Once this decision is officially implemented, I believe it should have a certain impact on the entire industry. Here is a simple analysis for your reference.

What is traditional manufacturing for State Grid?

Traditional manufacturing does not have a clear definition; it is just a vague consensus. I believe that narrowly defined traditional manufacturing refers to industries with low entry barriers, low technological content, low added value, intense market competition, and low profit margins.

This brings up two in-depth questions:

1. Which manufacturing industries involved with State Grid are traditional manufacturing?

Power equipment manufacturing is not necessarily all traditional manufacturing. For example, ultra-high voltage equipment, some DC electrical equipment, and certain power electronic devices, as well as integrated transmission and distribution equipment, are areas with high technological content, patent barriers, and high added value. Some of these are even "bottleneck" equipment for State Grid, which has clearly stated in its documents that they need to be developed.

I believe that the "traditional manufacturing" that State Grid intends to exit mainly involves the manufacturing of medium and low voltage electrical equipment, wires and cables, power pole equipment, and some secondary equipment manufacturing.

2. Which manufacturing companies of State Grid will exit?

The electrical equipment manufacturing business of State Grid includes direct industry companies such as NARI Group, XJ Group, Pinggao Group, Shandong Electric Group, and State Grid Information and Communication Industry Group. From what I understand, some of these companies had news of partial or complete divestment in the second half of last year, and relevant plans are also in the process of being formulated.

However, I believe this is not the entirety of the exit. The aforementioned companies are leading enterprises in the manufacturing sector of State Grid, and their products are mainly aimed at the transmission network. More importantly, and with a more far-reaching impact, are the collectively owned power equipment manufacturing enterprises in various provinces, cities, and counties under State Grid, which mainly provide medium and low voltage distribution equipment and belong to the long tail part.

The exemplary case from the telecommunications industry

The large-scale exit of network operators from related manufacturing links actually happened once during the reform of state-owned enterprises in China, specifically in the telecommunications industry, where the leading government department is now the Ministry of Industry and Information Technology (previously the Ministry of Information Industry, and before that, the Ministry of Posts and Telecommunications). The new chairman of State Grid, Mao Weiming, has experience working in the Ministry of Industry and Information Technology, so studying the case of the telecommunications industry has certain reference significance for the power industry.

Due to space constraints and my time, I can only outline the thoughts here.

The large-scale popularization of civilian communication technology in China was triggered by the transition from analog telephone systems to digital program-controlled telephone exchange systems, which occurred from the late 1980s to the early 1990s. At that time, China Telecom (which was formerly the China Postal and Telecommunications Administration under the Ministry of Posts and Telecommunications) was also a dominant player, with provincial companies as entities responsible for the construction and operation of local fixed telephone networks (similar to distribution networks) and long-distance communication networks (similar to transmission networks).

Later, to build mobile communication networks, China Mobile was spun off from China Telecom, and China Unicom was established, leading to today's three-operator landscape. As an old state-owned enterprise, China Telecom monopolized the national fixed telephone network at that time and was responsible for the main transmission backbone network, making it quite powerful, and it also had its own related manufacturing companies. These mainly included two types:

1. Directly affiliated industry companies. Mainly the "Datang Telecom" restructured from the Telecom Technology Research Institute of China Telecom, which was once known as "Giant China" in the telecommunications circle. Jilong Communication had a military background, while Datang represented Datang, Zhong represented Zhongxing, and Hua represented Huawei.

2. Various provincial tertiary industry companies. In the mid-1990s, to alleviate employment pressure at that time, the state encouraged various state-owned enterprises to establish tertiary industry companies (i.e., service businesses). The collective enterprises of State Grid also started from that time, along with the tertiary industry of provincial and municipal telecommunications companies. Huawei's first pot of gold came from ten thousand exchange machines, but few people know that to win over telecommunications bureaus that looked down on domestic products, Huawei established joint ventures with almost every provincial tertiary industry company, outsourcing non-core exchange machine components manufacturing, such as cabinets, power supplies, and all engineering services to the joint ventures.

