1. Core Premise: The Profitability of a Mature Industry Is Fundamentally About “Dividing the Cake”
When an industry enters maturity without finding a second growth curve, there are two possible outcomes: either being replaced and entering decline, losing its investment value; or, thanks to a wide moat, entering the “stable market cyclicalization” stage and becoming a cyclical industry. At this point the market size is hard to expand further—like “a cake that can’t get any bigger, only expand and contract with temperature.” The investor’s focus shifts from “overall growth of the track” to “how much cake the companies within the industry can get,” requiring careful selection of the most profitable links and leading enterprises.
The core logic of this chapter: starting from the supply side, judging an enterprise’s profitability by analyzing the industry’s competitive landscape (horizontal + vertical)—only when horizontal competition is not intense and there’s bargaining power in vertical relationships can enterprises in the industry achieve good profitability. All analysis unfolds around the three levels of Know-what, Know-why, and Know-how.
2. Horizontal Landscape: “Cake Distribution” Among Peers (Focus: Industry Concentration and Capacity Cycle)
(1) Know-what: Core Indicators—Market Share and Industry Concentration
Market share: A single enterprise’s sales ÷ the whole industry’s sales. Its core function is to reflect the enterprise’s bargaining power with upstream and downstream (though it doesn’t reflect cost-control differences, it’s enough to judge the enterprise’s position).
Industry concentration (CRn): The sum of the market shares of the top n enterprises by market share in the industry (common are CR3, CR4, CR5, CR8). It’s the core indicator describing the industry’s horizontal competitive landscape.
Market structure classification (by CR8):
Competitive type (0%＜CR8＜40%): decentralized competitive (0%＜CR8＜20%), low-concentration competitive (20%≤CR8＜40%). Enterprises have similar scale and profitability, and the market favors enterprises with large growth space.
Oligopolistic type (40%≤CR8≤100%): low-concentration oligopoly (40%≤CR8＜70%), extremely high oligopoly (70%≤CR8≤100%). Industry barriers are high, leaders have strong bargaining power, and profitability is more stable.
Key conclusion: The higher the industry concentration, the stronger the leading enterprises’ bargaining power, and the higher the industry’s overall profitability. Example: the food and accommodation industry is a “big industry with small companies,” with few listed companies; its CR8 is calculated by dividing the sum of listed companies’ sales by the whole industry’s market size, which reached 90.85% in 2023.
(2) Know-why: The Main Causes of Changes in Industry Concentration
Macroeconomic influence: Moves inversely with industry concentration—during an economic downturn, leaders have strong risk resistance (cash flow, financing advantages), and small and medium enterprises shut down and cede share, raising concentration; during an upturn, the reverse.
Policy influence: Supply-restricting policies (such as supply-side reform and the “dual carbon” goals) accelerate the clearing of backward capacity and push concentration up; demand-stimulating policies also indirectly affect concentration.
Industry life-cycle influence: Concentration first falls then rises through the life cycle—introduction stage (few firms, high concentration) → growth stage (a large number of firms pour in, concentration falls) → maturity stage (firms are eliminated/merged, concentration rises) → decline stage (few firms remain, high concentration).
Capacity cycle (the core influencing factor):
Definition of capacity: Under existing technological conditions, the maximum output when capital and labor are fully utilized; capacity utilization = actual output ÷ maximum capacity.
The four stages of the capacity cycle: supply falls short of demand → capacity surges → capacity clears → landscape improves (the supply-demand gap triggers the cycle, stemming from entrepreneurs’ delayed reactions and expectation bias).
Examples to associate: The dense layout of coffee shops like Luckin and Cotti resembles the “capacity surge” stage, prone to oversupply; in the CDN industry, the entry of Alibaba and Tencent triggered a price war, squeezing the share of small and medium vendors—reflecting intensified competition after a capacity surge.
(3) Know-how: Methods for Analyzing Industry Concentration
Qualitative analysis: Follow the pattern “leaders passively expand capacity → leaders actively expand capacity → outsiders expand capacity in disorder.” The core signal: when outsiders blindly pour in to expand capacity, the industry is near its peak (similar to the logic of stock-market sentiment).
