Commentary: How China’s Manufacturing Can Escape Involution

More than a dozen Chinese automotive manufacturers have pledged to pay their suppliers within 60 days, responding to a move by the China Association of Automobile Manufacturers (CAAM). This collective action, spearheaded by an industry self-discipline organization, is viewed as more than just an automotive sector reform—it is considered potentially pivotal for Chinese manufacturing in general if other sectors follow suit. The aim is to break out of the destructive cycle of “involution-style” competition and guide the industry towards healthier, sustainable development[para. 1][para. 2].

The current situation in China's manufacturing sector is marked by pervasive price wars and chronic delays in supplier payments. These issues are not isolated; they are symptoms of a broader crisis defined by involution-style competition—where companies engage in self-defeating battles that ultimately erode their own and their partners’ prospects[para. 3]. Exacerbating the situation, Chinese manufacturers have been subjected to countervailing duties abroad, have been targeted in labor rights violation lawsuits, and face heavy compensation claims. Domestically, they often force suppliers to slash prices and use their market power to squeeze the supply chain, resulting in cash flow issues for suppliers[para. 4].

Despite enormous growth in China’s manufacturing sector, including advances in technology, management, and product quality, these improvements have not translated into higher profit margins. Instead, the industry continues to witness resource depletion, declining product prices, thinning supply chain profits, and increasingly protracted cycles for supplier payments[para. 5].

The underlying cause of this pattern is rooted in economics and policy. Many firms feel trapped by the “prisoner’s dilemma,” where the fear of being undercut by competitors forces everyone to cut prices, trim costs—including salaries—and delay payments to suppliers. This sets off a vicious lose-lose cycle throughout the sector[para. 6]. Local governments have amplified these woes by rolling out generous subsidies and incentives to lure investment, often creating overcapacity and subsidizing destructive competition. Some of these public funds even end up benefitting foreign consumers or overseas governments through duties and penalties[para. 7].

Structurally, the root of involution is an imbalance between excessive supply and insufficient demand, driven historically by a focus on production and investment at the expense of consumption. As income growth stalls and deflation risks rise, companies are forced to aggressively cut prices, deepening the involution trap[para. 8].

The automotive sector’s coordinated action to curb price wars and ensure timely supplier payments is regarded as a possible milestone. If these practices are enforced across other industries and supported by coherent policy measures, it could mark a critical juncture for China’s manufacturing path[para. 9]. To help industries escape this downward spiral, market regulators, associations, and leading companies must collaborate, strictly enforcing competition laws and punishing abuse of market dominance, predatory pricing, and delayed payments[para. 10]. Associations should set clear industry standards and ensure compliance, while flagship firms must set positive examples[para. 11].

A broader mindset shift is also necessary. Instead of endlessly cutting costs, Chinese companies should focus on innovation and investment in human capital, mirroring global best practices. Fostering creative and healthy business ecosystems will empower suppliers and generate sustainable growth[para. 12].

Finally, local governments are urged to stop perpetuating involution through unnecessary subsidies, and macroeconomic policy should focus on activating domestic consumption by redirecting resources to Chinese consumers, stimulating demand and reducing the pressure to cut prices excessively[para. 13]. These measures combined could transform China’s manufacturing landscape into a healthier, more sustainable model[para. 1]-[para. 13].