What we are pursuing is a real replacement, not a great spare tire.
Editor’s note: This article comes from the manuscript. The author Mr. Guo, Managing Director of Songhe Capital ( WeChat (ccg4472), Close Notes on domestic alternatives, industrial Internet, and Internet of Things investment in the middle and later stages, the original title “ Domestic replacement: a boiling decade’s tide ” , reproduced with permission, slightly deleted.
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Domestic substitution is not like VR, AR, or 5G, AI, and can penetrate almost any field. Someone joked that in the 5G era, all industries can be redone again. In fact, in the context of domestic substitution, almost all industries in China can be redone again. Semiconductors, machinery, heavy industry, chemicals, materials, components, software, and system architecture, regardless of the investor in any field, can find topics in domestic substitution.
I have been focusing on domestic alternatives at Songhe Capital since 2018. Someone joked with me that the domestic alternative project is the easiest to see. 1) How important or large-scale this industry is 2) Currently monopolized by foreign countries 3) Whether domestic production can be replaced 4) How much income is seized as a result of grabbing shares. The requirements do not need to be verified, the technical feasibility does not need to be worried, the market should not worry about it, and the upstream and downstream are very clear. Everything looks like a template and you can invest. However, it is difficult to know, and it is still very difficult to see. There are always too many tangles and traps.
We should be looking for a real replacement, not a great spare tire.
China’s domestic replacement of semiconductors is my main direction. This field cannot avoid Huawei and Hisilicon. Everyone often feels formidable Hisilicon and Huawei’s vision.
I’ve always been asked why you can’t cast a few thoughts. However, I think that a great spare tire like Hisilicon has great strategic significance, but he should not be the target of VC investors. Spare tires are important, but their value is always in the limit. What if the Americans confessed? As many entrepreneurs proudly say, “I am the only one in China who has the relevant technology. In the event that the United States bans existing suppliers, I will be Hisilicon in this industry.” But capital is the enemy of risk, the highest certainty and the highest return are the goals he pursues.. The idea of ”just in case” is not the general logic of VC. It is the responsibility of the company and the state to be vigilant and reserve in case, and VCs should not incubate spare tires for the state or enterprises, and should not pay for it. The project has become an important spare tire, and VCs should not be proud of it. Because it was a great adventure.
Forecasting purchasing decisions, evaluating potential shares, and then calculating profit expectations and exit returns are the VC thinking. I hope that the entrepreneur said, “I am the only Chinese company that has the relevant technology. Even if the United States does not ban China, I will grab a sufficient share.” What we want is a real alternative. No great spare tires.
Be wary of the “ball-point pen core steel ball” project
In the past, there were 38 billion pens in China. The steel balls of the refills could not be produced, and all were imported from Japan. In 2015, the “ball-point pen-core steel ball” finally completed a domestic breakthrough in the scolding of the whole country, but it was found that a single steel ball was only 0.002 yuan, and the annual market was nearly 100 million. It cost tens of millions of research and development costs, and mass production did not get a lower price advantage. The final market share replacement did not take place on a large scale, and now it has become a spare tire to prevent the ballpoint pen core from discontinuing supply. This story has always reminded me of my duty to avoid paying too much attention to safety value and ignoring scale.
In large markets, such as memory, panel, mobile phone chip manufacturing, operating systems. These can be used to dilute costs and risks through huge market depth. This is the exclusive place for large capital and large industries. VC focuses more on the chip, niche industrial software, and segmented material and component markets. They all face the embarrassing situation similar to the “refill steel ball” which has a key role, a foreign monopoly, and a small market.
Entrepreneurs always proudly say that the entire chain is indispensable, but they always want to cover up this key part, which may be only a few cents. Venture capital needs to be extremely cautious: is the market really big enough? Is it really worth doing it yourself? But someone must do it in such an important area. Such tangles can always drive people crazy.
If you want to pursue absolute security in the industry chain, you need to pay a huge price. Just like Huawei, it is necessary to invest madly on almost all fronts to maintain a dignified existence. Supply chain security is a public good, and externalities benefit the entire industry. The domestic replacement of refill steel balls often occurs within the enterprise and is part of its own security strategy, or it occurs in industries with a high degree of downstream concentration (externalization internalization). There are downstream giants such as Huawei and central enterprises. Push for price.
No one will realise the market share of weapons in peacetime
The common syllogism of domestic alternative projects is 1) the market is large 2) monopolized by overseas 3) 10% can be listed before it can be listed. Seemingly perfect logic, but ignoring that war is just an imaginary, competition is the most realistic at this moment. No one can easily fulfill orders given in the peacetime. on