A slowing economy and politically sensitive anniversaries have led policymakers to cite social unrest as a threat to stability. However, the government, enterprises and individuals are also growing concerned about social unrest of a more mundane nature: crime.
"The government is now putting a lot of security systems in place to [lower] the crime rate," said Terence Yap, chief financial officer of New York- and Dubai-listed China Security and Surveillance Technology (CSST).
The full import of the economic downturn on the security and surveillance industry in China remains a matter of debate. Analysts are confident that urbanization makes the business a good bet for long-term growth, while industry participants claim that crime concerns are already paying short-term dividends.
Good times, bad times
"The security industry is often counter-cyclical. In bad times people steal more," said Benjamin Schwall, China manager for Jablotron, a Czech company that manufactures security equipment such as household alarm systems in China.
Schwall said Jablotron’s sales increased 17% year-on-year in 2008, and maintained that growth rate through January.
Nevertheless, industry insiders question the sustainability of growth should the downturn worsen. Overseas demand would be hit as companies struggle to find the cash for new security products, and the domestic market may also feel the pinch. Han Lijuan, a senior analyst at Sinotrust, a Beijing-based consultancy, noted that 40% of Chinese demand is driven by private enterprises and residential communities, which will be impacted by the slowdown.
Furthermore, most Chinese security and surveillance equipment manufacturers are low on the value chain and are seeing margins squeezed by falling prices.
Estimates on the size of China’s security and surveillance market vary significantly, as analysts include different subsectors – such as fire safety equipment – in their calculations. The China branch of US research firm iSuppli put the market value at US$15.1 billion in 2007 and expects it to grow to US$24.7 billion by 2012. Other estimates are much lower, around US$7 billion.
While growth may slow, it is expected to remain in the double digits.
Doug Wright, Asia president for UTC Fire & Security, said that the downturn has had little impact on the firm’s manufacturing investments in China.
In the near term, growth will be driven by high-profile events such as the Shanghai World Expo and the Asian Games in Guangzhou. Xiang Liangbi, a senior engineer with secu.hc360.com, which tracks the industry and provides consulting services, said that Shanghai will spend US$292.4 million on security and surveillance equipment for the Expo.
Government backing
The industry can also depend on government policies to offset declines in corporate spending until a recovering economy revives private demand, said CSST’s Yap.
Experts cite the "Peaceful Cities" and "Strengthening Police through Science and Technology" policies as the major long-term drivers for the market, particularly in second- and third-tier cities.
The central government has also earmarked US$131.6 billion for building low-income housing between 2009 and 2011; those communities will require security products, and these will likely conform to a universal government standard, according to Wang Hongwei, an analyst with CCID Consulting in Beijing.
A source of uncertainty is the effect of China’s US$586 billion stimulus package. Heavy infrastructure spending should drive demand for security systems to accompany public works projects, but spending plans are unclear. Effects will take two or three years to appear, said Li Jing, a senior analyst with Sinotrust.
For now, the industry will continue to face challenges common to a young, fragmented market, including the lack of nationwide standards for manufacturing quality or after-sales services. But insiders remain confident about growth.
"The business will not go away, it’s just a matter of when the business picks up again," said CSST’s Yap.
