Frankly there is nothing unique about market competition in China, only that it has been given its own term and perhaps that it is more intense. AWS for many years lowered costs voluntarily even though it was the clear leader in cloud services.
Amazon is usually the example given but I think it’s rather the exception that proves the rule.
Amazon’s businesses have enormous network effects that makes new entry really difficult. With Involution, there’s basically no protection from the network effect.
Meituan, Alibaba, JD have been engaged in "involution" in instant commerce in the past several months. OpenAI, Anthropic, Google, and others, have been engaged in "involution" in the chatbot space for the past couple of years. It's the same thing, burning capital while selling at a loss. A war of capital attrition where you hope you'll be the last standing.
This is a great article and super-interesting!! One thing I didn't understand is how the new entrants get capitalized if the expected RoI is essentially running to zero. Usually there is a concept of "required return" (otherwise investors might as well just keep their money under their mattress) that prevents the cost of capital from going negative.
First of all, China basically popped their ginormous housing bubble during COVID and then to prevent their economy from cratering, turned on the cash spigot full-bore for manufacturing projects. This is on top of decadal industrial policy in support of strategic industries.
But wait there’s more! Because the local supply chain is so vertically integrated and complete, it’s far less of a barrier to entry. Remember how Apple gave up on an Apple car after all that investment? But in an environment where all the components to a EV are so readily available, it’s much less complicated to “make” one…the real difficulty is how you differentiate from everybody else.
I think now the Chinese government if they are really serious about stopping Involution will need to take the role of capital more seriously. Money isn’t free and there might in fact be some discipline that is missing.
But they’ve achieved their strategic goal so far of (a) softening the landing from the housing deleveraging and (b) creating a high level of competitiveness in numerous strategic sectors.
But as various western economic commentators have noted in a critical tone, they have replaced a housing bubble with a manufacturing and tech bubble. That’s objectively better in my mind, but still a problem down the line.
Frankly there is nothing unique about market competition in China, only that it has been given its own term and perhaps that it is more intense. AWS for many years lowered costs voluntarily even though it was the clear leader in cloud services.
There’s a 2012 blog post that describes this strategy by Eugene Wei called “Amazon, Apple, and the beauty of low margins”
Note that Amazon isn’t exactly known for their cozy working conditions, even in corporate HQ
Amazon is usually the example given but I think it’s rather the exception that proves the rule.
Amazon’s businesses have enormous network effects that makes new entry really difficult. With Involution, there’s basically no protection from the network effect.
Minor note...exceptions don't prove anything. It's a phrase taken out of its original meaning.
In short....
The old, precise meaning is legal/logical: an exception points to a general rule.
The modern, casual meaning is rhetorical: an exception underscores the general tendency.
Just sayin'.... I've been reading this phrase a LOT lately, and felt compelled to say something.
Meituan, Alibaba, JD have been engaged in "involution" in instant commerce in the past several months. OpenAI, Anthropic, Google, and others, have been engaged in "involution" in the chatbot space for the past couple of years. It's the same thing, burning capital while selling at a loss. A war of capital attrition where you hope you'll be the last standing.
This is a great article and super-interesting!! One thing I didn't understand is how the new entrants get capitalized if the expected RoI is essentially running to zero. Usually there is a concept of "required return" (otherwise investors might as well just keep their money under their mattress) that prevents the cost of capital from going negative.
A few things here…
First of all, China basically popped their ginormous housing bubble during COVID and then to prevent their economy from cratering, turned on the cash spigot full-bore for manufacturing projects. This is on top of decadal industrial policy in support of strategic industries.
But wait there’s more! Because the local supply chain is so vertically integrated and complete, it’s far less of a barrier to entry. Remember how Apple gave up on an Apple car after all that investment? But in an environment where all the components to a EV are so readily available, it’s much less complicated to “make” one…the real difficulty is how you differentiate from everybody else.
I think now the Chinese government if they are really serious about stopping Involution will need to take the role of capital more seriously. Money isn’t free and there might in fact be some discipline that is missing.
But they’ve achieved their strategic goal so far of (a) softening the landing from the housing deleveraging and (b) creating a high level of competitiveness in numerous strategic sectors.
But as various western economic commentators have noted in a critical tone, they have replaced a housing bubble with a manufacturing and tech bubble. That’s objectively better in my mind, but still a problem down the line.