This was an email that went viral on Chinese social media a couple months ago, purportedly from a supplier to BYD who had been asked to reduce its price by 10% to pre-empt the EU tariffs imposed on Chinese EVs.
Whether the letter is real or not does not matter, but the request for a 10% price cut was real and BYD eventually responded after the netizens storm that it was “not mandatory”.
Anyway, let me translate the third and fourth paragraphs because it was so incisive to the situation with “involution” in China right now:
Your company used “cutthroat pricing” to enter the international market, and mercilessly squeezed your suppliers, so the wealth and value created by the Chinese workers are translated into cheap benefits that serve advanced countries. Such model of endless squeezing has caused our domestic suppliers to fall into the vicious cycle of “either we die from involution (extreme competition), or we die from hunger (company goes broke)”, and this will even directly push otherwise well-run enterprises on to the brink of bankruptcy, and finally cause the entire sector to spiral into a dead-end of endless competition.
More importantly, when BYD pushes its own cost and price down to an extreme level as a strategy to expand into the international market, we have already stepped into the hidden traps set by the high tariffs and boycotts from advanced countries. Once we lose the advantage of pricing competition, the “success” of your company will go up in smoke, while all those profits and revenues squeezed out from your peers will end up benefiting foreign countries. Such short-sightedness will bring not only destruction to yourself, but to the entire supply chain, and end up sacrificing the long term benefit of the Chinese people and their enterprises.
Do you see what’s going on here? Extreme involution is causing an advanced tech sector to squeeze the profits out of their suppliers until the everyone is scraping at the bottom of the barrel. Many EV companies are already making losses for each EV they sold (Xiaomi, for example, loses 7k yuan for every vehicle sold, and by the way, Xiaomi is a phone but everyone is eating into each other’s lunch nowadays - that’s extreme involution!).
Do you now see how the tariffs are supposed to work? It is designed to intensity extreme competition within the industries that is unique in China such that they squeeze each other out of existence, and with it the jobs of many people who work somewhere along the intermediaries. Meanwhile, Western companies are protected behind tariffs and maybe they have to cut their prices a bit, but hey, their people get to benefit from cheaper goods because China is willing to serve as a “competitor”.
As I have always said, working harder is not the way to go. Chinese people need to work less and consume more, not to create value for Western countries, but for our own!
I totally get where you’re coming from, I hope China can expedite the process of getting there without undermining its own stability. I’m not an expert on the full extent of the power that China’s govt has gotten from its manufacturing capacity so I can’t really do too much except for trusting the plan. Do you know any details about work that’s being done within the CPC to address the issues you brought up?
A few years ago there was an initiative to shift the export-heavy economy toward a dual circulation model i.e a balance between external circulation (export) and internal circulation (consumption).
Come 2024, and we saw record trade surplus ($1 trillion) while domestically people don’t even have the money to consume - I don’t have to tell you that it has by all accounts, been a failure.
Why don’t people want to consume? For most people, it’s the uncertainty about the future, not just from Covid, but also falling property prices and potential for layoffs or having to take wage cuts in the near future. As such, people prefer to save their money instead of consuming, and especially have been refraining to spend on buying houses where in some places the prices have already fallen by half.
Imagine working yourself to your limit, using your hard earned money for downpayment and take out a mortgage for the next 30 years, only for the price of your house to fall by 30% in 2-3 years, and if you’re being laid off next year, you’re pretty much screwed.
So people are prudent and prefer to save, not to consume, which only serves to amplify the vicious cycle of less consumption, less demand, production cuts, layoffs etc.
But that is not all, of the 11.79 million high school graduates last year, 45% of them could not find jobs. The same proportion for university graduates. And you know what’s ironic? This is the generation of kids has been trained and educated under the best possible environment in the nation’s history, and guess what? Couldn’t even find jobs after graduation. Funny isn’t it.
The September 24 policy has made it very clear what the central government intends to do: bring up consumption (this was the top priority listed), save the property market, save the stock market, open up the capital market and attract foreign investors to come in and save us with their foreign capital. If there was any illusion before then, they made it very clear this is where they’re heading.
But many of the efforts to drive up consumption were short-term stimulus, for example, last year the government gave subsidies for car purchases, washing machines and refrigerators, and it finally brought the growth to 5% at the end of the year. This year they’re giving out subsidies for cell phones etc., but you can see these are short term policies and does not fundamentally tackle the real problem - wealth inequality. The wealth is being accumulated at the top while most of the people earn less than 5k yuan a month. We know this because only 65 million people have to pay income taxes every year (minimum income of 5k per month).
