The “ecological balance” principle in China’s compressor industry

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This post was last edited by yinkuilin6868 on 2015-11-23 08:44. For many years, Chinese people have loved eating yellow croaker, especially the wild ones; they represent some of the most delicious memories from our childhood meals. In order to catch more wild yellow croaker and earn more money, Chinese fishermen have adopted a brutal method called \"knocking operation\": dozens of boats strike bamboo boards together, causing resonance in the otoliths in the yellow croaker’s skull, which renders both large and small fish unconscious, allowing them to be caught all at once. This destructive fishing method led to catches of yellow croaker reaching a record level of 197,000 tons in 1974, while also dealing a devastating blow to wild yellow croakers. In 1994, the catch of yellow croaker dropped sharply to 20,000 tons. Since the beginning of the 21st century, there has been almost no fish in China’s coastal waters; all of China’s ten major fishing areas no longer exist in practice, and wild giant yellow croakers have virtually disappeared. Not only are fishery resources in this state, but China’s forest resources are also suffering from destructive logging. When on business trips in countries such as Sweden and Norway, I often ask myself a question: Why did their ancestors leave behind lush mountains covered in forests, while our ancestors only left behind bare, barren mountains? Later I learned that there are strict regulations in place: after trees are cut down, an equal number of saplings must be planted to ensure the forest remains sustainable. So, the question is not what our ancestors left us, but whether we have enough wisdom to maintain ecological balance – to turn these resources into wealth that benefits humanity while also preserving them as a foundation for sustainable development for future generations. “The industry ecosystem is in jeopardy, and the same is true for the development of China’s compressor industry. Taking screw compressors as an example, from 2001 to 2011, the double-screw compressor industry in the Chinese market experienced a golden decade, with a compound growth rate of over 30%. However, due to the industry’s desire for quick success and instant profits, there has been a frantic expansion of production capacity, resulting in a severe imbalance between supply and demand. According to statistics from 2014, there were approximately 500 compressor manufacturers across the country, along with over 200 manufacturers of compressor housings. The production capacity for screw compressors reached 400,000 units, while the inventory amounted to 150,000 units. In 2015, domestic market demand was only 150,000 units, which means that the entire industry could meet this demand without producing any inventory over the course of a year; international demand was also on par with domestic demand. To make matters more complicated, foreign brands continue to enter the Chinese market, while new domestic brands are also on the rise. Taking Shanghai, which is representative in terms of compressor production, as an example, there were 65 certified manufacturing enterprises in Shanghai in 2014, an increase of 10 compared to the number of certified enterprises in 2013. Compressor suppliers can only lower prices, reduce down payments, and offer aggressive credit terms to lower entry barriers in order to sell more equipment. However, the actual demand in the market does not depend on the manufacturing capacity of producers. The short-term prosperity brought about by economic stimulus merely brings forward future demand; a \"fake bull market\" created through various promotional tactics cannot last, and disrupting the balance between supply and demand only imposes greater financial risks on manufacturers, distributors, banks, and consumers. When the market inventory far exceeds market demand, the return on investment for such equipment decreases, which directly affects customers’ ability to make repayments. This leads to an increase in agents’ claims and a sharp rise in the risks associated with credit sales. An excessive pursuit of market share and sales has damaged the industry’s ecosystem, ultimately harming everyone involved in it: manufacturers, distributors, and users. According to statistics from industry associations, based on data submitted by 76 member companies in the compressor industry, sales revenue for 2014 amounted to 1,690,525 million yuan, a decrease of 3.3% compared to the previous year; the growth rate dropped by 6 percentage points compared to the same period last year. The cost of main business operations was 1,306,978 million yuan, a decrease of 2.62% on a year-on-year basis, indicating a decline in the overall efficiency of the company’s operations. Among the 76 companies, 37 saw growth compared to the same period last year; of these, 13 experienced a 20% increase ； 39 companies experienced a decline compared to the same period last year, of which 19 saw a 20% decrease. Over the past 10 years, screw compressor manufacturers have continuously lowered price thresholds, even adopting innovative marketing tactics such as \"zero down payments\" and reduced specifications, yet few have seriously assessed the risks and harm that such aggressive approaches pose to distributors. Rule reconstruction: Is it never too late to mend the fold after the sheep are lost? China’s compressor market has seen a decline in growth rate for four consecutive years, and this crisis may continue. Faced with the severe market conditions, have we ever wondered: what caused this downturn in the compressor market? It’s never too late to mend the fold after the sheep are lost. If we do not learn from this experience, even if we manage to get through this crisis by chance, we will still make the same mistakes in the next crisis and be doomed to suffer the same consequences! As China’s economic growth rate dropped to 7%, the compressor industry felt the effects of a severe economic downturn; yet such a growth rate is already considered a luxury for Western developed countries. In fact, in 2014, China still held the position of having the largest compressor market in the world. Why can foreign compressor companies survive and thrive even in an economic environment with growth rates below 2%, while it is difficult for us to do so in an environment with 7% economic growth? The cause of the current crisis is not a slowdown in growth, but rather our disruption of the ecological balance in the compressor market, just as we have destroyed fishery and forest resources in the past. We not only invested recklessly in large amounts of excess production capacity and adopted an aggressive credit sales approach, but also sold large quantities of components at low prices to the parts market in times of market downturns in order to generate immediate cash, thereby depleting resources needed for the after-sales market for compressors! Mature compressor markets abroad also use credit sales models, but those markets have **well-developed credit control systems; the lending process is a purely commercial transaction between banks and customers. Banks have specialized staff to assess and evaluate customers’ creditworthiness and assets, and in case of overdue payments, the banks are responsible for collecting the debts or taking legal action. China’s business environment differs from that of mature markets abroad; in an environment lacking a sound credit system, adopting an aggressive credit sales approach and overusing financial leverage will inevitably lead to severe consequences. If we do not draw lessons from experience, do not analyze the roots of this crisis, and do not abandon wrong practices, we may repeat the same mistakes in history. When the fishermen in the Zhoushan fishing grounds fish by tapping on the rocks, if someone doesn’t do this, the yellow croakers will be caught by others! When someone in the compressor industry comes up with crazy marketing tactics such as zero down payments, other companies always follow suit. It’s not that they’re unaware of the risks involved, but rather that they’re afraid of having their business taken away by others! Unless this irrational, trend-following marketing mentality changes, the industry’s future will also be bleak. Therefore, restoring the ecological environment and development rules of the compressor industry is an urgent task for the sector. In his book The Story of Purpose, Joey Lemann points out that the best companies in the world are those with a noble purpose, aiming to make the world a better place through everything they do. At the current stage, the biggest problem for companies in the compressor industry is that they regard profit as the sole goal of their operations, turning the development of this industry into a race driven by a desire for quick success, by the use of any means necessary, and by an ambition to expand for profit’s sake. The lack of a sense of social responsibility, and the failure to give proper consideration to the ecological balance and healthy development of the industry, are precisely the core issues hindering the growth of China’s compressor industry.