How did the "involution" phenomenon in China's manufacturing industry come into being?
Huang Qunhui
Researcher and Professor at the Institute of Economics, Chinese Academy of Social Sciences
Ye Qichu
Doctoral Candidate at the School of Economics, University of Chinese Academy of Social Sciences
The "involution - style" competition in the manufacturing industry is a complex economic phenomenon. A large number of existing studies have focused on the ineffective consumption of resources caused by excessive competition among enterprises, the imbalance between supply and demand and the restructuring of the industrial chain, and the dual pressures of "innovation - driven and efficiency improvement" and "resource misallocation and intensified involution" faced by China's manufacturing industry. However, there is still a lack of a comprehensive theoretical framework to explain the formation mechanism of the "involution - style" competition phenomenon in the manufacturing industry, especially a comprehensive theoretical framework that organically integrates market structure changes at various levels, such as macro - level supply - demand imbalance, meso - level industrial chain reconstruction, and micro - level changes in enterprise scale and quantity.
Based on the classic SCP model in industrial organization theory - Structure (structure) - Conduct (conduct) - Performance (performance), this paper analyzes the macro - level market structure changes influenced by domestic and foreign demands, the meso - level market structure changes brought about by platform development and industrial chain restructuring, and the micro - level market structure changes caused by changes in enterprise scale and quantity. It systematically explores the formation mechanism of the "involution - style" competition phenomenon in the manufacturing industry and further puts forward corresponding comprehensive governance suggestions.
Connotation and Manifestations of "Involution - Style" Competition in the Manufacturing Industry
"Involution" is a process of diminishing returns to scale, and "involutionization" has little effect on development. Moreover, the "involution" phenomenon is closely related to the market structure and is often jointly affected by factors such as the market competition pattern, resource allocation methods, and product substitutability.
Based on the definition and connotation of "involution", when extended to the field of industrial economics, "involution - style" competition can be used to describe the decision - making behavior of enterprises under the background of structural imbalance where the supply side continues to expand while the demand side responds relatively slowly. Such behavior is not based on an expansion strategy for the incremental market but stems from intensified irrational competition under the pressure of the stock market.
When facing a highly uncertain market environment and increasingly tight resource allocation, enterprises generally tend to adopt the "red ocean strategy", seizing limited market shares by reducing costs and rapid imitation, thus forming an "involution - style" competition phenomenon, which is usually manifested as a cycle of "limited resources - excessive competition - low efficiency".
This not only hinders the optimal allocation of resources but also suppresses technological progress and the improvement of organizational efficiency, preventing enterprises or the industry as a whole from achieving qualitative breakthroughs and ultimately falling into the dilemma of "more work, less gain" or "more investment, no result". More seriously, "involution - style" competition is often accompanied by irrational and even distorted enterprise behaviors, giving rise to unfair competition means such as vicious price wars, exclusive agreements, abuse of market dominance, and false propaganda, which damage the normal market order and resource allocation efficiency. Furthermore, large enterprises in the industry often form a de - facto market monopoly position by virtue of their comprehensive advantages in technology accumulation, data resources, platform control, and capital operation, significantly squeezing the survival space of small and medium - sized enterprises and weakening the openness, fairness, and innovation vitality of the market.
The current "involution - style" competition phenomenon in China's manufacturing industry is mainly manifested in two dimensions: horizontal "price involution" among enterprises and vertical "chain involution" in the industrial chain.
"Price involution" refers to the strategy of enterprises in the same industry to continuously lower prices to maintain their market competitive position in the absence of core technology and brand differentiation advantages, leading the industry into a vicious price war. Such horizontal competition behavior is not based on value improvement or product innovation but is a short - term game at the expense of profit margins, reflecting the intensification of low - end homogeneous competition in the market structure.
"Chain involution" refers to the situation where leading platform - type enterprises, leading enterprises, or chain - master enterprises (hereinafter referred to as "leading enterprises") in the industrial chain use their monopoly potential to lower the supply prices of upstream and downstream enterprises and distort the normal supply - demand price mechanism. Through irrational competition means, especially price - cutting methods represented by "cost reduction, project - period reduction, and service reduction", they continuously transfer cost and profit pressure to the upstream and downstream of the chain, thereby squeezing the survival space of enterprises at a competitive disadvantage. Such behaviors aim to maintain the profits of leading enterprises but often weaken the collaborative relationship within the industrial chain and even trigger unfair competition phenomena such as channel control and data monopoly.
