The physical security business in 2012 will look to emerging markets, new technologies and M&A (mergers and acquisitions) activity. In the last two years, the physical security industry has given nothing short of a stellar performance. While it will continue to defy gravity in 2012, its performance will decline in some important measures.
Future Growth from BRIC Countries
The aftershock from the 2008 financial meltdown resulted in sovereign debt problems in Europe that are now receiving corrective actions. These will dampen future demand for physical security equipment in Europe, particularly in the public sector.
However, the industry was faced with an even more dire economic situation in 2008, but innovative companies did not cut R&D. Instead, they applied new technologies and developed more attractive products for clients. The industry is stronger and we are optimistic that demand will edge forward at a CAGR of 3.7 percent over the next five years. This will depend upon the emerging markets, particularly China and Asia, delivering higher growth rates.
Figure 1 compares the product sales revenues per capita in four regions against the GDP per capita. This shows the penetration of physical security systems in China and Asia is more than one order of magnitude smaller, while economic growth is at least three times faster than the developed economies of North America and Europe. The BRIC countries - Brazil, India Russia and China - will play a major role in keeping demand growing and increase their market share.
Five emerging technologies have created new business opportunities. They are wireless communications, IP networking technology, video surveillance-as-a-service (VSaaS), managed video, analytics software and security management software, including physical security information management (PSIM) and physical identity and access management (PIAM). The opportunity for these technologies to create new business opportunities is enormous, led by IP networking technology. There are a good number of medium-sized companies, particularly in video, that have developed cutting-edge products and gained market share.
Consolidation and Organic Growth
M&A activity has grown at a compound annual rate of 12.5 percent over the last 10 years. During this time it has peaked and declined twice, doubling value during the last three years to reach its historic peak in 2011 of U.S. $9.847 billion. We forecast the value of deals will decline by 2.5 percent in 2012, despite the fact that the security market will grow by a similar amount, thanks to buoyant markets in the BRIC countries.
In the last three years, the volume of deals has only increased by seven percent, but the value has more than doubled, thanks to a few large deals worth more than $1 billion combined. The two trends in the exit valuation figures is that software and biometric suppliers, together with alarm monitoring companies, have achieved the highest valuations in 2011.
The Majors Review Future Strategies
The major multinational leaders have used merger and acquisition as an important part of growing their business. It is therefore surprising that they have almost abandoned this policy in the last two years. There are a number of reasons why, but current exit valuations is not one of them because they are still well below 2006-2007 levels.
Most have positioned themselves toward the systems business. This has not required major investment and feeds off their heritage estate business, integrating from other parts of their organization such as fire detection, evacuation, mass notification and energy management. We expect them to extend their interest in PSIM and PIAM software to deliver system differentiation in the integration business. One potential market is outsourcing security services, as a result of reduced budgets in the public sector. Through PSIM, PIAM and MVaaS, they would have the ultimate service to offer, with little competition from the smart innovative product manufacturers.