Recent China Reports from i&i

The Fastest Growing Market in the World Continues to Deliver & Will Claim No 1 Status in 2038

The latest report on the China market for environmental control systems in buildings from i&i - Proplan shows that the market has grown at an average compound rate of 10% over the last four years. If it continues growing at the same rate it will in 2038 overtake North America and will be the largest single market in the world. By that time penetration will still only be some 25% of that recorded in developed western markets.

The total IBC(e)1 systems market in 2006 was worth CNY2,658 million and of this IBC(e) manufactures contributed CNY1,067 million. The main demand drivers have been increased output of new building construction in the Commercial and Industrial sectors and further penetration of DDC controls and their convergence on conventional systems. However, despite these very favourable trading conditions IBC(e) manufacturers have inevitably had to concede their share of the total value added business but have increased their product sales by 46% in the last four years. In 2002, virtually all DDC product was imported into China from approximately 10 international IBC(e) manufacturers. Since then, local manufacturers have taken a larger share of the market but the majority of product manufactured locally relates to valves, actuators and sensors. Local manufacture prices are very competitive but are believed to lack quality and reliability. Strong demand has not reduced competitive pressures, but the emphasis today is still to keep the control system simple and apart from prestige installations, not to be too concerned about energy consumption and indoor air quality.

This study shows that Controls Contractors / Installers have now established a firm base and their influence is growing, but they still lack software and network communication skills. However, now that foreign owned manufacturers can now install total systems direct, provided they have a license, they are likely to exercise this option on major projects, particularly if full integration with other technical infrastructures is required.

The geographic distribution of IBC(e) systems is still concentrated on the Eastern Seaboard around the regions of Beijing, Shanghai and Guangdong, but Tier II cities in the North and West have developed new opportunities. The OEM market for DDC product has yet to develop but given that an enormous air conditioning manufacturing industry is under development in China, it will attract companies to provide for this specialist niche.

Communication standards have not made an impact on the IBC(e) business during the last eight years but DDC controllers that comply with one or more standards are available. BACnet, EIB (Konnex) and LonWorks are the three most often used standards and they are penetrating the market, albeit very slowly. These three standards will continue to penetrate the market but, despite all the hype, none have stamped their authority on it. Very few projects in China specify a common communication standard and we believe that "interconnectivity" will for the main part, be provided by overlaying manufacturers' proprietary protocols on IT networks using TCP/IP.

The report concludes that there is no other market in the world that offers better opportunities to develop the IBC(e) business, but that it will require political stability to be maintained and that the supply side rapidly develops its engineering and application skills and the government implement its plans to reduce energy consumption in buildings.

¹IBC(e) Intelligent Building Controls - environmental controls: - Computerised / microprocessor products and systems that control/monitor environmental plant such as heating, ventilation, air conditioning in non-domestic buildings, comprising a central user interface, communications network and data acquisition/direct digital controllers (DDC).

The World's Fastest Growing Market Establishes its Claim to be No 1 in 2018 and is set to double its size again by 2025

The latest report on the China market for electronic security systems from i & i - Proplan forecasts that it will become the largest market in the world when it overtakes North America in 2018 and will be double its size by 2030. In the last five years growth of 29% per annum has been achieved and in cctv / video surveillance this has been well exceeded. Nevertheless, starting from its present position of being less than 25% of the size of the North America market, itself fast growing, this takes some believing. However, i & i - Proplan have been charting the performance of this market since 1994 and our reports show that it has far outstripped any other market of size during the last fifteen years. It is not just the growth or future potential that marks China out for special attention, it is the shear consistency of extra ordinary performance over the last 15 years that sets it up as the most attractive and consistent market in the world. When we carried out our first multi-client study on China in 1995 the best economic brains in the world declared that the current economic growth could not be sustained, but it actually went on to outperform. Then in 2002 when we carried out the second edition of the study they advised that it could no longer defy gravity and growth would decline but it continued on at the same breathtaking pace and now in 2006 the experts say that economic growth will be sustained provided that the country remains politically stable. No one doubts this or the important role that security will play in achieving it.

