Corporate Strategy: How to Climb China's Value Chain

“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.
 
The next phase in the blue ocean environment is services. 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.
 
Services is a high-margin business for recurring revenues. That is the next phase of our [three-part] business model — manufacturing, installation and services.
 
Foreign brands in China’s security and surveillance market will charge foreign prices, which are expensive. As a Mainland-based organisation, how does your company market itself?
We aren’t the most expensive, but neither are we the cheapest. [in contrast], American brands do charge a premium, and branding is the most valuable component. But most of it is manufactured in China, and the components inside are almost the same. That’s why the brand value is important.
 
From our perspective, we’re also conscious of brand building. That’s why if you go to China, you’ll see our CSST billboards. And we do not play the zero-sum game in terms of who’s the cheapest, which is why we don’t sell to the retail market. We work with major corporates who demand a certain level of credibility and quality.
 
We don’t buy cheap chipsets. We buy chipsets from Intel, and from Sony, which is probably the most expensive right now but also the highest quality in terms of camera CCDs. We don’t market ourselves as the cheapest, but it’s still cheaper than an international brand.
 
For a lot of players in the China market, they will prefer to support a local enterprise, if it’s a choice and it’s approved. If a lot of the international brands are about 40% more expensive, who would you choose?
 
Before you were listed on the NYSE and the NASDAQ Dubai, what was your strategy for building up your brand? The company started in 2001, doing small assembling. In 2005, we felt that there was a huge opportunity in the security and civilians business, so we decided to get listed, to raise funds and consolidate the market. Like everything else, it just happened that we were in the right place at the right time. Listing on the Bulletin Board was a stepping stone, because back in 2005, our revenues were only about US$32 million. With US$32 million we couldn’t do an IPO anyway.
 
We hired a financial advisor, who said, “Why don’t you buy up all the Bulletin Board shares? You can list yourself on the world’s largest capital market and grow from there.” Listing on the OTCBB (over the counter securities market in the United States) and merging into NYSE certainly helped us a lot in terms of credibility, especially the NYSE listing.
 
Has the market demand for security surveillance in corporations increased since the recession? Perhaps employees under financial pressure are more tempted to commit fraud?
Even from the government sector itself, the demand has certainly gone up a lot, mainly from the need for better safety. The Chinese government actually announced US$20 billion spending on security this year. So we do see that the requirements and the drivers for security from the government sector are growing, given the [rising] crimes rates that we have seen. And the government is also trying to ensure social harmony and social stability. Peace, safety help drive the economy.
 
In the corporate sector, we see that the security market is somewhat anti-cyclical and doesn’t follow the economic sector. If the market goes down and people are scared stiff about crime rates, they’ll have to spend more [on security]. If the market goes up, people overspend more in terms of managing assets.
 
MANAGING THE WORKFORCE IN CHINA
In the Pearl River Delta, there have been a lot of issues with managing factory staff and increasing the minimum wage. How have you dealt with those challenges in your factory?
We don’t really have that many employees compared to other companies. In our main facility, which is CSST’s industrial park in Shenzhen, we have less than 2,000 people. We have a fairly good policy in managing staff morale, so we buy [train] tickets for them to go back home for Chinese New Year. That’s why our factories will close one week before Chinese New Year, because if we close on the day before [the holiday starts], they can never go back home [due to the traffic congestion].
 
From our perspective we have not seen a lot of changes, and we’re still monitoring the situation. Obviously, we don’t have the cheapest pay. Most of our staff are assembly workers.
 
Is there a reason why your staff turnover is low, such as the production line workers possessing specialised skills that aren’t easily transferred elsewhere?
[Part of the reason for low turnover] is the environment we provide. When we first bought the indust�2=���[email protected]��ʱ͢�U�P3�v�;�NS�BP���� They’ve got balconies. They’ve got basketball courts for the people, and we actually allow them to live as they like, they’ve got a lot of shops.
 
We always discourage people to come and visit our factory during lunchtimes because they are sleeping — siesta time. From our perspective, so far we have been treating our employees very fairly.
 
BUILDING UP THE CSST CULTURE
What’s the biggest challenge in keeping your production lines running?
Integrating everyone together is probably one of the biggest challenges. Between 2006 and 2008, we bought a lot of companies. We’re slowly integrating the suppliers, supplier chain, common purchases and common functions. But it takes time and it’s also cultural.
 
When you carry out M&A, you buy up different companies, and each company will have their own culture. It takes about three years for them to eventually say, “We’re from CSST.”
 
We have training sessions and our own internal Outward Bound group. [The staff may say] “I don’t know you”, but after being together, sleeping in the training institute, eating, singing songs, they’ll build an esprit de corps. Whether they are an administrator to a line worker, or a line worker to the middle management, they get to go through this [training] reguarly.
 
Your staff goes into orientation training before entering the company, or is it a yearly event?
For specialised jobs like R&D, accounting personnel are trained at least every year, but factory workers may go through the training programs just once. Our different departments and positions have different training programs.
 
We started in 2009 and we felt that changing a culture was important. For the first half of this year, senior management’s target was to push through at least 1,200 of our staff through the program. The 30-day program teaches them the corporate strategy and culture. Various people, like me, our internal audit team, our media relations person and a few of the other guys will come in and lead a session.
 
Sometimes, I get auditors to come in and teach my finance team on tax, SOX and 404. Then we get the different division managers to come in and ask, “What is my division’s objective?”
 
If you put your finance team in training for 10 days, who runs the ship while they’re gone?
They will split. I’ve got my domestic finance team and I’ve got my external team — 250 people in total. That’s why it’s only 10 days, probably about 30 people each time. Usually, I choose to have them go after the quarter is done, because it’s like a breather.
 
Training is important, to build culture — that’s the biggest challenge. If people don’t buy into your idea, people won’t believe your story or won’t believe in the company objective, and you can never expect them to work 100 percent for you.
 
TRAINING MANAGEMENT STAFF
Is there a company holiday?
Not yet. We do have training every year, where we get 200 of the middle management and senior management, and lock them up, typically in a resort. The manufacturing division will spend 20 minutes with the distribution division and say, “Why don’t you distribute our products?” And then they exchange, “Because your products are not that good”, or “Your price is too expensive”. As a company grows, you don’t get a chance to communicate effectively. They come together once a year to meet face to face, and talk about areas they can collaborate in.
 
It’s good for us to get to know each other. The next time you pick up a phone to call, at least you can recognise the voice and face – then it becomes a lot more personal if you want help.   
 
Do you notice a change in the staff relationships?
When we first started, the different managers were saying, “We don’t have time”. But slowly we start to see there’s a lot of benefit. If you think it’s right, you’ll stick to it and eventually you’ll see results.
 
What about the companies that you’ve acquired? Do you do training with them starting in the third year, or right away?
Regardless of whether we’ve just bought you, or whether you’re already within the company — everyone [gets the training] straight away.
 
Do they embrace the idea of training?
Now they’re starting to. They even do their own videos. They interview the other staff, and they have shots of them climbing up the wall, pushing each other, jumping off the “graduation wall”.
 
In my finance team, they’ve became more aware of the company. Their sense of belonging has definitely increased a lot.
 
In dealing with the Generation Y age group, do you find that the teambuilding is helpful to them?
The majority of our line workers are probably below 20. That’s why we provide basketball competitions.
 
We don’t have a huge age gap in terms of the production line. We do look after our staff, in a sense, trying to be “in [vogue]” with them.

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