By Jane Ho
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China’s nationwide outbreak of SARS in 2003 may have caused trouble for many businesses but it jump-started Avcon Information Technology, a provider of videoconference and surveillance systems. (And, yes, the two are close cousins.)
“We caught a glance from Lady Luck,” says Liu Xiaolu, 43-year-old cofounder and general manager of Avcon in Shanghai. Basically there are two methods to set up a videoconference system: using PC-based software or using special equipment with embedded software. At that time the China market for such capability was divided up by international giants like Cisco and Polycom of the U.S., which focused on the more profitable equipment business. Avcon, as a new player trying to find a way in, was engaged in less capital-consuming software development.
“The outbreak increased the demand for videoconference but also made it hard to find intercity logistics for equipment shipping,” Liu recalls, “while we only need to remotely install our software on our clients’ computers. Actually we didn’t even meet our first batch of clients until a couple years later.” Avcon collected $1.4 million in sales within a year of its founding in 2003. Last year it made $13 million net profit on $33 million revenue and qualified for FORBES ASIA’s Best Under A Billion (BUB) companies list.
Avcon has been the leader in Internet-based (versus intranet) videoconference systems in China for seven years, with a current 19% market share. It has since expanded into the hardware-oriented intranet as well, though Polycom still dominates that space. Avcon went public on the Shenzhen Stock Exchange in 2010 and today has a nosebleed $727 million market capitalization, even after a recent share-price drop.
“Videoconferencing is a high-tech sector for which high prices are not unusual,” says Shen Jianyong, senior analyst in China for IDC, a U.S. research firm specializing in information technology. “Policy changes, including the loosening of control over the communications industry, also bring out a promising market prospect.”
Liu grew up in Jiangxi Province, where his mother worked with a military aviation group. He got a job there as a technician after graduating with a degree in automation from a local college but left in a few years. “The pay there was far from enough, and no girl would go out with a poor guy like me,” says he.
Avcon’s predecessor was set up in 2000 in Shenzhen by five cofounders, including Liu’s mother and chairman, Liu Yan; his sister, Liu Xiaodan, who came from a finance job; and two of his former colleagues. Liu’s family now has a 21% ownership stake. (And he found a wife.)
Shanghai, with its more favorable policies for tech startups, attracted the company to relocate, plus Liu had a run-in with Shenzhen’s tax office. “One month I made a lot of networking calls and filed for a large amount of cellphone reimbursement, but a local tax officer accused me of fraud,” Liu says. “That was really hurtful.”
After finding its new home, Avcon released its first hit product, Network Video Conference System 4.0, in 2004 after the early versions during SARS. Launch events were held in eight metropolises, including London and Tokyo, and the software was acclaimed.
“But I’d only give it a ‘C,’ as we were just lucky enough to benefit from a concurrent revolutionary development of PC hardware,” Liu says. This advance, including a major boost in graphics card performance, made mature videoconferencing software possible, and Avcon, again with its PC focus, was able to seize on this more quickly than its overseas competitors.
Liu’s modesty doesn’t change the fact that Avcon is one of only three companies in the world–with Russia’s Spirit DSP and Sweden’s GIPS, which was acquired by Google in 2010–to attain cross-platform voice-engine technology. Voice engine is a software system that processes audio data, with functions such as removing the echo from a telephone conversation, while cross-platform means the algorithm is applicable for different types of devices covering PC, iPhone or specialized equipment.
“We considered purchasing such technology and talked with GIPS in 2005, but their offer was too much for us,” Liu remembers. “Without our own technology, each time we run our software on a new device type we’ll have to pay again. Developing voice engine sure wasn’t easy, but it saved us a fortune in license fees.” The company’s R&D expenditure in 2012 totals 17% of its revenue, and 55% of its 850 employees across China are technical staff. Today it holds 89 patents and 47 software copyrights.
With a head start in software, Avcon made a bold move in 2006–it spent $1 million to add specialized videoconference equipment to its product line, exhausting most of its previous profit. “People didn’t value intangible products enough in China, and they still don’t,” Liu complains. Another reason is, he points out, that there are still limitations in PC hardware holding back software design in terms of performance and customization.
Since 2010 the company has launched several industry-specific remote communication systems, which in large part are customized videoconference for sectors like health care, education, construction and insurance. Last calendar year industry-specific systems brought in 50% of company sales.
Now, for instance, with Avcon’s remote damage assessment system an insurance assessor can save a field trip when a car accident happens, using a multimedia terminal installed in the auto repair shop, thus reducing the claim period to as short as one hour. This requires the terminal to be portable, applicable for wireless transmission and able to record while transmitting.
The company provides that technology to People’s Insurance Co. of China and hopes to bring it to top conferencing client China Life Insurance, which also covers property-casualty. China Life contributed 6% of Avcon’s 2012 revenue, and its top five customers together account for 28%. “We have over 8,000 clients across the board, but in each sector we’d like to start with a major player to showcase,” Liu says. “Also, for a large-scale company like China Life, we can barely finish covering all their outlets when a new round of technology innovation starts, and this gives us endless business opportunities.”
Avcon expanded into surveillance in 2012 when it signed a $23 million contract with the Tongren police force in Guizhou Province to supply monitoring systems. Those will constitute part of the SkyNet program, China’s nationwide electronic monitoring network, and Avcon followed with a dozen townships in southeast Guizhou.
“It’s easy to expand from videoconference to surveillance, as the former involves multidirectional data flow and basically contains all the technology needed in the latter, which usually involves one direction,” Liu says. “We are relatively new in this arena, but we have a strong suit.” Bigger surveillance rival Dahua Technology of Zhejiang, a former BUB listee, relies greatly on hardware, while Avcon claims an advantage in software design.
Under the so-called Smart City initiative, the Ministry of Housing & Urban-Rural Development has selected 200 cities since 2012 to set
up such systems, and the total projects–said to advance social services, efficient resource use and “livability”–could reach $70 billion.
Liu has always sought collaboration with the government. Shanghai’s Yangpu Technology Innovation Center helped incubate Avcon. The company has also received several state subsidies, but Liu is wary of those with ambiguous terms on intellectual property. He says, “Avcon prefers subsidies for, say, being the top taxpayer in the district. There’s no strings attached there.”
Despite fears in the West that China is on a state-sponsored technology crusade, Liu thinks Beijing is not doing enough for domestic high-tech ventures. “In some government projects they would choose foreign suppliers like Cisco, even if domestic companies like us have similar or better offers. The reasons are, well, complicated,” he says.
“Domestic high-tech ventures are a driving force for China’s development. What would the government do if none of us survive? Where would it find the technology to build aircraft carriers and contend with the U.S.?”
The company is also a vendor for the Chinese military, but Liu can’t say more. He grew up collecting magazines and blueprints of combat aircraft because he couldn’t afford the models. “Designing aircraft is still my dream job,” he says, “and it always will be.”
In the meantime his software is making some connections easier than taking a flight.