Volume Over Value: The Manufacturing Trap Exposed || Digging into China

Hi, I'm Dong Xiong. Welcome to Digging into China, where we explore China in-depth to review unique perspectives. Unemployment in China is shooting up and deflation is starting to bite. Now, I wouldn't go as far to say the economy is completely falling apart these past few years. That's a stretch. But it's definitely not what it was back in 2015. Back then, life in China may not have been perfect for most Chinese folks, but at least they had some hope, a sense that things could get better down the road. Fast forward to today, and we are in a tougher spot. Xi Jinping, after a few years of trial and error, let's call it that, has finally started rolling out some stimulus ideas. Some of these are straight up cash boosts to get people spending others like those consumer loans everyone's grumbling about. Not so much. So why am I so sure Xi's plan won't cut it? Tonight we are going to dig into why China's stuck in this rut of recession and deflation and trust me, it's a deep dive. First off, why do I think Xi's approach is going to flop? Well, we need to start with what's really going on. The recession, the deflation, it boils down to this. People don't have the cash to buy stuff, while companies are pumping out products like there's no tomorrow. Sounds odd, right? Here is the deal. A lot of Chinese businesses right now are making things at a loss. Take something I've talked about before, electric cars. Or look at the Xiaomi SU7, the hot new model everyone's buzzing about. Is it a solid car? You bet. But is Xiaomi making money on it? Not a chance. Their own numbers tell the story. Each SU7 sells for over 200,000 yuan on average, but they are losing 45,300 yuan per car. Some folks say, oh, that's just because they haven't ramped up the production yet. They are still getting started. Fair point. Sure. But here is the catch. That exact mindset is what's dragging China's economy into the mess it's in. Let me break it down with a couple of accounting terms. Net profit and gross profit. What's net profit? Picture Xiaomi in 2024. They spend 39 billion yuan building cars. That's the total cost. They bring in 32.8 billion yuan from sales. Subtract those and you are left with a 6.2 billion yuan loss. That's net profit, or rather net loss. Divide that across the 130,900 cars they sold, and each one's losing them 45,000 yuan. But it's not that simple. They are not losing more with every car they sell. Strip out fixed costs. Think marketing, R&D, and they actually make money per car. That's gross profit. In 2024, their gross profit per car hit 18.5%, adding up to over 6 billion yuan. Split that across those 136,900 cars, and they are clearing about 44,000 yuan each after stuff like labor, shipping, and materials. So here is the weird part. Net profit says they are losing on every car, but gross profit says they are gaining. Confused? Think of a noodle shop. They charge you 20 bucks for a bowl. Ingredients cost 10, so they pocket 10 bucks gross profit. But if they've got rent, staff wages, and spoiled stock, they might still end up in the red. That's net profit. You can make money per bowl but lose overall. And that's where companies face a choice. The obvious fix? If you are losing big on net profit, stop making stuff or jack up prices. Say push the gross profit from 18.5% to 30%, 40%, or higher. If I am making 44,000 yuan per car but still losing overall, why not aim for 100,000 yuan? Then I'd turn a profit, right? But most Chinese companies aren't doing that. They are going the other way. Keep producing. If each car brings in some gross profit but the business is still under water, they figure they'll just make more. Sell 136,900 cars this year, 1.4 million next year. That'll cover the losses and then some. That's the game plan for a lot of Chinese car makers. Take 2024's new car companies for example. Only Li Auto made a profit, and they are selling way more than the rest. They are spreading out their cars with volume. NIO, on the other hand, took the biggest hit. Instead of raising prices, they cut them, hoping more sales will save the day. Sometimes it's not even about profit, it's about losing less. If gross profit is positive, the more you sell, the smaller your losses get. So they keep the factories running, not to get rich, but to stay afloat. Where does that leave most Chinese businesses? They are stuck in this weird middle ground. Below total costs but above variable costs. Variable costs are things like labor, shipping, materials, stuff that changes with how much you make. When you are above those but below your full expenses, you've got losses on net but gains on gross. If it was just about making more, fine. But there is a twist. Besides piling up volume to spread the cost, they are also squeezing variable costs, haggling suppliers for cheaper materials, paying workers less, even skimping on truck drivers' wages. Zoom out to the big picture in China and it's clear what's happening. Companies are churning out goods like crazy to offset costs, flooding the market. Meanwhile, they are cutting wages to keep those variable costs down, leaving people with less money in their pockets. Too much stuff, not enough cash to buy it. That's deflation in a nutshell. Now people do cut the electric car industry some slack. EVs, solar panels, these are new fields. If they take off, build some big advantages, they could pay off later. But here is the problem. This isn't just happening with the shiny new stuff. It's everywhere, almost every industry in China. And that's what's really hurting. I've said before, China's export boom isn't just high-tech gadgets. Low-end manufacturers exploding too, faster than the fancy stuff even. That means those basic industries are stuck in the same rut trying to spread costs with more output. For old-school industries though, just making more doesn't always work, especially the low-end ones. High-end manufacturings at least competing with places like Europe or the US where wages are steep. If you can't cut those costs, that's life. But low-end? That's a slugfest with countries like Pakistan, India, Vietnam, places where labor is super cheap. To compete there, they've got to slash wages down to that level, Pakistan or Vietnam rates. So China's workers get squeezed, their paychecks shrink, and their hours drag on forever. That's where China's at right now. Looking for a job? Sure, you'll find one. Factories are still hiring like mad, but these gigs pay peanuts and work you to the bone. High-end or low-end companies are all about cutting