The history of progress is littered with casualties. The automobile replaced the horse-drawn carriage, streaming killed the video store, the smartphone swallowed the camera. Each wave of innovation builds on the old, even as it dismantles it.

The influential twentieth-century Austrian economist Joseph Schumpeter popularized a name for this process: creative destruction. His economic theory describes a cycle of innovation, competition, displacement, and renewal—in which the churn of progress demolishes what came before—yet ultimately leaves the system stronger, more efficient, and with economic growth. Chinese business today represents an extreme version of this dynamic, but with a twist—and it's critical to understand this distinguishing feature of China's landscape.

The fuel for this competitive engine is the same cocktail we unpacked in the last chapter: sheer scale, breakneck speed, insatiable consumers, plus a surge of private capital—at times reinforced by state support for strategic sectors from solar panels to satellite towns to electric vehicles. But that intensity has a darker side captured by the term involution, derived from the Latin involutio, "to fold back upon itself." In Chinese, it's neijuan—literally, to "roll inward"—business slang for self-defeating effort and diminishing returns. You're not alone if this term is unfamiliar; it only recently entered English-language business writing, borrowed to describe a phenomenon that's almost exclusively Chinese: competition so extreme it stops being productive, resulting in chronically low returns, inefficient capital allocation, bloated inventories, and eventually deflation.

After decades working with clients in the thick of China's juan—shorthand for neijuan, terms now often used interchangeably—we've seen a clear paradox: the grind is punishing, but it forces firms to sharpen their capabilities and raises an industry's performance baseline. It's a twist on Schumpeter's creative destruction—progress and damage can, and often occur simultaneously.

Crucially, involution isn't simply hyper-competition. We define it as a market state where output and quality rise while industry-wide returns fall, driven by price wars, overcapacity, and "me-too" entrants. At first glance, it looks like madness: coffee prices falling to bottled water levels, food delivery apps sending noodles to doorsteps for free, sidewalks turned graveyard for abandoned shared bikes, and steelmakers celebrating survival margins.

China may be the only major economy where, for several major industries, annual budgets forecast price declines—and where five hundred million thrifty households enforce a national discipline of low costs and high expectations. Yet China's distinctive pattern is that involution doesn't just erode margins; it often produces stronger supply chains, deeper engineering capabilities, faster iteration cycles, and ultimately a few survivors that break away through genuine innovation.

We often describe China to clients as "The World's Toughest Gym," a mixed-martial-arts "Octagon," or a modern Roman Colosseum—whatever analogy works for you. The contest indeed leaves weaker companies limp on the mat and creates system burnout in ways that no one intends. It also forges resilience and equips the survivors to succeed anywhere in the world.

"Involution is both painful and extreme," says Xin Huang, a McKinsey partner in the consumer practice. "But it's also a core cultural strength, giving Chinese companies a unique way to differentiate themselves both at home and abroad. Firms that harness this involution culture can drive cost efficiency, speed, and resilience—and while multinationals have traditionally lagged in this kind of relentless internal optimization, many are now learning from their Chinese competitors and leveraging this distinctive feature of Chinese business."

At its core, involution is the result of a uniquely Chinese blend of corporate or entrepreneurial ambition, abundant capital from both public and private sources, a growth mindset, and a culture that celebrates stamina and relentless hustle. Layered onto the defining features of China's market, involution can fuel bursts of innovation while simultaneously compressing margins.

A major strength of the Chinese system is its pro-growth, pro-business government. At every level, often guided by national priorities, local governments have jump-started industries—especially sectors flagged as strategic—with subsidies, low-cost or free financing, and cheap land to achieve aggressive local growth targets. Provinces competed to build the "next Shenzhen," offering loans and industrial parks to clusters of entrepreneurs and suppliers. Consumers got subsidies, too: early EV buyers could receive up to 60,000 RMB (about $8,600) per car—an incentive that shrank as standards rose and ended in 2022, but not before more than a hundred EV brands were born (though only a dozen or so comprise the majority of sales). For years, anything tied to the "new three"—electric vehicles, lithium-ion batteries, and solar panels—was showered with local support. More recently, it's robotics and advanced manufacturing, commercial and industrial drones, semiconductors, aerospace and aviation, and large language models.