In recent years, the sales profit of China's manufacturing industry has dropped from 13.24% in 2021 to 11.87% in 2024, hitting a new low in recent years. The decline in the sales profit margin is highly related to the current "price involution" and "chain involution" phenomena in the manufacturing industry. Against the background of increased market uncertainty, product homogenization, and platform dominance, enterprises have to offer significant discounts and increase sales expenses to obtain limited market shares, resulting in a decline in marginal sales efficiency. Especially in highly competitive industries, sales are no longer simply a matter of market expansion but have gradually become the core battlefield for resource consumption and profit games.
Another manifestation of the "involution - style" competition in China's manufacturing industry is overcapacity.
In fact, the capacity utilization rate can not only reflect the supply - demand situation of the industry but also serve as an important indicator to measure the degree of "price involution". Chinese manufacturing enterprises may continue to expand production, update equipment, and compete for orders even when demand is insufficient, resulting in continuous overcapacity and a decline in unit output efficiency.
The profit decline caused by "involution - style" competition is more prominent in general traditional manufacturing industries. Due to factors such as a long development history, mature technology, and low market entry barriers, the competition in traditional manufacturing industries is becoming increasingly fierce, with low industrial profit margins and added value. Some studies suggest that the current "involution - style" vicious competition phenomenon in China's manufacturing industry mainly occurs in general manufacturing fields, and some enterprises are trapped in the triple dilemmas of capacity expansion, product homogenization, and innovation anxiety. Without the support of technology and brands, enterprises generally compete for market shares through low - price competition and fall into a cycle of resource internal consumption. Judging from the ratio of operating costs to operating profits, the profitability of many traditional manufacturing industries has been under continuous pressure in recent years, reflecting the profit compression effect under the dual pressures of "price involution" and "chain involution".
The problem of "involution - style" competition has also gradually emerged in some strategic emerging industries. In recent years, driven by local government development plans and industrial support policies, localities have actively deployed strategic emerging industries. However, due to the lack of strategic thinking tailored to local conditions and the constraints of the institutional mechanism, problems such as industrial convergence among regions, repeated production capacity, and resource waste have become increasingly prominent, and the risk of homogeneous competition has significantly increased.
Formation Mechanism of "Involution - Style" Competition in the Manufacturing Industry
The SCP model in industrial organization theory provides a systematic theoretical basis for understanding the "involution - style" competition phenomenon in the manufacturing industry and its causes. Under this analysis framework, the choice of enterprise competition behavior is affected by market structure changes, and there is an inherent relationship and interaction mechanism between competition behavior and enterprise performance. That is to say, the key reason why enterprises choose "involution - style" competition is that the market structure has changed significantly, and enterprises have to choose low - price competition strategies to adapt to the market structure changes. Generally speaking, the market structure mainly reflects the relationship pattern among enterprises, including the number, scale, distribution, market concentration, supply - demand relationship, competition relationship of enterprises, as well as their own technological innovation ability and market adaptability.
1. Changes in the Structure of Domestic and Foreign Demands under the Background of the "Dual - Cycle" Development Pattern
The structural evolution of China's manufacturing industry has been deeply influenced by changes in the international market, supply - demand relationships, and the transformation of the national development strategy. From the trajectory of industrial structure change, from 1949 to 1978, China was dominated by heavy industry, focusing on building a basic industrial system; from 1979 to 2000, it was a stage of "correcting the deviation" of light industry, focusing on improving the supply of consumer goods for residents and gradually improving people's livelihood. Since China's accession to the WTO in 2001, its manufacturing industry has rapidly integrated into the global market. Its share in global manufacturing output has continuously increased from 8.64% in 2004 to about 30% in 2022, and it exceeded the United States for the first time in 2009, becoming the largest contributor to global manufacturing output. In contrast, the share of the US manufacturing industry has been continuously declining since reaching its peak of 28% in 2000. This trend indicates that China's manufacturing industry has achieved continuous scale expansion in the process of structural adjustment and global integration, significantly changing the global manufacturing power pattern.
