In the security industry, a new perspective is emerging that redefines how we look at both supply and demand dynamics. Over the past few years, the industry has been dominated by a duopoly—Hikvision and Dahua—whose high profit margins have been sustained by a supply-side logic based on "scale effect and brand premium," and a demand-side logic driven by "high-definition intelligence and security operations." This model has not only maintained their market leadership but also fueled their impressive growth rates. Looking ahead, this same logic in the B2B space is expected to drive continued expansion for both companies over the next three years.
Breaking away from the traditional industrial focus on products and equipment, a wave of intelligence has reshaped the consumer electronics sector, emphasizing vertical integration—from entry-level devices to hardware, systems, and data services. The rise of Apple’s intelligent ecosystem in 2009 marked a shift from traditional division of labor to an era of full integration. Samsung's hardware integration and Apple’s seamless system experience have continually redefined consumer expectations. Google’s push toward integrating hardware, software, and services signals a new five-year phase where the core drivers are the entrance point and data control. Whoever controls these two elements will dominate in the vertical integration race.
This trend isn’t limited to consumer electronics. Across various industries, traditional models are being replaced by integrated solutions. In the security sector, as it moves into the era of high-definition and smart technologies, the value of data becomes more pronounced. Unlike the analog era, today’s data flows are faster, more voluminous, and more compact. New players in the security space are now offering end-to-end solutions—from data capture and compression to transmission and processing. This shift challenges the efficiency of traditional, fragmented approaches.
Hikvision and Dahua are well-positioned to lead this vertical integration. Their dominance in cameras, supported by economies of scale and brand strength, allows them to control both the front and back ends of the market. Unlike traditional contractors or system integrators, they have access to the data source directly through their hardware. In the age of IP cameras, image processing and data compression occur within the camera itself, giving them a unique advantage.
Moreover, Hikvision and Dahua are essentially platform software providers, much like Microsoft and Apple in the PC world. They started as hardware vendors but have evolved into system providers and, eventually, into security operations service providers once they gain access to data. This transition positions them to offer comprehensive solutions beyond just equipment.
The logic of consumer electronics applies equally to civil and commercial security. Whether for individuals or businesses, the product strategy mirrors that of consumer tech. Hikvision and Dahua are no longer just equipment providers; they’re moving toward becoming solution and service providers. Cameras are evolving from mere security tools to video management platforms. We’ve already seen many civilian applications of Hikvision’s technology, and as user bases grow, the potential for transformation into IT-focused or even internet-based companies increases.
The government sector is also opening up opportunities for security operations. Traditionally, the government bought systems, equipment, and services, but with a shift toward buying services, professional operating providers are emerging. Security vendors can leverage the massive data collected through surveillance to create valuable data-driven applications, especially in business contexts. Their true value may lie not just in security operations, but in becoming big data providers.
While the business model around security operations and big data is still in its early stages, it represents the core growth path for these companies. Taking inspiration from global examples like ADT and Secom, which have market values of $8.6 billion and $12.4 billion respectively, China’s larger population and market size suggest even greater potential.
Looking ahead, the third quarter is expected to be a peak season, with increased adoption of high-definition cameras. This year, penetration is expected to rise from 10% to 30%, maintaining strong growth momentum for the next two years.
From a strategic standpoint, Hikvision and Dahua each have their own strengths. Hikvision leads in big data and security operations, while Dahua benefits from a more flexible private enterprise structure. A balanced investment approach between the two is likely the optimal strategy. Based on performance estimates, Hikvision is expected to deliver earnings of ¥0.75 and ¥1.05 in 2013 and 2014, while Dahua is projected to reach ¥1.12 and ¥1.68 during the same period, supporting a "BUY" rating.
However, one key risk remains: Smart City investments may fall short of expectations.
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