I. Industry pattern
Many people in the study of a business, will focus on the growth of this business in the industry, of course, this is no problem. But if you just look at the growth space of the industry this is not right, for example, the Internet, the industry development space is very large, then many people will think that this enterprise has potential, such as a certain manufacturing industry, the industry to the ceiling, it will simply think that this enterprise has no potential.
In fact, to determine the long-term growth of a company in addition to the industry space, I am afraid that the most ignored is the industry competition pattern, in a sense, the competition pattern is more important than the industry space.
Some industries, such as clothing is a trillion-dollar industry, people spend more and more money on dressing up, the industry development space is very large, but this industry is difficult to come out of the big companies. Because this market is a market of disorderly competition, hundreds of thousands of companies engaged in the garment industry, millions of companies, and the consumer demand for personalized clothing is too large, brand loyalty is very low.
But some industries, the market will slowly to a few companies concentrated, the formation of a solid industry competition pattern, and this pattern is difficult to be broken, at this time the industry if the high-speed development, the industry’s leading companies will get faster development speed and higher profits.
One of the best examples is the air conditioning industry, from a dozen brands many years ago to now Gree and Midea in an absolute monopoly. Why does the industry move from fragmentation to concentration? Because the air conditioner is a relatively standardized product, air conditioning is not like clothes, everyone has a different style of dressing. Consumers in buying air conditioners mainly look at the performance of the product and brand strength, then the stronger companies in the industry will increasingly win the favor of consumers, and eventually the market will be concentrated in the hands of one or two companies.
When the market pattern becomes more and more stable, the profitability of the leading companies will become higher and higher, because the larger the scale, the lower the production costs, while the selling price can also slowly increase. An interesting phenomenon is that, in previous years, the high inventory of the air conditioning industry, Gree and the United States to find ways to reduce prices to eliminate inventory, but the strange thing is that the year-end statements out of a look, the profit margins of the two companies but also rose, price reduction is just a slogan, in only two strong industry, although the two companies fight to the death, but in the sales side will form a tacit understanding that never play a price war, if one party If one party significantly reduce prices, the other party can only reduce prices, so that the industry pattern is disrupted, we have no money to earn, and prices down after trying to rise back is very difficult, so we will not reduce prices, are making a lot of money. If there are many players in the air conditioning industry? Price war will let everyone have no money to earn.
Like the beer industry, now too many brands of beer, are not much money, until the industry to eat small, mergers and acquisitions finally only one or two left, the value is out, like Coca-Cola and Pepsi, because there are only two left, the two sides will be very tacit agreement to stabilize the selling price in a range, this range we have a relatively good profit.
Gree Electric’s share price has risen hundreds of times over the past decade, has the industry grown a hundred times? Far from it, because the industry is constantly concentrated, in the process of concentration, profitability and rising, you see Gree ten years ago the net profit margin of only 3%-4%, now reach 14% to 15%. Such a company will significantly exceed the industry’s rise, the industry rose ten times, the company has risen a hundred times.
This is the power of the industry pattern, industry pattern is far more valuable than the growth of the industry itself to study.
So what kind of industry can go to concentration? This involves the industry characteristics, product characteristics and competitive advantages of the issue, with competitive advantages of the enterprise is ultimately the beneficiary of industry change. The two aspects involving industry characteristics and product characteristics I summarized the following points.
The increase in industry concentration means that many participating companies exit the market, usually because of losses or lack of excess returns. There are three factors that lead to the increase of industry concentration: industry recession, industrial upgrading, and user convergence.
1、Industrial recession
When the industry is in recession, all incumbent companies have a hard time, such as the steel industry. For example, the U.S. Steel, founded in 1901, was formed by the merger of a dozen companies such as Carnegie Steel and United Steel, which had controlled 65% of U.S. steel production. It has annexed more than 50 companies, and the concentration of the U.S. steel industry has been increasing. The stock price fell all the way after peaking in 2007, averaging down to an ROE of less than 4%, with no excess return at all.
POSCO was called “the world’s most efficient steel company” by Munger, Munger bought at the bottom in 2008, but POSCO is no longer good enough to withstand the next nearly 10 years of industry recession, ROE has been declining, and in 2015 was close to a loss. Munger summed up the lesson saying, “For a long time, POSCO was almost a local monopoly in Korea …… But POSCO is a case study for everyone to ponder, and it shows us how harsh reality can be.”
Recession means that it is difficult to have excess returns, because of the availability of business resources, many competitors in the recession died, and may be resurrected in the recession again or the emergence of new rivals, the so-called “wildfire can not be burned, spring fly blowing again”. Therefore, it is difficult to have investment opportunities in declining industries even if the concentration of the industry has increased significantly. This kind of concentration increase generally occurs at the end of the industry development.
