RUSSIA SECURITY MARKET SECURITY INDUSTRY ASSOCIATION REPORT Security Industry Association Mission Statement To proactively represent SIA members in the global security and life safety markets in order to ensure a safer world. Founded in 1969, SIA is an international trade association whose membership has grown to almost 400 companies from every segment of the electronic security industry, including access control; biometrics; surveillance cameras and systems; fire detection and suppression; home automation; intrusion; remote and wireless monitoring; personal security products and response systems; mobile security; and many other specialized services. SIA s programming, products, and services fall into four core areas: education & training, government relations, research & technology, and technical standards. SIA s Research & Technology Department provides high quality, actionable data and analysis on a variety of issues in the global security industry by collaborating with the best international research organizations available. Groteck, a security market consultancy for Russia and CIS countries, to conduct the market research study for the SIA Russia Security Market Report. Groteck maintains a regularly updated database of securitydistributors and installers, and holds long standing relationships with major companies and players in the Russian security market. Established in 1992, Groteck has enjoyed over 15 years of successful operation and publishes more than 20 industry magazines and newspapers. Groteck mission statement Groteck provides up-to-date information to professional societies. Project team Sergey Trapani, Alexander Vlasov, Gennady Makarov, Julia Tsimakhova, Irina Vodopjanova, Irina Lebedeva, Olga Fedoseeva, Anastasia Miroshkina, Linda Lippner All rights reserved; reproduction in whole or part without prior written permission is prohibited. 2008 by the Security Industry Association Russia Security Market Report 2 Introduction
Security Industry Association Forward Dear Colleague: Russia s recent robust economic growth and its impending entry into the World Trade Organization (WTO) are all good signs for any business that plans to open in Russia, including electronic security companies. Russia s long delayed entry into the WTO will likely be realized this year, removing many barriers to trade and foreign direct investment. The Russian government hopes to wrap up the process to gain full WTO membership by this summer (2008). The Security Industry Association (SIA) and the Russian Security Industry Association (RASI) are partnering on a range of new initiatives designed to enhance industry relations and build market opportunities between the two countries. As a result of a 2007 signed Memorandum of Understanding (MOU), the industry organizations plan to cooperate on a number of programs designed to promote business and market opportunity, while building awareness of the impact of the security industry in both countries. The Russia security market is growing at a double-digit rate for the past few years and it expected to continue at that rate through 2012. By partnering with RASI, SIA is able to position our members to capitalize on this lucrative market. SIA is pleased to be associated with such a high-caliber organization and we look forward to a long and prosperous relationship. The SIA Russia Security Market Report looks at opportunities for security companies that want to enter this rapidly expanding market. The report defines and quantifies the current size of the electronic security market and its short-term future growth. The report includes an overview of the general economic, social and business environment in Russia today. An in-depth analysis of the electronic security market in Russia, its drivers and restrainers, laws and regulations, follows. Detailed supplier profiles, and analyses of vertical markets wraps up the report. This report is an essential strategic planning document for any electronic security business that plans to do business in Russia. The SIA Russia Security Market Report would not have been possible without the extensive efforts of SIA research team, Mark Visbal and Linda Yelton, and Groteck researchers Sergey Trapani, Alexander Vlasov, Gennady Makarov, Julia Tsimakhova, Irina Vodopjanova, Irina Lebedeva, Olga Fedoseeva, Anastasia Miroshkina Linda Lippner, who worked to produce an accurate and high quality study. This report is a testament to their collective knowledge, experience and commitment to excellence. Sincerely, Richard W. Chace CEO and Executive Director Security Industry Association Russia Security Market Report 3 Introduction
Table of Contents Executive Summary.......................................................................... 10 Chapter 1. Introduction...................................................................... 13 1.1 The Russian Security Market: general characteristics........................................... 14 1.2 Volume of the Russian EPS equipment market and development trends........................... 15 1.3 Russian EPS market by sectors.............................................................. 16 1.4 Different types of security purchases according to consumer.................................... 17 1.5 Government regulation and its influence on the market........................................ 17 1.6 Main driving forces for market growth....................................................... 18 1.7 Technical aspects of EPS equipment market development in Russia............................... 18 1.8 Competition and Primary Players............................................................ 19 Chapter 2. Russian Economy.................................................................. 22 2.1 Economic structure....................................................................... 23 2.1.1 Infrastructure........................................................................... 26 2.1.2 Financial Services....................................................................... 35 2.1.3 Telecommunications..................................................................... 39 2.1.4 Fiber Optic Communications.............................................................. 