Although China's manufacturing industry has maintained huge production capacity, as the world's largest manufacturing country, the overall growth rate of manufacturing exports has shown a downward trend. The cumulative year - on - year growth rate of the export delivery value of industrial enterprises above designated size in China has generally shown a fluctuating downward trend.
Currently, China's manufacturing industry is at a critical stage of transformation from being dominated by foreign demand to being dominated by domestic demand. With profound changes in the process of economic globalization and the continuous escalation of Sino - US trade frictions, the export - oriented manufacturing development strategy relying on the international large - cycle has become difficult to adapt to the requirements of the new environment. To cope with this situation, China urgently needs to promote the transformation of the manufacturing industry from the "export and investment - driven" model to the "domestic demand and innovation - driven" model. Among them, the core mechanism of industrial structure upgrading driven by innovation lies in effectively responding to the upgrading of the domestic demand structure.
Overall, the transformation of the domestic and foreign demand structure of China's manufacturing industry faces the problem of weakening foreign demand and insufficient ability to undertake domestic demand. This will lead enterprises to fall into "involution - style" competition, relying on price wars to maintain market shares and squeezing profit margins, further suppressing technological upgrading and brand development.
2. Impact of the Reconstruction of the Platform - Dominated Industrial Chain
Under the resource allocation mechanism dominated by platform algorithms, the market structure of the manufacturing industry is undergoing profound changes, and enterprises with competitive advantages are increasingly becoming key hubs in the industrial chain. These enterprises actively utilize industrial Internet platforms, intelligent manufacturing ecosystems, etc., taking platform enterprises as the key entities for releasing the value of data elements, further exploring the value of their data assets in the process of "real - digital integration development" and large - model research and development. They combine the "accelerated turnover" effect and the "value extraction" effect on the profit margins of manufacturing enterprises, thus capturing a higher proportion of profit shares in the value chain.
Platform enterprises are not only deeply embedded in the market operation mechanism of the manufacturing industry but also substantially promote the transformation of the industrial chain structure from the traditional linear model to the platform - dominated collaborative network. For example, in manufacturing fields such as home appliances and automobiles, leading enterprises generally establish platform - type collaborative networks, integrating component suppliers, processing plants, and distributors into a unified data system, forming a platform - type supply chain with key enterprises as nodes, and achieving integrated control over multiple key links such as raw material procurement, product design, pricing strategies, and consumption guidance.
On the one hand, platform algorithms achieve dynamic pricing and elastic supply - demand adjustment through intelligent processing of multi - dimensional data such as user behavior, regional demand, and supply capacity, changing the traditional pricing method of manufacturing enterprises based on long - term contracts or market equilibrium. On the other hand, the intervention of platform algorithms in consumers' attention and purchase decisions in turn affects the production behavior of manufacturing enterprises.
It can be seen that through the dual influence on the supply side and the consumption side, leading enterprises, with technology, data, and traffic as core resources, reshape the price formation mechanism and the supply - demand matching logic, and continuously consolidate their dominant position in resource allocation and value distribution in the industrial chain. This platform - centered industrial chain reconstruction not only breaks the boundaries of horizontal competition and vertical cooperation among traditional enterprises based on market rules but also changes the value creation and distribution mechanism, making it easier for leading enterprises to expand market shares through economies of scale and enhance their ability to integrate and allocate industrial resources.
Meanwhile, small and medium - sized manufacturing enterprises at the edge of the platform gradually lose their dominance over the market rhythm and product strategies in the new industrial chain and are forced to compete under these established rules, further increasing the risk of "involution - style" competition in the manufacturing industry. Research has found that while competitive monopoly brings growth effects, it also has a strong distribution effect, which is not conducive to the innovation and development of enterprises with weak market power. Inside the platform, they face traffic competition under algorithm sorting and continuous price - cutting pressure, forming intense horizontal "price involution"; outside the platform, they are subject to the institutional requirements of leading enterprises in terms of delivery cycle, cost control, and standard setting, suffering from vertical "chain involution", resulting in a continuous increase in performance costs and a continuous decline in bargaining power.
