‘Involution': China's problem with competition is there's too much of it

Straits Times

2 days ago

China's efforts to tackle domestic overcompetition face new urgency in the face of Trump's tariffs.
TIANJIN, China – It's the circle of life in China's business world.
A promising technology or product emerges. Chinese manufacturers, by the dozens or sometimes the hundreds, storm into that nascent sector. They ramp up production and drive down costs. As the overall market grows, the competition becomes increasingly cutthroat, with rival companies undercutting one another and enduring razor-thin profit margins or even losses in the hope of outlasting the field.
Adding to the competitive fervour, China's local governments, each with its own target for economic and job growth, back a homegrown champion and shower it with financial and bureaucratic support. Soon, the whole industry, awash in production capacity, is trapped in a race for survival.
While most governments encourage vigorous competition and low prices, China is going in the opposite direction. It is trying to rein in 'involution' - or 'neijuan' as it is widely used in the country to describe a self-defeating cycle of excessive competition and damaging deflation.
Chinese President Xi Jinping pledged to take steps to crack down on 'low price and disorderly competition' and eliminate outdated industrial capacity at a high-level economic policy meeting in July. At another recent gathering, on urban development, Mr Xi questioned whether every province needed to rush into sectors such as artificial intelligence and electric cars.
'Price wars and 'involutionary' competition will only encourage 'bad money driving out good money,'' wrote People's Daily, the official mouthpiece of the Chinese Communist Party. 'Simply 'rolling' prices downward will not result in a winner.'
China's efforts to tackle involution face new urgency as
President Donald Trump's tariffs discourage exports to the United States. Other countries are also wary of a flood of inexpensive Chinese goods redirected their way. These unsold goods, combined with a slowing domestic economy, have intensified competition, fueling a deflationary spiral.
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China's gross domestic product deflator, a broad measure of prices across the economy, has fallen for eight straight quarters – the most prolonged downturn on record. In June, the country's producer price index, a measure of the price of goods leaving factories, fell by its largest amount in nearly two years.
China has pledged to step up its regulation of companies driving down prices and to rein in subsidies and incentives from local governments that provide a lifeline to 'zombie' firms, or noncompetitive firms kept alive by outside support.
Fierce competition and overcapacity have plagued industries such as steel and cement. And newer, fast-growing sectors such as solar panels and electric vehicles have quickly become a race to the bottom. It has created an unusual dynamic: Chinese firms collectively dominate market share in an industry, but individual companies struggle to eke out a consistent profit.
During a meeting on July 16 of China's State Council, or Cabinet, officials pledged to regulate 'irrational competition' in the EV sector through investigations into costs and price monitoring.
The measures came after BYD, China's largest EV manufacturer, slashed prices on nearly two dozen models of electric and hybrid cars in May. The China Association of Automobile Manufacturers, a government-linked industry group, rebuked BYD and warned about the perils of 'price wars.'
Zhang Kai, a salesperson for Xpeng Motors, one of China's biggest EV makers, said pricing pressure would remain because of sluggish consumer spending and overcapacity in the sector. He said manufacturers had no choice but to maintain discounted prices for EVs, even after a popular government subsidy support program aimed at helping people buy energy-efficient cars and other goods comes to an end.
'This is a new normal,' he said. 'Once prices drop, they definitely won't go back up.'
To understand the challenges of excessive competition, consider Hebei province in northern China. Hebei, a region renowned for its mining, heavy industry and agriculture, has become notorious for cutthroat competition. One publication referred to the area's merchants as 'price butchers.'
At an industrial park in Hebei, more than 100 garment makers operate in rows of nearly identical storefronts, selling clothing that is so similar that it is hard to distinguish one from another. The complex caters to customers interested in finding factories to mass-produce T-shirts, sweatshirts and other pieces of outerwear.
The commercial zone was established about a decade ago by the Suning County government, after garment manufacturers started building factories on farmland in Hebei to meet the growing demand for inexpensive clothing from online shoppers.
The local province is opening an even-larger industrial park for 'knitting technology' adjacent to the existing one. Construction had been scheduled to finish in May, but the complex appeared only partly built in June. And the existing industrial park feels almost abandoned. Many storefronts were closed, and the lone restaurant was shuttered.
Zhang Cuihua is one of the small T-shirt manufacturers working in the complex. She said she produced about one million shirts a year for wholesalers across China. Since 2024, the competition has grown so intense that her business has been losing money.
'The involution is unbearable – people are driving themselves to death,' said Ms Zhang. 'The general market environment is poor, sales are stagnant and production capacity is overloaded.'
She said that customers were constantly asking her for price cuts, but that she had already reduced her margin per shirt more than 60 per cent in the past several years. Ms Zhang said some of her competitors were willing to sell items at a loss to turn inventory into cash. Then customers ask her to match the competition's low prices, leaving her in a no-win situation: Match the price and lose even more money, or don't match and lose the business entirely.
She said many factories had closed, but that had not alleviated the competitive pressures.
Tang Yongsheng, a T-shirt manufacturer in Guangdong, operates eight factories in Hebei. He said his competitors were willing to undercut one another endlessly, especially as many of China's dominant e-commerce platforms drive down prices.
Mr Tang said many factories in Hebei engaged in the race to the bottom because the local government encouraged continued investment. It is easier to borrow money from banks there than in other parts of the country. That drives factory owners to do whatever it takes to stay in business.
'The main goal is to survive,' Mr Tang said. 'They'll stubbornly persist.' NYTIMES