Summary of Key Points
Shijing Technology was originally a specialist in photovoltaic environmental protection equipment, making money from expanding its production of systems for treating waste gas and wastewater. However, when it decided to cross into the photovoltaic industry by investing 11.2 billion yuan to build a photovoltaic cell factory, it suffered huge losses for two consecutive years and experienced a break in its cash flow. The company is now facing over 400 million yuan in litigation and is in the process of pre-restructuring. The key to this cross-industry failure was not its lack of understanding of the photovoltaic industry, but its failure to recognize that the underlying business logic had completely changed from selling equipment to manufacturing cells. Starting a new business with low barriers does not mean that it can be operated at a low cost. Moreover, by tying the new and old businesses to the same industry cycle, the risks were not diversified but instead doubled. Before making the cross-industry move, Shijing failed to address three critical questions: how to generate sustained profits, how much capital is required, and whether the cash flow could be independent.
Detailed Analysis
1. The fundamental shift from selling equipment to manufacturing cells
Shijing's original business in environmental protection equipment was project-based: customers placed orders, and the company designed, purchased parts, installed, and tested the equipment, then received payment for each completed project. Although this model required upfront investment, the costs were tied to specific projects, and there was no need for full-capacity production on a daily basis.
Manufacturing photovoltaic cells, on the other hand, is a manufacturing-based business. It involves building factories and purchasing equipment (which are heavy assets). Regardless of whether there are orders or not, fixed costs such as rent, equipment depreciation, and employee salaries must be paid. Additionally, companies need to stockpile raw materials like silicon wafers and silver paste, which ties up working capital. Even minor fluctuations in production rates, product quality, or market prices can lead to significant cost increases. For example, after the Ningguo project was launched, the price of photovoltaic cells dropped, and since the production lines were not fully utilized, the high fixed costs resulted in substantial losses.
In simple terms, selling equipment was like doing occasional work, where you earned money for each project completed. Manufacturing cells, however, is like operating a factory on a continuous basis, where you have to constantly worry about whether you can cover costs, whether you can sell the products, and whether your costs are manageable—these are completely different approaches.
2. Less initial investment does not mean less pressure later on; financing is like borrowing from the future
The Ningguo project seemed to be easy to start: the local government helped with the construction of the factory, and Shijing only invested 350 million yuan of its own funds (4.67% of the total investment), with the rest coming from loans and financing leases. However, these arrangements merely postponed the payment of costs, not eliminated them entirely:
- The factory was rented, and the land and building need to be repurchased over four years starting from the seventh year.
- The cost of the equipment is covered through financing leases, with monthly interest payments.
- Continuous investment is also required for raw materials and employee salaries.
This is like using a credit card to start a project, with monthly bill payments. If the photovoltaic cell business becomes unprofitable, the accumulating bills become insurmountable—this is why Shijing's cash flow dried up, and it ended up in legal trouble.
3. Tying new and old businesses to the same industry doubles the risks
Shijing's old business (environmental protection equipment) relied on the expansion of photovoltaic companies for revenue, and its new business (cell manufacturing) depended on the prosperity of the photovoltaic industry. Both businesses were tied to the same industry cycle. When the industry was doing well, both benefited: more orders for environmental protection services and higher prices for cells meant higher profits. However, when the industry declined, both suffered: photovoltaic companies stopped expanding, orders for environmental protection services decreased, and lower cell prices, along with low production rates, led to heavy fixed cost burdens. For instance, if the photovoltaic industry performs poorly in 2024-2025, Shijing's revenue from its environmental protection business would decrease, and its cell manufacturing business would also lose money, exacerbating its financial problems. The new business did not become a source of stability but instead increased the company's risks.
4. Think carefully about three key issues before crossing industries; don't just focus on whether it's feasible
Shijing's experience shows that crossing industries is not about simply having customers and technical expertise. Three critical questions must be addressed:
- How will the new business generate sustained profits? Just because customers are willing to buy your equipment does not mean they will buy your cells. Just because you can apply your environmental protection technology to your own factory does not mean you can manage the manufacturing costs and quality.
- What kind of capital structure is needed? The initial investment is not the main concern; the real question is where the funds for rent, loans, and raw materials will come from during an industry downturn. Shijing failed to plan for these future expenses, which led to its financial problems.
- Can the cash flow be independent? Can the new business generate its own revenue when the old one is struggling? If both businesses depend on the same industry, they are as vulnerable as ants on the same string—without diversification, the risks are amplified.
In summary, crossing industries is not about adding a new product but about establishing a new profit-making model. This is the most challenging part of the process.
Final Conclusion
Shijing's story serves as a reminder to all companies considering entering a new business area: being in a related industry (such as having existing customers or technical expertise) is just a starting point. The real barrier is whether you can develop a new set of operational capabilities suitable for the new business. Otherwise, crossing industries could turn out to be a costly mistake.