Episode 1: China’s Influence on American Security Systems

Help me give a big warm welcome to John Honovich the founder of IPVM. John thank you so much for being my very first guest. Within this podcast we will discuss a variety of topics revolving around security systems. Some including China’s involvement with American video surveillance, the comparison of industries outside of the security market including the involvement of the system integrators, as well as the contrast of consumer and professional cameras. We’re also going to touch on the value chain of security system suppliers and start up tech being integrated in video surveillance technologies like gunshot detection and surveillance systems that provide end to end solutions.

But you know some of the things are interesting Hikvision has a contract that was publicly disclose where they did facial recognition to nine hundred plus mosques. What’s interesting about this is that if you think from the perspective of the mosques, they don’t want to have that facial recognition, it’s of no benefit to them. It’s the counter right. The issue there is that they’re forcing facial recognition into these mosques and they’re using it such that you use the Hikvision facial recognition then you say, okay who’s coming to the mosque regularly. These people are likely to be enemies quote unquote of sort of the China Communist Party and those people need to be sent to quote unquote reeducation camps. So, surveillance technology, video surveillance technology is at the core of what’s going on in Shenzhen being used you know across the country.

But Shenyang is in many ways considered like the laboratory of sort of doing all these types of social experiments using technologies. For example, Dahua who has one project alone is more than 600 million dollars a contract and they’re building what again the PRC likes to call convenience police stations those police stations are not convenient for the people being put into these concentration camps and tortured. But they are very convenient for the CPC and their police to be all throughout their cities and Dahua is actually building and managing these convenience police stations among many other surveillance projects that they’re doing. So, both of the companies are pretty significantly and directly involved there’s actually interestingly, pictures of Dahua’s chairman smiling like it’s a groundbreaking ceremony in Shenyang. Dahua actually has said nothing. Hikvision is at least sophisticated enough to say, hey we respect human rights and we’re going to look into this, you know we promise. Dahua basically just put their head in the sand and is hoping this goes away.

For instance, the Financial Times just today which is not a U.S. publication the U.K. publication. And then last week what was it, The Times UK had a report. So, these types of things have sort of like rolling ramifications and other parts of the world. So I think that’s one of the reasons basically why they go to such great lengths and then I think the other thing you especially look at what’s going on in Shinji Yang is that if there were sanctions right that are being sort of discussed or reported the sanctions are ready or to be held it’s not clear but I think it’s fair to say even they acknowledge that there is a real risk that they might be sanctioned. The problem with sanctions for them right is that just what we’re seeing with Huewei.

There is lots of core technology that has ties back to the United States and could have them being blocked from accessing. I mean the most obvious ones are Intel, Nvidia, and Western Digital. So, there’s a number of big companies that they might not be able to buy from. And that would have implications not only in the US but in the EU and potentially even inside of the PRC right. Especially a lot of these deep learning A.I. analytics things that they’re doing and Nvidia and Intel are key players in this. And so if they were somehow blocked from basically being able to access this technology it could actually give a ramification now of course they say, well you know we have our own stuff we develop is like with Huewei said well we don’t care about Android we’re going to develop our own operating system by the end of the year Is it true, is it not true you don’t know how much is bluffing but I think the reason why and they’ve spent you know two million dollars or more at this point on lobbyists in the US in the last two years is because they concerned about the branding and the supply chain ramifications.

But now to your question the other part that you mentioned was basically what’s their strategy? It’s not clear to me that ever for instance for Dahua as I mentioned this on IPVM many times is that they’re just a very poorly run business like shockingly poorly run the most poorly run multibillion-dollar business I’ve ever seen. Sometimes you see small companies right poorly run but usually when you have a thousand employees and billions of dollars in revenue usually, you’re pretty well put together. Case in point is basically Dahua saying nothing about some of the sanction risks and their contracts in Shenyang at some level what can they say. It’s totally true. Right. It’s not like they can say basically aww it’s a mistake that’s the other Dahua. But I don’t think Dahua overall has a plan I think Dahua is doing better in the United States when they acquired the Flier Lorex team and I think now doing better in terms of the SMB market. And if you look at Hikvision their strategy thing for now is to hope this sort of goes away. And then in the meantime just sell to the SMB. If you look at basically the consumer market the Dahua and Hikvision have never really done well in Nest and Amazon on even Wise Camera. They’re using China hardware developing their own software. They’ve never really done well in the consumer market and the enterprise market has been a challenge. And now the enterprise market has really sort of shrank and even for Hikvision they had a little bit of position in the enterprise market. So, I think the strategy Dahua has no strategy overall. The U.S. team strategy is customer service. Go and go to the SMB and the Hikvision strategies retreated to SMB hopefully sort of these things will blow over. You know Trump will basically be Trump and someone will basically knock him off office the new person comes in will basically be happy and we’ll sort of re-engage China. I think that’s the approach for now.

But it’s pretty clear when you go to Chinese language publications that you know not only is he the chairman but he is the primary spokesperson for Hikvision within China. And he’s been there from the beginning it’s not like oh they added this guy last week or something right like Hu and Chen basically were together. Chen was Hu’s manager when they worked for the Research Institute of the Chinese government so Chen has been there from the very beginning and he’s been the communist party secretary and now last year which is sort of amazing he was elected to their national government.

They have National People’s Congress. It’s roughly in sort of like our Congress except people aren’t actually elected and it’s more of a rubber stamp thing nobody basically opposes the China Communist Party because if they do, they sort of wind up locked away in prison but it’s clearly quite powerful. I mean it’s clearly a point of honor and power for him to be a delegate of the NPC so you know not only basically as the chairman of Hikvision he’s a communist party secretary and he’s a member of the Chinese government. I don’t know of any basically comparable, if you look at Dahua like it’s Mr. Fu. Fu basically is kind of like an operator guy independent generally from here. The things we hear kind of in various places right they have their electric car start up now. So even from a PRC perspective Dahua basically is nothing like Hikvision in terms of the control the connections.

