Corporate Strategy: How to Climb China's Value Chain

by Angie Mak, 05 September 2010

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CSST manufacturing Pearl River Delta security services surveillance Terence Yap

“The majority of the security vendors in China are in manufacturing,” observes Singapore-born Terence Yap, who is CFO and vice chairman of China Security & Surveillance, Inc. (CSST). “That’s very bloody — too many guys there. We decided to break the mould and to consider the blue ocean environment.”

The strategy is working. From US$32 million in 2005, revenues jumped to US$580 million last year. CSST forecasts sales of as much as US$850 million this year. The bulk of revenues come from the installation of security cameras and systems, not the sale of products and equipment.

“The next phase in the blue ocean environment is services,” says Yap, “If we manufacture it and we install it for you, why don’t we also monitor and maintain for you? If you look to the US and UK, the majority of revenues are [generated] in the services phase. They’ve gone through the growth that China is going through right now.”

Yap spoke to CFO Innovation’s Angie Mak on CSST’s blue ocean strategy, the secret to reducing factory staff turnover in the Pearl River Delta and other issues on its way to becoming a US$1 billion a year business.

Are government contracts a main source of revenue for CSST?

About 55% of our revenues come from the government sector, and about 45% comes from the corporate sector. We don’t do business in the retail market at all. The corporate business includes major banks, universities and large shopping malls. The government contracts in China typically include the citywide (Safe City) solutions. Ninety-five percent of our revenues come from China, at this point in time.

How did CSST win these government contracts?

Initially, the majority of our contracts came from the corporate sector, because we are listed on the New York Stock Exchange. In China, the bigger you grow, the more skill you’ll build. With more visibility, the more traction you’ll get from a government. Because of our NYSE listing, the majority of our Board of Directors are independent.

As we built up our skills, the company grew from less than 300 people. Now, we have more than 3,500 people. We do a lot of advertising in China and lot of projects with the government, which also build up. Scale is very important, because the bigger you are, the more support, visibility and credibility you’ll get with the government.

BUSINESS STRATEGY

What kind of barriers did you have to overcome initially to set up these contracts?

The biggest challenge was that it was a “blue ocean environment”, where [the market] is new. The “red ocean” is where it’s bloody, a lot of competitors. At this point in time, the majority of the security vendors in China are in manufacturing – that’s what they do best. And that’s very bloody — too many guys there.

We decided to break the mould and to consider the blue ocean environment. A blue ocean opportunity includes doing installation. Besides manufacturing, why don’t we also install [the security system] for you? So we started with the corporate sector.

We did acquisitions at a manufacturing site, and we started to do installation. That’s why 77% of our revenues come from the installation business right now, not products sales. [In contrast], the international companies only want to sell equipment.

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