SINGAPORE: When Ma Lingfei, 30, and her startup team of engineers in Shenzhen unveiled their prototype - a state-of-the-art wearable headband designed to monitor and enhance children’s attention spans - back in 2021, they were confident they were ahead of the curve. 

Created using sophisticated brain computer interface technology (BCI), the device had taken just under three months to design and develop - an unusually quick turnaround and no easy feat especially in China’s hyper competitive tech sector.

However, as the team prepared to launch, they soon discovered “a flood of similar products” had already penetrated the market. 

“In places like Shenzhen, Hangzhou and Shanghai, many innovative companies are doing quite well,” Ma said. “When we come up with an innovative idea, (we discover that) someone else has already thought of it and they move very quickly.” 

“This does create psychological pressure for us because we’re not sure whether (our) product can compete with those from other companies.” 

Often dubbed China’s Silicon Valley, tech hub Shenzhen now has a new nickname - capital of “involution” or neijuan in Chinese - where excessive internal competition leads to diminishing returns and stagnation for companies.

The intense and often vicious competition also leaves individuals feeling trapped in an endless rat race, inflicting huge amounts of stress and financial pressure, especially on young entrepreneurs. 

The phenomenon has been at the forefront of public debate in China - even being addressed by top policymakers.

For the first time in its highly-anticipated work report released on Wednesday (Mar 5) during the opening of the National People’s Congress (NPC) in Beijing, Chinese Premier Li Qiang addressed the issue of “neijuan-style competition”. 

“We will move faster to develop and improve foundational institutions and rules for this purpose,” Li said.

“We will eliminate local protectionism and market segmentation, remove bottlenecks and obstacles such as those impeding economic flows in terms of market access and exit as well as allocation of production factors and take comprehensive steps to address rat race competition.” 

His words follow previous pledges, including one at the Central Economic Work Conference (CEWC) in Beijing last December, where officials called for industry self-discipline and sustainable market practices to combat industrial overcapacity and vicious competition. 

“The fact that this term appears in the government work report clearly indicates the government’s strong concern over this negative phenomenon,” Dr Chen Bo, a senior research fellow at the National University of Singapore’s East Asian Institute, told CNA. 

“Through such high-level government documents and the policy-making process, it is hoped that effective measures will be introduced.” 

Liu Zhibiao, a professor and director of the Yangtze Industrial Economic Think Tank at Nanjing University, on the other hand, downplayed the significance of neijuan being mentioned for the first time in a government work report.

“It is simply about implementing the spirit of the Central Economic Work Conference,” he said.

On Feb 25, China’s top industry regulator, the State Administration for Market Regulation (SAMR) chaired a fair competition symposium with top executives from conglomerates like the Alibaba Group, JD.com and Mercedes-Benz China. The session focused on addressing involution and gathering industry feedback on market challenges as well as potential solutions.

Local governments have also outlined plans to combat neijuan.   Officials in the eastern coastal Jiangsu province proposed tackling involution in key industries through coordinated industrial planning, while Hunan prioritised regulating competition in investment attraction.  

Excessive and unhealthy levels of competition can often lead to “a loss of growth-oriented thinking within the industry”, Ma said, especially for startups and smaller companies competing against more established firms in the market. 

“When markets become saturated with similar products, businesses start competing on subsidies, working hours and aggressive marketing rather than investing time developing products that truly address user pain points,” she added.   

“When everyone is focused on competitors rather than user needs, companies can easily fall into the ‘if you have it, I must have it too’ race - chasing after rivals rather than creating unique value.”

Involution poses “very significant” challenges for China’s post-pandemic economic recovery, noted Dr Chen.

Overcapacity, weak demand and geopolitical pressures have intensified competition between companies, Dr Chen says, with local governments under pressure to sustain employment rates are reluctant to let struggling businesses fail or go bankrupt. 

“(Zombie) companies that lack competitiveness cannot exit the market,” Dr Chen said.

Overcompetition would also make it difficult for China’s market to “become more international”, he said. 

“Foreign industries and service sectors attempting to enter the market, or survive and develop, are finding it increasingly difficult since (domestic) competition is growing more and more intense,” he added. 

IMPACTS OF INVOLUTION 

In China, high-pressure work environments are especially common in sectors like electric vehicles (EV), tech, e-commerce and solar panel manufacturing.

Cutthroat pricing and competition in the booming EV industry has led to heavy losses being felt on the ground. 

Hong, a former public relations manager at a new energy vehicle (NEV) brand, told CNA that he had watched the industry spiral into an all-out price war when US electric car giant Tesla slashed prices back in 2023, triggering a market-wide domino effect that saw hundreds of Chinese car makers follow suit - by offering deep discounts in a bid to stay competitive. 

