Why does overcapacity persist in China?
Is there a possibility that in mature industrialized societies, overcapacity is inevitable?
Industries are synonymous with surplus, and surplus is synonymous with industries. Surplus is the truth.
The reason it prevails in China is because China is the world's largest industrial producer.
Before delving into this issue, let's shift perspectives: Imagine a world without national boundaries, where 6 billion people live in the same nation.
Now think, is there an overcapacity of clothing production on this Earth? Even without searching for data, you'd realize it's definitely in surplus.
What about smartphone production? Apologies, it's also in surplus. It transitioned into a market of fixed supply in 2017. With the current production capacity, each person can easily get a new phone every two years globally.
And how about construction capacity? Does each person globally need at least one house in their lifetime? Well, it's also in surplus. Ever since China entered the construction sector, the global market has been in surplus, with scarcity only residing in land.
Shifting perspectives, you'll notice that on this planet, numerous industrial sectors have long been in a state of severe surplus. Those not in surplus are restricted by other resource endowments, like the quantity of minerals, energy, and the nature of technology available.
In essence, it boils down to technological limitations.
Why overcapacity? Because surplus is at the heart of industry.
What's at the core of industry? Production. And what's the prevailing mode of production? Large-scale assembly lines, commonly known as mass production.
Why opt for mass production? Because only this standardized, large-scale production method can spread the costs of personnel, equipment, land, utilities, and other substantial upfront expenses, resulting in a product pricing acceptable to the masses.
However, this kind of scale-driven assembly line inevitably leads to overcapacity.
In order to gain larger market share through lower pricing, participants compete in optimizing mass production within their capacity.
In an environment with minimal resource constraints, the overall market presents a state of pure competition, making it more prone to overcapacity, such as in the case of clothing.
Monopolistic competition and oligopoly are the same. Fast-moving consumer goods (FMCG) typify monopolistic competition, where brand and tiered pricing are clearly defined; smartphones typify oligopoly, with all participants cautiously considering rivals' reactions when setting prices.
Why are these two industries also experiencing overcapacity? Because in a relatively stable landscape, participants design mechanisms to stimulate consumption iteration through technology and advertising, enhancing market revenue under the same share.
Men may be familiar with "technological changes in appearance" (referring to how iPhones mainly change in appearance each year) and "squeezing toothpaste" (how Intel's CPU performance increases only slightly each year). Women might recognize the concept that "the difference in cosmetics lies in advertising and endorsers."
These actions greatly exacerbate overcapacity. The "flower" of the consumer electronics industry, smartphones, is in surplus, and so is the "flower" of the consumer machinery industry, automobiles. Everything is in surplus, and it's not far from the concept of communism.
Speaking of communism, many people might think: A comprehensive planned economy shouldn't experience overcapacity, right? Under a fully monopolized economic mechanism, can there still be overcapacity?
Apologies, there can still be overcapacity, often at a lower level.
What's this lower-level phenomenon? It's when the demand for these types of products is already declining, yet state-owned capital, influenced by bureaucratic systems, continues to blindly expand capacity.
In reality, if you dig into the industrial history of China and the Soviet Union, you'll find that there were manufactured light industrial products in the past. However, many of them weren't what ordinary people wanted to consume.
It's like how Soviets really didn't lack washing machines, but those appliances looked like trash cans – it was really hard to tell they were washing machines.
The widespread scarcity in socialist countries back then was actually a result of allocating limited resources into heavy military and industrial sectors. The lack of consumer industrial capacity was actually a consequence of severe overcapacity in heavy military and industrial production.
In essence, it's still overcapacity.
At this point, it becomes evident that the trend of industrial overcapacity is inevitable. The ultimate means to address overcapacity lies in the penetration of information.
However, achieving this level of penetration is incredibly challenging.
You not only need to penetrate your consumers, but you also need to penetrate your competitors.
Because you must anticipate various fluctuations – earthquakes, tsunamis, diseases, new technological breakthroughs – all of which can disrupt demand. But is this feasible? It's not.
As long as the fog of information persists, overcapacity is certain. It's like how as long as an A.T. field exists, human emotions are bound to overflow.
Why do both capitalism and socialism pay attention to the contradiction between socialized production and private ownership? Because it inevitably leads to overcapacity.
Industry is truly magical in this sense.
As we delve deeper, let's reexamine China's current overcapacity issues.
Scholars have long emphasized two types of overcapacity in China: systemic overcapacity and structural overcapacity.
The former mainly refers to the chaotic capacity management resulting from government interventions, such as blind expansion, forced retention, and interference with quotas.
The latter primarily refers to various low-end industries that might be considered undesirable, like clothing, toys, steel, and more.
I believe that addressing systemic overcapacity is essential: continuing to implement a dual-track system where strategic industries and redlines are safeguarded by the state – for example, investing heavily in semiconductor manufacturing, and state-owned enterprises securing essential supplies like food and chemicals. The remaining capacity should be determined by the market, allowing those that should naturally shut down to do so.
However, some individuals repeatedly stress China's structural overcapacity issue. They suggest that China should stop producing items like toys, clothing, glasses, and cups. These products have high pollution, thin profit margins, and low technological content. Why bother making them?
Furthermore, they argue that overcapacity already exists, so why not shift production elsewhere?
I strongly oppose this perspective.
Every nation ultimately focuses on three core areas: resources, finance, and manufacturing.
