First he builds a tower, then he entertains his guests, and finally the tower collapses.

This phrase perfectly captures the ups and downs of industrial development.

When an industry is on the rise, there are always a few years when the prevailing sentiment is one of “everyone is doing well.” Of course, a booming market and promising prospects are indeed good news for the industry’s development.

However, even when the industry appears to be “all roses,” there are inevitably overlooked variables, risks, and challenges lurking beneath the surface.

Many industries lack sufficient experience and preparation; when the tide recedes, they immediately find themselves “swimming naked.”

Only those industries that quietly build up their strength during the “good times” will be able to weather the “hard times” when the “winter” arrives.

Are the barriers to entry really that low?

When an industry takes off, it’s most prone to a rush of new entrants.

Whether it’s companies from within or outside the industry, or regions with or without an industrial foundation, everyone chants slogans like “seize the opportunity” and “a slice of the market pie.”

Even companies with no connection whatsoever to the sector often announce expansion plans worth billions.

For an industry that appears to be just getting started, are the barriers to entry really that low?

In the wake of the pandemic, the pre-cooked meal industry has gradually entered the public eye. "Meal kits," which were originally aimed primarily at restaurants, have expanded to include "quick-cook meals" for consumers.

The rapidly expanding market boundaries have attracted a large number of new entrants. However, the lack of a competitive “moat” means that those in the industry can only earn a meager living.

Looking at the entire supply chain, beyond ingredient sourcing and processing plants, segments such as cold-chain logistics and equipment manufacturing offer higher value-added potential but also present higher barriers to entry in terms of production and R&D.

It’s easy to enter the industry, but hard to sustain it. While entering the ready-to-cook meal sector may seem straightforward, increasing production value truly requires both companies and local governments to put in some serious thought.

The same holds true for other “booming” industries. Although the artificial intelligence market is expanding rapidly, most companies are still expanding their presence and competing for market share in the low-end segment, primarily relying on a patchwork model of “imported components plus domestic assembly.”

Currently, many regions are eager to “get a piece of the pie” in the robotics industry, and some districts and counties have introduced policies to support related industries. However, due to a lack of necessary conditions, truly capable enterprises are not attracted, while many of the introduced companies are merely “fly-by-night operators.”

Local industrial clusters appear to be gradually taking shape, but they lack competitiveness and do little to help the region attract businesses from across the industrial chain.

The gap itself is not the problem; what is truly concerning is that after achieving some success in attracting investment, local authorities become complacent and fail to identify underlying issues.

As long as we confront the issue of weak industrial foundations head-on, focus on leading enterprises with core competitive advantages within the industry, and simultaneously strengthen the industrial infrastructure and the business environment for enterprise development, we can catch up step by step through determined efforts.

Is Capital an Enabler or a Game?

When a large amount of capital suddenly floods into an industry or a region, it may mark the beginning of its transformation into an “internet sensation.”

Capital is often a double-edged sword; when well integrated with the real economy, it can propel industrial enterprises to rapid growth. Today, for the manufacturing sector to sustain long-term development, the demand for solid manufacturing capabilities and technology-driven innovation is higher than ever.

However, if capital rushes in indiscriminately, it may lead to disorderly expansion of low-end production capacity. We have seen this lesson play out repeatedly in multiple domestic sectors, including photovoltaics, new energy vehicles, and chip manufacturing.

Capital chasing trends makes the industry’s “pie” appear much larger, but in reality, it brings with it a host of substandard products and investments. Among them are companies that merely ride the wave of popularity or aim to “make a quick buck” before disappearing—entities that simply cannot withstand market scrutiny.

In an environment where the tide washes away the sand, companies chasing capital collapsed, resulting in a massive waste of social resources. At this point, local governments and capital markets suddenly “came to their senses” and gradually became more cautious.

This has cut off the energy supply for many companies that had been living in “lukewarm water.” However, it has also accelerated the rise of those companies that have been steadily developing technology and deeply rooted in the real economy.

In recent years, the new energy vehicle industry has shown strong momentum, but this journey has also been marked by both the infusion and withdrawal of capital.

In 2014, the charging station market was opened to private capital, prompting a massive influx of funds from various sources to build charging stations on a large scale. To secure market resources, some operators overinvested in low-cost AC slow-charging stations, resulting in low utilization rates for a large number of charging stations.

By 2018, the fervor in the capital market had subsided. Over the course of two years, the number of companies in the charging station sector plummeted from a peak of over 1,000 to just over 300.

Companies that “do things with dedication” gradually came to the forefront, finally moving away from the “low-price, low-profit” model and able to invest more funds and effort into enhancing their “hard power.”

However, a significant amount of land and social resources had already been wasted, and the development of the new energy vehicle industry was consequently affected to varying degrees.

Amid the “black swan” event of the pandemic, investment activity in capital markets and local industrial funds began to “cool down.” This deprived short-sighted companies of opportunities to exploit the situation, leading to an improvement in the industry’s landscape—moving away from “overnight success” and “fierce shakeouts.”

As is well known, China’s photovoltaic industry has weathered its share of “storms.” There was a time when it was the darling of capital, but the “young” industry moved too fast, leaving a mess in its wake when the tide receded.

Having learned from these painful lessons, and guided by market demand and national policies, PV companies have gradually mastered the key crystalline silicon technologies that once “defeated” many competitors. The conversion efficiency of monocrystalline and polycrystalline silicon cells has now entered the industry’s top tier.

This demonstrates that for industrial development, capital only serves as an enabler when it enters the market in an orderly and healthy manner. Otherwise, it may merely be a game.

Stepping Back to View the Industry

Although companies within the same industrial chain are like “grasshoppers on the same string”—where a tug on one affects the whole—

However, even grasshoppers on the same string have different “meals”—some get the broth, while others get the meat.

In July of this year, a remark by Zeng Qinghong, Chairman of GAC Group, went viral: “With battery costs accounting for 60% of a car’s price, am I not essentially working for CATL?”

If we shift our focus to the lithium-ion battery supply chain, CATL is also navigating a period of rapidly rising raw material prices. From this perspective, automakers are effectively working for CATL, while CATL is, in turn, working for its raw material suppliers.

This situation is not unique to the new energy vehicle industry; the photovoltaic industry faces the same challenges. The sharp rise in upstream polysilicon prices has impacted the profitability of midstream module manufacturers, while downstream construction demand has also been suppressed to some extent.

To view an industry from a broader perspective requires us to examine its development from the standpoint of the entire supply chain. If we focus solely on a single segment, our understanding of the industry’s development may be incomplete.

For an industry to develop in a healthy, sustainable, and orderly manner, every link in the chain must enjoy its fair share of reasonable profits. If some “eat the meat while others drink the soup,” the ultimate outcome may backfire on the development of the entire industrial chain.

In addition to viewing industrial development from a broader industry perspective, we can also examine it from a regional perspective. This year’s initiative to “establish a unified national market” requires regions and investment promoters to adopt this approach.

The current model of industrial development, where different regions and sectors operate independently and in isolation, has a certain impact on fair market transactions and competition. Establishing a unified national market will help break down barriers between domestic industrial and supply chains, eliminate institutional barriers between industries, and improve the efficiency of resource allocation.

While strengthening industrial, supply, and innovation chains, this will enable domestic industries to integrate more rapidly into global industrial value chains and seize the initiative in global industrial upgrading and transformation.