Commentary: China’s Chip Industry Must End Its Race to the Bottom

In March 2024, Chinese Premier Li Qiang signed a State Council decree aimed at ensuring timely payments to small and midsize enterprises (SMEs). This move is part of the Chinese government’s larger initiative to address “involution-style” competition—excessive, self-destructive rivalry—particularly noticeable in industries like automotive and semiconductors. In response, leading Chinese carmakers pledged to pay their suppliers within 60 days, and similar regulatory scrutiny is expected in the semiconductor sector [para. 1].

“Involution-style” competition in China’s semiconductor industry manifests most commonly in “lowest-bid-wins” business models, where companies secure contracts by offering bids that are either at zero profit or even at a loss. These unsustainable practices are driven by motives such as inflating revenues, damaging competitors, or securing fundraising, and can destabilize entire supply chains. Suppliers often face excessively extended payment cycles, from three months up to two years, far longer than the 45–60 days standard in the U.S. and Europe. Some buyers utilize delayed payments to invest for higher returns, putting further cash-flow pressures on suppliers. Moreover, startups bear significant front-loaded costs to get their products adopted, challenging innovation and raising the risk of reduced quality—despite state subsidies supporting leading firms. Ultimately, these burdens cascade from top enterprises throughout the supply chain due to stringent performance and cost controls, aggravating the destructive competition [para. 2][para. 3][para. 4][para. 5].

Historically, such cutthroat business tactics were regarded as inherent traits in the Chinese corporate environment. The belief that time, self-discipline, or market consolidation would self-correct these issues has not held true—even mature industries and regulated government procurement have not escaped harmful practices. For example, a Chinese home appliance market leader still enforces a 90- to 130-day supplier payment cycle, despite the industry accounting for over 65% of global appliance production capacity in 2023. Government procurement has seen companies win contracts with bids up to 30% below the industry average, sometimes relying on outdated technology with higher failure rates. Such examples prove that only robust government intervention and top-level policy design can curb excessive competition [para. 6][para. 7][para. 8][para. 9][para. 10][para. 11][para. 12].

The March decree mandates that large enterprises must pay SMEs within 60 days of delivery, while government agencies and public institutions must pay within 30–60 days. These standards align with practices in the U.S. and Europe, where similar regulations and legislation, such as the EU’s Late Payment Directive and U.S. antitrust laws, have substantially reduced payment cycles and fostered healthier competition [para. 13][para. 14][para. 15][para. 16][para. 17].

For effective reform, the commentary highlights several policy suggestions: (1) Mandate industry-wide use of standard contracts and strictly enforce the 60-day payment term with strong penalties; (2) Empower independent agencies to audit bid prices and encourage public reporting of below-cost bids; (3) Establish industry databases to monitor payment cycles, prices, and reputational risk, with blacklists and price monitoring systems; (4) Create arbitration tribunals for rapid resolution of supply-chain disputes; (5) Leverage digital technologies like ERPs and blockchain to oversee compliance in real time. Ultimately, legal and regulatory pressure should be applied to large firms to reduce involution-style competition, lessen performance burdens, and foster a more sustainable, innovative industry environment that does not place undue strain on SMEs [para. 18][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24].