42 2.2 Major Foreign Direct Investors.............................................................. 46 2.3 International Organizations and Commercial Agreements....................................... 49 2.4 Legal Environment........................................................................ 54 2.5 Labor Legislation and Policy................................................................ 64 2.6 Foreign Direct Investment................................................................. 67 2.7 Tax System.............................................................................. 76 2.7.1 Income Tax............................................................................. 81 2.7.2 Foreign Investment Statute............................................................... 81 Chapter 3. The Market........................................................................ 83 3.1 Introduction.............................................................................. 84 3.2 Consumers. General Groups................................................................ 86 3.2.1 Corporate and State Consumers: Branches.................................................. 91 3.2.2 Corporate and Government Consumers: Government and Commercial Purchases................. 95 3.2.3 Government Regulation of the Security Market.............................................. 98 3.2.4 Corporate Consumer.................................................................... 101 Russia Security Market Report 4 Table of Contents
3.3 Competition............................................................................ 107 3.3.1 Share of Majors in Projects and Sales..................................................... 111 3.3.2 Main Factors of Competition for Suppliers and Producers..................................... 116 3.4 Market Size............................................................................. 119 3.5 Residential.............................................................................. 129 3.5.1 Homes & Security..................................................................... 130 3.5.2 Protection types........................................................................ 131 3.6 Companies............................................................................. 136 3.6.1 Market Volume........................................................................ 136 3.6.2 Retail................................................................................. 139 3.6.3 Financial Sector........................................................................ 142 3.6.4 Oil and Gas Industry.................................................................... 147 3.6.5 Industry - Mechanical engineering, metallurgy, processing industries........................... 152 3.6.6 Power Engineering..................................................................... 154 3.6.7 Transportation......................................................................... 155 3.6.7 Small and Medium Businesses........................................................... 156 3.7 Market Tendencies...................................................................... 159 Chapter 4. The Industry...................................................................... 164 4.1 Video Surveillance....................................................................... 165 4.2 Physical Access Control Systems........................................................... 171 4.3 Alarm systems market.................................................................... 177 4.4 Fire alarm systems...................................................................... 181 Appendix 1: Russia s Social and Economic Makeup.............................................. 187 Appendix 2: Criminal Statistics............................................................... 195 Appendix 3: Legal Restrictions to the Incorporation of Security Companies.......................... 198 Appendix 4: List of major companies with shares in Gazprom (July 1, 2006).......................... 203 Appendix 5 : Russia s Construction Statistics................................................... 205 Russia Security Market Report 5 Table of Contents
List of Diagrams Diagram 1: Expert assessment of the income distribution and market share between the installation organizations at the Russian projects market.............................. 19 Diagram 2: Expert assessment of the distribution of income generated by the scales of ACS technical devices at the Russian market......................................... 20 Diagram 3: Cargo transportation according to transport types...................................... 27 Diagram 4: Passenger use of transportation..................................................... 28 Diagram 5: Concentration of federal public roads................................................. 30 Diagram 6: Shares of the Russian telecommunication market....................................... 40 Diagram 7: Mobil users and mobile penetration rate.............................................. 40 Diagram 8: Share of government and corporate companies, small and medium businesses and individual consumers in EPS equipment purchases in Russia............... 86 Diagram 9: Share of companies and individuals in the EPS equipment market in Russia................ 87 Diagram 10: Share of government and corporate consumption in term of branches in the amount of sales of EPS equipment in Russia.......................................... 91 Diagram 11: Government purchases and the main areas of sales were received as a result of telephone interviews from 121 industry experts..................................... 92 Diagram 12: Ratio of electronic physical security equipment purchases in monetary terms and in physical terms in the controlled and commercial sectors.......................... 96 Diagram 13: Division of types of regulation according to equipment type............................. 98 Diagram 14: Main regions of business activity in the security industry.............................. 