Climateer Investing: "China’s Problem With Competition: There’s Too Much of It"

Tuesday, July 22, 2025

"China’s Problem With Competition: There’s Too Much of It"

From the New York Times, July 22:

The Chinese government is taking steps to rein in what it calls “involution,” or excessive competition that is hurting local companies and fueling the country’s deflationary spiral.

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 fervor, 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,” a sociological phrase widely used in China to describe a self-defeating cycle of excessive competition and damaging deflation.

Xi Jinping, China’s top leader, pledged to take steps to crack down on “low price and disorderly competition” and eliminate outdated industrial capacity at a high-level economic policy meeting this month. At another recent gathering, on urban development, Mr. Xi questioned whether every province needed to rush into sectors like 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 are taking on new life as President 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.

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 like 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 Wednesday of China’s State Council, or cabinet, officials pledged to regulate “irrational competition” in the electric vehicle sector through investigations into costs and price monitoring.

The measures came after BYD, China’s largest electric vehicle 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 salesman for Xpeng Motors, one of China’s biggest electric vehicle 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 electric vehicles, 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.”....