1988: Back to the human world for a few years

Chapter 551: Uneven IRR, how can you upgrade your industry? (2)

There was a hot topic in later generations: By 2024, the United States' Boeing aircraft and Ford aircraft carriers continued to expose problems, and technologies such as aviation engines, medical technology, and robotics technology no longer have absolute dominance. Not only has it been overtaken by Rabbit in the field of drones, but its shipbuilding capacity is only 1/200 of that of a certain major country in the East. Why has the United States' manufacturing industry declined to this extent?
There are many answers given by various industries and professions on this issue, and they all sound reasonable. After all, a three-foot-thick ice does not form overnight. The decline of the United States' manufacturing industry is the result of the combined accumulation of countless factors. No matter which angle you look at it from, it cannot be said to be wrong.

However, as early as 2005, the research community warned in a white paper that "the United States' manufacturing industry is facing huge challenges" and asserted that if the situation does not improve, the United States' manufacturing industry will inevitably decline in the short term.

This judgment, which seems extremely insightful to ordinary people in later generations, has actually long been a consensus in the research community, and the basis of the judgment is irrefutable... The threat of the decline of the U.S. manufacturing industry comes from a substantial reduction in effective investment in real enterprises and a rapid outflow of capital from the real economy to the capital market, especially the financial capital market. If this situation is not curbed, the U.S. manufacturing industry will soon become hollowed out due to a lack of profit-driven driving force.

"Lack of profit driving force" is the fundamental reason for this situation.

When it comes to profit-driven forces, we must mention a concept - 18% internal investment threshold rate of return (IRR).

Simply put, when investing, you must ensure that the expected rate of return on investment is not lower than a certain threshold rate of return, so as to ensure the continuous expansion of capital - for example, the threshold rate of return on 100 million is 15%, and then you take out 100 million to invest, the expected rate of return on investment should be greater than 15%. In other words, this 15% is the minimum rate of return for a one million investment project. If it is lower than this rate of return, the investment project is a failed investment project;
Since IRR can make the net present value of the project equal to the discount rate at zero, it can also directly reflect the actual return level of the investment project from a dynamic perspective, and is not affected by the high or low industry benchmark yield, it is relatively objective. Therefore, European and American capital likes to use IRR as a measurement indicator when investing - although the calculation process of this thing is complicated, and when a large amount of additional investment is made during the operating period, it may lead to multiple IRRs, which lacks practical significance in operational guidance, but who cares about this in most capital?
Unfortunately, according to statistics from JPMorgan Chase, since the early 90s, the weighted average cost of capital (WACC) of the S&P 500 companies in the United States has basically fluctuated between 8.3% and 9.5%. In 1999, the WACC fell to 6.7%, the lowest point in the past years!

In fact, strictly speaking, even a WACC of 6.7% is considered good, at least it has outperformed inflation - but just like the guests in a casino always win and lose, top capitals such as Morgan and GS have large business scales and many investment projects. There are many successful projects, but there are also many failures. Therefore, if the expected IRR of a new project is lower than 18%, they have no way to guarantee that they can effectively hedge the risks of all their projects.

In this case, if a listed company needs to invest in a batch of robots worth 100 million to improve the production efficiency of the workshop and reduce defects, if this investment cannot bring at least 20 cost savings per year (calculated based on a 15-year project life, such as a 5-year project, 40 per year is required), then the investment project will be rejected.

With such a goal set, basically 90% of the endogenous projects will find it difficult to pass the approval of the company's management and board of directors. In the end, the American physical enterprises would rather pay dividends and repurchase stocks, and hand over the company's cash to its shareholders for redistribution, rather than invest in the development and growth of their own industries.

For example, IBM has spent an additional $2004 on dividends or stock buybacks for every dollar of CAPEX (capital expenditure) it has spent since 4. Cisco spent a total of $2005 billion on stock buybacks from 2020 to 1100, and only spent $150 billion on replenishing the company's productive assets during that period. (The TV series "Win or Lose" starring Chen Kun and Xin Zhilei a few years ago was adapted from the business war novel of the same name written about the fierce competition between IBM and HP for the banking data center market in China in 2006. Although the TV series is nonsense, the book has a relatively profound description of this content. If you are interested, you may wish to read it.)
………………

Well, IRR is not a difficult concept to understand. After all, the Chinese people are so tired of hearing the saying “People die for money and birds die for food” passed down by our ancestors. The only thing we need to pay attention to is the 18% internal investment threshold rate of return, which is more like a number summarized from industry experience.

