Hello! I'm your financial analyst friend. Today, we're going to discuss an article from "Zhanmo Tianmo" that touches on a common issue for many established Chinese companies and even the entire economy: They have a substantial wealth, but they're struggling financially.
Many people's first reaction upon hearing that Konka incurred a huge loss of 12.5 billion yuan in 2025 was, "Oh no, that's a terrible loss." However, the core message of the article is much deeper: It's not just about losing money; it's about assets becoming a burden. In the past, we made money by constantly buying, building, and expanding. But this strategy no longer works because the market is no longer growing at a rapid pace. The factories, equipment, and brands that once represented strength are now weighing down the companies instead of contributing to their profits.
Let me break down this complex article into five key points to help you fully understand this challenge:
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1. Why was being "large" a advantage in the past, but now it has become a liability?
Core logic: Growth could mask inefficiencies, but once growth slows down, those inefficiencies become apparent.**
Over the past few decades, the Chinese economy has been like a high-speed train. At that time, companies' strategies were simple: Acquire land, build factories, and expand distribution channels.
- Past logic: As long as the market was expanding, we built factories first, even if only half of the machinery was in use, and we relied on future orders to fill the remaining capacity. Since demand was rising, idle capacity could become valuable in the future. This "first-mover" strategy helped many companies grow rapidly in size.
- Current dilemma: The train has slowed down, and the market has shifted from a situation of supply falling short of demand to one of oversupply. Factories and stores built to capture market share now, if not utilized efficiently, have become money-draining liabilities.
- Example: A factory, whether it's operating or not, incurs costs for depreciation, maintenance, and employee salaries. With more orders in the past, these costs were spread out, making them manageable. Now, with fewer orders, these fixed costs severely squeeze profits.
- Conclusion: In the past, the competition was about who could grow the fastest and occupy the most territory; now, it's about who uses resources most efficiently. Many old companies are still managing their assets with an expansion mindset, which is the root of their financial troubles.
2. "I spent 1 billion on this asset; does it still worth 1 billion now?"
Core logic: Don't be trapped by sunk costs. Focus on future profits, not past expenditures.**
This is a common psychological trap in business management.
- Misconception: Owners think, "I spent several hundred million on this equipment, and it has a decades-old brand—how can I just discard it?" This attachment to past investments is known as the "sunk cost fallacy."
- Harsh reality: The market cares only about the future. If a factory will have few orders in the next three years, its current value might be negligible. Even if the brand is well-known, if consumers no longer buy its products or its pricing power is gone, it's just an empty shell.
- Dangerous situation: The article highlights that the most problematic assets are those that are barely functioning. They still generate some revenue, but the returns are very low. Management often comforts itself by thinking, "Let's wait; maybe things will get better next year, and a little more investment will turn losses into profits."
- Judgment criterion: Ask yourself: Is this business in a normal growth phase (e.g., investing in new technology with temporary losses but improving performance) or in a state of chronic decline (increasing investment with no improvement)? If it's the latter, continuing to invest is like throwing money down a drain.
3. Why are companies reluctant to dispose of unprofitable assets?
Core logic: Behind assets are complex human and power dynamics. Exiting a project is not just a financial issue but also a political one.**
In economics, exiting a project is straightforward (cutting losses). But in large companies, it's extremely difficult.
- Organizational inertia: A business unit that has existed for years employs hundreds of people, involves management, suppliers, and has employment ties with local governments. Shutting it down means dealing with layoffs, compensation, and reorganizing power structures.
- Interest conflicts: Who wants to admit that their project failed? Who wants to relinquish control over their budget and team?
- GE's lesson: General Electric (GE) was split into three separate companies (aviation, healthcare, energy) because its mixed structure was too complex. Different businesses require different management approaches, and combining them hinders capital flow.
- Realistic challenge: Mature companies often face the dilemma of having many assets but little available cash. Money is tied up in factories, inventory, and old businesses. Making changes can have significant consequences. Therefore, many inefficient assets are not retained because the math doesn't add up, but because it's practically impossible to move them.
4. What can Japan teach us? Profit alone is not enough; we need to look at the **return on capital**
Core logic: A new standard for evaluating companies has emerged: How much capital are you using to generate the profits you're earning?**
A recent move in the Japanese stock market is illustrative: The Tokyo Stock Exchange now requires listed companies to pay attention to capital costs and share prices.
- Old standard: As long as I'm not losing money and making a profit, I'm doing well.
- New standard: If you use 10 billion yuan in capital (land, equipment, cash) to earn only 500 million yuan in annual profit, while bank investments or other industries can yield 800 million yuan, you are destroying value.
- Why this matters: Many old companies have substantial cash and assets, but their stock prices remain low. Why? Because the market believes they're not using their resources wisely.
- Critical question: Does your profit cover your capital costs? If a company uses a lot of resources but earns below market returns, it's wasting social resources.
- Impact: This forces companies to shift from blindly pursuing scale to focusing on **high-quality growth.* Even if the absolute profit remains the same, improving the return on the remaining assets can increase the company's value.
5. The essence of Konka's huge loss: It's not about this year's problems; it's about past issues coming to light
Core logic: Financial impairments are a reflection of past decisions. True management should focus on the present.
Konka recognized asset impairments of 7.6 billion yuan in 2025, which may seem alarming, but it's actually a postmortem. These assets (such as real estate, inventory, and goodwill) may have been depreciating for years, and accounting rules allowed them to remain on the balance sheet until it was confirmed they were unrecoverable, at which point the losses were recorded in one go.
- Real cost: The true cost is not just the 7.6 billion yuan; it's the years of wasted capital, management effort, and missed opportunities due to these inefficient assets.
- Advice for companies: Regular assessments: Managers should ask themselves, "If I didn't own these assets today, would I still buy them at their current price?" and adjust strategies dynamically. Good asset management means letting capital flow freely:
- Efficient assets: Continue investing to build on strengths.
- Growth assets: Give time and resources, but set stop-loss limits.
- Inefficient assets: Sell, divest, or collaborate to free up capital for more profitable uses.
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Summary: From accumulating wealth to managing capital effectively
The article highlights a crucial shift: In the past few decades, Chinese companies focused on turning capital into assets (buildings, land, employees). The future competitive edge will lie in releasing those assets back into capital (selling unprofitable assets, optimizing structures, and making capital more flexible).
For the average investor: When evaluating stocks or companies, don't just look at the size of their assets (factories, brands); also consider asset turnover and return on equity (ROE).
- If a company has a lot of assets but can't move them effectively, resulting in declining profits, it's like a large truck loaded with stones—imposing but inefficient. Truly successful companies know when to buy and when to sell, ensuring every penny is invested where it can generate the most value.
In one sentence: Assets are not for ownership; they are for management. If they don't generate sustainable returns, they are not assets but liabilities.