So, it’s a bit shocking to me with that perspective and mine that ADT basically sees their boat sinking and they’re sort of like a lifeboat is now commercial integration but at another level they’re probably right. It’s a safer choice to go into commercial because when you look at Amazon and Google, they’re clearly more consumer-oriented businesses. And then the thing of basically selling to sort of Business Solutions and enterprise sales-B2B if you will right-is clearly not a core part of who they sell and market to. So, I think residential will end once they suffer but will basically be severely impacted by the Silicon Valley if you will companies with a commercial space. Certainly, if you’re looking sort of to 2025, it seems very unlikely that they’re going to have significant inroads basically by that time. No one knows what goes on the long-term future but in the short term I think there is a lot of safety on the commercial side.

Like you know for your house or something if you have Nest it’s two Nest cams a thermostat whatever you really only care about that. But you know in a commercial application how do you basically integrate different systems cameras over time with buildings, floors, rooms, etcetera. And then I think there are certain things that you know in terms of you look at like video quality like a lot of consumer products have really short IR range everything with every camera.

So, if you don’t have a web page or something, you’re pretty much out of luck right. Like it’s going to be hard for you to be considered unless somehow someone you know already uses you but that you know that would have so dramatically sort of limits basically your potential market. But I do think that that is all too common issue with anywhere. One thing we did, we did a survey with some statistics and was like integrators one thing was really anything integrators turned out to be. I don’t know surprisingly to be pretty highly risk averse in the sense that we ask them something like you know would you rather like grow faster or make more profits. And like the clear answer was like make more profits.

So, I think more and more of that the internet makes it so that Verkada is a great example of where they’re moving this more down market. Certainly, a lot of these schools that Verkada is winning are thousands of cameras. So, it fits perfectly in that sort of model that like listen if you have a thousand cameras and I’m a manufacturer that’s a deal that’s big enough that I want to go after and have my own people directly involved. But I think you look at the Internet with webinars, email, newsletters, social media marketing and who does it right. It’s easier now than ever for manufacturers to directly communicate with end users, even end users that might only have a few hundred cameras. You know when we first got into the industry, I think a lot of it used to be like well I’m going to be in Houston for three weeks from now and I set up an appointment right. That was literally it. Because otherwise you do a phone call but it’s not very sort of useful just to do a phone call. And now obviously these things have changed. You know if I want to know in Houston who is the security manager operating in our facilities manager. Whatever it might be is pretty likely that I’m going to be able to find it on LinkedIn. That’s why you see so many sales people that are paying eighty-five dollars a month for LinkedIn premium whatever they call it.

So, you can have that type of intel and reach out to these people directly and then do webinars etcetera to sort of picture products directly. So, I see that you know more and more continuing and I think that’s you know to the detriment of the historical role or at least the historical role of what an integrator was where you know the integrator would figure these things out and bring it back to the end user. You’re seeing a lot more I think in general when talk about the Internet disintermediation right the inner the integrator is historically been the intermediary between the manufacturer and the end user and the Internet like it does from anything like real estate agents right. It enables basically people to connect directly or the buyer and seller correct directly without having to use real estate agent or the integrator as exclusively as the intermediate point.

Now is a good time to sell a camera not just a generic camera or just a higher resolution camera but a camera that has AI. You’re better off selling a camera that has AI embedded than trying to say like hey I got this algorithm with the software and we’re going to try to add it on and connect it and whatever. I think it’s an easier sell, it’s more revenue, you probably can get greater performance by controlling both ends. If you look at Verkada which I think is just from financial perspective is the star but doing the best so far they’re selling an end to end solution. Another company that we’re seeing right now that that’s working on selling an end to end solution is Vaion. V-A-I-O-N, they are a primarily European startup.

Yeah, you’re not going to be able to get into existing accounts that are like, oh I’m happy with basically Avigilon, Milestone, or whatever but there’s those replacement cycles out there. And you’re better off basically finding people or finding customers or end users that are looking to do a replacement and going after them than you’re trying to say hey you we want to sell you this sort of analytics for 50 dollars per camera per month. Because then you know what you’re saying is like okay 50 dollars per camera per month or even thirty dollars per camera per month right now you define a new budget.

This is one thing I learned when I was a startup 13-14 years ago a long time ago. But the issue there was that security is how do you find budget for new product. So, it’s one thing to say like oh I can either replace my VM mass my recorder my cameras or whatever. That’s sort of a known standard budget thing and it’s much easier to say like yeah, we have this block of dollars and we were going to use it for cameras X and now we’re using camera Y. But if you listen well you know you have this sort of block of dollars and now by the way I need to get a new block of dollars in addition to the block of dollars you have. That’s a hard thing. Then you need to go back, now you need to sort of explain well what’s the return on this money and then security has always famously the issues -which you know- it’s hard to justify the return, are you reducing operational costs or reducing losses? Probably not generating revenue. So, I think those are the types of challenges when you look at what the startups and again you know most the startups are pretty new. They’re a year two years old. So, they really have been selling that much yet. So, I think they’ll learn and they’ll adapt in the next few years. And then you’ll see how it shakes out.

If you’re a large integrator there’s lots of like startups that come to you like oh yeah, my thing works so great, but your thing doesn’t really work that great. And like we’re stuck servicing it. If the company of the startup sort of has problems or fails or whatever they need to deal with it right. What do you do with this equipment that like has these problems or is now out of business? So, I think a lot of rationality that many integrators are risk averse with startups.