Commentary: China’s Auto Sector Risks Stalling From Excessive Competition

“Involution” has become a prominent term in the Chinese auto industry, referring to excessive and disorderly competition among carmakers. This competition is characterized by firms striving to outdo each other in price, cost, technology, service, and employee demands, often resulting in reduced profits, financial losses, and product homogenization across the industry 1. Healthy competition is essential in a market-driven economy, as it encourages better products and services; however, involution-style competition is marked by price wars, low efficiency, financial losses, and minimal profit margins, distinguishing it from healthy market rivalry 2-4.

Six key issues emerge from involution in China’s auto sector: cutthroat pricing, poor product quality, intellectual property infringements, administrative monopolies and fragmented markets, lack of credibility, and competition with undifferentiated products 5. Such practices are considered unfair competition under China’s legal framework, as they disrupt market order and harm legitimate business interests and consumer rights 6. In the automotive supply chain, involution causes misallocation of resources and distorts pricing, hampering the sector’s transition toward smart electric vehicles 7.

Orderly and fair competition is vital for sustainable industry growth, supporting innovation and helping top companies emerge, while weeding out less competitive players. However, involution poses several risks: 1) It destabilizes industry and innovation ecosystems, extending financial strain to over 150,000 suppliers, causing layoffs and bankruptcies; 2) It undermines product and service quality, eroding consumer trust; 3) It squeezes automaker profits, with established carmakers experiencing major profit drops and new energy vehicle (NEV) firms remaining unprofitable, hampering investments in research and development; 4) It drives foreign carmakers out of the Chinese market, reducing collaboration opportunities and raising the risk of supply chain fragmentation; 5) As Chinese automotive firms expand overseas, involution-style competition damages their reputation and hinders global growth 9-14.

China’s auto industry is capital- and technology-intensive, facing strong regulatory scrutiny as well as rapid transitions to low-carbon, electric, and intelligent vehicles. As vehicles transform into mobile terminals and digital spaces, China has progressed towards leadership in new energy vehicles, yet must focus on innovation rather than excessive, inefficient competition to maintain global standing 15.

Five main factors drive involution in the sector: a crowded market with numerous brands and weak concentration, aggressive pricing and frequent model updates by dominant players, lack of product differentiation, local government subsidies that distort competition, and vague industry regulations with weak enforcement 17-21.

Addressing involution requires a systemic approach, reinforcing red lines defined by legal, regulatory, and ethical norms. Recommendations include strengthening law enforcement, clarifying rules with judicial interpretations, standardizing local government support, increasing penalties for violations, and closing regulatory gaps with new legislation 23-27.

As carmakers pivot toward smart electric vehicles and global expansion, success will require focus on core strengths such as technology, brand, software, and operational ecosystems. Automakers should abandon inefficient, involution-style rivalry and pursue value-driven, innovative competition—delivering diverse, high-quality products to meet evolving consumer demand 29-31. [para. 1][para. 2][para. 3][para. 4][para. 5][para. 6][para. 7][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14][para. 15][para. 17][para. 18][para. 19][para. 20][para. 21][para. 23][para. 24][para. 25][para. 26][para. 27][para. 29][para. 30][para. 31]