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The pen squeaks as Jeff Pan sketches a chart on a\u00a0white-board. He draws a black line signifying consumption that shoots up, then a\u00a0blue line\u00a0that\u00a0edges higher\u00a0in fits and starts, before\u00a0ultimately overtaking the first.<\/p>\n
That, he explains, is supply.<\/p>\n
Pan, who manages\u00a0a mid-sized\u00a0copper processing plant in China\u2019s manufacturing heartland, is laying out\u00a0a lesson he and others in the high-tech supply chains\u00a0championed by President Xi Jinping have learnt to their cost\u2014demand isn\u2019t\u00a0everything.<\/p>\n
\u201cCompetition has been too fierce these past two years,\u201d Pan said at his\u00a0plant near the factory hub of Yiwu, a few hours\u2019 drive south of Shanghai. \u201cA lot of companies will rush to a growing industry. At\u00a0some point there is a big filter and\u00a0only the strong can survive.\u201d<\/p>\n
Back in 2017, when he set up\u00a0Zhejiang Huanergy Co.<\/a>, Pan aimed to seize on what he forecast would be a vast need\u00a0for super-thin copper foil used in electric-vehicle batteries and electronic circuitry. He was right, and consumption ballooned. Huanergy,\u00a0as the company is known,\u00a0supplies\u00a0Chinese powerhouses like BYD Co. and Contemporary Amperex Technology Co. Ltd.\u00a0<\/p>\n The trouble was that a lot of other firms had the same idea, a dynamic that has affected other sectors\u00a0picked by the government<\/a>\u00a0to help remake the economy and dominate tomorrow\u2019s industries.<\/p>\n The predicament is\u00a0visible across green-energy\u00a0manufacturing, one of the key sectors in Xi\u2019s effort get ahead of geopolitical rivals. Solar panel producers have\u00a0been engulfed by an\u00a0oversupply crisis<\/a>\u00a0that\u2019s pushing companies to\u00a0hefty losses<\/a>\u00a0and forcing a brutal shakeout. In\u00a0batteries<\/a>, China\u2019s capacity is already big enough to feed all of global demand and more.<\/p>\n The excess\u00a0has left\u00a0companies like Huanergy battling to capitalize on Beijing\u2019s attention\u2014while seeking to avoid\u00a0becoming a casualty\u00a0of Xi\u2019s\u00a0\u201cnew productive forces\u201d<\/a>\u00a0drive.\u00a0A\u00a0twist on an\u00a0old Marxist concept of \u201cproductive forces,\u201d\u00a0the campaign in practice\u00a0entails using state power to accelerate everything from nuclear technology to EV output, with the aim\u00a0of helping fire up\u00a0tech advances,\u00a0productivity gains and ultimately economic growth. It\u2019s likely to make a fresh appearance at next week\u2019s policy\u00a0gathering<\/a>\u00a0in Beijing.<\/p>\n Copper should, in theory, be a beneficiary. \u201cGreen\u201d demand for the metal will grow at more than 10% this year and next in China, according to Goldman Sachs Group Inc\u2014versus almost no expansion elsewhere.\u00a0<\/p>\n But Huanergy\u2019s experience makes clear that the consequences of economic imbalances are far-reaching, even for those at or close to the cutting edge.<\/p>\n The copper foil rolled out at Pan\u2019s plant is not unlike\u00a0the familiar aluminum\u00a0used in\u00a0kitchens everywhere,\u00a0only more fine and with higher-tech uses.\u00a0In lithium-ion batteries, ultra-thin slices of copper,\u00a0highly conductive and heat tolerant,\u00a0are a vital part of the anode. The same sheets are\u00a0ubiquitous in consumer electronics and computing\u2014almost everywhere that requires\u00a0super-smooth connectivity between components.<\/p>\n Annual demand for copper may grow more than 50% by 2040, according to estimates by BloombergNEF, a\u00a0figure that mostly captures\u00a0wires and cables in vastly expanded electricity networks.\u00a0<\/p>\n According to consultancy CRU Group, demand for flat-rolled copper demand, including plate, strip and\u00a0foil, will rise by almost a fifth\u00a0from 2023 levels by 2028, partly driven by demand growth from foil.<\/p>\n \u201cIt\u2019s relatively small, but a very fast-growing market,\u201d Pan said.<\/p>\n A former\u00a0China Daily\u00a0<\/em>journalist married to the daughter of Shao Qinxiang, founder of parent Huayuan Group, Pan spotted an opportunity not long after his return to China from the U.S., where he studied for a masters in business administration.\u00a0<\/p>\n Huayuan, one of the world\u2019s biggest suppliers of vitamin D as well as a textiles and building materials, also had an established copper fabrication plant. Pan\u00a0made a pitch for the company to eschew\u00a0traditional copper products in favor of manufacturing the foil that tech companies required.<\/p>\n \u201cWe had to believe that both\u00a0electronics, which means all the devices and digital applications, and\u00a0batteries were\u00a0going to become very important,\u201d he said. \u201cBoth of these came true, but at that time it was a leap of faith.\u201d<\/p>\n Few will dispute\u00a0that Pan won the tech portion of his bet. Massive computer power is needed to support artificial intelligence, and that in turn requires metal, even if China\u2019s copper sector is today struggling with too much processing capacity and not enough raw material.<\/p>\n The outlook for copper\u2019s traditional applications is more cloudy. Processing fees have been dropping a few hundred yuan every year due to \u201cinsufficient demand and rapid expansion in domestic capacity,\u201d Hai Jianxun, a sales executive at Henan Yuxing Copper Co., a smaller firm in central China that makes copper pipes for use in items like air-conditioners, said by phone. That means \u201cno meaningful profit\u201d for the moment.<\/p>\n What Pan did not expect was a\u00a0surge in other companies following the same path.\u00a0<\/p>\n Still, what has brought industry-wide overcapacity could also develop China\u2019s technological edge.<\/p>\n The only way out, Pan\u00a0reflects as the plant quietly hums in the background, is to move up the value chain, cutting costs and trying to make better products. For copper foil, that means sheets that are thinner, cleaner and smoother at the molecular level.<\/p>\n There has to be a way of separating the companies that will survive from the rest, he\u00a0said.\u00a0\u201cI think that\u2019s the natural way of capitalist system.\u201d<\/p>\n<\/div>\nSubscribe to the Fortune Next to Lead newsletter to get weekly strategies on how to make it to the corner office. Sign up for free<\/a>.<\/div>\n