Yet it's easy to misread China's system as a state-dominated monolith. "In practice, on measures of competition and private-sector activity, China is often more competitive and more private than most global economies," says Yermolai Solzhenitsyn, a McKinsey senior partner in the metals and mining practice who transferred to Shanghai after decades with the Firm in Russia. "State-owned enterprises account for only about 30 percent of GDP—far below Russia's 60 to 70 percent, and far lower than much of the Middle East. The reality is a vast system driven by competition—among companies, among local governments, and among regions."

While most sectors have experienced phases of involution, not all have—and involution also isn't limited to government-favored sectors. It appears across many industries, even those without state involvement—from restaurants to tea chains to tour services. In our own field, when we see consulting firms chasing the same work at cutthroat fees, we joke that consulting is involuting, too.

Capital keeps the system moving. Venture funds chase unicorns, state subsidies power strategic sectors, and friends-and-family money supports new ideas. Funding was scarce in the 1990s and early 2000s; after three decades of wealth creation and a maturing investor ecosystem, it's far more accessible today. From 2014 to 2024, China poured $42.1 trillion in capital expenditures into its goods-producing industries—about twelve times the investment of ASEAN, ten times that of India, and five times that of the United States. Between foreign private equity, local and state funds, and wealthy entrepreneurs, promising projects rarely lack financing.

Culture adds its own momentum. Competition isn't just tolerated in China—it's long been part of Chinese life. For 1,400 years, the imperial exam system made upward mobility a winner-takes-all contest, embedding a culture that prizes diligence and chiku (eating bitterness). Today's high-pressure ethos is a direct heir to that mindset. The modern national college entrance exam still packs a lifetime of ambition into a two-day ordeal. We've also long struggled with work-life balance in our own offices. We once adopted a global McKinsey initiative that declared "Wednesday Me" nights as time off, but even shutting down air-conditioning to force consultants out of the office simply pushed them into hotel lounges with their laptops to continue working.

The same logic carries into the business culture. Chinese entrepreneurs routinely enter saturated markets—coffee, steel, chemicals, anything—not because they underestimate competition but because they believe they can outwork it—by cutting costs, improving execution, or expanding the market itself. Overcapacity is seen as less a warning sign than a challenge. As one leading synthetic fiber producer explained, making products cheaper and more available can create demand. "We are planning for the long term, and not just for China. Indonesia has three hundred million people," she adds, "and billions more worldwide still need clothing."

There can be a comical predictability to it all, almost as if you could lay bets on the next industry to be involuted. A Chinese friend with a longtime European business partner likes to joke, "A European guy opens a gas station and becomes successful. His friend then opens a supermarket next door. Other friends come and open a school, a medical clinic, a laundromat—soon there's a thriving community and everyone prospers. In China, the first Chinese guy opens a gas station. If he is successful, very soon, a second gas station appears. Then a third, and then a fourth. Before long, you've got ten gas stations on one street—and no one makes any money."

Some friends ask, "Well, why gas stations and not supermarkets?" The answer is yes, of course, the Chinese build supermarkets, too, and pretty soon there are ten others alongside it. It's China. There's more of everything.

Soul Capital founder Herry Han reminds his European investors that China comprises a fifth of the world's population jammed onto land surrounded by mountains—with only a few arable pockets. "When I return to China after a month in Europe, what hits me most is how close people stand to me," says Herry. "Space is not something we've experienced as crucial over our long history. So when a market exists, we Chinese tend to squeeze into any corner of it—even if it's already crowded. Space is an opportunity."

Joe remembers the first time he stumbled upon a Luckin Coffee kiosk. It was a bitter cold Shanghai morning in 2018, and after hours of client meetings, he slipped downstairs in search of caffeine. That first taste turned out to be a preview of extreme competition. The winners didn't just flood the market with cheaper coffee but also built irreplicable strengths in procurement, logistics, operational efficiency, and marketing.

