The Transformation and Upgrading Path of Cable Enterprises

China's economy has become the second largest in the world, but its simple, extensive growth model driven by investment has resulted in many negative consequences, such as environmental degradation and overcapacity in traditional industries. This overcapacity is not ordinary; it is severe. Take the wire and cable industry as an example: capacity and demand are severely mismatched, with many wire and cable companies operating at less than 50% capacity. The Chinese government's top leadership has recognized this problem, and the government no longer endorses the past simple, extensive economic development model that sacrifices the environment for unsustainable growth. The Chinese economy will enter a period of industrial transformation and upgrading.

As the national economy transforms, so too must businesses. For some time to come, the Chinese economy must pursue a path of simultaneously seeking new economic growth points and reducing inventory. Coupled with the cumulative effect of GDP base, this objectively constrains the potential for continued high-speed growth of the Chinese economy. During this transformation period, several changes in the Chinese economy will significantly impact the Chinese wire and cable industry.

First, China's economic growth rate is unlikely to maintain the high-speed growth of 10% per year as in previous years. According to the National Bureau of Statistics, in 2014, China's GDP growth rate was only 7.4%, a significant slowdown compared to the more than 10% of previous years. Furthermore, the economy may slow down further in the future. Another negative consequence of the extensive economic development model is resource waste and environmental degradation. China will pay more attention to the efficient use of resources, replacing the original resource consumption and labor input with improvements in science and technology to achieve development; it will focus on environmental protection and promote energy conservation and emission reduction policies and the application of green and environmentally friendly materials. The development of the Chinese economy will place greater emphasis on quality and sustainability.

All of this will have a significant impact on the wire and cable industry. As an industry closely related to the national economy, the wire and cable industry cannot remain aloof. Even without considering the external environment, the development of China's wire and cable industry itself has reached a critical juncture. Increasingly fierce competition within the industry, overcapacity, declining profits, and low product value-added have resulted in the wire and cable industry being large but not strong. These changes in economic development are undoubtedly an external force of change for the wire and cable industry. This external change will undoubtedly have a significant impact on the Chinese wire and cable industry, presenting both opportunities and challenges for businesses. Whether it's an opportunity or a challenge depends on how wire and cable companies understand and respond to these changes.

Similar to the cyclical development of GDP, the wire and cable industry is also a highly cyclical industry. According to research by the renowned Shanghai Wire and Cable Research Institute, the correlation analysis between the growth curve of the wire and cable industry and the GDP growth curve reaches 0.97 and 0.98, indicating a very high correlation, almost overlapping, between its growth curve and the national economic development curve. This means that the development of the wire and cable industry is closely related to the overall economic situation. The slowdown in China's economic growth directly restricts the development of the entire wire and cable industry and limits the increase in its growth rate.

As mentioned earlier, the result of extensive economic development is environmental degradation. Increased environmental awareness has led to increasingly stringent environmental regulations, and higher operating costs for businesses. China's past economic development neglected environmental concerns, resulting in numerous adverse consequences today, with smog becoming a persistent nightmare for the Chinese people. In recent years, the government has repeatedly issued policies on energy conservation, emission reduction, and environmental protection, requiring businesses to consider the consumption of environmental resources and energy while focusing on development. This increases the additional operating costs associated with the treatment of waste materials generated during production. The selection of materials also requires businesses to use green, environmentally friendly, low-pollution cable materials, which increases the cost of raw materials.

Environmental degradation will force wire and cable companies to take the following actions: More efficient manufacturing equipment and technologies can maximize material utilization and minimize pollutant emissions; the use of energy-saving and environmentally friendly materials that adapt to the environment and market demands. Environmental degradation will drive the development of new product directions in the industry, such as energy-saving and environmentally friendly cables, low-smoke halogen-free cables, and even high-temperature superconducting cables. Cables that are free of lead, cadmium, hexavalent chromium, and mercury; free of brominated flame retardants; that meet and exceed the requirements of the EU RoHS Directive (tested by recognized testing organizations such as SGS), do not produce harmful halogen gases, corrosive gases, and have low combustion heat and do not pollute the soil. These environmentally friendly wires and cables will undoubtedly be more favored by the market and more likely to win large orders in government power grid bids.

China has nearly 10,000 wire and cable companies. There are many manufacturers, and while their products differ, the differences are small, with most products concentrated in the mid-to-low end. The growth rate of the entire wire and cable industry market cannot keep up with the growth rate of the industry's production capacity, which inevitably intensifies competition within the wire and cable industry. The profits of ordinary cable companies are sharply declining. The average net profit margin of the wire and cable industry is less than 5%, and some manufacturers even less than 3%. Such low profit margins make it difficult for many wire and cable companies to invest in research and development. This intensifies industry mergers and reorganizations. On the one hand, the transformation and upgrading of the national economy encourages mergers and reorganizations in industries with overcapacity. The "Twelfth Five-Year Plan for the Development of the Wire and Cable Industry" requires that enterprises should become stronger, larger, and more specialized, and that industry clusters should improve their development level and optimize their industrial organizational structure. Through mergers, acquisitions, and joint ventures, the goal is to have 2-5 large enterprise groups with sales of 30 billion to 50 billion yuan and a certain degree of international competitiveness by the end of the Twelfth Five-Year Plan. On the other hand, fierce industry competition and declining profits force poorly managed companies to exit the cable market.

China's wire and cable industry experienced rapid growth in less than a decade, surpassing the United States to become the world's largest. However, this growth was unhealthy, and the future direction of industry growth must change; companies must transform and upgrade. On the one hand, companies need to change their business direction; on the other hand, their business philosophy must also change. In the past, when market competition was insufficient, industry enterprises mainly focused on production; almost anything produced could be sold, and sales were simple. However, in today's fiercely competitive market, this production-only business philosophy will put companies in a difficult position. Companies must focus on service, quality, and technological value-added.