China to Push Foreigners Out of Surveillance Market?

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Great foreign investment and trade story here in the New York Times:

[I]n an article published last month by the state-run China Daily, a Ministry of Public Security official said that domestic companies were better suited to produce the equipment and software that are part of the Safe Cities program, a six-year-old surveillance network that uses Internet-connected cameras to combat street crime and to keep tabs on political dissidents.

“China’s security cameras play an important role in countering crimes and maintaining social stability,” Chen Chaowu, deputy director of a research institute affiliated with the Ministry of Public Security, told China Daily. “In some important areas and industries, we should avoid the risks to national security that might come from using overseas standards and products.”

First off, keep in mind that no one really knows how strong this “signal” was and whether this article really does suggest a change in policy. This is all speculation, but it’s also a great discussion starter.

So let’s assume that China decides that it would rather have domestic firms dominating this space. Can it then implement this policy? Probably not, at least not right away. The surveillance market in China is, according to the Times, currently dominated by foreigners (80%). It is also damn lucrative, with 20% annual growth and a potential value of $11 billion by 2015. A tech market worth that much where foreigners hold 80%? Security and surveillance aside, that’s a big fat target for domestic suppliers to go after, with the assistance of government policy if they can get it.

This also suggests that there is a very good reason why the government has allowed such market dominance to continue to this point. I won’t keep you in suspense. This is all about product quality. In the area of security and surveillance, the government needs what it needs, and protectionism has to take a back seat.
All else being equal, wouldn’t China prefer to have domestic suppliers in this sector? Of course, and for two reasons. First, we’ve got the commercial/protectionism motivation. Second, there are national security implications.But the quality gap between foreign and domestic providers doesn’t last forever, and that dynamic may be what’s driving this chatter. Certainly for some of these products, such as digital cameras, domestic companies can step up and replace some of their foreign competitors. And if not now, then in the near future.

We’re all quite familiar with the national security argument. This is the same reason the U.S. government has successfully kept Huawei from participating in certain service/investment deals over the years. It’s reasonable to assume that China has the same concerns. And even if those “concerns” are merely a way to justify protectionism, well, reciprocity is a real bitch sometimes, and China is very, very good at playing that game. I chalk it up to all those engineers in high leadership positions here who think Newton’s Laws of Motion (in this case, the third one) work pretty well as policy guidelines.

Finally, I wonder what a move in the Chinese surveillance market would mean for Chinese firms that wish to expand overseas? I simply don’t know the market well enough to guess about the value of some of these contracts, what products they might sell in the future, etc. On the one hand, a localization policy would mean significant revenues for domestic suppliers; however, there is a danger that foreign governments might respond with some reciprocity of their own.

For example, look at a company like Huawei. The video surveillance apparatus is increasingly digital and networked, so it’s probably not a stretch to assume that companies like Huawei and Cisco are/could be equipment providers. Now let’s assume that China implements new policies that favor domestic firms in this area, citing national security concerns. Huawei, which already has big time political problems with folks in Washington, D.C., now has an even bigger image problem on Capitol Hill because U.S. companies are losing market share. You can replicate this argument, to some extent, with respect to Japanese and Korean camera manufacturers, etc.

So if you’re a domestic Chinese supplier with overseas ambitions, is this “signal” good news, bad news or both?

2 responses on “China to Push Foreigners Out of Surveillance Market?

  1. Anon

    Until China joins the gov’t procurement agreement, they don’t even need the national security justification to push foreign companies out of a huge chunk of the market anyway…

    1. Stan Post author

      Yes. It’s more of a political justification than anything else. Protectionism in this area is perfectly legal (as is US CFIUS).