Summary of Key Points
Hefei has transitioned from a land-based economy to an equity-based one by focusing on "industrial investment" rather than risky ventures. By making strategic bets in sectors such as BOE, Changxin Technology, and NIO—representatives of advanced technology—Hefei has built a robust industrial cluster centered around semiconductors, displays, automobiles, and electronics. The city has also faced failures with projects like plasma and photovoltaic technologies, but its high tolerance for failure and comprehensive industrial chain approach have made it a model for urban industrial investment. The core of Hefei's strategy is to "invest in industries, create ecosystems, and support long-term development" rather than engaging in short-term speculation.
I. Hefei Is Not a Gambling City; It’s an Expert in Industrial Investment
Many people label Hefei a "gambling city," but the city itself disagrees, as its approach is characterized by "industrial investment" rather than speculative risk-taking. The logic of venture capital (VC) is to invest and then wait for the company to go public to make quick profits before withdrawing; in contrast, industrial investment involves supporting companies throughout their development process and building entire ecosystems. For example:
- After investing in BOE, Hefei attracted upstream and downstream companies like Corning Glass and Sumitomo Chemical, fostering a display industry worth hundreds of billions;
- Following its investment in NIO, it brought in比亚迪 and Volkswagen Anhui, assembling a complete industrial chain for vehicles, batteries, and motors;
- With Changxin Technology, Hefei not only provided funding but also supported areas such as chip design and packaging, making it one of the few cities with a full semiconductor industry chain.
In simple terms, VC is like buying lottery tickets; industrial investment is more like planting fruit trees—aiming for both fruits and a thriving ecosystem.
II. Where Does the Money Come From? Where Does It Go? How Is It Withdrawn?
Let’s break down Hefei's process of raising funds, making investments, and managing them:
1. Fundraising: Converting Government Funds into Investment Vehicles
Hefei doesn’t rely on direct fiscal spending; instead, it transforms government funds into investment funds. In 2015, it restructured three state-owned asset management platforms: Jian Tou (to attract leading companies like BOE and NIO), Chan Tou (for early-stage technology investments), and Xing Tai (as a financial support). It also collaborated with market-oriented institutions like CITIC and CICC to establish a fund network covering various stages of development, attracting nearly 400 billion yuan in social capital. This approach effectively uses 1 yuan of government money to leverage 10 yuan of private investment, reducing fiscal pressure while leveraging professional management.
2. Investment: Targeting National Needs and Technological Opportunities
Hefei invests strategically in areas with clear long-term potential:
- In 2008, it invested in BOE during the global financial crisis when international panel manufacturers were shrinking, creating an opportunity for domestic substitution;
- In 2013, it invested in Changxin Technology as domestic display production was developing but chips were still a bottleneck;
- In 2020, it invested in NIO at a time when electric vehicles were part of the national energy strategy, despite the company’s financial difficulties.
In other words, Hefei focuses on addressing critical national shortcomings and seizing technological breakthroughs.
3. Exit Strategies: Prudent Reduction of Equity
Hefei is cautious when exiting its investments:
- It gradually reduced its stake in BOE after the company became profitable, netting a profit of 14 billion yuan;
- After NIO turned around, it realized a profit of 10.5 billion yuan while still holding an 8% stake;
- With Changxin’s listing, it waited for the lock-up period to exit gradually.
This approach ensures both capital recovery and continued support for the companies’ growth.
III. The List of Failures Behind the Success: Tolerance for Failure Is Key
Hefei hasn’t always succeeded:
- Its investment in plasma technology (PDP) failed in 2009 when LCD became the mainstream, resulting in a 1 billion yuan loss and project closure;
- The photovoltaic project with Saiwei LDK in 2010 was nearly wiped out due to overcapacity and trade barriers from Europe and the US;
- Its investment in WM Motor in 2020 resulted in a loss of 1 billion yuan when the company went bankrupt in 2023.
However, these failures didn’t derail Hefei’s development. The city has a robust tolerance for failure:
- Since 2014, it has adopted policies allowing up to 30% losses for angel funds and up to 80% for younger investment funds;
- Provincial seed funds now tolerate up to 50% losses.
Unlike many government funds that aim for zero losses to avoid accountability for asset loss, Hefei’s approach allows it to take risks in areas others are hesitant to invest in.
IV. The Hefei Model Is Not Easy to Copy
Many cities want to emulate Hefei’s success with its "semiconductor-display-automobile-electronics" cluster, but they fail to grasp the key elements:
1. The courage to tolerate failure: Local governments must be willing to accept project failures without fear of accountability;
2. Long-term commitment: Hefei supports companies for decades, even during tough times;
3. A strong research foundation: The presence of institutions like the University of Science and Technology of China (USTC) has laid a solid foundation in research areas like semiconductors and quantum technology;
4. Flexibility in adjusting strategies: Hefei’s focus has shifted from "semiconductor-displays-equipment" to "semiconductor-display-automobiles," demonstrating its ability to adapt to strategic changes.
Hefei’s success is the result of a half-century of effort, from providing support for scientific research to becoming an expert in industrial investment.
Conclusion
Hefei isn’t a "prophet" or a "myth." Its success stems from a willingness to experiment with new approaches, alignment with national strategies, and long-term commitment. It’s more of a builder of industrial ecosystems—using tolerance for failure and a comprehensive industrial chain approach to turn vision into reality.