For two decades, Starbucks had defined China's coffee experience: leather armchairs, walnut-colored tables, lattes priced like small luxuries in prime high-rent locations. A Starbucks cup was a status symbol: discerning taste and a white-collar identity. The stores themselves were your "third space" apart from your home and your office. By the time Joe encountered Luckin in 2018, Starbucks had 3,300 outlets across China and plans to open a new one every fifteen hours. From its 1999 Beijing entry, Starbucks had turned a tea-drinking nation into a coffee-loving $20 billion industry.

That day in the lobby of his logistics client on Shanghai's outskirts, Joe found something very different. The Luckin kiosk was built from black sheet metal and barely the size of a street noodle stand. Its footprint was lean and cheap, and so was its staffing: a lone barista pointed to a QR code. A few taps on Joe's phone, and his latte appeared. No line, no cash, no banter. The coffee itself was fine, but the price—barely more than a soda—was extraordinary.

Luckin didn't just enter the coffee market; it detonated it. Its founders, who'd built China's largest car-rental company, applied the internet-venture playbook: raise massive capital, build a model with a vision of profitability, scale fast, and subsidize user acquisition. Phones were flooded with promos. It became the fastest "from zero to Nasdaq IPO" story in Chinese enterprise history—from its October 2017 founding to initial public offering (IPO) in about eighteen months. "Luckin targeted the younger generation," says David Li, Luckin's current chairman and founder of Centurium Capital, an early investor who's now its largest shareholder. "They wanted digital-first, affordable, and more creative drinks. They wanted something new."

Luckin's success—and access to eager capital—drew hundreds of rivals, though the company's rise wasn't linear. In 2020, the company divulged it overstated 2019 revenues by 2.2 billion RMB ($314 million); the chairman, CEO, and COO were ousted, shares suspended and de-listed from the main board. The ousted chairman and CEO soon launched Cotti Coffee, widely seen as Luckin's "second act," and quickly fired the first shot in a nationwide price war with a 9.9 RMB ($1.4) coffee, sometimes as low as 8.8 RMB ($1.3) during marketing campaigns. By comparison, mainstream chains such as Starbucks and Costa were pricing lattes at 25 to 30 RMB ($3.6 to $4.3); suddenly competitors were selling alternatives almost as cheap as a pair of 5 RMB ($0.7) street meat buns.

This competition drove prices to the floor, burned through capital, and made innovation a survival strategy. We regularly see on a single Shanghai block a Cotti next to Manner across from Starbucks, while passersby carry cups emblazoned "Luckin" and the niche chains MStand and % Arabica. Insane—but millions of first-time drinkers embarked on a coffee habit, and ordering on an app was normalized.

"Luckin came in with a totally different way of playing: digital first," says Grace Hu, the former VP of Starbucks China who oversaw strategy and store development during the mid-2010s. "This new generation of competitors lowered the cost of everything—and they had rich consumer data from day one that helped keep the customer engaged." (In many ways, their model is effectively "digital only.")

Luckin had rebuilt its cost stack for exactly this moment. Its scale enabled huge bean volumes and leverage to negotiate with suppliers, while its engineered "coffee basket" flavor—crafted from dynamically shifting blends—allowed the company to arbitrage global commodity swings, cut waste, and extend shelf life. By owning warehousing, transport, roasting facilities, and logistics, it stripped even more volatility out of the system. Hence it was able to price drinks at what David Li calls the "should-be cost"—the industry's theoretical floor—long before it'd achieved it.

Meanwhile, the chain turned coffee into "fast fashion": nearly a hundred new products a year plus thousands in the pipeline: coconut, liquor, seasonal, novelty, orange juice coffee, malt coffee. The innovation seems to be in the drink, but in fact it's in using SKU variety as a weapon. Copying drinks is easy. Replicating Luckin's operational supply chain complexity is not. Cost control plus its optimized supply chain gave Luckin advantages no competitor has been able to match.

