Because for some insane reason the Chinese companies don’t focus on “maximizing returns to shareholders” but “minimizing profits so you can kill your competitors.” They call it being 內卷 or “involuted” although I’ve never understood the meaning of that term either in English or Chinese. I just know what it is. Imagine a German Mittelstand SME cornered the market in making some obscure but essential widget for more than a century and got the bright idea of outsourcing the manufacturing to China. For 8-15 years everything works beautiful. Costs plummet and even junior Chinese executives get to fly business class because everyone is so flush. Then, on a cursed day, some Chinese guy figures out how to do it without the Germans. The $8,000 widget becomes $950 overnight. If you asked him how he arrived at that insane pricing he’ll say “I take my cost. I add my 20% profit. Boom.” But wait! You and the woebegone German are the only ppl on the planet with this technology? Why not price it at $6000? You’ll make more money because you still significantly undercut the German. You’ll both survive and have more money in your pockets! It’s a duopoly. Nope! That maniac, even after he buried that Mittelstand that has been passed through multiple generations minting fat profits, will keep cutting costs. Junior executives aren’t flying business no more. And then he’ll lower prices. On himself. It’s pathological. I’ve heard Chinese economists beg businesses not to do it. It’s why the stock market in Shanghai sucks. And it’s why the Chinese businesses are beasts.
Because for some insane reason the Chinese companies don’t focus on “maximizing returns to shareholders” but “minimizing profits so you can kill your competitors.” They call it being 內卷 or “involuted” although I’ve never understood the meaning of that term either in English or Chinese. I just know what it is. Imagine a German Mittelstand SME cornered the market in making some obscure but essential widget for more than a century and got the bright idea of outsourcing the manufacturing to China. For 8-15 years everything works beautiful. Costs plummet and even junior Chinese executives get to fly business class because everyone is so flush. Then, on a cursed day, some Chinese guy figures out how to do it without the Germans. The $8,000 widget becomes $950 overnight. If you asked him how he arrived at that insane pricing he’ll say “I take my cost. I add my 20% profit. Boom.” But wait! You and the woebegone German are the only ppl on the planet with this technology? Why not price it at $6000? You’ll make more money because you still significantly undercut the German. You’ll both survive and have more money in your pockets! It’s a duopoly. Nope! That maniac, even after he buried that Mittelstand that has been passed through multiple generations minting fat profits, will keep cutting costs. Junior executives aren’t flying business no more. And then he’ll lower prices. On himself. It’s pathological. I’ve heard Chinese economists beg businesses not to do it. It’s why the stock market in Shanghai sucks. And it’s why the Chinese businesses are beasts.
I wish I understood Ming dynasty business better. Here are some factoids: (1) each town had several merchant associations & they usually regulated the prices of goods, but not the quality! (Note: this is definitely true in the Qing, not certain about Ming). There weren’t guild like Europe but knowledge of many crafts was closely guarded by families & villages. (2) you could travel freely across China with goods but had to pay something to enter walled cities (all walled cities? Or just some of them? Very unclear, and apparently this was a small fee. Money likely went to maintain the walls.) (3) all sorts of people could become merchants and it was a life which anyone could dabble it. Most scholar-officials seem to have set up shops with the extra money they earned from working as district magistrates. Fairly often, the officials would set up apothecary shops to be run by relatives who didn’t pass the exam. (4) merchants weren’t taxed! Farm land was taxed. It seems merchant associations were expected to contribute a yearly donation to… the city government? If you lived in a big city, what did you pay to the government? Unclear to me.
The US-style capitalism where oligarch class (billionaires) are top funders of politicians has lead to lot of duopolies e.g. Apple iOS + Android on phones or OS X + Windows on PC or monopolies e.g. Google Search, YouTube, Amazon, Uber etc. Or price cartels (30% cut on all major app stores). This is BAD for consumer and small businesses. USA has anti-monopoly laws, but they are not applying them, even though for many companies it would be easy e.g. chop up Alphabet into Google search, Android, YouTube, DeepMind (AI). Chop up Meta into Facebook, Instagram and WhatApps. But since USA reigns supreme in media game and teh rich in USA actually do own major news outlets, this generally has positive spin among people. The monopoly company leaders are admired and there are millions of Americans who want to be next monopoly winner. The Chinese of cut throat capitalism with razor thin profit margin goes global. It kills the global competition being more cost efficient than anything else. This has lead to increasing amount of anti-Chinese propaganda, tariffs and other restrictions against Chinese, but the real reason is that others just cannot compete. There are plusses and minuses to both models. US model: + much higher stock values and leading to a new millionaire & billionaire class + the rich and the gov are in same bed - US allies getting the short stick as capital is drained from their own markets to the hyperfinancilized USA - if unchecked would lead to US-controlled monopolies & duopolies around the world, with few people owning most of the wealth on this planet and unaffordable prices for many China model: + less likely to lead oligarchy & plutocracy, because as CPC has the ultimate final say + China will become as capital rich as USA - kills the global competition, leaving only the Chinese standing and still fighting against each other - if unchecked would lead to industries decimates in other countries, but far cheaper prices for consumer than the US-model. Choose wisely!
@AngelicaOung Fascinating theory. This seems to have some explanatory power, color me intrigued.
While in China, I did hear a story about a company in Shenzhen working on an AI-based learning tool for school children. The staff were excited nearing the day of product launching. But the excitement was short-lived, because another company managed to launch almost identical product before the launching date. Another aspect of involution (not just cost-based, but also speed of product development).
@AngelicaOung Great post and the comments are full of insightful takes!!
@AngelicaOung On that basis there is no concept of profit maximising over the long run even just pure cost minimisation.
@AngelicaOung It is a social structure in which only the family members of the Chinese Communist Party cadres prosper. Amazingly, the world has reverted to a social structure where only the ruling class can prosper, as in China.
@AngelicaOung @pegobry_en This is called “undercutting” or “predatory pricing”: it's not an ancient Chinese secret.
@AngelicaOung yeah we call that "some insane reason" the Chinese Communist Party this isn't a mystery, this is state policy
@AngelicaOung Yea that’s totally why the Shanghai comp bee lined 65% down after Xi dressed up as chairman Mao and disappeared a bunch of executives in 2021
@AngelicaOung Well written explanation. Not many people realize that but you did. Well done.
@AngelicaOung This is absolutely amazing and the reason for China's success. People matter! It's proper Conscious Capitalism.
A $1000 mobile phone and a $20 radio are both made of cheap materials like silicon from abundant sand. The price difference arises from intellectual properties such as patents, design, and know-how. A widget worth $8000 instead of $950 is due to the value of intellectual property. Many Chinese people do not respect intellectual property; in their worldview, only tangible, physical property matters. Their economy has thrived over the last three decades by copying or stealing Western intellectual property. Not only are SMEs involved in this, but even large brands with billions in cash, like Xiaomi, also copy Western designs without guilt or shame. Once the Western economy declines due to fierce competition from China, the Chinese economy will also suffer due to a lack of creativity.
@AngelicaOung pricing strategy on costs instead of pricing on value. absolutely brutal
@AngelicaOung Isn't it because they are run by a communist government?
@AngelicaOung As an economist we sometimes talk about the “race to the bottom” Economic profits trend towards zero in the long run as firms keep trying to undercut each other This also feeds commoditization