The reconstruction of the industrial chain dominated by platform algorithms not only changes the existing pricing mechanism and product supply - demand logic in the industry but also changes the traditional competition logic among enterprises centered on products and costs, and more profoundly affects the behavior choices and organizational models of manufacturing enterprises.
3. Impact of Changes in the Number of Enterprises of Different Sizes
In market competition, the profit margins of manufacturing enterprises are restricted by the following five forces: the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, the bargaining power of customers, and the game among existing competitors.
Small and medium - sized enterprises have weak bargaining power in the supply - demand chain and face the dual squeeze of price fluctuations of upstream raw materials and price - cutting pressure from downstream channels. Among peers, they compete for market shares by lowering prices and accelerating delivery, resulting in increasingly fierce homogeneous competition. Such enterprise behaviors highly dependent on low - cost games essentially intensify the internal differentiation and resource misallocation in the manufacturing industry, leading to the situation where the industry as a whole "grows large but not strong".
From the perspective of the scale structure of manufacturing enterprises, the market structure has changed significantly in recent years. A large number of small enterprises have been added, while the number of medium - sized enterprises has decreased significantly, and the number of large enterprises has remained generally stable. This change in the market structure will inevitably lead to increasingly fierce competition among small enterprises. That is to say, even without considering the situation where large enterprises can rely on their capital and technological advantages to penetrate upstream and downstream and squeeze the survival space of small and medium - sized enterprises, the large increase in the number of small enterprises, their subordinate position in industrial competition, and their lack of bargaining power and innovation resources will lead to more competition concentrated on the "survival battle" in low - value - added links, which will inevitably make small enterprises more inclined to "price involution".
Overall, large, medium, and small enterprises are in different competitive niches. Large enterprises are more likely to benefit from their technological, capital, and platform advantages, while small and medium - sized enterprises, especially small enterprises, are deeply trapped in the dilemma of price wars and low - value - added competition. Due to the uneven distribution of investment in equipment and technology improvement and the platform - dominated market structure, the survival pressure of small and medium - sized enterprises not only comes from their scale disadvantage but also from their subordinate and marginal position in the market structure.
Currently, digital transformation has not brought comprehensive and balanced development opportunities. Compared with large enterprises with resource, technology, and data advantages, a large number of small and medium - sized enterprises lack sufficient capital investment ability, digital infrastructure, and technological accumulation, making it difficult for them to effectively follow up on technological updates and model innovations and still facing many practical difficulties in the process of transformation and upgrading. In addition, at the level of policy resource allocation, local governments often tend to attract investments from large enterprises and support large enterprises with economies of scale and fiscal contributions in the process of promoting the high - quality development of the manufacturing industry, easily ignoring the key role of small and medium - sized enterprises in filling the innovation chain, absorbing employment, and promoting regional balanced development. This policy bias further strengthens the dominant position of large enterprises, enabling them to dominate the setting of industrial rules through subsidies, credit resources, and scale advantages and squeeze the profit margins of upstream and downstream, forming a competitive pattern of "the strong get stronger".
Policy Suggestions for the Comprehensive Governance of "Involution - Style" Competition in the Manufacturing Industry
Based on the SCP model, this paper systematically sorts out the "involution - style" competition phenomenon in China's manufacturing industry and its formation mechanism from three levels: the macro - level domestic and foreign demand structure, the meso - level industrial chain reconstruction, and the micro - level changes in enterprise scale.
The research finds that, on the one hand, the "price involution" in China's manufacturing industry stems from changes in the market structure and the path dependence of industry development. Against the background of changes in the domestic and foreign demand structure, weak technological barriers, and a large increase in the number of small enterprises, enterprises generally rely on low - price competition to maintain their market position, forming an "involution - style" competition phenomenon of "low - price competition - low profit", squeezing the overall profit margin and innovation ability. On the other hand, the rise of platform enterprises and the use of their monopoly potential by leading enterprises distort the pricing mechanism, intensifying the "chain involution" in the manufacturing industry, manifested as the transfer of cost pressure to enterprises in the chain and the concentration of value distribution