To David, the price war was inevitable. Established brands had been living too comfortably on inflated premiums, he says. "That actual profit margin leaves room for other competitors to disrupt the market," David tells us. "If I set my price too high, I give others that kind of room."

Luckin makes money even at 9.9 RMB ($1.4), a price point that sends most rivals scrambling. After turning profitable in 2022, it didn't ease off the gas—it accelerated. In less than a decade, it grew from a few Beijing stores to more than thirty thousand nationwide by the end of 2025 and surpassed Starbucks China in revenue in 2023 at $3.5 billion. In 2025 alone, it launched nine thousand new locations—roughly one every hour—aided by AI-driven designs.

Like many multinationals caught in a price war started by locals, Starbucks refused the 9.9 RMB ($1.4) fight. Starbucks China doubled down on a different philosophy: human connection and experience—the opposite of kiosks, speed, and takeout. Starbucks translated that philosophy into execution: more distinctive store formats, faster delivery, improved digital experiences, and revamped lids, for example. It also trained up baristas to improve those "micro-interactions," the small social touches that make Starbucks "stickier" than a delivery app as mobile ordering and delivery continued to scale. The competition, however, is real. David notes Luckin runs four times Starbucks' volume for twice the revenue—a fundamentally different operating model.

This fierce competition takes a toll on every competitor. After more than a decade as the uncontested growth star of the Starbucks portfolio, Starbucks' China business hit a rough patch: shrinking margins, declining market share, and local upstarts nipping at its heels. The company pivoted. In a move that echoes McDonald's China's shareholder changes a decade ago, Starbucks sold a majority stake in its China venture to the Chinese private equity firm Boyu Capital. Boyu's partner in charge of the deal, Alex Wong, tells us, "We aren't intimidated. There's plenty of value here; this is the world's largest coffee market, still growing, and we have a phenomenal brand." Starbucks expects the partnership will help fuel expansion from eight thousand to more than twenty thousand stores nationwide.

The coffee wars were brutal. While some were successful, many franchisees all over the country, excited about the opportunity to be their own bosses, lost their savings in failed outlets. Yet they together invited more than a thousand competitors, big and small, to try their hand at coffee and expanded the market to about four hundred million coffee drinkers in China. The survivors emerged stronger and more focused. "Hyper-competition has driven innovation. Quality of specialty coffee in Shanghai is on par with that of any leading global city," says Grace, the former Starbucks exec.

Of course, there's no permanent dominance in the world's toughest gym. Delivery wars erupted in 2025 between Alibaba, Meituan, and JD.com, cratering coffee prices to 5.9 RMB ($0.8)—even lower with promos—while milk tea chains and other beverage formats move in on the same consumers. The latest coffee brand? Shanghai's "Taijuan Coffee"—with the Chinese characters literally translating as "too involuted." It offered a 3.9 RMB ($0.6) Americano during morning hours. What will the future hold?

Nowhere has involution burned hotter than in EVs, where prices fell faster than costs even as competition forced eighteen- to twenty-four-month model development cycles and software-first architectures—leaving survivors with a mobility tech stack they can deploy anywhere.

Industrial policy has anointed "green" and "new energy" vehicles—including electric cars, plug-in hybrids, and hydrogen fuel-cell vehicles—as strategic sectors meant to pull the country from low-cost manufacturing into high-value, technologically advanced production. To accelerate the transition, subsidies, grants, tax rebates, and purchase incentives poured in, and early domestic players such as BYD laid the groundwork.