Later, these companies gradually separated from their main businesses, forming standardized capital relationships. The main methods included:

1. Leading companies operate completely independently and participate in market competition. For example, Datang Telecom, during the 3G era, still wanted to make an effort, buying out Siemens' TD-SCDMA technology. The Ministry of Industry and Information Technology asked China Mobile to promote the TD plan, and China Mobile suffered greatly due to adopting Datang's TD technology and services. By the 4G era, they eagerly partnered with Huawei and parted ways with Datang, leading to Datang Telecom's decline.

2. Various local tertiary industries, some quality assets were integrated to establish China Communications Services Corporation, which was listed in Hong Kong; another part was the establishment of telecommunications industrial companies in various provinces to integrate tertiary industry resources. Although these enterprises are financially and managerially independent from their main operations and have established market-oriented operating mechanisms, they still provide planning, design, engineering, operation and maintenance, and value-added services for the telecommunications main business. Although there were many development plans back then, with grand ambitions to engage in gaming, social networking, and other internet businesses, claiming to invest a lot, almost none achieved substantial results.

I believe this path is very likely to be the path for State Grid to divest from manufacturing, and some ideas can also be reflected in State Grid's documents. As for whether the divested companies will end up like telecommunications industrial companies, lingering between decline and survival, we will analyze further.

The impact of State Grid's divestment from traditional manufacturing

This impact is divided into two parts: one is the impact on the divested enterprises, and the other is the impact on the entire industry.

1. Impact on the divested enterprises

1. Leading enterprisesIn the short term, the impact is not very significant. State Grid's infrastructure scale will expand in the next two years, especially with additional investments in ultra-high voltage, with total investments exceeding 450 billion this year, which will help the divested enterprises' short-term performance growth and stabilize their business (equivalent to giving them a short-term lifeline). In the medium to long term, on the one hand, investment in the power grid is entering a low to medium-speed growth range, and this trend will not change, so these enterprises will still face considerable performance pressure in the medium term; on the other hand, with the development of power marketization, new businesses in the energy internet aimed at the electricity side will grow. Whether these enterprises can turn the ship around and adapt presents certain uncertainties. Just like Datang Telecom, once they leave the protection of their main business, they cannot compete with Huawei in a fair market technology competition, let alone enter the mobile internet field. Of course, these leading enterprises have strong competitive capabilities in many areas, and whether they can establish a competitive incentive system to stimulate the vitality of the enterprises will be key (State Grid's documents have also mentioned this multiple times and have conducted pilot implementations, such as equity incentive systems, etc.).

2. Local tertiary enterprisesThe State Grid's attitude towards local tertiary industry enterprises is currently focused on integration, reducing the number of enterprises, and establishing provincial-level asset operation platforms. This is done through equity participation and control to merge local manufacturing industries. These enterprises essentially belong to system integrators, which are relatively traditional and have lower industrial added value. If they lose support from their main business, their survival may become difficult. Therefore, it is not possible to push them directly into the market all at once. Instead, it is similar to the telecommunications integration approach for the tertiary industry, optimizing and integrating at the provincial level, while providing certain supporting services (similar to telecommunications tertiary services, such as planning and design, integration debugging, construction operation and maintenance, and value-added services) under the premise of fair competition. However, in the medium to long term, the existing business of these enterprises is shrinking, transformation is difficult, and a lack of core competitiveness will be the biggest obstacle to survival. The future state may be: surviving, but not thriving. Therefore, for local manufacturing industries, how to adapt to the State Grid's energy internet strategic trend, seize the new trend of intelligent and digital distribution equipment, and transform into energy service businesses, truly sinking to the customer side and forging their own core capabilities, is a challenge.

2. Impact on traditional power manufacturing industry

For various power manufacturing enterprises outside the State Grid system, I personally believe that opportunities and challenges coexist.

1. OpportunitiesFirstly, the fairness of the State Grid's market-oriented procurement will further increase. Under the background of investment compression and strengthened supervision, the State Grid will pay more attention to equipment quality and the total lifecycle cost (because in the new round of transmission and distribution price regulation, repair costs + labor costs must not exceed 1.5% of the asset's original value, this will have a significant impact on the future asset procurement and maintenance strategies of grid enterprises), so the chances of high-quality private enterprise products winning bids will increase.