Back to topic.

What does the 18% IRR have to do with the people who are upgrading the industries in Texas?
What does this have to do with the fundraising that Yang Mo instructed Xialiu Sales Agency to carry out?
Although on the surface they seem to be two completely unrelated things, they are actually very closely related.

First of all, you must face up to a problem. At this time, China's domestic commodity economy is not prosperous. Therefore, in terms of GDP, the economic dependence on foreign trade is as high as 70%, far exceeding the other two carriages!

But what is the main body of foreign trade business at this time?

It is processing with supplied materials, processing with supplied parts, assembly with supplied parts, and compensation trade!

This is the three-in-one and one-supplement strategy that has earned China the reputation of being the “world’s factory”!
Yang Mo didn't want to judge whether the words "world factory" sounded good or not, but the business of "three-in-one" and "one-compensation" was definitely relying on selling labor to make a tiny profit, which was beyond doubt.

Therefore, with the average gross profit margin of 5% to 10%, and the highest being around 15%, what’s the point of talking about industrial upgrading? To be precise, unless the overseas order suppliers have put forward higher quality requirements, or specified a certain process, there’s no point in talking about proactive industrial upgrading!

Low gross profit margin - no ability to upgrade technology - no horizontal comparative advantages and competitive barriers - no competitive barriers, everyone rushes in - in order to grab orders, they can only actively lower prices, and then make profits through economies of scale - gross profit margins are further reduced - the entire industry forms a low-price bidding inertia and path dependence - after making money, there is not enough profit to drive reinvestment in manufacturing and promote technological upgrading - the money earned is transferred to real estate, finance and other industries with high returns.

This was the status of most Chinese companies, especially private companies, from the 1980s to the first decade of the millennium.

It can be said that if there was no national will to implement and support it, it would undoubtedly be a dream for China to achieve comprehensive catch-up and surpassing in manufacturing like later generations and become the world's only manufacturing superpower!

However, students who have some knowledge of China’s modern economic development history know that China’s manufacturing industry began to gradually achieve comprehensive upgrading after 2008.

why?
There are many reasons for this, but apart from the fact that China's national strength had already reached a stage where it could take small steps and jog slowly, there is another very important reason - the super-large money printing in 08 objectively caused a rapid decline in the average purchasing power of the RMB, but thanks to China's exchange rate policy, it also allowed the IRR of the domestic manufacturing industry to reach a very good number.

Therefore, since 2008, a large amount of funds have begun to flow into China, and China's industrial capital and commercial capital have entered a stage of rapid development that has astonished the world. Institutions waving money and frantically investing in various projects and industries can be seen everywhere in the country.

Although this process lasted only a few years, and soon these capitals shifted from industrial capital and commercial capital to financial capital due to oversupply and various reasons, these few years were enough for China to achieve rapid industrial upgrading in all aspects, and under the regulation of the country, it entered an orderly iterative process - although the Chinese themselves did not feel anything, this rapid qualitative change process, like nuclear fusion, made researchers all over the world drop their jaws in shock. This shows the terrible heritage of an ancient country with a history of 2008 years. (If you doubt this, you might as well check it out yourself to see whether most of the various applied technologies and those technologies that were once blocked or even blocked by foreign countries have emerged and broken through like mushrooms after rain since 2010, especially during the period from 2016 to .)
Well, at this point, I believe everyone should know the importance of improving IRR - although under China's national conditions, it may not be a decisive factor in industrial upgrading, but it is definitely one of the most important endogenous factors.

Through the previously sorted out endogenous behavior driving chains of most industries and enterprises before the late millennium, it is not difficult to see that whether or not sufficient gross profit margin and profit driving force can be retained at the beginning is crucial to improving the IRR level of the manufacturing industry and then entering a relatively benign positive cycle - even if this positive cycle may not last long, its value may be immeasurable.

Then the problem is coming...

The 90s was an era of change and uncertainty. Given the current international environment and China's situation, it was impossible to change the foreign trade business, which was mainly in the form of "three imports and one supplement", in the short term. In other words, it was impossible to leave you with too much gross profit... Firstly, those "international friends" could not be so kind; secondly, the international division of labor distribution of the smile curve did not allow it.

