The Pelco Progression

Which regions are you forecasting most of the growth potential?

It’s not rocket science because it’s the ones everybody and their brother are chasing as well. We are investing pretty heavily in China. The Middle East for us is very strong. Brazil is very strong. I could almost say the BRIC countries. India is more difficult because it has some different market dynamics. But China is one of those markets you can’t afford to fail in. You can’t afford not to try, let’s put it that way. You might fail, but you can’t afford not to try. China is a very specific focus for us, as is the Middle East and Brazil.

How do you compete in China with all the low-cost products there?

You have to know where you can be successful. There are markets there that appreciate what I’ll call multinational companies that value legacy, history, quality, reliability. A lot of that is the infrastructure work, railways, city surveillance. There is appreciation in that market for differentiation and/or
value and they tend to look to multinationals for their solutions. That’s where we’ve been able to play.

We are being realistic. We focus on the areas we think we can win, and even those areas alone are growing at such rates that you can get substantial growth. But we also recognize there is a huge part of that market that we’re not kidding ourselves.

Are you manufacturing specific product lines in China?

The initiative we kicked off is to build there what we are primarily selling in China. The reason we are there is to lower our cost base so we can be more competitive in that region. The products we sell there today from a camera standpoint are Spectra and Esprit. We do a lot of city surveillance and a lot of transportation, a lot of government buildings.

Does the China plant effectively replace production at the Clovis, Calif., campus?

I’ve answered that question standing on the production floor here in the Clovis. There are a couple of variables working on us. We have a good line of business in China today that is under pressure for two reasons: No. 1, price; no different than anybody else. The other thing, particularly on a lot of state projects in some provinces, there are indications there is a requirement that the products being sourced must be made in China. One could claim if we didn’t do something different we are going to lose that volume anyway, and the jobs would have went away here anyway. That is less volume we would have to manufacture anyway.

I always say, ‘Are we transferring jobs to China? If our year to year volume is flat and we don’t grow globally, then I guess you would say the answer is yes.’ Another way to look at it is if we don’t do it that volume might have went away anyway and we would have had to reduce the staff here anyway. To me it’s not an option. We can’t manufacture in Clovis, Calif., and expect to be competitive and serve the China market.

In January the company cited increased manufacturing efficiencies as a contributing factor to why layoffs occurred. How did you achieve these efficiencies?

Twofold. The majority of it is labor efficiency. We spent millions in 2009 investing in and implementing Lean manufacturing techniques. We completely ran through this entire facility. We totally changed the material flow. At one point, we mapped a product and realized it went through five different buildings before it was shipped. It was a function of how we grew up.

We started with a clean sheet of paper and reloaded out the material flow throughout the facilities. So now a product begins and ends in a particular building; it doesn’t bounce around between buildings. Then, we also built and consolidated. We had a number of surface mount machines in multiple buildings and so we built a very large, single printed circuit board assembly room with temperature and humidity control, and consolidated all of the assembly operation. This really improved our yields and our efficiencies. It was through all of that that we made a dramatic change from a manufacturing standpoint.

We made some moves early in ‘09 in recognition of that efficiency. We went to furloughs for a long part of ‘09 so we could retain the workforce so we didn’t have to let people go in hopes that later in the year we might be able to see a turn in this recession and see volume pick back up. But we came to the realization this thing is going to be more a long haul than a quick recovery. Furloughs every Friday is not a sustainable approach, in my opinion, for the company or the employee.

How is the co-branding partnership with Cisco working out?

We have a significant number of resources committed and dedicated on both sides that really work together as a team. We probably have married up almost a dozen people on both sides who are working multiple work streams on numerous issues — technology, manufacturing, licensing, etc. We are both very pleased with the progress we have made in the last five months.

What do you make of the nagging question, ‘Is Pelco abandoning analog?’

If you sat in my shoes you’d laugh. It’s the majority of our sales. We know that this industry is dealing with a transition; the current forecast is something like another three or four years when IP volume might surpass analog volume. There is just no way we can abandon analog. Even if we wanted to we can’t. It would probably put us out of business. Are we going to abandon analog? Absolutely not. That would be craziness.

I do understand why people ask it. We talk about IP all the time. Who does stand around and talk about analog a lot lately? That doesn’t mean it’s not a good business or a viable business. We continue to support analog and move forward because it is our business. When you boil that question down, really what we’re talking about is, ‘Are you going to abandon analog cameras.’ Because if you think about it, Pelco doesn’t just do cameras, we do recording solutions and viewing solutions as well. And then we do peripherals on top of it, mounts and the other stuff. It’s not a peripherals question. It’s not a monitor question. It’s not a systems question. When you think about all of our recording solutions everything is now hybrid. We do analog and IP on the same device. So it’s not a recording question because we are helping our customers transition and migrate, if and when they want to.

Really it’s a question about, ‘Are you going to get rid of analog cameras?’ We have analog cameras. We have encoders. We have no reason to get rid of analog because look at the installed base in the world — it’s huge and people want to add to their system so we continue to offer analog. We’ve always been the leader in analog so it would make absolutely no sense for us to abandon analog.

Since being acquired by Schneider has there been any shift in philosophy in terms of selling to and serving both the dealer and end-user customers?

We sell through the channel. We don’t sell to the end user. That has always been the strategy of Pelco, it hasn’t changed.

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