This in turn fuelled a dangerous involution effect - marking three consecutive years of declining margins according to data released by the China Passenger Car Association (CPCA) - with few companies able to sustain losses indefinitely.

“Price wars inevitably lead to selling cars below cost,” Hong said. “Some automakers price new vehicles thousands or even tens of thousands of yuan below their bill of materials (BOM) cost, and everyone in the industry is aware of this.”   

Sales teams have also been feeling the squeeze. Yang, a salesman working in Guangzhou for the past 11 years, said staff were often expected to work overtime not because of real business needs - but to create an illusion of productivity for investors. 

“Most EV sales staff are just sitting (around), waiting for the day to end, putting on a show for managers and investors,” he said, adding that those who refused to work overtime were often asked to leave. 

China’s EV and automotive sector is still in a “relatively early stage of development”, noted Zhang Xiang, director of the Digital Automotive International Cooperation Research Center at the World Digital Economy Forum, making it particularly vulnerable to the impacts of overcompetition. 

Price wars have become an unavoidable competitive strategy, Zhang adds, driving smaller firms into bankruptcy. 

“Leading firms lower their prices first, forcing smaller players to follow suit,” he said. 

“Eventually, smaller enterprises run out of cash, can’t pay wages, and shut down - leading to factory closures, mass layoffs, and economic instability.” 

China’s thriving trillion-dollar e-commerce industry, the largest in the world, is also seeing some of the worst effects of involution. 

Fierce competition to attract online shoppers has pushed leading platforms towards cutthroat price-matching. While more bargains and lower prices might benefit consumers, merchants find themselves caught in a race to the bottom, experts say, and are forced to slash margins to unsustainable levels. 

This in turn has caused competition between businesses to surge in the past few years, said Dr Chen. “While it might be a short-term pain, it could turn into a long-term crisis if left unchecked.” 

Regulating bigger e-commerce platforms to curb anti-competitive practices might be crucial for promoting longer term growth, Dr Chen said, pointing to China’s record 18 billion yuan (US$2.8 billion) anti-monopoly fine on Alibaba in 2021, as an example of regulators stepping in to curb anti-competitive practices. 

“Clearer rules and oversight are needed to prevent digital involution from worsening competition,” he said.

After a record boom in solar and wind power installations, China’s solar panel industry, which once dominated global supply chains with productions of key equipment and components, is now grappling with a severe downturn due to oversupply. 

Manufacturing output continues to shrink, according to the China Photovoltaic Industry Association (CPIA), with prices for key materials plunging by up to 49 per cent in 2024 and numerous firms reporting net losses. 

An increasing number of firms are competing for a shrinking pool of investment opportunities in China’s private equity and venture capital market, industry players say. 

Jason Wu, Venture Partner at the Beijing-based Source Code Capital firm, said startups were increasingly prioritising attracting investment over genuine market demand.

“This is a clear example of neijuan,” Wu told CNA. 

“Companies are over-polishing pitch decks that focus on storytelling for fundraising rather than for business viability, and use cash-burning strategies to drive artificial growth and inflate valuations.” 

IS THERE A WAY OUT OF INVOLUTION?

Steps to tackle involution in China’s economy might have been just a brief announcement during Li’s speech on Wednesday, but mentions at previous important party meetings could signal a step in the right direction, experts say. 

Overcapacity in China has occurred in many industries and this is an issue that must be “thoroughly resolved” but it cannot be solved overnight, said Liu. 

“It will take a long time - possibly (over) two or even three Five-Year Plans to fully address it (and) whether we reach that point, we will have to take it step by step and see.” 

The fundamental solution, he adds, is to “move away from a production-first mindset, where economic growth is driven solely by expanding capacity, increasing output and boosting investment”. 

“The key shift should be from supply-driven to demand-driven growth - ensuring that goods can actually be sold rather than simply produced in excess.”

National policies and participation from local governments must also undergo reform, Liu said. 

“Only by achieving people-centred development and making the fulfilment of people's needs the goal of growth, can there be genuine attention to household income and consumption, as well as a balanced approach to both demand and supply.”

Beyond government efforts, industry groups have already been taking notable action.

CPIA has held multiple industrial forums throughout 2024 to strengthen self-regulation and in November, urged bidders to set minimum price limits and prioritise service and quality scores in procurement evaluations.

Even despite all its negative connotations, involution is simply domestic competition at work, said Dr Chen. “Involution means domestic competition. How could domestic competition not exist?”

What the economy needs is healthy competition, Dr Chen says - where “more efficient, high-quality and innovative businesses can thrive”. 

“More new products, raising productivity, creativity and quality … we want to eliminate backward products through forward development - that is the kind of involution we’d like to see.”