There can be lots of economic theories to explain why so many industries in China are suffering from overcapacity, but a popular story circulating on the internet may provide a simple answer–it has a lot to do with the Chinese culture.
According to the story, a Jewish businessman opened a gas station in a new market and made a fortune. Then another Jew arrived and put up a coffee shop right next to it. He too made good money. Then came a third Jew opened a supermarket in the area, and it also became successful.
Meanwhile, a Chinese businessman opened a gas station in a different market and it soon became profitable. A second Chinese saw this and opened another gas station right next to it. Soon, a third Chinese joined the competition with yet another gas station.
They say Chinese businessmen are more likely to copy rather than offer something different. When a certain business sounds lucrative, tons of companies quickly pile into it and churn out very similar products.
The result is quick saturation of the market, falling prices, thinning margin and a long overhang of excess capacity.
We have seen this across numerous industries, from steel to solar panels, from cement to coal.
The mobile phone industry is grappling with the same problem at the moment.
Rivalry has been driving down the sector’s profitability. The weakening of the renminbi could push up component costs (key parts are still imported) and hurt the makers further.
Some are venturing overseas to dial up new revenue, only to see their peers follow suit. For instance, Chinese brands are now storming the Indian market and splashing marketing dollars to vie for a bigger share.
Huawei, Jin, vivo are all sponsoring India’s premier cricket league. Lenovo and OPPO are reportedly spending aggressively on advertising. At the same time, these Chinese makers are competing to build up their distribution networks in the country.
It probably won’t take long before the Indian phone market too becomes overcrowded and everybody engages in cutthroat competition.
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