Wednesday, October 27, 2004

Korean Players Striving to Stay on Top

The International Monetary Fund has recently slashed its earlier forecast of South Korean gross domestic product from 5.5 percent to 4.6 percent, expecting the number will further slow to four percent next year. The weak sentiments have hurt the nation’s businesses, including the security industry.

By Veronica Chen, Jason Tan

For long, South Korean security manufacturers have been positioning themselves in the high-end market segments.

For instance, they are the pioneers in introducing 16-channel standalone digital video recorders (DVRs), aiming to grab a larger slice in the first-tier DVR market with the sophisticated technologies and high pricings.

However, they failed to realize that the size of high-end market is actually limited and the buyers are only a handful.

The makers started to suffer as they can not make profit without volume. In fact, the real gold mine is in the bottom of market, which is mid to low-end consisting of high potential--the market of replacing video cassette recorders (VCRs) with DVRs, said a spokesperson at Ellim.

Unfortunately, when Korean DVR makers are aware of the fact, the gold mine has been dug up by Taiwanese and some Chinese makers.

And now, Korean security players are gearing up to ensure survival.

Over-heated Local Competition

It used to be over 100 DVR manufacturers in Korea, however, there are currently only 30 to 40 including small and medium-sized players left, said Jun Minjae, general manager of D-TEG Security Co., Ltd.

“Among them, 10 to 20 of them are major players. And only five will survive in the next three years,” he noted.

Vendors can not get enough margins from local market as the competition has become too stiff, he added.

“The number of new DVR companies has reduced this year. We tried to call some of them but they are already gone. A lot of them are breaking down,” he observed.

As the sales slow, investors start to lose faith, and the financial problems begin to surface, even some big names have to deal with bankruptcy issues, Jun added.

For those who are struggling to maintain smooth capital flow, they have to reduce the pricings to clear off the old stocks before calling the game off. “They are selling DVRs to local market in a very low price, and this is breaking the market,” he stressed, estimating the prices have been slashed by 30 percent compared to last year.

The price reduction inevitably forced others to follow suit, and this has caused lose-lose situation for most of them.

Financial support is the other difficulty that Korean DVR makers encounter.

Two years ago, South Korean government has been remarkably supporting the relevant companies when DVR was just launched. Unfortunately, the support does not continue. Except the top three companies in Korea, most makers are very difficult to get money, said Jun u Yi, chief executive officer of 4NSYS and chairman of DVR Community of Korea (DVRCK).

“To solve the problem, DVRCK keeps talking to the government. We hope to line out some requirements and regulations in the domestic market to stimulate the sales of DVR. For instance, there may be enforcement to install DVRs in chain stores or other risky areas,” he said.

Head-to-head with China, Taiwan

The hurdles do not end there as China and Taiwan have traditionally been the strongest competitors to eat up Korean share in the export markets.

Carving the niche as the quality original equipment manufacturers (OEMs) or original design manufacturers (ODMs) for other security companies, China and Taiwan are well-known for their hardware production.

In the case of DVRs, they seized the market by storms with the introduction of competitively priced 4-channel models.

“2004 is not a good year to Korean DVR manufacturers as a whole. We’ve faced severe challenges from Taiwan. They are very good in marketing and always focus on overseas. So they can supply suitable products in different markets and this is their competitiveness,” said Jun of 4NSYS.

“The biggest distinguish among us is the pricing and quantity. For example, when we get the inquiry from clients, we ask the volume of quantity to decide the price. But Taiwanese suppliers can always offer very competitive price even at small quantity. In terms of similar products, Taiwanese suppliers are more competitive than us,” said the spokesperson from Ellim.

“In CCTV, China has grown to be a strong competitor. Compared to four years ago, 15 percent of orders now have been taken by our counterparts in China.

“We have to give away cheap CCTV cameras to avoid the vicious competition with China. Now we only focus on high-end products, like IR dome camera with extra functions for easy installation and operation,” lamented the spokesperson.

Echoing Ellim, Kim Dae Hee, president and chief executive officer of WinnerTec Systems Co., said that Korean players have to find ways to deal with the intense rivalry.

As such, cooperation might be the way to turn the competition into a win-win situation for all of the three parties.