Then in 2019, Elon Musk opened up a Tesla Gigafactory in Shanghai, the first wholly foreign-owned car plant in China. It disrupted a decades-old equilibrium dominated by Volkswagen, Toyota, and the mass-market gasoline cars that had carried China's middle class for years. A generation of Chinese entrepreneurs saw their first Model S, heard Musk speak, and decided the auto playbook could be rewritten. XPENG founder Xiaopeng He switched from a Land Rover to a Tesla and was struck by the acceleration, the quiet, and the unexpected pleasure of listening to music in such silence. But to him, Tesla represented something more than just a great electric vehicle; it reframed who could build great cars. "What left the deepest impression on me was that a company that wasn't originally an automaker could make such a good car," Xiaopeng says. Tesla's history in car-making at the time seemed short, and in fact thinking an outsider could easily make great EVs "was wrong," he says—yet that illusion empowered so many with the courage to try.

One company turned China's intensity into a superpower: BYD. It started as a humble battery shop, then in 2020 launched the Blade Battery, which set new benchmarks for cost and scalability and rendered the lithium-iron phosphate battery as the mainstream default. From there, BYD built a vertically integrated supply chain stack—from mines to materials to batteries to cars—which let it structurally underprice competitors. It then grew rapidly: fewer than four hundred thousand cars in 2015 to more than four million by 2024 to become the world's largest EV maker. Yet BYD's scale cuts both ways: a machine built for massive volume isn't necessarily nimble. Sustaining dominance may require a new phase of innovation as the domestic market inevitably slows.

Other EV makers chose different capabilities. NIO put the customer at the center of everything by working to create a seamless, emotionally resonant relationship with them, while Li Auto simplified product complexity to deliver value-for-money SUVs. Huawei and Aito focused on advanced cockpits and intelligent driving. Geely—a legacy combustion carmaker—pivoted aggressively into platforms and software. Any advantage in China lasts as long as the next new model cycle.

Consumers reaped the windfall. When Tesla first unveiled the Model 3 in 2017, it was pitched globally at about $35,000, though early versions imported into China cost far more. A BYD Dolphin? About a third of that at 80,000 to 100,000 RMB (about $11,000 to $14,000). At the peak of the price wars, entry-level sedans in some smaller cities even dipped below the cost of a scooter in Europe. Famously, the Wuling Hongguang MINI EV launched at 28,800 RMB (about $4,000) in 2020—tiny, basic, and wildly popular, at one point outselling the Model 3 thanks to unbeatable utility for short city commutes.

Competition forced extreme speed: development cycles collapsed from four or five years to under two, powered by agile engineering, continuous iteration and improvement, and clean hardware-software decoupling. The "involutionary" churn of start-ups and legacy original equipment manufacturers (OEMs) fought for survival.

This relentless cost compression forced new forms of organizational creativity. We've visited OEMs that have built lean, digitally-enabled, flat operating models where cost efficiencies have become innovation. Gigacasting, modular production, and AI-assisted design unlocked speed and efficiency, turning survival tactics into repeatable advantages.

But do these advantages last? Usually not, simply because the bar keeps rising. We recently test-drove a Li Auto EV with flawless self-parking, massage seats for every passenger, and a cowboy-hat-donning AI agent executing rapid-fire commands. That's just par for the course in China. Chinese firms have built a deep base in smart-cockpit technology with more than sixty thousand related patents—enough to turn many cars into something closer to rolling living rooms than people movers. Autonomous driving is advancing, too. In summer 2024, Beijing expanded trials to cities including Shanghai and Shenzhen, allowing operators to remove the human "safety" driver and run limited passenger and cargo services. In these pilot areas, riders can watch a movie, relax, or even tutor their children while the car drives itself.

And the leadership title keeps rotating: first NIO captured imaginations with battery swapping. Then Li Auto impressed drivers with extended-range hybrids delivering over 1,300 kilometers. Then Huawei's Aito surged with its Harmony-based cockpit and autonomous driving capabilities. Then Xiaomi stunned the global industry with the fastest start-up development in auto history—just three years from announcing their plans for mass production.

We believe the battle might ultimately be decided by technological capabilities, and many EV players are now full-stack technology companies that can compete across other sectors. XPENG vice chairman and president Brian Gu notes that the same capabilities—AI foundations, chips, sensors, autonomous driving systems, lightweight tech—can scale into flying vehicles and humanoid robots. "We're developing our capabilities toward smart mobility, and there will be multiple solutions. Vehicles will only be a part," Brian tells us.