The total electronic security systems market in 2006 was worth CNY13,248 million and of this the CCTV Video Surveillance market has not only maintained its position as the largest of the three markets, but its growth has far outstripped that of Access Control and Intruder Alarm. In 2006, the breakdown of the total IBC(s) systems market is a whopping contribution of 66% by CCTV Video Surveillance, 18% attributed to Access Control and 16% for Intruder Alarm. However, the penetration of IBC(s) in China based on sales per capita is only 6% of the EU(7)1 average and therefore there is enormous potential for growth. In 2018 when we forecast it will become the largest market in the world it will still only have a penetration of 25% of the world's most developed markets.

The main demand drivers have been increased output of new building construction, particularly in the Commercial and Industrial sectors, rising crime and fear of crime , not least as a result of the massive migrant workforce. The introduction, as part of the Government's 11th five year plan, of public security programmes such as the Safe City Scheme (SCS), has given a mammoth boost to the sales of security systems, particularly in the area of CCTV / video public surveillance but it is also aimed at intruder alarms and its influence on the entire security market will continue to grow as the project is rolled out.

The China IBC(s) industry is therefore bristling with opportunity and the last five years has seen the emergence of several Chinese manufactures, particularly in the area of digital video surveillance technology, who have now established leading market positions. At the same time, all the world's major players are active in the market and fighting to carve out a solid position. Most have found it difficult to establish a firm commercial base and have been frustrated by barriers, which are now coming down as measures to implement WTO membership are introduced. Their considerable effort is now starting to be rewarded as the market continues to expand at unprecedented rates and the playing field starts to level off, providing new strategic options to develop their business, including buying into established Chinese companies.

¹ EU(7) comprises Belgium, France, Germany, Italy, Netherlands, Spain, United Kingdom

The latest report on the China market for fire detection and safety systems from i & i - Proplan forecasts that it will become the largest market in the world when it overtakes North America in 2033, but even then penetration will still only be some 25% of that recorded in developed western markets. The China market has grown at an average compound rate of 15% over the last four years. The total fire detection systems market in 2006 was worth CNY3,141 million and of this third party channels delivered 71%. The total system sales market is approximately 45% of the size of the UK whilst the value of construction is currently running at 45% higher, dependent upon which set of official statistics you benchmark against. Just based on one demand driver, new building construction, the penetration of fire detection should be treble, based on similar prices. However, the penetration of fire detection systems in China based on sales per capita is a little less than one fiftieth of the UK and therefore there is enormous potential for growth. But this will only be achieved if political stability remains whilst the much needed reforms to the economy are introduced and the codes of practise and standards are fully implemented and updated to meet the need for reducing risk and increasing safety. The last fifteen years have seen enormous progress on these points and there is no reason to doubt that this will not continue.

Although this market has not been able to keep pace with its sister business, electronic security systems, there is simply no other country in the world that offers these kind of prospects and not surprisingly therefore, all the world's major players are now active in the market establishing a position.

The study shows that despite these very favourable trading conditions, imported products cannot compete on price with local manufactured products at the medium to low end of the market. However, imported products are being used on more sophisticated and high quality projects, particularly on foreign financed projects, such as hotels. Over the last eight years the share of imported products has declined as they have progressively been driven out of main stream business. Foreign owned fire detection manufacturers have also set up production in China for the local market and some have formed alliances and invested in Chinese companies. As a result, foreign owned companies have regained some of their market share lost over the last eight years and have a much stronger base from which to grow, but the quality of locally manufactured products improves and their production expands.

So despite a rapid and consistent growth over the last eight years, the forces that determine profitability and attractiveness have conspired to make it a difficult market to operate. Some suppliers have grasped the nettle and have implemented new strategies to combat the change through forming alliances and investing in Chinese companies. This report shows that this strategy is not just built on getting a share of China market but has much wider implications in developing a coherent world strategy.

¹ EU(7) comprises Belgium, France, Germany, Italy, Netherlands, Spain, United Kingdom

FOR MORE INFORMATION CONTACT Allan P McHale or visit our web site www.proplan.co.uk.

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