Industry scarcity is fluid
An important reason why it is difficult for companies to make money is the scarcity of the industry. Every industry has its scarce links. In an industry, who can make money depends on who is more scarce. For example, from raising cattle to processing milk in factories to selling milk on supermarket shelves. In this industry, if raw materials are scarce, the source cattle farm will make money; if the efficiency of the production process is scarce, then the processing plant will make money; if the ability to reach users is scarce, then the supermarket will make money. Under this logic, if you do not make money, it may be that the scarcity of your link has flowed away.
What’s the meaning? For example, live e-commerce companies look at traffic in the short term, supply in the medium term, and brands in the long term. Live streaming e-commerce made money from traffic in the early days, so many anchors and MCN organizations made money. But there are too many people rushing in, so there must be a surplus of them in the near future. At this time, high-quality supply chains will become scarce. Who can find really good products, who can find a high-quality supply chain, continuous, stable and fast delivery, and stable price and quality, is the scarce ability. If everyone has the ability to find a high-quality supply chain, then in the future, the scarce ones will become brands.
The same goes for the electric car track. If you find out at the beginning that electric vehicles are scarce, then Tesla, Weilai, Ideal, and Xiaopeng will make a lot of money at this time. But, slowly, every company started making electric cars. More and more major mainstream manufacturers have also entered the game, and complete electric vehicles are no longer scarce. At this time, the scarce thing is the battery. Similarly, when there are more and more battery manufacturers, lithium mines become scarce. As a result, the price of mines began to rise.
It can be seen that the scarcity of the industry will flow. You can change careers, or you can choose not to change careers, and flow with scarcity upstream and downstream. For industries with huge investments like new energy, there is usually a strategy called backward integration. The competition starts from the front end, and as the intensity increases, the competition will continue to push back one by one. From the competition of complete vehicles to the competition of batteries, it has become the competition of lithium mines. You can choose early, before the competition has entered the back-end, start to do backward integration, that is, go backward, go upstream, go to raw materials.
BYD makes its own batteries, and Ningde era buys lithium mines overseas, which is essentially backward integration. However, backward integration is not to be a hegemon, nor is it to be a whole industry chain, but to gain certainty for oneself under the circumstance of scarcity and flow. There are many purposes for extending upstream: one is to ensure the stability of its own supply chain; the other is to reduce production costs, ensure its own price advantage, improve competitiveness, and even supply to other manufacturers.
Backward integration is a very important strategy to solve the scarcity flow. It is massive and expensive. Whether or not an enterprise wants to enter such competition depends on the important basis for its judgment: barriers to entry and barriers to exit.
Whether the entry barrier of an industry is high or not depends on how easy it is to enter the industry. The higher the barrier to entry, the greater the risk. Because the investment in the early stage is huge, once you enter, no one will quit easily no matter how fierce the competition is. Its advantage is that because the barriers to entry are high, not many people are willing to enter such an industry.
At the same time, it also depends on whether the exit barriers of an industry are high or not. One day, you find that you can’t go on, can you quit more easily? Can the assets, production lines, etc. you hold be transferred soon? If when you exit, no one is willing to take over, or you have to take a deep discount to sell, then the exit barrier is high. If the exit barrier is not high, or you can easily dispose of the assets in your hands, it means that these assets are highly liquid.
If an industry has high barriers to entry and high barriers to exit, the industry is highly competitive. Because once all the players get in, they have to play to the end, and they will compete fiercely and continuously. To judge whether an industry needs to do backward integration, it depends on the entry barriers and exit barriers. If you are in such an industry, early backward integration will give you a chance to gain a relatively large advantage in this industry.
