Industry Cycles: Prisoners vs. Surfers

Nearly all industries operate in accordance with cyclical patterns. The only distinction lies in long-cycle sectors, whose fluctuation curves have an extremely gentle slope and appear to grow almost linearly when viewed from a macro perspective.

China’s real estate sector went through a 20-year expansion cycle driven by unleashed demand after the housing reform in 1998, with its compound growth rate once staying above 15%. Following the launch of the Double Reduction policy in 2021, the hundred-billion-yuan K12 after-school training market collapsed within three months. Consumer internet platforms saw explosive growth in user base and market value during the traffic dividend era, before entering a phase of stock competition after 2023. The number of active P2P online lending platforms peaked at over 3,800 in 2015, yet the industry was fully phased out by 2020. Benefiting from sound supply chains and overseas traffic dividends, cross-border e-commerce achieved a compound annual growth rate of 28% over the past five years. After the Federal Reserve kicked off its rate hike cycle in 2022, the total market value of cryptocurrencies plummeted by more than 70% from its peak, with leading trading platforms collapsing one after another.

All the above cases prove that cyclicality is an underlying rule governing every industry. Take the new energy sector as an example. The gradual withdrawal of government subsidies in 2018 sparked widespread doubts over subsidy fraud and overcapacity. Fueled by the dual carbon goals, downstream demand surged between 2021 and 2022, pushing the industry’s average gross profit margin to 35%. After 2023, massive new capacity led to a supply-demand imbalance, and price wars in the power battery segment dragged the average profit margin down to below 8%. The entire cycle took merely five years to complete.

Most market participants make decisions based on short-term trends, lacking in-depth understanding and judgment of industrial cycles. Typical pitfalls include advocating long-termism at the peak of a cycle while ignoring signs of reversing supply and demand. During an upward cycle, many enterprises blindly pursue diversification and expand into unrelated businesses under the guise of "ecological synergy". This stems from overconfidence in industry beta dividends: when the overall industry growth rate exceeds 20%, companies can still register positive growth even with below-average operational efficiency, often mistaking industry-wide windfalls for their own alpha capabilities. Leading real estate developers’ forays into FMCG, sports and new energy vehicles are typical ill-judged decisions made at cyclical peaks. Once the industry slides into a downturn, these enterprises shift to a "cash is king" strategy, cutting headcount and divesting non-core businesses. Such moves are nothing but remedial measures resulting from strategic vacancies. Having failed to build solid moats via technological advancement, brand building and cost control during growth phases, they can only erect temporary defenses in downturns. These enterprises are typical cycle prisoners.

The core strategy to weather cycles is counter-cyclical layout, or the capability of advance preparation — just as people repair heating systems in summer and install air conditioners in winter. Backed by steady cash flow from its carrier network business, Huawei founded HiSilicon in 2004 to independently develop chips as a backup plan for supply chain security. This strategic move became a lifeline when the company faced U.S. tech sanctions in 2019. When China’s real estate sales hit a record high of 17 trillion yuan in 2018, Vanke set "survive" as its core strategy. It deleveraged ahead of schedule and scaled down operations in tier-3 and tier-4 cities three years in advance, greatly mitigating liquidity risks during the industry adjustment starting in 2021. When ByteDance launched Douyin in 2016, short videos were still regarded by mainstream investors as a low-value niche content format. This layout helped ByteDance seize the last major traffic entry point in the mobile internet era. In 2015, when lithium iron phosphate batteries took up 70% of the power battery market, CATL invested over 3 billion yuan in research and development for ternary lithium technology. When demand for long-range new energy passenger vehicles boomed in 2018, the company captured more than 60% of the high-end market share. These enterprises are genuine cycle surfers. They launch strategic investments at industry troughs, when asset valuations drop by over 60% from cyclical peaks, talent mobility costs decline, and the competitive landscape remains unsettled. Investment costs at this stage are only one-third of those during booms, yet such moves secure market access for the next 5 to 10 years.

Conversely, the top priority at cyclical peaks is value realization. Enterprises should dispose of non-core assets, reduce interest-bearing debt and lock in existing profits to build safety buffers. Li Ka-shing earned his reputation for extraordinary foresight not for asset appreciation, but for his precise judgment of cyclical inflection points. He sold off mainland China real estate at the peak of the domestic property cycle between 2013 and 2014, and increased holdings in public utility assets in the UK when local asset prices hit bottom in 2020. This embodies the classic cycle arbitrage logic of "buy when others sell, and sell when others buy" — a fundamental skill for surviving industrial cycles.

Enterprises of different types need tailored cyclical strategies. Defensive industries such as water supply, power supply and expressways feature rigid demand, with growth closely correlated to GDP. Players in these sectors act as steady revenue collectors throughout cycles. Their core goal is not explosive expansion, but sustainable operation across ups and downs. The key principle here is anti-fragility: maintaining an asset-liability ratio below 40%, a cash flow coverage ratio above 15% and strong bargaining power over upstream and downstream partners to ride out cycles.

Offensive industries including technology, optional consumption and internet services are marked by volatile demand and rapid technological iteration. Players in these sectors must take the initiative to steer through cycles and go all-in with concentrated resources when strategic windows emerge. Accurate timing is the prerequisite for full commitment: moving half a step ahead of the industry secures first-mover advantages, while rushing two steps ahead may lead to premature failure due to excessive market cultivation costs and immature technologies.

The most dangerous mindset is pursuing aggressive expansion in upward cycles and slashing investment in downturns. Leveraging more debt to expand at peaks and cutting R&D spending on long-term layouts at troughs may seem beneficial for short-term gains, yet it essentially gives in to human weaknesses: greed at market highs and fear at market lows. This is the primary reason why most market players eventually get eliminated by industrial cycles.