However, Paul Gao, Mercedes-Benz's global head of strategy and one of the industry's most astute veterans, cautions that it's far from certain technology will decide the winner. "We've seen very rapid commoditization of technology in China such as ADAS, smart cockpit, and electric drivetrain," Paul says. "Today Huawei is supplying a growing number of Chinese and foreign OEMs with its tech stack." When everyone has access to similar technology, Paul argues, the real edge shifts to customer experience, speed of product refresh, and other non-tech differentiators. In short, this race won't be settled quickly.

None of this unfolded by accident. China's leadership engineered the rise of its electric vehicle industry through a full-spectrum industrial strategy: generous consumer subsidies, preferential "green" license plates, production grants for OEMs, and the creation of the world's most concentrated and efficient EV supply chain.

All this played out inside the largest auto market on the planet. Western analysts often focus on subsidies as the source of China's cost advantage. But consumer pull, steadily falling prices, rapid improvements in vehicle quality and technology, and an increasingly compelling value proposition also play a role. In 2024, Chinese carmakers produced nearly three-quarters of the world's electric vehicles, while Chinese consumers accounted for almost two-thirds of global EV sales—by far the largest EV ecosystem in the world.

Serious questions still hang over the sector. A few of the leaders may be profitable, but the supply/demand imbalance remains stark. Without the excess cash flow needed to fund continued investment and R&D, further consolidation appears almost certain. A few players have already collapsed, yet most are still digging in, hoping to emerge among the eventual survivors.

"Digging in" also means competing overseas. Chinese OEMs are exporting this juan competition globally onto the streets of Bangkok, London, and Sydney, rapidly capturing market share. Its outward expansion feels relentless. "2025 was a turning point for the auto industry because China became the world's largest auto exporter for the first time," notes Daniel Birke, a McKinsey partner in advanced industries. For Chinese players, overseas markets offer a reprieve from competitive pressures at home—at least at first. Margins abroad are typically higher than at home—at least until the next Chinese entrant arrives and competes margins away. Still, there's cautious optimism that competition overseas will be less purely price-driven. "Given today's competitive landscape, it'll take time before the industry is truly healthy again. In China, these cycles are just really painful," Mercedes-Benz's Paul says.

China's EV story isn't just a story about cars. It's a tale of scale, capital, supply chain, government industrial strategy, speed, involution—and the conversion of brutal competition into innovation.

In the same way, China's green tech expansion isn't only a climate story. It's an experiment in scale, capital, and involution—what happens when an industry becomes too extraordinarily good at what it does. Chinese solar companies have weathered an environment of steep losses and endured razor-thin margins yet in doing so have helped drive down the global cost of clean energy deployment and reshaped the economics of greening the planet.

The state's push into renewable energy—solar, wind, batteries, power electronics—was rooted in climate goals, energy security concerns, and industrial strategy. As in other priority sectors, support came through subsidies, preferential financing, land access, and guaranteed grid connections. Once the policy framework was in place, the building began.

Solar manufacturing, in particular, became a magnet for capital. Capital poured in, capacity surged, and costs fell—often faster than demand—and in little more than a decade, China became the primary manufacturing base for nearly every major solar component. Today, Chinese companies produce roughly 95 percent of global solar wafers, over 80 percent of cells and modules, and a similar share of key upstream inputs such as polysilicon. Most new installed solar capacity now relies on Chinese-manufactured hardware. China installed nearly 60 percent of new global PV capacity in 2024 and nearly 70 percent in the first half of 2025—more than double the rest of the world combined. Without this industrial surge, the energy transition wouldn't just be slower—it would be more expensive.

For a time, the system was profitable. China's climate goals triggered a rapid post-2020 solar boom, but upstream supply of polysilicon—the critical raw material at the top of the value chain—proved slow to scale. Polysilicon prices surged more than four-fold; the mismatch created a bottleneck which created pricing power upstream, and for many solar manufacturers and developers, 2022 was a banner year.

