Eugene Hsiao of Macquarie Capital unpacks China's anti-involution strategy, and how its evolved from previous supply-side reforms that primarily focused on the SOEs, to the private enterprises.

Beijing

China is focusing on addressing 'involution'—a term now used by the government to describe excess competition, oversupply, and price deflation—in its electric vehicle (EV) industry. While the government has signaled intent to manage these issues, no major policy actions have been implemented yet, particularly as most excess capacity is found in the private sector rather than state-owned enterprises. 

Industry experts and company leaders expect consolidation in the Chinese EV market over the medium term, as many firms lack the scale required to survive. Meanwhile, Chinese EV manufacturers are expanding into overseas markets, capitalizing on cost advantages and efficient supply chains. Recent regulatory changes in regions like the EU may further support the international growth of Chinese EVs, especially as consumers become more familiar with these vehicles through rental fleets.

How will China's anti-involution campaign impact its EV industry?

So there's a lot of focus now on how China is going to tackle the issue of involution, which it has signaled it has strong intent to. So are you expecting some sort of strong strategy, wide sweeping strategy, or very targeted measures when it comes to involution, and particularly for EVs? Yeah, the tricky thing is what does involution mean? To be honest, I think it's been a little bit tricky because this word almost seems like it came out of nowhere. We've done a lot of work looking at the official text and when it really came out, and it's interesting because the social meaning of involution came out probably in the mid-2020s, but it was very much a social term. It was about working very hard, or university exams being very difficult, and people competing against each other. But over the last couple years, the government, especially from last year, started to co-opt this term. And they, in my opinion, changed the meaning of it. It's not really the social competition. They brought it to this different level where we would define involution as excess competition, to a certain degree excess supply, but also to a certain degree price deflation. And that wasn't the original meaning, right? The government sort of changed the meaning to this sense. So now when they're talking about anti-involution, and specifically for EVs, a lot of it is about managing that price competition, getting out of the deflationary spiral. Now in terms of the actual concrete actions, right now we haven't seen a major concrete policy out that's, quote-unquote, cut a bunch of capacity in EVs or something like that. I don't, I haven't seen that happen. There's reasons for that, mainly because the previous supply-side reform in China was mostly about SOEs. This time around, it's mostly about private enterprises. So it's a different ballgame this time around. And because now most of that excess capacity, or a lot of that, is in the private sector, so do you think that that will be a challenge for policymakers too? And do you think consolidation is necessary to deal with excess or outdated capacity? In the medium term, consolidation is necessary. I do think that the Chinese auto market, and a lot of the CEOs of the major companies, be it XPeng or Li Auto, have mentioned this. That long term, there will be consolidation in industry. You need to have probably at least two million units of sales per year to survive. A lot of these companies are not there. So you would imagine there is consolidation in the medium term. But whether or not the government will push it is still unseen. We haven't seen that clear push from the government to say we want consolidation. Yeah, but you're talking about the Chinese market, EV market. But if you're looking at some of the moves that they are doing in Japan and South Korea, and of course obviously Europe, they're taking things overseas and sort of setting the EV standard. And the pricing is very, very attractive. So maybe it's a longer term kind of a play here for China. Yeah, I definitely agree with that point. I think that for China, there is the domestic market, which we all know is extremely competitive. And if we were looking at any auto company in China, the real ability to grow is going to come from the overseas market. And I think that's the most important thing because as you mentioned correctly, the cost advantage in China is huge. Supply chains are very efficient. And a lot of the global OEMs have figured this out. You know, I think Ford CEOs come out, they've looked at the Chinese cars, they realized wow, their components are so much cheaper. We need to sort of copy the China model. It's not that we should be like avoiding China, we should be actually looking at China to try to make our cars better. And I think that's something which everyone's figuring out over the last couple years. And do you think they're sticking to the strategy where they sort of tap into the commercial vehicle segment of an overseas market first, and let that foreign market sort of have that experience. This is not too bad. And it's cheaper, so I will go for it for my passenger vehicle down the road. Like eventually open up that segment as well. That's right. I think it was maybe two weeks ago that the EU came out with regulation where rental car fleets actually have to go pure EV in the next couple years, right? I actually see that as positive for the Chinese auto industry, exactly to that point. Because if you could, you're renting a car, generally speaking you don't have that much choice over what kind of car you get. But you end up with a Chinese EV, you enjoy that experience, that could be sort of the hook that gets people, actually this car, despite the origin, is not that bad. And that would help consumers allow Chinese companies to grow overseas.

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Breakdown