2、Demand upgrade
Demand upgrade, generally from the customer demand quality improvement. When the quality of customer demand increases, those companies that provide inferior products or services are easily squeezed out of the market.
After China’s economy entered the second half of growth, the market space of many traditional industries came to an end, and what remained was the competition among the stock competitors.
In 2012, the number of real estate companies in China approached 90,000, a result of the golden decade of real estate. The vice president of the All-China Real Estate Association believes that, with reference to foreign development experience, domestic real estate enterprises came to the critical point of a major reshuffle in 2016, and the real estate consumer market is still huge, but in the next decade or so, a large number of small and medium-sized real estate enterprises will exit the market, and it is possible that only 1,000 real estate companies will remain in China, and the concentration of the industry will increase significantly. On the one hand, leading companies like Vanke will be able to expand their market share, which is the backbone of Vanke’s courage to propose a trillion revenue plan. On the other hand, certain building materials industry will face opportunities, such as the construction of waterproof materials industry.
In the era of real estate companies can make money with their eyes closed, the threshold of construction waterproofing materials is very low, small and medium-sized developers do not pay attention to quality, resulting in a variety of poor quality waterproofing materials companies can survive, the industry concentration is very low. Construction waterproofing industry is “three points of material + seven points of construction”, its quality problems need 3-5 years to show up, and at this time small and medium-sized developers have long collected money to leave. In the process of elimination of the fittest in the housing industry, the importance of long-term quality and reputation of real estate developers to survive, their requirements for building waterproofing materials continue to improve, resulting in those inferior waterproofing materials companies are increasingly difficult to survive, the industry threshold, the concentration of upstream building waterproofing industry will also increase significantly, as shown in the leading enterprises in revenue growth rate is much higher than the industry growth rate.
The reason for the upstream and downstream industries to increase their concentration together is that the downstream increase in concentration is a process of moving from disorderly competition to branding as king. Branded companies require higher quality upstream, and too many suppliers are not conducive to reducing procurement costs and maintaining consistency in quality, and eventually the leading companies in the entire industry chain increase their market share together.
This situation is reflected in the corrugated packaging industry. After a long period of competition in the United States, brand-name leaders have emerged in all industries. The chart below shows the process of increasing concentration in the food and beverage industry in the U.S. over several decades (it is still very fragmented), with a similar upward trend in concentration in the cosmetics, alcohol, pharmaceutical, and retail industries.
These brand companies demand higher quality and service in packaging, and then orders continue to be concentrated to the leading packaging companies. Rocktenn, founded in 1973, is a leading corrugated packaging company in North America with customers in a wide range of branded companies in various industries, including food and beverage, cosmetics, alcohol, and pharmaceuticals. In 2013, revenues and net profits reached $9.55 billion and $720 million, respectively, benefiting from increased industry concentration and achieving a ten-fold increase in stock price over the decade.
As you can see, the increase in industry concentration due to demand escalation is also significant for its leading stocks, such as Gree Electric, which we mentioned earlier. This type of increase in industry concentration generally occurs in the middle of the industry development.
3, user convergence
If the industry recession and demand escalation led to the increase in concentration is the result of external environmental changes, then the user convergence led to the increase in industry concentration is determined by the endogenous properties of the industry. User convergence generally occurs in industries where products have natural interoperability requirements and users are difficult, or lazy, to choose diverse products or services, such as windows operating system, WeChat, etc. When a company’s products or services reach the level of the industry’s demand, it will be difficult for them to choose a product or service. When a company’s product or service reaches a certain market share, it is the safest and most beneficial choice for potential users to use the product with the highest market share. The result of interoperability will lead to a “winner-takes-all” phenomenon in the industry, which is common in the intangible information industry and difficult to find in the tangible physical industry.
In contrast to industry decline and demand escalation factors, user convergence can lead to extremely high levels of industry concentration, which generally occurs in the early or early-mid stages of industry development. Obviously, for growth, this is the most valuable industry to invest in.
Another aspect that reflects user convergence is the birth of niche super brands.
Many people ask why large market cap companies like Coca-Cola have emerged when the food and beverage industry is so fragmented. For a mega industry like food and beverage, it is important to look at the segmentation. In the segment of Coke, the industry is extremely concentrated.
In the case of Coca-Cola, if there is a company that can produce a product with the same taste as Coca-Cola, will consumers pay for this product? No, people still choose Coca-Cola. This is the power of the brand, here is the most powerful proof that for a consumer brand, the brand is the widest moat.