101 Diagram 15: Availability of uniform EPS equipment regulation documents in large consumer companies with developed branches...................................... 101 Diagram 16: The degree of centralized decision making, concerning EPS equipment purchases......... 102 Diagram 17: The centers of business activity in the area of technical security devices.................. 103 Diagram 18: Industry experts evaluation of the degree of competition.............................. 108 Diagram 19: Consumer experts evaluation of the degree of competition............................ 108 Diagram 20: Industry experts assessment of profit distribution between installation companies........ 111 Diagram 21: Industry experts assessment of profit distribution from the sale of access control systems........................................................... 112 Diagram 22: Industry experts assessment of profit distribution from the sale of fire and security alarm systems........................................................... 112 Diagram 23: Industry experts assessment of profit distribution from the sale of Russian produced fire and security alarm systems........................................... 113 Diagram 24: Industry experts assessment of profit distribution from the sale of foreign produced fire and security alarm systems........................................... 113 Diagram 25: Industry experts assessment of profit distribution from the sale of video surveillance devices.............................................................. 114 Diagram 26: Experts analysis on market distribution according to the types of equipment in terms of the price............................................................. 115 Diagram 27: Profit distribution scale of the video surveillance market from sales of separate types of equipment...................................................... 116 Diagram 28: Sales volume by EPS type in terms of consumer price................................. 120 Russia Security Market Report 6 List of Diagrams
Diagram 29: Distribution of industry respondents according to their activity on the security market.................................................................. 124 Diagram 30: EPS segments.................................................................. 125 Diagram 31: Respondents by region........................................................... 129 Diagram 32: Respondents Internet connection.................................................. 130 Diagram 33: Market portions of government and private control panel system companies............. 132 Diagram 34: Monthly cost of control panel guard services, that city residents are willing to pay......... 133 Diagram 35: Acceptable reaction time for a control panel service supplier........................... 133 Diagram 36: EPS devices used by the upper and middle classes................................... 134 Diagram 37: Property insurance among those with technical security devices........................ 134 Diagram 38: Existing and potential demand for security systems in the upper and middle classes....... 135 Diagram 39: EPS consumption by corporate companies in millions of US dollars..................... 136 Diagram 40: distribution of security expenses at retail companies.................................. 140 Diagram 41: Retail trade dynamics............................................................ 142 Diagram 42: Distribution of EPS purchases in the financial sector.................................. 143 Diagram 43: The ratio between the capital at Russian banks and GDP............................... 145 Diagram 44: Russian bank assets and GDP as compared to the same values for other G8 members..... 145 Diagram 45: The volume of granted consumer credits............................................ 146 Diagram 46: The volume of mortgage indebtedness............................................. 146 Diagram 47: Industry-wide distribution of EPS costs............................................. 149 Diagram 48: Distribution of EPS expenses in the industrial sector.................................. 152 Diagram 49: Capital consumption in branches of industry......................................... 153 Diagram 50: The structure of sources of financing of capital investments of enterprises................ 153 Diagram 51: Distribution of EPS expenses in the power engineering branch......................... 154 Diagram 52: Distribution of EPS expenses in the transportation industry............................ 155 Diagram 53: Small business expenses on EPS devices............................................ 156 Diagram 54: Small businesses in Russia, divided into sectors...................................... 157 Diagram 55: What percent of consumers are using network data transfer?........................... 166 Diagram 56: Do you plan to use network infrastructure for video transmission in the future?........... 166 Diagram 57: Do you use IP cameras?.......................................................... 167 Diagram 58: When will IP cameras become as popular as analog cameras?.......................... 167 Diagram 59: Popular brands of access control systems........................................... 172 Diagram 60: Popular brands of identification control systems...................................... 172 Diagram 61: Popular producers............................................................... 173 Diagram 62: Population of the Russian Federation............................................... 187 Diagram 63: Residential buildings put into operation in 2005 and 2006.............................. 205 Diagram 64: Shares held by individual regions in total housing area put into operation............... 206 Diagram 65: Total area and new office construction project in Moscow.............................. 210 Diagram 66: Distribution and growth of offices in St. Petersburg................................... 210 Diagram 67: Growth rate and total area of sales centers in Moscow................................ 211 Diagram 68: Sales facility area growth in St. Petersburg.......................................... 212 Russia Security Market Report 7 List of Diagrams
