Code View | Wu Jian, Source Code Capital: Reassessing the Value of Manufacturing

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Source Code Capital invests in technology-driven innovation,

and in the creation of lasting, genuine value.

On September 29, 2022, the "Doing Practical Things for Enterprises" supply-demand matchmaking conference (Beijing inaugural session), jointly hosted by the China Academy of Information and Communications Technology and the Alliance of Industrial Internet (AII), was successfully held online.

At the conference, Wu Jian, Partner at Source Code Capital, delivered a keynote speech titled Industrial Internet Brings Value Reassessment to Manufacturing. He argued that the industrial internet sector holds tremendous value potential with numerous new opportunities. "The value of technological and process innovation in China's manufacturing sector is substantial, enabling us to achieve significantly lower costs at comparable quality, or substantially higher quality at similar costs."

The following is Wu Jian's speech:

As early as five or six years ago, we began continuously following research related to the industrial internet. Our entry point at the time was examining the value of robots as the last mile from an industrial internet perspective, and we also explored the critical role of new energy in manufacturing. Over the past few years, we have witnessed deeper integration between new-generation information and communications technologies and industry. From new infrastructure to application models to industrial ecosystems, people, machines, objects, and systems have gained entirely new ways of connecting, and manufacturing and service industries spanning entire industrial chains and value chains are emerging. Today, continuing this theme, I hope to share some new insights from the past year.

First, let me introduce my firm, Source Code Capital. Founded in 2014, Source Code Capital invests in technology-driven innovation. In its early years, it invested in ByteDance, Meituan, KE Holdings, and Li Auto. Starting in 2016, Source Code gradually increased its investments in B2B and hard-tech companies. To date, Source Code has invested in over 300 startups, spanning seed, early, and growth stages, across industries including industrial digitization, intelligent manufacturing, green development, consumer technology, life sciences, and international expansion.

In the broad sense of industrial internet, we have invested in companies such as Peraglobal and DeepWise. More narrowly defined, in intelligent manufacturing, we have invested in Biren Technology, HAI ROBOTICS, Mech-Mind, Cloud Whale, XSKY, and Silicon Integrated; in green development, we have invested in Li Auto, Sunwoda Electronic Co.,Ltd., Poweroak, Unisun Energy Group, and JD Energy.

Reassessing Manufacturing's Value: Possibly the "Premier Industry of All"

In recent years, as the international situation has rapidly evolved, people worldwide may be newly appreciating fundamental issues such as energy security and food security. The potential impact of the energy crisis is particularly noteworthy — the last energy crisis was in the previous century, and the one currently unfolding in Europe has become a matter of close global concern.

From an energy perspective, one must recognize that a very significant transformation is underway: the traditional fossil fuel trajectory is accelerating toward a "new energy for manufacturing" direction. In the new energy sector, the entire "generation-grid-load-storage" chain — from power generation (solar, wind, hydro) to energy storage (batteries) to consumption (new energy vehicles) — is manufactured in factories; in other words, it relies more on a manufacturing foundation than a fossil fuel foundation. Additionally, while some fossil fuel products go toward chemicals, we are now seeing many chemical products being replaced through synthetic biology, with numerous new materials emerging. As smart agriculture, including vertical farming, spreads and becomes more accessible, and as more technological applications address food security, we see various industries trending toward reliance on manufacturing for iteration and growth.

From the perspective of high-quality manufacturing development, the arrival of the "5G" era has brought manufacturing and new technologies into close integration, enabling applications that reach every aspect of people's lives, from infrastructure iteration onward. The requirements for high-quality manufacturing development during this period will take supply-side structural reform as the main thread, intelligent manufacturing as the primary direction, and digital transformation as the key lever, driving innovative industrial internet development while also advancing new business forms and industries that will reshape enterprise structures, supply chains, and industrial chains.

From the perspective of enhancing national competitiveness, manufacturing may become an even more important pillar industry of the national economy going forward. This year's ninth meeting of the Central Financial and Economic Affairs Commission also proposed to "accelerate the use of industrial internet platforms to upgrade traditional industries and develop advanced manufacturing."

Over the next two to three decades, we might even consider that high-quality advanced manufacturing could become our "premier industry of all." This means that at this stage, we must reassess manufacturing's value, combine manufacturing with technological development, and more foresightedly recognize the impetus that manufacturing brings to national development.

An Investor's Perspective on Industrial Internet Value

First, from the intelligent manufacturing and robotics angle, human-machine collaboration has become an inevitable trend in human development and has reached a historical inflection point. Broadly speaking, Robotics 1.0 occurred in industrially developed countries, particularly centered on the automotive industry's manufacturing, with entire production lines growing around automotive manufacturing — Japan and Germany, for example. Robotics 2.0 is flourishing in China, broadly defined as service robots across various production lines: warehouse logistics robots, industrial robots, commercial robots for dining and dishwashing, medical service robots, and so on.

Source Code made early investments in robotics, as we believe the sector will see substantial development domestically. This is based on China's transformation from a manufacturing giant to a manufacturing powerhouse — a process that may no longer offer exponential explosive opportunities, but rather requires technological innovation to drive industrial development and solve "chokepoint" problems. It is also based on our assessment that robotics is an important solution to labor shortages and population aging on a global scale.