In this case, it is undoubtedly a pipe dream to want to get enough gross profit from the foreign trade business with an economic correlation of up to 70%. Is improving the IRR of the manufacturing industry also equivalent to YY without limits?

In fact, this may not be entirely true.

Didn’t the teacher say that if you work hard, you can have enough food and clothing, and you can even farm in the Peach Blossom Spring!
Since it is nothing but a dream to expect those "international friends" to leave you enough gross profit in the division of labor chain of international manufacturing business, why don't we become the upstream end of the international division of labor and redistribute the business ring distribution of the smile curve?
It doesn't need to be a lot. As long as the gross profit from the allocated business can make the IRR exceed 18%, and then maintain it for a few years, you will be fully satisfied.

This is not YY.

At this time, Europe and the United States' industrial competitors are island countries. No matter how much you hate island countries, you have to admit that they are not a soft persimmon in this regard. Therefore, the industrial game between Europe and the United States and island countries will continue for several years.

Therefore, as long as China can make good arrangements in the Mexican springboard market in advance, there will be plenty of opportunities to reallocate international division of labor business links when the NAFTA agreement comes into effect.

Given Mexico's national conditions, it shouldn't be difficult to ask Shen Xing's people to find a few suitable people (not necessarily Chinese) to set up a company, and then use local connections to accept investment from the United States, and then get production order projects for the North American market, right?

In today's manufacturing industry where the division of labor is becoming increasingly refined, is it excessive for a project company that has received an order to look for a number of local partner companies?
As for whether these cooperative companies are run by locals or Chinese, it doesn’t matter, as long as there are no Japanese people behind them.

Since the end of the Gulf War, the United States' industrial capital has been rapidly shifting towards financial capital. Under the guidance of "return on investment only", the project company and its peripheral partner companies have reached cooperation with China, which has lower labor costs, and subcontracted some manufacturing business, and authorized or transferred some "insignificant" technologies. Is this not excessive?

Not only is it not excessive, but even all the accessories and processes are subcontracted. It doesn't matter if the project company in Mexico only retains the assembly or LOGO business. As long as the cost and quality control meet the standards, the numbers on the financial statements look good, and the red lines are not crossed, how to operate is the business of the project subcontractor.

Don't underestimate this little change.

Although the total cost and total profit are fixed for the investors in the United States, the gross profit that Chinese companies can get is completely different due to the different subcontracted processes. Perhaps this so-called "difference" is just a few percentage points higher gross profit per piece. However, under the influence of the exchange rate difference and the obvious difference in average purchasing power between the two places, this little extra gross profit per piece is enough for Chinese companies that have received orders to create a relatively satisfactory IRR locally.

Of course, this is only one side of the story.

Don't forget, the expansion of the scope of NAFTA this time is, to put it bluntly, a competition between the United States and the island countries in the industry. The companies in the island countries are not stupid enough to sit and wait for death. Therefore, in this process, whether it is borrowing from China or for other considerations, it is normal to give up some benefits to Chinese companies such as Dahua. Add the two together, as long as the control is good, those Chinese companies that seize the opportunity can make a lot of money!

………………

After hearing Yang Mo briefly explain the logic behind this, everyone present fell into a strange silence.

As the saying goes, different trades mean different mountains. Lacking relevant experience in this area, they naturally could not judge whether what Yang Mo said was true or false, let alone whether the 18% IRR that was repeatedly emphasized had any scientific basis.

But it is obvious that Yang Mo's grand narrative style makes it difficult for them to find something to exploit... Although the fundraising method of Xialiu Distribution Society is indeed suspected of violating regulations, as the saying goes, those who achieve great things do not care about trivial matters. It doesn't matter whether the cat is black or white, as long as it catches mice, it is a good cat.

Besides, Yang Mo has emphasized before that Dezhou is a pilot city for the tax-sharing reform, and the Urban Development Fund Company itself is a key unit responsible for experimental tasks. If you can't even do this, what reform, innovation, and pilot project can you talk about?

If he and others continued to hold on to the fundraising method of Xialiu Sales Society, he would be severely criticized instead of being punished by the organization.

You Yakun calmly pinched the joint of his thumb, quickly calmed down, and showed a warm smile on his face: "Boss Yang is indeed a talent that the organization has high hopes for. His broad vision and flexible thinking are really amazing;"

"But, can I, on my own behalf, give you a small suggestion, Mr. Yang?"

