China goes after the ‘rats’ in race to the bottom
Companies involved in electric vehicles, batteries and solar are creaking amid ‘cut-throat’ rivalry
China is going after the ‘rats’ in a move to curb the manufacturing “price wars” that are wreaking economic havoc. Last week leaders of the ruling Communist Party’s Politburo ordered the cull in a bid to prop up ravaged high-tech industries.
Massive debts instead of profits have left key parts of the clean energy sector on life support. Companies involved in electric vehicle, battery, and solar production are creaking amid “cut-throat” competition.
“Fierce price wars have erupted, and players in the sectors have found themselves locked in a cut-throat rat race,” the state-run Beijing Review reported today.
“[This] refers to a destructive cycle in which market entities pour increasing amounts of effort and resources into competing for a limited market without generating real gains in overall productivity or returns,” it said.
Crash and burn:
- China’s biggest solar firms shed nearly one-third of their workforces last year, or 87,000 staff, Reuters news agency reported last week.
- Longi Green Energy, Trina Solar, Jinko Solar, JA Solar, and Tongwei cut their payrolls by 31% amid eye-watering losses.
This leaves less room for investment in R&D [and] weakens competitiveness.
Tian Xuan, Tsinghua University
Delve deeper: President Xi Jinping’s administration has gone as far as “naming and shaming” companies deemed to be “the worst offenders,” blaming them for “fanning deflationary pressure in the economy,” Bloomberg News pointed out.
Why it matters: “There is a stronger emphasis on recognizing risks from demand-supply imbalance,” Gary Ng, a senior economist at banking group Natixis, said.
Between the lines: “The government is also more willing to take measures to battle deflationary pressure and overcapacity in the manufacturing sector,” he added.
Big picture: Chinese academic Tian Xuan warned that price wars to boost “short-term sales” have created challenges that threaten the high-tech sector. If not addressed, they could have catastrophic consequences.
Bottom line: “This leaves less room for investment in R&D, [and] ultimately [will] weaken the industry’s long-term competitiveness,” the president of the National Institute of Financial Research at Tsinghua University told state broadcaster CCTV.
China Factor comment: Communist Party leaders have vowed before to get a grip with over-capacity, cost-cutting and spiraling industrial debt. It ended up as business as usual. In the end, actions speak louder than words.