In a significant development in the Chinese market in 2024, the trend of price wars in the automotive industry since the beginning of the year has escalated, leading to the recent announcement of production cuts by two major photovoltaic industry giants to counter the issue of over-competition and internal consumption. With the term “internal consumption” becoming increasingly prominent in academic discourse, observers have noted that excessive competition and internal strains are engulfing more industries in China. What do experts think about this phenomenon?
Compared to 2023, the price wars in the automotive sector in 2024 have lasted longer with a wider range of car models involved. From January to November this year, a total of 195 car models have seen price reductions, surpassing the figures of 150 models in 2023 and 95 models in 2022.
Li Yanwei, a member of the expert committee of the China Automobile Dealers Association, revealed to the Beijing Business Daily on December 23 that the overall losses in the automobile retail market for the first 11 months of this year amounted to 177.6 billion yuan. The intense changes in the automobile market brought about by ongoing price wars have left car dealerships mired in difficulties.
Professor Sun Guoxiang from Taiwan’s Nanhua University, specializing in International Affairs and Business, stated in an interview with a media outlet that internal consumption, as a market and social phenomenon, has been particularly prevalent in various industries in China such as automotive, solar energy, education, and technology. This trend can be attributed to factors including China’s economic structure, competition models, and policy environment.
According to Sun, for struggling car companies, even if they offer management advice, “we all know that internal consumption in China has actually become a structural problem in various industries.”
“With the current Chinese policies and actual market operations, it is really unclear whether there will be a clear way out,” he said.
On December 24, two leading upstream companies in the Chinese photovoltaic sector, Tongwei Group and Daqo New Energy, simultaneously announced production cuts, sending shockwaves across the industry. This move was dubbed as the “first horn of the anti-internal consumption.”
On July 30, the Central Political Bureau of the Communist Party of China convened a meeting, highlighting the need to prevent “internal-consumption-style” malignant competition.
On December 5, under the organization of the China Photovoltaic Industry Association, dozens of photovoltaic companies signed a self-discipline agreement to regulate production capacity.
Noted mainland capital figure Xu Zhen told a media outlet that the issue of internal competition in the photovoltaic industry is mainly determined by the characteristics of the sector.
“The theoretical lifespan of photovoltaic panels is supposed to be 20-25 years (in reality, products manufactured in China do not last that long). Once installed, they require simple maintenance. With the huge export capacity of China to Europe and America, the market will quickly become saturated after some time. When photovoltaic companies have severe overcapacity, they will face fierce competition and internal consumption, of which the unrestrained expansion by the CCP will ultimately lead to self-destruction,” he said.
Xu also pointed out another aspect, “Product energy consumption and U.S. restrictions on imports: Due to abundant coal resources, the electricity generation costs in Xinjiang are low, and polycrystalline silicon is mainly produced in the Xinjiang region in northwest China. The US has banned the import of Xinjiang cotton and photovoltaic products, and the EU may follow suit. If this happens, a wave of closures in the mainland photovoltaic industry will soon emerge, and everyone should wait and see.”
Sun Guoxiang believes the pricing wars and internal consumption phenomena in China are rooted in the deep economic structure and market operation logic, making it immensely challenging to completely eradicate this issue.
He analyzed three reasons why internal consumption is difficult to end: “Firstly, the dilemma within the industry. Even if companies know that price wars are detrimental to the overall industry, individual companies still choose to lower prices for short-term survival, leading to the difficulty in ending internal consumption. Additionally, many companies have invested heavily in fixed assets and production capacity, exit from the market would result in huge losses, making it difficult for excess capacity to be naturally eliminated.
“Secondly, the limitations of CCP government policies. Local governments often provide subsidies or support to loss-making companies due to considerations of job retention and local economic growth, making it difficult for inefficient participants to naturally exit the market. Even though the CCP central government requires companies to reduce production or cease malign competition, the high costs of coordination and supervision in decentralized industries and inadequate self-regulation within companies pose challenges.
“Lastly, the lack of long-term competitive strategy. Many companies seek quick market returns rather than long-term technological innovation and brand value construction. For the majority of companies, they lack the capability to differentiate themselves in the market through technological upgrades and can only rely on price wars to maintain competitiveness. Therefore, this situation has resulted in what is known as a prisoner’s dilemma, with local protectionism and short-sightedness of companies being the reasons why there is currently no way to stop (internal consumption).”
Sun Guoxiang believes that the global economic slowdown, trade barriers, and geopolitical risks limit the export growth of Chinese enterprises, forcing them into even fiercer competition in the domestic market.
He also acknowledges that “internal consumption reflects the intensification of social psychological pressure in China, with both businesses and individuals being compelled to accelerate, finding it difficult to escape the trap of competition. It can be said that the pervasiveness of internal consumption in China is the result of multiple factors working together, including supply-demand imbalances, industry structural issues, policy environment, and cultural psychological aspects.”