the company has tried to separate itself and its everyday operations from its shareholders, it is kind of hard to ignore.
The company started off selling video compression cards based on the H.264 video algorithm. The algorithm allowed video footage to be better compressed without taking up so much space. This made Hikvision products ideal for DVRs and the DVR cards - the devices that record and save the video data from surveillance cameras.
In 2006, the company leapt out of the video card and DVR OEM industries into making directly branded video cameras for surveillance and industry verticals like healthcare. It quickly consolidated its position as the leading surveillance camera vendor in China.
The company then aggressively moved to export its products abroad. Developing markets looking for a cheap digital surveillance camera gravitated to Hikvision cameras because those cameras recorded high quality video, had a broad range of features, and were very cheap. Cheaper than what is possible.
Some of these cheap cameras are sold under the Hikvision name. Others are resold by American distributors under their name. Honeywell, Security Camera Warehouse (SCW) and GE as of 2017 are such examples. This resulted in many Hikvision-made cameras ending up in places you would not expect them to be. Like in army bases and American embassies.
High Tech and Free Money
The Company likes to talk about its R&D efforts. The Annual Report mentions R&D in 53 of its 312 pages. The company constantly talks up how much it spends on R&D. In 2019, Hikvision invested 9.51% of its operating income into R&D.
They employ 19,065 engineers around the world and in 2019 they were granted 1,339 patents. Today they have about 5,000 design and software patents in total. They were amongst the first manufacturers to come out with 4K cameras in 2014.
In 2017, they released the first "deep learning" AI video recorder server, the DeepInMind NVR. Creatively named after Google DeepMind - a year after AlphaGo beat Lee Sedol.
So it is fair to say that Hikvision purports itself as a cutting edge technology company researching and coming up with innovative brand new technologies in the surveillance camera space.
Chinese President Xi Jinping visited the company in October 2017 and praised its development of talents and innovation-driven development.
Hikvision deserves credit for doing good technology work. It has helped them push out a wide variety of popular products. But it is also hard to ignore that the company is also very heavily backed by Chinese tax money. I would argue that Hikvision's dominant position in the surveillance camera market today is driven as much by its close government ties and rich contracts as its dedication to R&D.
Hikvision has benefitted from its state-owned roots as well as close ties to the state. Company CEO Chen Zongnian is the Communist Party secretary of the Hikvision parent company, the aforementioned CETC. Research head Pu Shiliang for instance has a second job as a high ranking leader at a lab within the Ministry of Public Security.
Hikvision has also ridden an immense government internal security spending wave. Beginning with the 2008 Beijing Olympics, the Chinese Government has spent billions of dollars with Hikvision. Hikvision's "safe city" camera project in Chongqing reached $1.2 billion in 2011 and thousands of cameras can be seen on Chongqing streets. Hikvision cameras were also selected for the 2014 APEC summit, the 2015 military parade commemorating China's WWII victory, and more.
The Chinese free money going Hikvision's way is quite significant. In the year 2015 for example, tax refunds, deferred tax assets, and "special project" funding made up 22% of Hikvision's profit. After Xi Jinping's visit in October 2017, the company received a further 200 million in subsidies a year later.
In addition, Hikvision received loans from Chinese policy banks. A policy bank is a government owned financial corporation that disburses loans as according to a country's stated policy desire. Because those loans have strategic value, they do not necessarily need to make money for the bank making them.
I need to say here that China is not the only country to have a policy bank. America for example has the Export-Import Bank of the United States. But its existence and impact is fiercely debated in the US public sphere. Some see it as a way to help encourage American exports abroad. Others see it as a way to give politically connected companies free money.
These artificially low prices have led to substantial disputes and complaints filed by the USA in the World Trade Organization. By WTO rules (which admittedly neither America nor China even attempt to follow nowadays), these government-backed subsidies are illegal.
On a side note. Some people argue that more competition and lower prices can only be a good thing. After all, the consumer benefits right? But I really do caution you from drawing a one to one line from “lower prices” to “consumer wins” to “good for the market”. Because doing so invites artificially distorting market behavior like cross subsidies and dumping. Eventually in the long term, you end with a market without competition.
I find it interesting that the same people who make these consumer benefit arguments also tend to rail against Amazon, Google and “The Monopoly”. Those people are basically talking Amazon’s book.
Changes in the Market
The subsidies are critical, and they rightly get a lot of press. But I do not think that Hikvision and fellow Chinese competitor Dahua would be so prevalent today *globally* if it were not for two other major changes in the video security market.
The first major change involves a generational shift in surveillance camera products that occurred in late 1990s and early 2000s.
Before then, most surveillance cameras were analog cameras. Analog cameras use copper wires to send video signals from the camera to the television. Think of your old school televisions.
In the early 2000s, a new type of camera emerged: The digital IP camera that sent video over the internet using similar protocols as those used by YouTube and NetFlix. These cameras offered better quality video, but can be more complicated to use, set up and debug.
American companies like Honeywell, Pelco and GE dominated the analog world. They failed to innovate and jump on the analog-to-digital transition. China's companies (amongst others like Swedish company Axis) did. America got left behind and left out in the cold. This is a disappointing blight on the state of American manufacturing.
The second major change has to do with digital video standards. In 2008, the surveillance camera industry came together to develop an open standard for IP cameras. These companies include major players like Panasonic, Bosch, Canon, Axis, and Sony. This industry group was called the Open Network Video Interface Forum or ONVIF.
ONVIF soon released a single unified video standard that allowed IP cameras to talk to the rest of the security system. The industry group soon developed cameras using this standard and it prevented a Tower of Babel situation where each manufacturer's cameras could not talk to another manufacturer's databases, etc.
The thing about open standards is that anyone can use them. Hikvision and Dahua jumped on this open ONVIF standard and used it as their doorway abroad. Now it was easy for them to make a product that can be plugged into incumbent western security systems.
If Chinese subsidies made Hikvision fat in its own national market, then ONVIF and the analog transition let Hikvision use those subsidies to escape the confines of those national borders to bully the world market.
Conclusion
In August 2018, the US government began to do more about making sure that the systems being used in critical locations did not have Chinese-made parts in them. They banned Dahua and Hikvision from their government purchasing programs.
Later that year, the US government started to give the two the Huawei treatment. They banned exports of certain critical US components going to Hikvision.
Hikvision might be a Chinese company, but their AI tech products are still heavily reliant on Intel and Nvidia semiconductors. Their computer vision chips are designed by California-based fabless company Ambarella and fabbed at TSMC and Samsung.
Considering what these AI tech products are being used for, it is natural that the US government would move to this export ban.
Hikvision stock crashed 25% from its top after the bans were announced. The company quickly dedicated resources to replacing these chips with Chinese-native technology. They announced a push into AI and away from security - trying to develop enterprise solutions like cow-counting AI. My guess is that they are trying to remake themselves into something like MegVii, SenseTime or the like.
But right now Hikvision remains heavily, deeply dependent on the government and its public security contracts. Subsidies grew 73% in 2018 and then another 30% in 2019. They received $153 million in subsidies from the Chinese government in the first half of 2020. I expect them to continue getting a whole lot more of the same in the years to come.