Quantitative analysis:
Core indicator 1: Capital expenditure (CAPEX)—a forward-looking indicator of capacity expansion. It can be calculated from relevant items in the cash flow statement, or you can use “capital expenditure ÷ the sum of depreciation and amortization” to judge the industry’s stage (a ratio ≤1.5 may indicate the capacity-clearing → landscape-improving stage).
Core indicator 2: Inventory—the “reservoir” of supply. It has four stages (active restocking → passive restocking → active destocking → passive destocking). A historical high in inventory = oversupply (a danger signal); a historical low = undersupply or the industry bottoming out.
Example: CATL’s 60 billion yuan investment corresponds to 120-200GWh of new capacity, close to 1/10 of global lithium-battery demand, reflecting short-term performance explosiveness while weakening long-term growth sustainability; when the inventory coefficient of auto dealers is ≥2.5, inventory risk is extremely high.
Auxiliary indicators: Industry bottom (leaders cut production, track players exit, analysts don’t recommend); industry top (leaders expand capacity, outside players pour in, analysts upgrade ratings with a gap up).
Notes: Combine with the industry life cycle (insufficient capacity in the introduction stage, reduced capacity in the decline stage—if supply contraction exceeds the demand decrease, product prices may rise, as in the coal industry); leaders may not play by the book (expanding against the trend or proactively starting a price war to eliminate small and medium players).
3. Vertical Landscape: “Cake Distribution” Along the Industry Chain
(1) Know-what: The Distribution Subjects—the Composition of the Industry Chain
The industry chain is a chain formed by upstream and downstream industrial sectors based on technological and economic links, covering “supplier’s supplier → oneself → customer’s customer.” It’s the foundation of industry research. The core of profit distribution is: different links in the same industry chain get different “cakes,” and the cake a single enterprise gets is also affected by horizontal competition (the number of enterprises in the same link).
Example: In the distribution model of domestic cosmetics brands, terminal channels can get 50% of terminal revenue while the brand owner gets only 25%; some links get a bigger share overall, but because there are many participants in the same link, a single enterprise struggles to reach the scale for listing (except leading channels).
(2) Know-why: The Profit-Distribution Mechanism—Willingness to Bargain and Bargaining Power
Willingness to bargain: Depends on two factors:
The value share of the good/service in the downstream: The lower the share, the stronger the downstream’s willingness to bargain (e.g. a price increase on a car screw has a negligible effect on the profit margin of a 500,000-yuan car).
The industry cycle stage: In the growth stage “everyone has meat to eat,” and the willingness to bargain is weak; in the maturity stage the cake can’t get bigger, the parties’ game intensifies, and the stronger party has a strong willingness to bargain.
Bargaining power: The core is “whether the counterparty has a choice,” mainly looking at two things:
The industry concentration of each link: Links with high concentration have strong bargaining power.
Supply and demand: Links where supply falls short of demand and technology content is high have strong bargaining power and take the lion’s share of profit (e.g. in the 2019 photovoltaic industry chain, silicon material and silicon wafer gross margins were >20%, while cells were only 5.7%).
(3) Know-how: Core Indicators for Judging Bargaining Power
Gross margin: The stronger the bargaining power, the higher the gross margin (e.g. cosmetics brands have 60%-80% gross margins). It directly reflects the profitability of a link in the industry chain.
Ability to occupy upstream and downstream funds: Judged through accounting items—accounts payable (occupying upstream funds), advances from customers/contract liabilities (occupying downstream funds). The stronger the ability to occupy funds, the stronger the bargaining power.
4. Core Summary
The core of industry profitability is the competitive landscape, divided into two dimensions: horizontal (peers dividing the cake) and vertical (upstream and downstream dividing the cake):
Horizontal landscape: The core is industry concentration, affected by the macroeconomy, policy, and the industry life cycle, and after maturity mainly driven by the capacity cycle. Through qualitative (signals of outsider capacity expansion), quantitative (capital expenditure, inventory), and auxiliary indicators, you can judge the industry’s stage and profit potential.
Vertical landscape: The core is industry-chain profit distribution, determined by the willingness to bargain (value share, industry cycle) and bargaining power (concentration, supply and demand). Through gross margin and the ability to occupy funds, you can judge each link’s profit position.
Investment takeaway: For a mature-stage industry, abandon “full-track coverage” and focus on “a high-concentration horizontal landscape + high-bargaining-power vertical links,” carefully selecting leading enterprises and high-quality niche links.
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