I'm back in 1990

Chapter 1176: Beware of the Frog in Slow Water

He typed on the keyboard and wrote: "I recently read someone's argument that 'low prices are the way out for China's manufacturing industry,' and I am deeply worried."

This viewpoint seems to cater to certain principles of market economics and captures the consumer psychology of cost-effectiveness, but in reality it is a serious misinterpretation of the basic logic of economics.

China's economy has reached its current state not through relentless low-price competition, but through the continuous accumulation of technological research and development, management expertise, and industrial synergy since the opening up of the country.

However, it is undeniable that in the first twenty years of opening up, we did participate in the global division of labor to some extent by relying on our labor cost advantage. But this is only a phase in the development of history. We must recognize that this model has a ceiling, and that ceiling is already very close to us.

The so-called low-price strategy may lead to increased orders and expanded market share in the short term, but in the medium to long term, this model will bring systemic and deeper problems.

He paused to think, and reviewed his thoughts again. As someone who had been engaged in economic research for many years and was also a reincarnated individual, he had a deeper understanding of this issue than others.

First, from the perspective of macroeconomic operation, low-price competition will inevitably lead to a terrible consequence, namely deflation.

Most people are sensitive to inflation and feel that rising prices are not a good thing. However, from a macroeconomic perspective, moderate inflation is healthy because it means strong demand, which encourages businesses to invest in increasing production, leading to a significant drop in unemployment and increased worker income, thus creating a virtuous cycle in the overall economic environment.

Deflation is the real economic killer. On the surface, things may seem cheaper, but the underlying logic is insufficient demand, overproduction, and shrinking investment. When businesses can't make money, they lay off employees and cut salaries. When people's incomes decrease, they become even less willing to spend. This lack of consumption further exacerbates insufficient consumer demand, making it even harder for businesses to make money. This is a concept known in economics as a death spiral. Once trapped, it is extremely difficult to reverse and requires enormous policy resources and time.

This year is crucial. If our companies are mired in a price war for too long, and their profit margins are squeezed to a very thin level, or even zero or negative, then they can only survive by doing two things: either desperately reducing costs or relying on subsidies or loans to stay afloat. The former will directly impact residents' consumption capacity, while the latter will cause enormous financial risks. Either way, it's like drinking poison to quench thirst.

With that in mind, he continued writing.

The second issue is that low-price competition can stifle a company's innovation drive. This is common sense, but it is often overlooked.

A company's R&D investment comes from profits. Without a reasonable profit margin, a company simply doesn't have the money to do R&D and innovation.

Fruit companies consistently rank among the world's top in R&D investment because their products have sufficient profit margins. Similarly, Chrysanthemum is a global leader in the communications field because it consistently invests over 10% of its revenue in R&D. This money isn't saved; it comes from healthy market returns.

In contrast, companies that rely on low prices to capture the market have razor-thin profit margins, some even surviving on official export tax rebates. Such companies can't afford research and development; they can't even afford to buy new equipment. Their only competitive advantage is cheapness, but cheapness is the least moat-like thing. If you can be cheap, can't Southeast Asia be cheaper? Can't Africa be cheaper?

From an economic perspective, when a country's economy develops to a certain stage, labor costs, land costs, and environmental costs will inevitably rise. This is an objective law that cannot be changed by anyone's will.

Once our competitors in countries and regions with lower costs grow, we will be at a greater disadvantage.

Huang Xiaochuan became more and more engrossed in writing, forgetting the time and his family waiting for him to eat.

He then went on to write about the third and most crucial issue: that low prices ultimately harm consumers themselves.

This issue seems like a paradox, because many people would say, "I just want cheap and good quality goods." But the key point is that every consumer is also a worker. Every penny you save when shopping may eventually be reflected on your paycheck, and some people may even lose their paycheck soon.

Imagine if the entire manufacturing industry were trapped in a low-price competition model, with meager corporate profits. In that case, the wages they could pay their employees would be limited. When millions of workers are earning relatively low wages, it would restrict their purchasing power.

Insufficient consumption leads to a lack of economic growth momentum, making the economy more reliant on the external environment. If the external environment fluctuates or trade protectionism rises, there will be huge risks.

Moreover, low prices are often accompanied by poor quality, and this is not just a quality issue, but also a series of problems such as safety, environmental protection, and labor rights.

Many low-priced products are cheap because manufacturers cut corners in these areas, such as using substandard raw materials, omitting necessary safety testing steps, cutting corners, and not paying overtime, etc.

These cost savings will ultimately be borne by all consumers.

Therefore, while supporting low prices may seem to be protecting consumer interests, it actually harms them.

As Huang Xiaochuan wrote this, he rubbed his slightly numb hands. Taking this moment, he thought about it again and realized that he couldn't just talk about the problems without solving them.

After making up his mind, he continued writing: "There is a way out, and that is upgrading and transformation. That's how those European and American countries have gone through it, from low-price competition to value competition, from cost advantage to technology and brand advantage, and from grabbing market share regardless of cost to improving quality and efficiency."

This road is not easy, it is even very difficult. Some companies will fail halfway and some workers will lose their jobs, but we still have to keep going. Otherwise, we will be like frogs being slowly boiled in water. When the water starts to boil, no one can escape.

Fortunately, many well-developed enterprises have emerged in China, gradually gaining market share by leveraging technological barriers and trustworthy quality. These enterprises demonstrate that Chinese manufacturing can absolutely move towards the mid-to-high-end market, compete with top international brands, and win the market without sacrificing reasonable profits.

Huang Xiaochuan's fingers flew across the keyboard as the sky outside gradually darkened, but he didn't notice at all.

"Dad! Dinner's ready!"

Huang Ruiying's voice came from outside the door. She pushed open the study door, but didn't come in; she just poked her head in.

Huang Xiaochuan didn't even look up: "You guys eat first, I have some things to take care of here."