Neijuan: Why Chinese Firms Keep Cutting Prices and What It Means

China’s “involution” culture explains how solar, steel and EV-battery makers slash margins even after winning. Learn the mechanics, numbers and investor takeaways.

When you see a manufacturer drop prices even after it has crushed every rival, chances are you’re watching 内卷 (nèi juǎn) — “involution” in action. The idea first appeared in anthropology to describe “growth without development.”

In 2020 it went viral on Chinese social media to capture workplaces where everyone works harder for less return.

Applied to business, neijuan is a self-reinforcing loop: more capacity → fiercer competition → thinner margins → another round of capacity just to stay alive.

Below, we unpack why that loop exists, how it has reshaped three global supply chains, and what outsiders can do about it.

1. Why Margin Takes a Back Seat

1. Policy before profit
   Beijing’s industrial plans reward output, jobs and technological self-sufficiency. Easy credit from state banks and local subsidies buffer firms when margins evaporate.
2. Cost-plus reflex
   Many factories still price on cost + 15-20 percent. Once costs fall, management feels obliged to pass savings straight through instead of raising prices to what the market will bear.
3. Overcrowded home market
   Dozens of near-identical competitors operate inside China’s borders, each terrified of being leap-frogged. The quickest pre-emptive move is to cut price first.
4. Survival culture
   In a setting where bankruptcy is common and capital can be politically directed, holding share today often ranks higher than maximising earnings next quarter.

2. What the Numbers Look Like - Case Studies

Solar Panels

• Average crystalline-silicon module prices fell from ≈ $1.90 per watt in 2010 to $0.21 in 2023, a >90 percent drop.
• Western firms like Solyndra, SolarWorld, REC Solar that couldn’t match those costs filed for bankruptcy or pivoted to niches.
• Chinese leaders kept margins thin (often 8-10 percent gross) yet kept adding gigawatts of new capacity.

Flat Steel

• By 2015, Chinese flat-rolled steel landed in Europe at €404 per tonne, undercutting EU mills priced around €427. Brussels slapped duties as high as 74 percent to slow the flow.
• Even after tariffs, China still produced more steel than the next ten countries combined, forcing further price concessions at home.

EV Batteries

• CATL and BYD are already quoting lithium-iron-phosphate cells at about $56 per kWh, half what Japanese suppliers charged just a few years ago.
• Goldman Sachs now models a sector-wide battery price of ≈ $80 per kWh by 2026.
• Instead of banking windfall margins, Chinese players keep reinvesting in manganese-rich and sodium-ion chemistries to drop costs again.

3. Why the Stock Market Lags the Factories

Chinese A-shares often trade at single-digit forward P/Es despite world-class operating metrics. Morningstar notes that the CSI 300 has under-performed most global indices for three straight years, largely because profit growth trails volume growth. The disconnect boils down to:

• exceptional execution ➜ subdued earnings ➜ sceptical investors

4. How to Protect (or Position)

• Stress-test your bottom line under a scenario where a Chinese rival prices at cash cost for five years.
• Track unit-cost breakthroughs, not just earnings. Capital-equipment orders, new chemistries or utility-scale power contracts often flag the next leg down in price.
• Watch policy tea leaves. Subsidy expirations, VAT-rebate tweaks or local capacity curbs can signal when margins might briefly recover or get squeezed again.
• Lock in diversified supply early. Once a niche is involuted, raising prices later is almost impossible.

Final Word

Neijuan isn’t an occasional quirk; it is baked into how several Chinese industries compete.

Until one models survival-first, margin-later behaviour, traditional valuation and strategy playbooks will keep misfiring.

Understanding involution is now table stakes for anyone buying, selling or investing where China sets the price.