Under this investment philosophy, Source Code has invested in dozens of robotics companies, including industrial robot company Mech-Mind, warehouse logistics robot company HAI ROBOTICS, fruit sorting robot company DaoChuang Intelligent, dining robot company Keenon, and smart home robot company Cloud Whale, among others.

Another important area is EVs. In the first half of this year, two landmark shifts occurred: China's automobile exports surpassed Germany's, and Chinese new energy vehicle exports — led by BYD — surpassed Tesla's. Alongside rapid development in the EV sector, related industrial chains such as power batteries, represented by CATL, have also exploded. Source Code invested in Sunwoda Electronic Co.,Ltd., which is currently a major battery supplier for various EVs.

China has consistently emphasized achieving high-level technological self-reliance. Under this guiding principle, the value of corresponding technological and process innovation in China's manufacturing sector is substantial, enabling us to achieve significantly lower costs at comparable quality, or substantially higher quality at similar costs. This represents achievements that China's industrial internet and advanced manufacturing may continue to expand upon.

Meanwhile, the National SME Development Fund is an investor in Source Code, and we also pay close attention to "little giant" enterprises, hoping to help them realize value. In our investment process, Source Code places considerable weight on a startup's position in the industrial chain, with particular attention to "breakpoints" in that chain. While individual "little giant" enterprises may not be large in scale, they can leverage industrial development and serve as a backbone force in "strengthening" and "completing" industrial chains, driving high-quality economic development.

To date, 17 of Source Code's portfolio companies are recognized as "little giant" enterprises. They include: in technology and biomedical healthcare, DeepWise and Keya Medical; in dual-carbon, Poweroak and Unisun Energy Group; in enterprise services, XSKY, Yidianyun, CoolCollege, YiCan, and QingFlow; in intelligent manufacturing, Cloud Whale, Keenon, LD Robot, and Woan Technology; in industrial digitization, YQN Logistics and Ruigu; and in agricultural digitization, Yimutian. Most of these companies received Source Code's support at very early stages. Among them, XSKY, Yidianyun, and Space Transportation are national-level "little giants."

Industrial Internet Still Holds Many New Opportunities

Innovation and entrepreneurship in the industrial internet sector have been notably active in recent years, generating substantial new opportunities. According to the China Industrial Internet Investment and Financing Report by the China Academy of Information and Communications Technology, based on research and surveys, entrepreneurial activity among non-listed companies in 2021 returned to pre-pandemic levels. In 2021, the Alliance of Industrial Internet tracked 617 financing rounds across 544 industrial internet companies, up 36.5% year-over-year, with total financing amounting to approximately RMB 89.307 billion. This field is giving rise to increasingly more innovation and entrepreneurship.

Regarding new opportunities, operating systems and industrial software will be important areas to watch. The first major new opportunity lies in operating systems. New energy vehicle development is an essential path to building a strong automotive nation, and automotive operating systems represent a significant area of current attention. Beyond this, other sectors such as PC, server, and even more specialized domains like Metaverse, VR/AR require operating systems as underlying infrastructure — all offering opportunities for SMEs to participate. Source Code has invested in AR/VR operating system company IrisView, among others.

The second new opportunity is industrial software. In 2020, when the Ministry of Industry and Information Technology organized an industrial software symposium, Source Code had the honor of being the only investment institution participating. At that time, supply disruptions were not yet widespread, but we are now seeing an increasing number of categories facing cutoffs, creating opportunities across many specialized industries. For example, the new energy areas mentioned earlier such as energy storage, smart grids, synthetic biology, and smart agriculture — these industries, while relatively fragmented, will grow in scale as they expand and their service cycles lengthen.

Currently, industrial internet integrated applications are widely expanding into key national economic sectors, forming six new models: platform-based design, intelligent manufacturing, networked collaboration, customized production, service extension, and digital management. These are demonstrating ever more visible effects in enabling, empowering, and adding value, effectively promoting quality improvement, efficiency gains, cost reduction, green development, and safety in the real economy.

The 2022 Government Work Report proposed to "accelerate industrial internet development, cultivate and strengthen digital industries such as integrated circuits and artificial intelligence, and enhance innovation and supply capacity for key software and hardware. Improve digital economy governance, cultivate data factor markets, unleash data potential, and improve application capabilities to better empower economic development and enrich people's lives." We also believe that through further development and integration of technology and industry, and based on China's globally competitive manufacturing foundation, China's industrial internet sector will unleash even greater innovation and form distinctive advantages.

About the author: Mr. Wu Jian graduated from Tsinghua University with a Ph.D., Master's, and Bachelor's degree in Economics, and was a visiting scholar at the University of Wisconsin-Madison's Department of Statistics. He previously worked at China Investment Corporation and CIC Capital, engaging in overseas equity and fund investments focused on stable returns, and at the People's Bank of China headquarters. He joined Source Code Capital in 2015 and is a senior expert in policy research, corporate strategy, fintech, and capital markets.

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