costs and banking on volume. That's the real trouble with China's economy today. So why is it like this? You could say high-end stuff like EVs got here because governments are throwing money at it, propping them up, hoping they'll dominate the world. Someday that makes sense. But why are low-end factories doing the same? Why keep going when they're losing? Even if you rule a low-end market, so what? There's no tech edge, no safety net, someone cheaper comes along and you're done. Why not just close shop and try something new, upgrade? Because local governments won't let them. From the top in Beijing to the provinces, manufacturing is on a tight leash. Coastal cities grab talent for high-tech projects. But inland, where things are slower, local officials cling to old industries, subsidizing them, sure, but also strong-arming them to stay open. Cai Xin, a finance outlet, checked out a company on Fujian's coastal making polyester filament yarn, stuff for seatbelts, fishing nets, loops and ropes. It's dirty work, old-school, labor-heavy stuff. What you'd call a human-mind operation. It's fighting it out with Pakistan and Vietnam. Who's even complain about China dumping this stuff cheap? You'd think these places, up against Pakistan and Vietnam, would've shut down by now. China's growing, its wages should be those countries. But Cai Xin found these yarn makers aren't just hanging on, they are getting a big push from local governments. They are not staying open because they are making money. Most are losing it. They are open because local officials won't let them stop. Some even get threats, close down and will dig into your old taxes, forcing them to keep going. Why? Three letters. GDP. China's GDP growth has slowed lately, no surprise there. But something else has changed. What those GDP targets mean? Every March China sets a GDP goal of 5% this year. By December, they'll hit it. The statistics folk will make sure that 5% is now the hard bottom line. But it used to be different, just a loose target. For years, actual growth blew past it. Since Xi took over, though, it's become the bare minimum. Lately, China's been right on that edge or below it. Now that targets a huge pressure, hitting everyone from Beijing to the smallest towns. Officials at every level feel it. It's tied to their careers. So how do they hit it? Keep the factories running. Here's a glitch, though. GDP comes in two types, real and nominal. Real GDP uses a fixed price times how much you make. Nominal uses current price. China goes with real. It's 5% is real GDP. But that fixed price bid, it only cares about quantity, not price swings. For local officials, more stuff equals more GDP. It's their ticket to staying safe, maybe not a promotion, but at least no trouble from Xi's corruption crackdowns. Back to that Fujian yarn place. It's outdated, but it's a local big shot. If it stops, GDP tanks fast. A smart official might say, let it go, shift to something new, better for the long haul. But that's not smart for them. Switching takes time, years, and they might not be around for the payoff. If it flops, though, then GDP crashes, their careers toast. So these should-be-dead companies keep going, forced by local pressure. To match Pakistan and Vietnam, it's a brutal grind. Bosses losing big, workers stuck in 996 schedules 9296 days a week for next to nothing. The market's supposed to clean out the weak, but local officials' need for numbers stops that. If it worked naturally, those old industries would have tanked. Jobs would drop short, but people adapt. Those owners, their money, they'd find a new path, forced to level up. New jobs would come, better ones, for younger, skilled folks with decent pay. You'd see it in the cities too. Smaller towns, especially inland, would lose those old trades. Workers would head to big cities joining high-tech hubs. Population stats should show it. Small towns shrinking, big ones growing. Japan did it. Tokyo and Osaka's population share went from 21.7% in 1950 to 38.1% by 2020. Taiwan too. Taipei's metro hit 30% from 18% since 1980. That's what happens when markets kill off low-end stuff and people move. But China's stopped that cold. Big city migration stalled after 2020, even dropped by 2022. Why? Partly because local governments won't let old industries die. Partly crazy housing costs in places like Beijing and Shanghai. Land money is a factor too. But it's clear, something's fighting the market, keeping low-end factories alive by pumping out more and cutting pay, driving deflation everywhere. What's worse, China's been slow to react. Xi might have thought deflation was no big deal. Only in late 2024 did he wake up to it. His fix? Pushing spending. Subsidies, cheap loans. But that doesn't solve it. People aren't broke. They are scared to spend. Their wages can't keep up. China needs local governments to let the market work, not some quick boost. It reminds me of what ex-premier Wen Jiabao said, no political reform and economic wins slip away. It's not about economic tweaks now, it's political ones. Not Xi going democratic, but fixing how Beijing, local folks, and the market mesh. Back in the reform days, Beijing handed the economy to the market, ditched the old planned system, let the locals and the markets run it. No more quotas, just lose GDP goals. Local governments follow the market to hit them. Then it built China's boom. But that's old news now. It doesn't fit anymore. GDP goals used to push growth with the market. Now they are a drag. To meet them, locals go against the market, keeping dead companies alive. China needs to let go more, let local governments watch junk industries fade without a fight. That means Xi and Beijing stop judging officials by GDP alone. That's a tough shift, a big political shake-up. Not dictatorship to democracy, but a total rethink of how things connect. Empty towns after industry die, what then? Extra government workers fire them? If GDP is out, what's the new measure? In a democracy, it's votes. For the CCP, it's a messy puzzle. Then there's this. Low-end jobs vanish, workers flood big cities. How do Beijing and Shanghai handle that? Welfare for them, or new jobs? Big questions. Xi might not even see them, let alone fix them. So China's economy still miles from turning around. Xi's finally pushing spending, that's something. He's getting why deflation stinks. But a full political fix? That's way off. And without it, how does China's economy bounce back? Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my videos to others. I'll be back with more content soon. Until then, be well.