Secondly, in a publicly fair market environment, the concentration of industries at various stages will increase in the future, and high-quality large private enterprises will gain more opportunities for asset mergers, equity transactions, and industrial chain extensions.

Thirdly, the grid and various energy enterprises will extend downstream, and in the customer service segment, they may choose to cooperate with private enterprises that have strong customer resources and service capabilities.

2. ChallengesFor small and medium-sized integrators and engineering service enterprises lacking core technologies, I personally believe that challenges outweigh opportunities. These challenges come from four aspects.

Firstly, under the backdrop of slowing electricity consumption growth and the State Grid's investment slowdown, the entire power equipment manufacturing industry has obvious overcapacity. After mergers and reorganizations, local tertiary enterprises will increase their competitiveness, posing challenges to private enterprises as everyone competes for limited incremental market share.

Secondly, the State Grid has not completely abandoned manufacturing; instead, while abandoning low-end, low-value-added manufacturing, it has proposed the slogan of seizing the technological high ground. This high ground mainly refers to the core technologies related to the energy internet that combine high-end technologies such as 5G, industrial internet, AI, and power electronics technology. I believe one of the typical characteristics is: "software-defined power + intelligent interaction of source, grid, load, and storage" under power spot conditions. This trend of industrial development, which integrates primary and secondary systems and combines secondary systems with cloud big data AI, will be the main battlefield in the future, and many private enterprises are not fully prepared.

Thirdly, as the service business extends, the incremental market space is gradually narrowing. Therefore, in conjunction with electricity sales, incremental distribution, and comprehensive energy services, everyone is extending into the existing equipment service market, while also needing to extend in line with the digitalization trend mentioned in the second point. Many private manufacturing enterprises still have a "project-driven" gene and have not built core service capabilities.

Fourthly, there is the issue of industry concentration. The State Grid is building a collective enterprise asset operation platform at the provincial company level, integrating local tertiary industries, and internally optimizing the allocation of technology and resources. The State Grid's industrial companies will further integrate resources and seize high ground. Marketization means specialization, and the trend of market competition is that resources continuously concentrate towards leading enterprises. The mid and downstream segments of power equipment manufacturing, especially complete sets and installation, have traditionally been industries with obvious regional attributes. I believe that in the future, cross-regional and cross-professional competition and restructuring will become more intense, and there may even be a reshuffling of the original industrial pattern in certain regions.

To summarize

The State Grid's divestment from traditional manufacturing is a significant business decision of "doing what should be done and not doing what should not be done," which is to seize the technological high ground and promote industry development through marketization, while divesting from low-value-added low-end manufacturing. The broader context of this decision is that in the future, with the slowdown in electricity growth and reduced investment, the entire industry will undergo five transformations:

1. Transformation from manufacturing to service industry

2. Transformation from traditional power equipment to digital power systems

3. Transformation from mechanical power components to power electronic solid-state devices

4. Transformation from "distribution and sales" acting independently to "integration of generation, distribution, consumption, and regulation"

5. Transformation from traditional grid operators to energy internet enterprises

The State Grid's strategic planning also aims to insight and lead this industry trend. Therefore, as various power equipment manufacturers outside the grid, they should strategically pay attention and prepare in advance. Future industry competition is likely to intensify further, and only those enterprises with greater foresight and determination in business, technology, and strategy will stand out.

Finally, let me share an interesting perspective:There is no such thing as "traditional manufacturing industry" in the world, only "traditional manufacturing enterprises that are outdated and unable to change."In the future, in the wave of digitalization and intelligence of the energy internet, the traditional electrical equipment manufacturing industry will achieve a multi-format integration of "primary + secondary + cloud AI + power electronics + service-oriented," thus becoming a brand new intelligent power equipment industry. Only enterprises will be eliminated, not the industry.

Reform is not easy; cherish it as you go.