Yang Mo smiled modestly: "Mayor You, you are too kind. I just made some changes and attempts based on the ideological guidance of the organizational documents and the actual situation in Texas. I don't deserve your praise. "

"Besides, I am young after all. I don't have as much work experience as my leaders and predecessors. My position and vision are not as good as yours. Therefore, it is inevitable that I have some shortcomings in my ideas and working methods. "

"Mayor You, you are very experienced and your vision is far beyond the reach of a junior like me, so what is your suggestion...are there any serious shortcomings or loopholes in my idea?"

At the end, Yang Mo looked anxious and curious, like a humble and studious child: "If there is anything lacking, please feel free to give me some advice, Mayor You."

You Yakun's eyes twitched, but he laughed: "Boss Yang is well-known for his expertise in economic construction. How can I be qualified to give him advice?"

"But I do have a small suggestion."

At this point, You Yakun's expression became more friendly: "Since your idea, Mr. Yang, is to increase the internal investment threshold rate of return of the manufacturing industry in Dezhou through the redistribution of overseas business division of labor, then... why do you have to target those township enterprises and village collective enterprises?"

Looking around at everyone in the conference room, You Yakun smiled heartily: "I think the enterprises in our city can also take on this important task... If Mr. Yang is worried about the funding issue, don't worry, the city will find a way to help you solve it. If it doesn't work, I will shamelessly ask the organization for help. With so many state-owned enterprises, it's impossible for them to be inferior to those township enterprises, right?"

He was indeed an old fox. When he saw that things were impossible, he immediately gave up the idea of ​​controlling Yang Mo and started to fight for his own interests.

Yang Mo was somewhat surprised at You Yakun's courage. After all, there were too many small variables in this plan, and even he couldn't guarantee whether this idea could be implemented. However, the other party dared to take the initiative to bring it up when nothing was decided.

Is it because the undefeated golden body he has built up in the past two years is too deceptive, or is it that this old fox wants to give it a try after seeing that he has not achieved any results?
After a moment of hesitation, Yang Mo shook his head and said, "Mayor You, I appreciate your support, but... I'm sorry, the city's companies cannot get involved in this matter."

You Yakun was stunned: "Why?"

why?
Why else?
These companies are not doing their job well!

In later generations, China established industry entry barriers and industrial protection policies in many fields and provided great support;
On the one hand, this is certainly for strategic security considerations, but on the other hand, it is also intended to increase the IRR of these industries through various forms of support, thereby achieving a positive cycle in the internally related system.

But the result?

Again, without catfish, no matter how much water you pour into the seafood truck, other fish will not be able to flutter around.

However, Yang Mo could not say such words, so he could only find a random excuse: "It's very simple. More than 90% of the enterprises in the city are state-owned enterprises. This will bring huge variables to the actual implementation of the plan... and those village collective enterprises are also state-owned economies, but in the judgment of outsiders, they are two different things."

After saying that, Yang Mo thought for a moment and added, "Moreover, the overseas market is volatile, and the situation in Mexico is more complicated, so no one can say for sure which sub-projects can survive, and which sub-projects will fail halfway due to various unpredictable reasons... One of the important reasons why I entrusted Xialiu Sales Agency to raise funds from so many township enterprises and village collective enterprises at the same time is to consider hedging market risks through quantity;"

"After all, those village collective enterprises are small in size, so even if they fail, they can quickly turn around or make up for it in other ways. But if it were a large or medium-sized enterprise in the city, once the road is blocked, it would be difficult to wind up."

Ok……

Is it due to these two considerations?
You Yakun pondered for a while and had to admit that the two reasons given by Yang Mo were indeed very convincing.

Today's international situation is becoming more and more complicated. If we directly come forward as a Chinese state-owned enterprise or a directly affiliated enterprise of a state-owned enterprise, we will be in a passive position once we are discovered.

Of course, more importantly, once the project ultimately fails for various reasons, the follow-up work for these companies will be a real headache.

Thinking of this, You Yakun and Tian Guangyue looked at each other and sighed helplessly.

This little loach!
It's so damn slippery!

You can't catch it, and you can't get close to it.

Is it possible that in the next few years, I really can only fight alone?

Thinking of the documents recently conveyed by the organization and some news he had heard, You Yakun glanced at Ye Tao who had been silent beside him.

Hey……

It is so difficult to preside over economic development in a newly promoted prefecture-level city like Dezhou!

(End of this chapter)