Journey 1995:Non-Stop

Chapter 360 The Logic of Chemical Engineering
After a detailed discussion with President Yuan, Yan Hui nodded: "President Yuan, I will give you an answer within three days."

“No problem. We have a limited number of first-level agent slots, so please make preparations as soon as possible, Mr. Yan.” Mr. Yuan nodded, got up and left.

Sometimes, the bigger the business, the less complicated it is, because the barriers to entry are too high, and there aren't many people who can get into that circle.

Here, we must mention a key historical event: the "Four Trillion Yuan Investment Plan" of November 5, 2008. At that time, the government planned to invest four trillion yuan over the next two years, from the fourth quarter of 2008 to 2009 and 2010, to build various technological infrastructure. The start of this plan was also related to the earthquake, with a focus on supporting the reconstruction work in Sichuan Province.

The core purpose of this massive economic stimulus package was to cope with the 2008 global financial crisis. However, it was precisely because of this plan that bank loans became extremely easy to obtain in 2009. Many small business owners were able to secure millions of dollars, and groups of people pooling their money could raise tens of millions.

Therefore, it must be made clear here that the end of 2008 was a dividing line. Before that line, being able to come up with 20 to 30 million in cash was a remarkable achievement. But by 2009, it became much easier.

Yan Hui certainly didn't have the ability to predict the future; he had simply been turned away from the steel industry back then, so he wanted to enter the field at this time.

There are two ways to operate in the steel industry, mainly depending on whether a price is locked in with the bidding party.

Let's say Yan Hui wants to participate in a steel bidding process for a construction site. He must prepare a bid and submit it. The process is quite complex. In short, the winning bid is officially awarded after a seven-day public announcement period, at which point the steel can be purchased and transported. The construction site typically settles accounts and issues invoices at the end of each month, with payment received in the middle of the following month.

Due to various reasons, the amount recovered will not be the full amount, but rather approximately 95% or 97%.

Although the winning bid price may be slightly inflated, the fact that the construction site will not receive full payment will lead to a further decline in profit margin, which Yan Hui estimates to be around 3%.

In other words, a primary distributor's steel trading can achieve a monthly profit margin of 3%, requiring approximately 3000 million yuan in working capital each month, with an annual income of about 1000 million yuan.

While the profit margin may seem to be only 3%, this is already a highly profitable industry. Can you really say that a 36% annualized return on trade is small?

The above is a low-risk plan. Whether the price of steel decreases or increases, it will not affect the profits of the primary distributors, because the bidding party settles the accounts based on the price of steel on the day of delivery.

Another high-risk option is for the primary agent to negotiate a price with the bidding party in advance. Once the price is agreed upon, the agent must supply goods at that price regardless of whether the steel price rises or falls.

In other words, if steel prices plummet after a contract is signed, the primary agent will make a fortune because their delivery costs will be significantly reduced; conversely, they will suffer huge losses.

Of course, if a distributor is very powerful and believes that steel prices will rise sharply, they can stockpile goods in advance. However, this carries higher risks and storage costs.

Not locking in a price guarantees a profit, while locking in a price carries high risk and high reward.

For businesses, the difficulty of making money varies depending on the size of their capital.

For example, Yan Hui might occasionally encounter a great small opportunity, where an investment of tens of thousands of yuan could yield a return of hundreds of thousands. However, reaching the tens of millions level is unlikely. Turning an investment of tens of millions into hundreds of millions? That's unrealistic. Perhaps emerging industries like the internet could, but Yan Hui isn't familiar with those.

Previously, Yan Hui ran a steel formwork company, with an annual return of 36%. That was something only companies with a few million yuan could afford; tens of millions wouldn't be enough. Steel is different; it's only worthwhile with over 100 million yuan. Yan Hui hasn't reached that level yet, but once he becomes a steel agent with a monthly turnover of over 100 million yuan, he'll have a very high status and position wherever he goes.

As for Yan Hui's chemical plant, it is also facing many challenges. On the one hand, Dr. Luo's chemical plant is an established one with its own sales channels, which are difficult for Yan Hui to compete with because the quality and price of his products are not much different from Dr. Luo's.

As the technology improves, Dr. Luo's costs will continue to decrease. Although they will still be higher than Heng Hui Chemical's, the difference won't be significant. In such a small adhesive industry, there's no need to rashly start a price war when everyone can already enjoy high profits; it wouldn't benefit anyone.

In addition, Sika has already built a factory in Jiangsu Province, so its costs won't be high, and may even be lower. Sika is a global brand; it's a name that car manufacturers can use for advertising and can prominently appear at the top of supplier lists. Therefore, if a company tries to aggressively seize Sika's market share, a price war is inevitable.

This price war definitely benefits the car manufacturers who purchase the goods, but it doesn't benefit Yan Hui. Because of Yan Hui and Dr. Luo's presence, Sika's prices have also dropped by 25% this year.

Yan Hui's pricing is 55% of Sika's original pricing. That is, if Yan Hui is priced at 55 yuan, and Sika was originally priced at 100 yuan, now it is priced at 75 yuan, which is still 36% higher than Yan Hui's price. At this time, Yan Hui's gross profit margin is 42%, while Sika's gross profit margin is still around 100%. Previously, Sika's gross profit margin was about 160%.

If Yan Hui's production capacity doubles, it will inevitably encroach on Sika's market share significantly. If Sika then lowers its prices, Yan Hui will really have a headache.

Considering all these factors, it's pointless to rashly expand Heng Hui's production capacity at this point; it will only face strong resistance, as Heng Hui is no longer the unknown player it once was. Initially, Heng Hui could attract customers by offering low prices and lacking brand recognition. However, once people became aware of Heng Hui's capabilities, they adopted price reduction strategies. Now, with the large-scale construction of new workshops, its competitors will all know.

Even Dr. Luo's factory, which has a slightly larger production capacity than Yan Hui's, has tacitly refrained from expansion.

The market for polyurethane adhesives is only so big; this is not the same as polyurethane elastomers.

Yan Hui and Chen Jian had discussed the Heng Hui Chemical matter at length.

Rather than opening another workshop and forcing Chen Jian to shuttle between two, it's better to stabilize the cash flow and business operations on-site, allowing Chen Jian's team to focus on quality control and R&D. Only by maintaining quality control can a brand be gradually built; only by continuing R&D can they gain an advantage in the next stage of competition.

The chemical industry has high profit margins, but only the top players can reap the rewards. For example, silicone sealant, which is most commonly used in automobiles, has a profit margin of only 5%-10% because the process is too mature. Some small factories are even no longer making money due to their scale disadvantage.

There's an unwritten rule in the chemical industry: for every doubling of scale, costs decrease by 5%-10%. Therefore, to run a small but efficient chemical plant, you must maintain technological leadership; otherwise, there will be no profit.

Here, I have to explain why many people don't understand why Yan Hui went into the steel business. In fact, the more profitable something is, the harder it is to control. Unless you can be like a company like Sika, at the forefront of human development, then of course you can do whatever you want with it.

The same principle applies in 2025. The leading companies can achieve profit margins as high as they want, and then use those high profits to fund research and development – ​​that's the style of giants.

(Some readers didn't understand why Yan Hui didn't expand production, so let me explain here.)

(End of this chapter)