He suggests that Korean vendors can attempt to form technical partnership or join efforts in marketing and promotion with the Chinese or Taiwanese counterparts. For a start, WinnerTec Systems has imported mechanical components from Taiwan.

In addition to alliance, Korean vendors should not stop coming up with more sophisticated models with higher performance and technologies.

Digi-Flower’s sales manager Kathy Kim said it won’t follow in the price war but will put extra efforts into improving the product quality.

As a typical Korean DVR manufacturer which is proud of its strong research and development (R&D) team, she said that it will continue to invest heavily in R&D.

The company has a well-built team of over 25 staff, all of whom are specialized in the fields such as hardware, software and applications, which is a unique advantage to Digi-Flower.

Added Jae Won Choi, associate manager of international marketing at NeoSys, “DVR is not only a hardware product, but a combination of software and hardware. We are able to design software in-house and we offer high-spec DVRs which incorporate software solutions.”

Though Korean players generally enjoy a better reputation, the gap of hardware and software has narrowed in recent years and indeed, China and Taiwan are getting better in the software technologies.

“It is a matter of two to three years’ time that they could be on par with us. We are worried about this but right now, it is still not a threat,” claimed Tevicom Electronics Co., Ltd.’s president Jun-Kyun Dooh.

As such, who can meet the market requirements first will be the key to win, added J. S. Kan, general manager of overseas sales department at Picaso Info Communication Co., Ltd.

His comments are agreed by Chris Choi, overseas sales manager at Comart System Co., Ltd.

Although Taiwanese and Chinese solutions offer a variety of user-friendly functionalities, she asserted that Korea still has the best technology, especially in terms of high stability and superior display image in DVRs.

“Chinese vendors are notorious in imitating other people’s technology and products, we are not suitable to enter the Chinese market as we know the fate of bankruptcy,” she said.

She added that a number of players have closed their business as the result of venturing into China, whose products are popular for its low pricings.

As such, Comart System has given up on the mainland and is totally concentrating on the U.S., Europe and Russia for business growth.

Choi revealed that the U.S. is its major market contributing 50 percent to the overall turnover, while the growing Russia currently puts in 30 percent and the rest goes to Europe, mainly Poland.

Setting Eyes on Overseas

Comart is not alone in its quest to conquer overseas markets for business expansion.

Generally speaking, the U.S. and Western Europe have been the two largest export markets to Korean security manufacturers. Eastern Europe and Russia, on the other hand, are emerging to be the new promising lands full of untapped potential.

This well describes the business portfolio of WinnerTec Systems, which has the U.S. and Western Europe are the main export markets. And it is currently looking into Eastern Europe and Russia for further growth, informed its president and CEO Kim.

It is critical to conduct a thorough study on these countries before stepping in, he advised, adding that the company attempts to gain a stronger foothold by setting up strategic partnerships with local importers and distributors.

“Few big companies will survive in the tough competition. Ten to 20 percent of Korean players will disappear from the market next year. Nowadays, customers know which company is stable, and which product is good,” stressed Rhee Choong-Sup, Asian market manager of DVR sales team from Posdata.

As such, small and medium-sized outfits must find their own ways to survive, such as forming partnerships with big names, or else will face the plight of losing the business.

As Taiwanese and Chinese vendors continue to gobble up Korean share of the DVR market, Posdata has to focus on high-end market to win the battle, he said. Purely producing standalone models, Posdata is few such providers in the market that offer 16-channel standalone DVRs.

Korea failed to enter the low-end 4-channel segment with its comparatively higher priced products, and lost the market to China and Taiwan.

However, this did not deter Posdata from giving it a shot as it plans to form OEM alliance to enter the segment. Rhee revealed that it will have its first OEM partner in North America by year-end.

In future, the company might do the same for China and Taiwan, hoping to turn the competition into collaboration.

Currently, Japan is its main market, which brings in some 50 percent of revenues; tailing behind are China, Europe and Korea at 25, 15 and 10 percent respectively.

It also sees potential in Russia, Turkey and India. In fact, it has started to work in these markets two years ago and expects them to throw in more business in near term.

