Chinese companies must turn involution into sustainable evolution

Firms should engage in healthy competition by improving the quality of their products and services while phasing out excessive production capacity

Beijing is trying to curb cutthroat price wars that have broken out in multiple sectors. Caused by overcapacity and insufficient demand, many companies have been locked into an unsustainable spiral of price-cutting that not only forgoes profits but imperils their very business survival. Ultimately, job losses will be a lose-lose for all sides concerned.

Whether in food delivery, e-commerce or advanced manufacturing for batteries, solar panels and electric vehicles, excessive competition has created a vicious cycle that Beijing fears is contributing to price deflation. Such deflation is sticky and difficult to reverse once established. Factory gate prices fell for the 33rd month in June, hindering official efforts to boost domestic consumption.

The term neijuan , or involution, has gained currency to describe excessive competition . There is emerging consensus among officials and businesses on the need to turn neijuan into sustainable evolution to boost consumption.

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Online food delivery platforms Ele.me, Meituan and JD.com are among the latest to be hauled before regulators and urged to engage in "rational" competition. All three have been locked in a price war since February. Meituan's core local commerce business director, Wang Puzhong, even admitted that the price war made no sense but that his company was forced to join to avoid looking like "the loser".

Meanwhile, Industry and Information Technology Minister Li Lecheng warned solar panel makers that excessive competition and oversupply were hurting their industry. It is hardly the only one. Key sectors such as electrical machinery, steel, cement, ceramics and glass have all experienced price declines. Interestingly, the price of polysilicon, a key component of photovoltaic solar panels, rose significantly not long after Li met industry representatives.

Most recently, President Xi Jinping warned at a meeting of the Central Financial and Economic Affairs Commission that "disorderly low-price competition" was running out of control.

For Beijing, private-sector companies must improve the quality of their products and services while phasing out outmoded or excessive production capacity. Market competition is healthy and to be encouraged, but it becomes disorderly and irrational with price offerings that do not reflect a company's operating costs while causing rivals to do the same in a race to the bottom.

In practical terms, regulators need to strengthen the monitoring of both costs and prices, as well as supervise product manufacturing consistency and quality. Truly innovative firms ought to be able to restrain costs while offering differentiated products that may even sell at higher prices than rivals because consumers want them.