The price war in China has often been misunderstood, mainly because people tend to focus only on the surface-level aspect of what is commonly referred to as a "Chinese-style price war." However, if you take the time to understand the underlying principles and historical context of this phenomenon, you may come to a completely different conclusion.
Fifty years ago, when Wal-Mart first opened its doors, it introduced the concept of "Everyday Low Prices." It offered general merchandise at 20% lower than competitors and brand-name products at 50% less. This strategy was incredibly successful. Was it wrong? Of course not. But simply looking at Wal-Mart’s pricing isn't enough — one must also consider the entire system behind it.
It is often said that Chinese companies are engaged in price wars. In reality, these price wars are largely confined to the domestic market. Chinese firms do not engage in such battles internationally, because their pricing systems don’t directly compete with those of multinational corporations. It's like two planes flying at different altitudes — there's no collision.
The strategic importance of China’s pricing lies in its ability to reshape the global price comparison system, making Chinese prices unique on the world stage. I don’t believe China’s low prices constitute a true price war. These low prices have not competed directly with multinational companies, which have focused on the high-end market, while Chinese firms have occupied the low-end segment. Therefore, there is no real level of competition.
The confusion around domestic price wars is widespread. Without Shuanghui’s price war, many small manufacturers might still be producing counterfeit ham today. Similarly, without Changhui’s aggressive pricing, there could still be hundreds of TV companies, and ordinary consumers might not have been able to afford even a 21-inch television. The ultimate winners of these price wars are the consumers. In industries that haven’t yet reached concentration, price wars are necessary. Companies that lack the strength to survive may be forced to produce substandard goods unless they fight for survival.
Further research reveals that price wars are an inevitable part of rapid industrial concentration. As an industry matures, it often sees the collapse of 90%, 99%, or even 99.9% of companies — a process known as industry consolidation. Most foreign industries have already gone through this phase and experienced price wars. In contrast, most Chinese industries are still in the early stages of development and must continue to engage in price competition.
**In-depth study of price wars also reveals several key phenomena:**
1. A price war can be the highest form of competition or the lowest. It may be a desperate move for companies with no other options, or it may be a calculated strategy for those with multiple advantages. When a company has a strong cost advantage, it can dominate through price.
2. Sometimes, the second party in a price war may be the one who loses. The common belief that both sides lose is not always true. In some cases, a price war can lead to a win-win situation, with the third party — often foreign competitors — being the real victim.
3. Price wars can drive both scale and profitability. While it’s widely believed that price wars make no money, this is only the end result. Winners of a price war can not only outcompete rivals but also generate significant profits.
Only high-level price wars can eliminate low-level ones. Low-level price wars are essentially price harassment, while high-level ones act as a “clean-up†mechanism. Price wars are essential for a country to catch up and develop. Whether it’s the U.S., Japan, or the Asian Tigers, all went through a period of aggressive price competition before achieving industrial upgrades.
We hope that in this challenging year of 2009, some Chinese companies will have the capability and conditions to become the "clean-up portals" of their industries. Let’s look forward to them.
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