Overproduction remains top risk for Chinese companies

What are the most significant risks Chinese companies face today? Some may highlight potential woes involving human resources, finance, property, production, supply and demand. Of course, they are crucial.

However, in our opinion, the most important risk Chinese companies now face is overproduction. Overproduction happens when a company, driven by capital, produces more than the existing market demand.

The mass overcapacity China has experienced is a typical feature of overproduction. There are historical reasons why China’s development has faced this hazard. In the past, the country has participated in globalization with its cheap manufacturing costs and production factors. For decades, China has been “the world’s factory,” mainly producing cheap goods. The current structural adjustment is the result of China’s rather large production capacity compared with other major economies.

The world market has developed in a similar fashion. Globalization has made the world flat, and its connectedness has leveled the competitive playing field.

Multinational companies allocate production resources around the world in accordance with efficiency principles, thus increasing the global manufacturing capacity and trade volume. When globalization rises, there are too many countries and regions with the same production capabilities, with continuous capital investment, causing global overproduction.

A vital transformation has occurred, and we now live in a buyer’s world. Due to overproduction, buyers within the world market are increasingly tough, occupying a favorable position in the competition. Sellers need to beg buyers to purchase their products. Just as we have stressed, overproduction and market transformation are also significant factors contributing to the US-China trade frictions.

It is of great significance not only for companies but also for national and local economic policies to recognize the seriousness of the overproduction problem. Chinese economic policymakers don’t seem to have been aware of the overproduction problem and its seriousness.

When we did the research across the country, we found that almost everyone was talking about whether they could build an industrial park or a large-scale production base. The same is true of classical economics, and economists, who are generally concerned about production-related issues. Their talk of improving efficiency is aimed at producing more, while industrial transformation also aims to strengthen production capacity.

Consumption and market space issues are secondary. Today’s world still lives in the era of scarcity. Many people hold a disapproving attitude toward China’s transition toward a consumption-oriented society.

However, in our view, it is very dangerous to focus on production while ignoring consumption and actual market demand.

Whenever a country accumulates debt and stockpiles, it is an indication that a transformation is underway. It would be unwise to ignore this signal and continue to promote and expand production.

China is witnessing the development of industrial parks. Local governments have even set a number of targets, requiring industrial parks to complete output in massive amounts, pushing overproduction to extreme levels.

Where are these industries coming from? Where are the markets that will consume the products? Apparently, it this is not sustainable and will generate considerable market risk. Governments and companies alike should avoid overproduction.

To avoid such risks, companies need to adjust their business strategy and stop over-investing in production. In another word, they need to make more efforts to expand market space and promote consumption, with less emphasis on production volume.

The chances of success would be higher if companies could pay more attention to “increasing the market appetite.” Companies generating massive revenue have focused their efforts on “increasing appetite,” such as Alibaba and JD.com. If one continues to feed a market that is not hungry, one will end up with wasted resources and expanded debts.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound. bizopinion@globaltimes.com.cn

 

Source: Global Times