It looks like the strategy right now is to hope that some tech breakthrough, EV, AI or whatever, can transform the entire economy and pull it out of the rut, but that’s a high risk gambling move, while the government should really just create the money and give them to people so they can stimulate the economy domestically, and focus less on export - this would have been the safe and steady approach.
I really appreciate your insight into the conditions and problems facing your country. If you don’t mind me asking, do you think course correcting consumption is something that can happen in the next few years? What limited understanding I have, China’s government seems capable of recognizing policy mistakes, learning, and applying those lessons in the following years. Actually seeing and living with the process, does that sound accurate, or am I laughably off base?
Also, bonus material:
This was an email that went viral on Chinese social media a couple months ago, purportedly from a supplier to BYD who had been asked to reduce its price by 10% to pre-empt the EU tariffs imposed on Chinese EVs.
Whether the letter is real or not does not matter, but the request for a 10% price cut was real and BYD eventually responded after the netizens storm that it was “not mandatory”.
Anyway, let me translate the third and fourth paragraphs because it was so incisive to the situation with “involution” in China right now:
Do you see what’s going on here? Extreme involution is causing an advanced tech sector to squeeze the profits out of their suppliers until the everyone is scraping at the bottom of the barrel. Many EV companies are already making losses for each EV they sold (Xiaomi, for example, loses 7k yuan for every vehicle sold, and by the way, Xiaomi is a phone but everyone is eating into each other’s lunch nowadays - that’s extreme involution!).
Do you now see how the tariffs are supposed to work? It is designed to intensity extreme competition within the industries that is unique in China such that they squeeze each other out of existence, and with it the jobs of many people who work somewhere along the intermediaries. Meanwhile, Western companies are protected behind tariffs and maybe they have to cut their prices a bit, but hey, their people get to benefit from cheaper goods because China is willing to serve as a “competitor”.
As I have always said, working harder is not the way to go. Chinese people need to work less and consume more, not to create value for Western countries, but for our own!
I totally get where you’re coming from, I hope China can expedite the process of getting there without undermining its own stability. I’m not an expert on the full extent of the power that China’s govt has gotten from its manufacturing capacity so I can’t really do too much except for trusting the plan. Do you know any details about work that’s being done within the CPC to address the issues you brought up?
A few years ago there was an initiative to shift the export-heavy economy toward a dual circulation model i.e a balance between external circulation (export) and internal circulation (consumption).
Come 2024, and we saw record trade surplus ($1 trillion) while domestically people don’t even have the money to consume - I don’t have to tell you that it has by all accounts, been a failure.
Why don’t people want to consume? For most people, it’s the uncertainty about the future, not just from Covid, but also falling property prices and potential for layoffs or having to take wage cuts in the near future. As such, people prefer to save their money instead of consuming, and especially have been refraining to spend on buying houses where in some places the prices have already fallen by half.
Imagine working yourself to your limit, using your hard earned money for downpayment and take out a mortgage for the next 30 years, only for the price of your house to fall by 30% in 2-3 years, and if you’re being laid off next year, you’re pretty much screwed.
So people are prudent and prefer to save, not to consume, which only serves to amplify the vicious cycle of less consumption, less demand, production cuts, layoffs etc.
But that is not all, of the 11.79 million high school graduates last year, 45% of them could not find jobs. The same proportion for university graduates. And you know what’s ironic? This is the generation of kids has been trained and educated under the best possible environment in the nation’s history, and guess what? Couldn’t even find jobs after graduation. Funny isn’t it.
The September 24 policy has made it very clear what the central government intends to do: bring up consumption (this was the top priority listed), save the property market, save the stock market, open up the capital market and attract foreign investors to come in and save us with their foreign capital. If there was any illusion before then, they made it very clear this is where they’re heading.
But many of the efforts to drive up consumption were short-term stimulus, for example, last year the government gave subsidies for car purchases, washing machines and refrigerators, and it finally brought the growth to 5% at the end of the year. This year they’re giving out subsidies for cell phones etc., but you can see these are short term policies and does not fundamentally tackle the real problem - wealth inequality. The wealth is being accumulated at the top while most of the people earn less than 5k yuan a month. We know this because only 65 million people have to pay income taxes every year (minimum income of 5k per month).
It looks like the strategy right now is to hope that some tech breakthrough, EV, AI or whatever, can transform the entire economy and pull it out of the rut, but that’s a high risk gambling move, while the government should really just create the money and give them to people so they can stimulate the economy domestically, and focus less on export - this would have been the safe and steady approach.
I really appreciate your insight into the conditions and problems facing your country. If you don’t mind me asking, do you think course correcting consumption is something that can happen in the next few years? What limited understanding I have, China’s government seems capable of recognizing policy mistakes, learning, and applying those lessons in the following years. Actually seeing and living with the process, does that sound accurate, or am I laughably off base?