This paper processes the key co-evolution mechanisms between firm capability and the fundamental technology trajectory of the industry. First, firm capability heterogeneity drives the selection process, which shapes firm positioning in the industry. Second, fundamental technology is changed both by firms and other organizations. Firms attempt to gain more control of the technology or re-position themselves in the industry through technological innovation while other organizations such as universities innovate out of scientific purposes. Third, the renewed industrial position makes feedbacks to the firms in their capability develop process. And finally, capability development processes renewal feed forward to reshape the industry capability pool. These dynamics of capability and technology are illustrated through the case of Lithium battery industry in Taiwan. The emerging applications of lithium battery for green energies trigger industry change as well as technology advances.