Trade Wars, Security, and the Hikvision/Dahua Video Surveillance Ban

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4Q 2018 | IN-5268

On September 24, 2018, the United States imposed US$200 billion of new tariffs on Chinese products as a result of the escalating trade war between the two countries. This is in addition to the US$50 billion worth of tariffs that already went into effect in August 2018. The results of these tariffs remain to be seen, but American consumers could very soon be paying more not only for big ticket items such as washing machines and cars but also for smaller everyday purchases such as clothing, beer, and cosmetics.

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Government Ban

NEWS


On September 24, 2018, the United States imposed US$200 billion of new tariffs on Chinese products as a result of the escalating trade war between the two countries. This is in addition to the US$50 billion worth of tariffs that already went into effect in August 2018. The results of these tariffs remain to be seen, but American consumers could very soon be paying more not only for big ticket items such as washing machines and cars but also for smaller everyday purchases such as clothing, beer, and cosmetics.

One industry that has already been greatly impacted by the growing trade rifts between China and the United States is the video surveillance market. In August 2018, the U.S. government passed and implemented the 2019 National Defense Authorization Act that bans the U.S. government’s use of Chinese state-owned video surveillance equipment from the manufacturers Dahua and Hikvision, as well as any of their subsidiary and affiliates. This ban comes as the U.S. government has continued to shift away from using foreign state-owned technology companies to avoid threats of cyberspying. While both Hikvision and Dahua have adamantly denied using their technology and products to spy on U.S. interests and claim to be compliant with all U.S. laws and regulations, the two largest video surveillance manufacturers unfortunately find themselves in a hostile market environment that has the potential to affect more than just the video surveillance market moving forward.

State-Owned Companies

IMPACT


The U.S. Department of Homeland Security raised security concerns and set the ban in motion when it released an alert in May 2017 that revealed vulnerabilities in Hikvision equipment that could potentially allow hackers to remotely access some cameras. There was no public evidence that this had occurred, but nonetheless, the vulnerabilities existed. Hikvision responded by issuing an update for affected users, but that was not enough for U.S. lawmakers—partly due to the fact that the company’s controlling shareholder is the Chinese government, which historically has had broad authority to intervene in business operations. While Hikvision and Dahua claim that no such interventions have occurred or even been requested, this fear of foreign intervention coupled with China’s existing and extensive state-surveillance program led directly to the ban.

The ban will not officially start until August 2019, but it includes both purchasing equipment and using existing equipment. No government entity or subsidiary will intentionally purchase a camera system in the next 12 months that would have to be replaced in less than a year. There are severe branding impacts stemming from the ban, as enterprises and consumers not directly impacted by the ban might still be wary of additional security risks from these products. Also, no enterprise having existing U.S. government contracts would purchase these banned systems, as the law includes a provision banning government agencies from entering into contracts with entities that use any of the banned equipment, starting in August 2020. More broadly though, the ban serves as a warning to the Chinese government and other Chinese manufacturers that the United States will not tolerate threats of cyberspying or unfair trade practices—real or perceived.

Impact on the Video Surveillance Market

RECOMMENDATIONS


The overarching consensus when it comes to the Chinese video surveillance market, buoyed by China’s widespread surveillance network and need for video analytics such as facial recognition, is that “China buys China.” While some estimated goals state that the Chinese government is hoping to deploy 600 million cameras by 2020, many devices such as smart glasses and body-worn cameras are included in those figures that do not fall under the traditional video surveillance camera definition. The U.S. ban will do little to impact either the Chinese market or buying patterns within the market, but it will severely impact the companies’ market opportunities within the United States or with other allied governments. In 2017, ABI Research forecast that market leader Hikvision held nearly 25% of the US$24.8 billion global video surveillance market. It remains to be seen how the ban will impact its global market share moving forward. Both Hikvision and Dahua have fought against the ban. Dahua has stated that it is not a government-owned entity, as it is publicly traded on the Shenzhen stock exchange; Hikvision has reportedly set up a team to analyze the bill more closely and to determine its future ramifications. Publicly, the burden has fallen to Dahua and Hikvision to prove that they are not acting as a backdoor conjugate for the Chinese government, and this is more difficult than addressing actual claims or evidence of such actions.

As a result of these market conditions, U.S. video surveillance manufacturers and service providers are poised to benefit greatly from the ban on Chinese video surveillance equipment. Without the competition and price pressure of Chinese manufacturers, U.S.-based companies such as Dell EMC and Pelco, as well as Canadian companies such as Genetec, have the rare opportunity to increase their U.S. market share and revenue opportunities since the two largest competitors have been essentially removed from the market. Providers like Dell EMC offer extensive professional services that can help U.S. entities and other enterprises transition from their existing banned equipment to systems that are compliant with local laws and regulations. Whether allegations of cybersecurity concerns are true or not, the impact of the resulting ban will be felt not only throughout the video surveillance market. Moving forward, the ban could serve as a blueprint for lawmakers to help U.S. technology manufacturers and providers compete with Chinese manufacturers, as approximately one-third of business activity in China results from companies in which the state has a majority interest and where the threat (real or perceived) of foreign intervention persists.  

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