For brand awareness, many people just think that FMCG needs a strong brand, while consumer durables just need to do a good job on the product, in fact, many people underestimate the power of the brand, the brand occupies the minds of consumers almost unshakeable, unless the company is rotten inside. For those newcomers who do not occupy the minds of consumers, you make the same products, or even do better, but consumers will not buy.
Therefore, the industry pattern and industry concentration is determined by product and industry attributes, some industries will continue to concentrate, while some industries will become more and more fragmented, even if the industry has a lot of room for development, there is little meaning for individual companies.
Next we look at which industries will not move toward concentration.
After hundreds of years of market competition in the United States, the food and beverage industry still has more than 10,000 companies. There are other industries with fragmented competition, such as the pan-industry application software, games, apparel, interior design, and so on. The interior design industry, where a few people can start a business to start a job, is hardly concentrated. Some fast-changing industries, where one set of companies grows rapidly and then is replaced by another set of companies with more advanced technology or style. What these industries have in common is that supply resources are readily available, or demand changes too quickly.
For example, in the automotive industry, when the car was first born, Ford monopolized more than 70% of the U.S. market, but now no single car company in the world has such a large market share, and the industry is relatively fragmented. Why? Because when the car was just invented, it was a new thing, that is, it could run, and it was a better experience than a horse and carriage, and at this time consumers were only concerned about the car being able to run on the line, not about other aspects. Ford’s standardized models perform well, run fast, to meet the majority of consumer preferences, monopolizing the market. And with the slow development, the consumer demand for the car not only can run, but also to be able to pretend, to meet a variety of identity labels, and even racing, off-road. This time no one company can meet all the needs of consumers, so the market will eventually form dozens of brands to meet the different tastes and preferences of consumers, which is the destiny of the industry development, from the product and industry attributes can be analyzed.
For example, we see that Tesla has a large share in the field of new energy vehicles, because new energy vehicles are a new thing, at present only it does the best, consumers are buying its cars, and later this technology has matured, Tesla can not meet the needs of all consumers, and will certainly form many different brands. Because a technology has matured, it is impossible for a company to monopolize, and later, after the maturity of new energy technology, Mercedes-Benz and BMW new energy vehicles are also doing very well, consumers still just choose Tesla? It is not easy to say.
So this industry has a lot of room for development, but ultimately who will benefit is not known. But one thing can be more certain, is the lithium battery, the biggest core of new energy vehicles is lithium battery, and lithium battery is a standardized product, there is no problem of different taste preferences of customers, so the future will certainly be concentrated in the hands of a few one or two companies with the most bullish technology, then this company has investment value.
Therefore, if the concentration can not be improved, the uncertainty of corporate profit growth is great; and when the concentration can be improved, the industry profits are easy to converge to the superior enterprises. Therefore, the possibility and reliability of the growth of excellent targets is greatly improved by choosing the industry chain in which the concentration can be increased.
Through combing we found that
2C product customer demand is hidden, 2B product’s have a clear source of demand.
2C needs to discover and organize product demand through market research, operation feedback, industry analysis and PD’s own sense of smell. 2B class has both clear and hidden demand. 2B PDs with a high degree of productization also need the ability of 2C class to acquire hidden needs.
2C needs research is unbiased and uninduced form, 2B needs research is generally with strong inducement.
The 2C class needs to acquire the needs of a group and feed the group needs into the product features. 2B is generally based on existing products and induces customers to use existing product features and reduce customization to reduce costs from a comprehensive perspective of duration and cost.
Therefore, the end markets for consumer and industrial products are vastly different.
Industrial products, or 2B business in a broad sense are professional markets, professional markets are products where the sellers and buyers are professionals. Sellers know their costs, profitability, and buyers, although they do not know the exact situation of each seller, know the average situation of the industry, including cost, performance, advantages, and disadvantages. In the professional market, price and cost are linked, and the “cost-plus pricing method” is the financial expression of this relationship. There is an industry standard for gross margins in specialty markets, and when costs change, transaction prices change quickly. There are only two ways to achieve margins that exceed the industry average: 1) lower costs than others; 2) better technology than others.
And consumer goods are a typical non-professional market, or 2C market in a broad sense. A non-professional market is one in which the buyer of the product is a non-professional,. Sellers know their own cost and technology differences, but buyers do not know, buyers measure the two elements of the purchase decision is “do I want to buy” and “can I afford to buy”, manufacturing costs, logistics costs in the end is not in the scope of buyers can consider The cost of manufacturing and logistics is not in the buyer’s mind (or because they don’t have the ability to know that much). So in a typical consumer goods industry, there is no “cost-plus pricing” model.
This is simply