Do countries want resources? Of course, but can they obtain them easily? Just ask tectonic movements and the Gulf Stream.
Do countries want finance? Yes, and we've already become the world's largest financial capital in terms of volume. But can we solely rely on finance? No.
The United States shifted its focus predominantly to finance and within less than fifty years, encountered numerous issues. With our scale, if we put too much emphasis on finance, conflicts might erupt in less than ten years.
So, what's left? Manufacturing.
This is why we possess the most comprehensive range of industrial sectors globally. Who really wants to become a factory worker on an assembly line? It's because despite our vast territory, our resources are relatively scarce, our currency's internationalization rate is low, and to maintain our nation's continuous operation, we must continuously strengthen industrial manufacturing.
Since China is inevitably a long-term manufacturing-focused nation and already boasts the most comprehensive range of industrial sectors and the largest industrial capacity globally, overcapacity in these sectors is bound to erupt here.
Structural overcapacity isn't the issue, as this structure exists long-term. The real challenge isn't the structure, but the overcapacity itself.
Given the constraints of not significantly restructuring, there are two approaches to address overcapacity: expanding influence abroad to export surplus capacity to the acquired territories or internally planning effective investments to channel overcapacity into asset appreciation.
The former is akin to the British Empire's strategy, while the latter resembles the Roosevelt's New Deal.
However, the prevailing trend when discussing China's overcapacity is to immediately advocate for capacity reduction. It's as if shutting down low-end factories will magically redirect workers to more lucrative positions, the released funds will automatically fund industrial upgrades, and the accumulated technology will seamlessly transition into the digital age.
I find it extremely difficult to comprehend this line of thinking.
The reality is as follows:
A significant number of assembly line workers have nowhere else to go, ultimately requiring the state's absorption. The government either creates redundant positions or forcefully expands state-owned enterprise capacity to provide absorption, both of which burden the national finances.
Many laborers cannot enter large-scale infrastructure projects. Industries like textiles employ a substantial number of female workers, many of whom are older. How can they be resettled? Similarly, there are older male workers in packaging and furniture industries. How can they transition to construction sites?
The suggestion of returning to rural hometowns to farm is often impractical – those making such suggestions likely have no one in their family farming. Under the conditions of small-scale farming, returns are low. Most unemployed workers lack the capital to purchase land, making it more viable to simply receive poverty assistance funds.
Released funds often do not flow into industrial upgrades. Behind these funds are individuals. If they lack an understanding of the industry, would they dare to invest? Can they trust financial institutions after a lifetime of engaging in physical labor? Many would instead pivot to real estate development rather than make an about-face and delve into industrial sectors they are unfamiliar with.
However, over the years, the technology and production line experience we've accumulated have been rapidly disappearing. Industrial knowledge is heavily skewed towards engineering, relying on massive practical experience for improvements. While the parameters of an aircraft engine might be covered in university textbooks, it takes decades to develop the processes and techniques required for its production.
Yet, the most critical issue is the accelerated dissolution of numerous well-formed industrial clusters.
Chinese assembly line workers' wages have long exceeded those in Southeast Asia. However, despite years of outsourcing, only textile factories and toy assembly lines seem to have relocated. This is because these industries rely on existing industrial clusters to maintain profitability.
Years ago, my father worked with a weaving factory in Bangladesh. If a piece of equipment malfunctioned, they had to summon skilled technicians from Guangdong, China, for repairs. If certain fabric materials were lacking, they had to import them from Guangzhou. Training for a new process required hiring a master from Zhejiang to come and teach.
A neighbor of mine once worked as a technical consultant in Nigeria. He helped an Indian individual set up a factory for producing pots. The technical complexity was minimal, just involving a press machine striking a steel plate. Yet, the Indian was ready to pay an annual salary of 300,000 yuan to hire a Chinese vocational school graduate from Foshan, who would be on call to provide repairs.
In contrast, in any textile industrial park in China, these challenges are resolved with a single phone call. Huzhou Zhili produces a quarter of the world's children's clothing. Masters, skilled workers, materials – you can find almost everything you need within a five-kilometer radius of the factory.
These efficient and flexible industrial clusters ensure that even as labor costs rise in China, the country can still compete with Southeast Asian countries at similar prices while offering higher quality.
Moreover, these industrial clusters form a solid foundation for industrial upgrading.
Our industrial software is quite lacking, which is a disgrace compared to our production capacity. In the past, we made some efforts through national initiatives led by institutions like the Chinese Academy of Sciences and the Ministry of Industry and Information Technology, but the results were mediocre. Even when internet companies entered the scene with concepts, the outcomes remained average.
The real achievements and promising endeavors have emerged from leading enterprises within these low-end industries, pushing themselves to upgrade and painstakingly exploring solutions. It's akin to the early days of Hollywood, where numerous flops eventually led to the creation of a classic film.
Nowadays, when overcapacity is associated with low-end industries, and policies are introduced to encourage their shutdown and transformation, it's like pruning a potted plant. A snip here, a cut there, with the right posture and presentable data, they call it a success in reducing capacity.
However, these plants left out in the wind and rain wither in just a day.
Either you secure a market, provide enough water and nutrients, and let them grow – whoever becomes a towering tree proves their prowess; or you might lack water and nutrients, but with proper soil management, you let them grow – they might not be as rich but growing strong is still an accomplishment.
Now, it's about managing a forest, not just individual trees.
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