List of Tables Table 1: Descriptions of security technologies.................................................... 15 Table 2: Russian market for security in 2006-2008................................................ 16 Table 3: Main consumers of security systems.................................................... 16 Table 4: Share of consumer spending on security by technology.................................... 17 Table 5: Year over year output growth by sectors................................................. 23 Table 6: Volume of transportation routes in length................................................ 26 Table 7: Density of routes..................................................................... 27 Table 8: Access of independent gas producers to the gas transportation system....................... 33 Table 9: Credit organizations.................................................................. 36 Table 10: International credit ratings of Russian insurance companies................................ 38 Table 11: Facilities commissioning in communication networks..................................... 41 Table 12: Estimated communications development............................................... 42 Table 13: General information of the companies leasing communication channels..................... 45 Table 14: The Russian Federation Codes......................................................... 55 Table 15: Foreign investments by type of economic activity........................................ 68 Table 16: The amount of foreign investments in the Russian economy by investing countries............ 69 Table 17: Major taxes........................................................................ 77 Table 18: Share of large state and corporate consumers, small and medium businesses and individual consumers of EPS equipment purchases in Russia............................... 88 Table 19: The share of consumers in the total amount of EPS equipment purchases in Russia........... 90 Table 20: Distribution of interview data, assessing the volume of the Russian EPS market.............. 120 Table 21: Distribution of answers, assessing the volume of the Russian EPS market................... 121 Table 22: Total amount that consumers pay for security projects................................... 122 Table 23: Consumer experts recalculating experts No. 1 s data..................................... 123 Table 24: Types of security equipment not included in the research................................. 126 Table 25: EPS equipment purchases by industry................................................. 137 Table 26: Sectors of trading networks in which the consumer experts work.......................... 140 Table 27: Answers from consumer experts as to how much of the retail budget goes toward EPS systems and physical guard services........................................ 140 Russia Security Market Report 8 List of Tables
Table 28: Budget for EPS and physical guard services............................................ 141 Table 29: Physical and technical security expenses at retail stores.................................. 141 Table 30: Distribution of expenses on technical security devices.................................... 141 Table 31: Russian video surveillance companies, products, brands................................. 170 Table 32: International video surveillance companies operating in Russia............................ 171 Table 33: Russian physical access control systems companies, products, brands...................... 176 Table 34: International physical access control systems companies operating in Russia................ 176 Table 35: Russian burglar alarm companies, products, brands..................................... 180 Table 36: International burglar alarm companies operating in Russia................................ 180 Table 37: russian fire alarm companies, products, brands......................................... 185 Table 38: International companies doing business in Russia....................................... 185 Table 39: Economic figures on Russia.......................................................... 188 Table 40: Socio-economic situation in various Russian regions..................................... 189 Table 41: Major economic areas.............................................................. 191 Table 42: Price indexes...................................................................... 192 Table 43: Population s income level in 2006..................................................... 193 Table 44: Unemployment rate................................................................ 194 Table 45: Number of registered criminal offenses................................................ 195 Table 46: Largest increase or decrease in registered crime........................................ 195 Table 47: Rates of registered crime, as per specific offense descriptions............................. 196 Table 48: Russian compulsory certification systems applicable to the safety/security sector............. 199 Table 49: Federal executive authorities responsible for licensing of specific activity lines pertaining to the safety/security sector............................................ 201 Table 50: Major companies with share in Gazprom............................................... 203 Table 51: Regions with the highest average residential building construction costs.................... 207 Table 52: Residential building construction in Russian constituent entities........................... 208 Russia Security Market Report 9 List of Tables