That’s not all, as a means to increase margins and improve sales quantity, it will venture into the system-on-chip (SoC) business in 2006.

Rhee revealed that as there are currently less than five Korean players producing the chips compatible with other companies’ products, this will present Posdata a strong advantage in future.

It is slated to begin SoC trials in late next year.

Moving Production Line to China

For some big names, moving manufacturing base to China directly is one way to confront rivals nose-to-nose.

According to Jang Youngjae, LG Electronics Inc. assistant manager of security system group, it plans to move the security production line to China early next year.

“Other enterprises have set up manufacturing bases in the mainland, we will lose out competitiveness if not coming up with resolutions in these two to three years,” he stated.

Estimated to cost around US$262,000, this new plant is expected to increase its China market revenues by 50 percent, he revealed.

This year, this Korean second conglomerate foresees to increase 30 percent of revenues from the Chinese and Taiwanese markets. Among all, cameras account for 90 percent, while the rest goes to DVRs. The proportion of DVRs will up four-fold to 40 percent in next few years, he added.

For LG’s total security business, it aims to achieve 200 percent growth rate this year, claimed its assistant manager Eric Kim.

Towards this end, it has put in a significant sum of marketing fund than last year. It attempts to set foot in every market by attending large international exhibitions to promote the offerings.

In a move to expand product ranges, it will introduce five to 10 models of new camera and DVR next year.

Meanwhile, Asung Electronics had also set up a factory in Shenzhen, China early this year to produce hardware of cameras, with its R&D base remain in Korea.

Its president Park Young-Jun informed that China not only offers low labor cost with superior quality of engineers, suppliers can easily source for components in this world’s largest manufacturing house.

However, SJ Micro-Tech Co., Ltd. thinks otherwise.

Though big corporations are starting to set up factories in China to enjoy the low pricings advantage, it has no current plans of jumping into the bandwagon, informed its president S.H. Bae.

For medium-sized companies to survive, they should find a niche in the market. It does not plan to expand the company’s size, instead utilizing outsourcing as an advantage. It thus designs the cameras itself, but chooses to outsource the assembly part.

To ensure further growth, the company does not plan to venture into DVR field either.

Its firm position seems to be working just fine as its revenue growth is estimated to reach 20 to 30 percent this year.

Adjusting Focuses

Traditionally, the security industry has focused on ensuring safety in public facilities such as airports and buildings. However, the industry is now expanding into the home market to meet the needs of individual.

The one-year-old SecuVic Systems Inc. realizes that it has to switch its focus into home segment as a method to ensure survival.

James Joo, director of overseas sales department, informed that major banks, government agencies, police stations have already adopted DVR solutions since the products became available locally.

On the contrary, demand of home segment is increasing tremendously. “Everyone only sees the big markets, but no one notices the small ones. The potential of combining of all small segments is huge,” he said.

As such, the company will move into homes by launching its first standalone DVR in November, with more higher-end models in next year’s pipeline.

According to Joo, home users prefer effective and cheaper solutions with portability and good design. It would be critical to add in networking function as users need to monitor their home or children from remote sites.

As networking function is not a new term to most vendors, SecuVic aims to stand out by offering high-speed transmission and clearer images in high resolution.

Under the weak market conditions, Unimo Technology Co., Ltd, which claims to offer high-quality cameras, is also forced to turn its focus to DVRs.

“Cameras no longer give us huge profits, as Chinese and Taiwanese vendors are aggressive in pricings,” lamented overseas business team manager S. K. Koh.

Though it is still selling the cameras in same quantity, he said, the sales volume remains flat as its major clients in North America Vicon and Tyco are not expanding. It worries him that they might instead opt for Chinese or Taiwanese vendors in future.

To ensure survival, it attempts to enter budding markets in Southeast Asia such as Malaysia or Vietnam, where the demand is rising in terms of security. He believes that clients will still go for high-priced products if the quality is outstanding.

In addition, it targets to boost its DVR revenue proportion from 30 percent to 50 percent by year-end, striking a balance with camera business.

As PC-based DVR makers no longer make profits, it will only manufacture standalone DVRs, he informed. The company currently has three models, and is considering to introduce a 16-channel, MPEG-4 solution with CDRW and USB port functionalities.

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