HANGZHOU, China It would have made good material for a sci-fi flick. Too bad for budding screenwriters, then, that the high-powered surveillance technology of China's Hangzhou Hikvision Digital Technology is already a reality.
Hikvision is the world's largest supplier of video surveillance equipment. In a showroom at its headquarters in the coastal city of Hangzhou, staff guide government officials and businesspeople through a world in which there is little that cannot be seen and few who cannot be tracked. The company's advanced technology can capture sharp images even in fog, rain or darkness. Its cameras and patented software can track individuals by identifiers such as body metrics, hair color and clothing.
"Now there are about 11 people in the room, and it tracks every one of them and counts how much time they have spent in this area," said Ada Han, a company spokeswoman, showing off one of Hikvision's systems.
Hikvision has embedded its networks deep into a world increasingly paranoid about terrorism and in which corporations are desperate for consumer information. The company's video surveillance systems can be found everywhere from London's extensive underground train network to a prison in the U.S. state of Idaho, and from schools in Minnesota to all 300 McDonald's outlets in Malaysia.
Established in 2001 as a subsidiary of a state research center, Hikvision now has a leading 19.5% share of the global market for video surveillance and closed-circuit television systems, according to research company IHS. This strong position has made Hikvision a top pick among brokers eyeing an upcoming linkage between the stock exchanges of Shenzhen, where the company is listed, and of Hong Kong, which is fully open to foreign investors. Rising expectations about the link's launch helped Hikvision's shares to rise by nearly 30% between mid-June and the announcement of plans for the interconnection on Aug. 16, though they have since fallen back and now trade at around 24.5 yuan a share.
Set up as a state enterprise, some 41.9% of Hikvision's shares are still held by the central government, with a further 18.3% held by Vice Chairman Gong Hongjia, a venture capital investor. Among Hikvision's most recent high-profile projects was providing surveillance systems for the Group of 20 leaders' summit in Hangzhou on Sept. 4-5.
"You see our traffic cameras in Hangzhou, in buildings, parks and plazas," Han said. "Some were already installed, and some were added for the G-20." After the summit, Hikvision said it had supplied video surveillance for conference halls and receptions hotels and for other key infrastructure like the airport, subway and railway lines, and roads.
Government contracts have been critical to Hikvision, which has won tenders against both foreign and local competitors, including Dahua Technology and Zhejiang Uniview Technologies, both also based in Hangzhou. According to an analysis by investment bank Nomura, Hikvision's edge stemmed from an early move to broaden its portfolio into complete surveillance systems combining hardware and software.
"You can't depend on your parents forever," said Gloria Tsuen, senior analyst and vice president at Moody's Investors Service, referring to Hikvision's beneficial relationship with the Chinese government. "They have changed now."
Hikvision's revenues rose 28% to 12.5 billion yuan ($1.87 billion) in the first half of the year from the same period in 2015. Profits rose 18.1% to 2.6 billion yuan.
The company only started to venture abroad in 2007, initially manufacturing products for foreign brands like Honeywell. Now international growth is outpacing domestic sales gains. Overseas sales accounted for 28.6% of Hikvision's total in the first half of the year. Nomura projects the share will rise to 43% by next year. In August, Hikvision said it had secured a 20 billion yuan credit line from the Export-Import Bank of China. Hikvision's gross profit margin on foreign sales is also much wider than on domestic sales, at 47.7% versus 37% in the first half, according to Moody's.
Projects like the 2014 FIFA World Cup in Brazil, German railway stations and parks in Philadelphia reflect the diversity of the company's customer base. Last year, the company's largest customer represented only 0.8% of total revenue.
OWNERSHIP ISSUES Some critics have raised concerns over the strategic value that millions of cameras installed abroad by a Chinese state-controlled enterprise could have for Beijing, but so far Hikvision's ownership has not hurt its competitiveness, according to Tsuen of Moody's.
"The way they are gaining market share is really a function of their products," she said. "They are very decent products at a reasonable price. State ownership is a fact of life."
Some 40% of Hikvision's staff, or about 6,000 employees, are involved in research and development, and about 8% of revenue is put into R&D. The company last year nearly doubled its annual patent application count to 527. To give its researchers a stronger financial incentive, the company recently set up three subsidiaries in which staff will hold 40% stakes. "We have seized industry turning points each time they have happened and always seized opportunities and quickly developed products for market needs," Han said.
One of the new subsidiaries is focused on advanced driver assistance systems, combinations of sensors, cameras and smart technology that can alert drivers to potential dangers on the road or when they are backing up. Nomura projects that automotive systems could generate 600 million yuan in domestic sales next year for Hikvision, helped by new national rules requiring that rental cars be equipped with emergency alarm systems and recorders that film the driver's windshield view, as well as city-level regulations mandating the installation of surveillance systems in taxis. "We think Hikvision's core competency in video analysis is a natural fit for the company entering the faster-growing ADAS market," the bank's analysts wrote.
Hikvision in May completed its first overseas acquisition, the buyout of Pyronix, a U.K.-based intrusion alarm specialist with annual revenue of around 25 million pounds ($32.4 million). "Hikvision has plans for significant investment in the U.K. and particularly in its U.K.-based manufacturing, with plans to dramatically expand operations," Zhi Jiangfeng, who was appointed chairman of Pyronix by Hikvision, said when the deal was announced. "We look forward to growing the business through the introduction of intruder alarm products to the global market."
The deal should help Hikvision raise its position in Europe, the Middle East and Africa, where it ranked as the No. 2 provider last year behind Axis Communications, a Swedish company bought by Japan's Canon in 2015. In North America, where Axis also leads, Hikvision ranked 15th in 2014, but rocketed to No. 4 in 2015.
Han said there remains considerable room for development in drone surveillance, the improvement of image quality and big data analysis to track objects and individuals.
"The industry development is [toward] high definition and intelligence, going smart," she said. "That's the trend we've seen and what we are working on."