Executive Summary Russian economic growth and its impending entry into World Trade Organization (WTO) are all good signs for businesses that plan to open in Russia, including electronic security companies. Russia is currently the world s eleventh largest economy, according to the World Bank. It has been growing at a rate of approximately 7% annually since the financial crisis of 1998. Last year, the economy broke through the trillion dollar mark. Initially driven by the worldwide rise in oil prices, increased consumer demand has played a larger role in economic growth for the past five years. A 2007 survey of the Russian population revealed that 80% of Russia s 140 million residents consider themselves middle class. Personal income grew by 14% in 2007, which has increased the buying power of Russian consumers, including consumers of electronic security. Russia s long delayed entry into the WTO could be realized this year as many of the barriers are being worked out. Talks with the US and the EU on agricultural subsidies and intellectual property rights are ongoing and progress is positive. WTO accession requires Russia to liberalize foreign trade and foreign direct investment (FDI) policies. The Russian government hopes to wrap up the process to gain full membership by this summer (2008). In anticipation of WTO accession, FDI rose 70% in 2007, led by the United States, which invested $193 billion in Russia. The Security Industry Association (SIA) and the Russian Security Industry Association (RASI) are partnering on a range of new initiatives designed to enhance industry relations and build market opportunities between the two countries. As a result of a 2007 signed Memorandum of Understanding (MOU), the industry organizations agreed to release the SIA Russia Security Market Report, the first of its kind study to define and quantify this dynamic market and its short-term future growth. The report examines the markets for electronic security including access control, video surveillance, intrusion and fire detection and alarms, and perimeter control. It also profiles top vertical markets and top security players in Russia. The Russian economic environment and regulations for foreign direct investment are also discussed. The report serves as a guidebook for security companies that want to open in this market. SIA commissioned Groteck, a security market consultancy for Russia and CIS countries, to conduct the market research study for the SIA Russia Security Market Report. Groteck maintains a regularly updated database of security distributors and installers, and holds long standing relationships with major companies and players in the Russian security market. Established in 1992, Groteck has enjoyed over 15 years of successful operation and publishes more than 20 industry magazines and newspapers. Groteck conducted in-depth interviews with hundreds of electronic physical security equipment manufacturers, distributors, and integrators, government agencies and end users. The robust methodology served to define the Russian security industry and identify business opportunities in this rapidly growing market. Groteck also leveraged its internal knowledge base and utilized data from key local sources of information, such as statistical agencies, government and industry organizations to make this report comprehensive. Summary data include: In 2006, the market for electronic security (video surveillance, access control, burglar /fire alarms and perimeter control) was estimated at US$1.1 billion (1% of GDP) The growth rate from 2005 to 2006 is estimated at 15%, twice the rate of GDP In 2007, the industry is estimated to have grown 19% over 2006 to total US$1.3 billion Russia Security Market Report 10 Executive Summary
Share of Russian Security Market by Technology 2006 2007 2008 Video surveillance 35% 37% 39% Access control 25% 25% 26% Burglar/fire alarms 20% 20% 18% Perimeter control 20% 19% 18% Video Surveillance accounts for the largest share of spending and the fastest growth. In 2006, spending estimated at US$385 million By 2007, spending is projected to have grown 25% to US$481 million Major end-users are retail and financial institutions, transportation, oil & gas production and industrial facilities Digital video entered the market in 2003 on local area networks Access Control is the second fastest growing technology sector in the Russian electronic security market. In 2006, spending estimated at $US275 million By 2007, spending is projected to have grown 18% to US$325 million Major end-users are retail and financial institutions, transportation, oil & gas production and industrial facilities RFID is gaining popularity Passport requirements of US and EU push growth in biometrics Integration with network based business systems is growing Burglar and Fire alarm systems is the third ranked technology sector in the Russian electronic security market. Growth in this sector, although robust, is slowing down slightly due to saturation in the residential and retail markets In 2006, spending estimated at $US220 million By 2007, spending projected to have grown 18% to US$260 million Major end-users are residential property and small to medium businesses Must be certified by Okhrana There is a trend toward integration with access control and building systems Perimeter Control is the fourth ranked technology sector in the Russian electronic security market. Demand for perimeter control is strong, but growth is slower than other technologies. In 2006 estimated at $US209million By 2007, projected to have grown 18% to US$247 million Major end-users are the government and power production facilities Russia Security Market Report 11 Executive Summary
SIA s Russia Security Market Report is an instruction book for security professionals who want to enter the Russian market at any level. This report not only includes an overview of the general economic, social and business environment in Russia today, with a short term forecast, but also contains a highly detailed in-depth analysis and forecast of the market for electronic security in Russia. Quantitative methodology was used to ensure that the broadest sample of experts and end-users were interviewed for their market knowledge. In addition, the report provides detailed supplier profiles, and analyses of vertical markets. An overview of laws and regulations that apply to the security industry is also included. Whether you are already doing business in Russia, or plan to, you must read this report. Russian Security Market Segments Government Small/medium business Retail Financial *Oil/Gas *Industry *Power Production *Transportation Other commercial *Residential 0% 5% 10% 15% 20% 25% Share of electronic security market Russia Security Market Report 12 Executive Summary