LONGi Green Energy became emblematic of this boom. An early bet on monocrystalline wafers—backed by subsidies, research breakthroughs, and manufacturing efficiency—helped propel the company to global leadership as it standardized monocrystalline silicon, pushed wafer sizes from 156 to 210 millimeters (from 6.1 to 8.3 inches), and advanced industry-wide cell efficiencies. At its peak, the company generated tens of billions of renminbi in annual revenue.

The boom proved short lived. A flood of new entrants and aggressive capacity expansion collided with cooling demand, sending module prices plunging 70 to 80 percent over the next two years. Manufacturers responded as they always had—by innovating. Firms accelerated technology iteration with domestic equipment and material suppliers, pushed toward next-generation architectures that convert more sunlight into usable power and reduce use of inputs such as silver, and drove costs lower through automation and deeper vertical integration. From 2010 to 2025, solar cell efficiency rose from 16 percent to north of 25 percent. Even as margins thinned, industry players worked to preserve R&D spending—critical to competing in high-tech spaces.

Still, no company got better at making money, even as the industry got better at making solar panels. Gross margins collapsed from around 20 percent to roughly 5 percent in 2024, pushing the industry into net losses. In some segments, production capacity reached nearly two times global annual demand. The result was widespread financial damage. That year, LONGi reported a $1.1 billion loss, its market capitalization down to roughly a fifth of its peak—and it wasn't alone. The excess has landed even in Shanxi province, home to both a billion tons of coal production a year—about one-seventh of the world's total—as well as the largest single solar panel factory on earth with a target capacity of 56 gigawatts. That's about a tenth of global solar demand. "Most manufacturing industries have become too efficient for their own good," says Haimeng Zhang, LONGi's vice president and chief sustainability officer. "There's oversupply even at a global level," he says.

Geopolitics compounded the pain. Trade barriers rose, and export markets tightened just as domestic demand slowed. By 2024 and into 2025, many solar producers were burning cash, writing down inventory, and idling capacity. "We are building for a world that doesn't exist yet," one executive tells us.

This industrial implosion coincides with China's nearing—or possibly reaching—peak emissions, not because growth has stalled but because clean energy capacity scaled fast enough to decouple economic expansion from carbon output. Wind and solar now account for more than half of new power generation capacity added annually, with China building more than the rest of the world combined. This dominance extends beyond projects built at home: Chinese firms also play a substantial role in solar capacity added abroad through overseas investment; engineering, procurement, and construction (EPC) contracting; and equipment supply.

Though the green transition remains incomplete for the world's largest coal burner, electricity in China is cheaper, cleaner, and more abundant than at any point in modern history. For the planet, the gains are profound; for manufacturers, they've come at a cost. As one client puts it: "It's hard to appreciate the energy transition when you're reporting losses."

That cheap energy is becoming a strategic asset. As AI data centers, robotics, and advanced manufacturing scale, energy costs matter—and Chinese firms now operate at price points few global competitors can match. For now, some of the pressure is being alleviated through exports: Europe, Africa, and Southeast Asia absorb large volumes of low-priced equipment, while Chinese firms operate at thin margins. The question is whether the world pushes back on these renewables as another arena of Chinese "industrial overcapacity," or instead embraces them as a cornerstone of a faster, cheaper global green transition.

As we've described, the process of involution often begins with success—whether it be in coffee, solar, steel, or fashion. Starbucks introduced the Chinese consumer to lattes; Suntech Power led the early charge in photovoltaics; Tesla made EVs aspirational; Zara brought fast fashion to the masses. Success quickly draws new entrants, new money, new factories. This boom eventually devolves into overcapacity, price competition, collapsing profit margins, and the exhaustion of both capital and people.

While China has built world-class industries on this model—"ambition first, profitability later"—the bill does eventually arrive. "Involution and intense competition have been central to China's economic success, but several emerging factors could introduce new uncertainty," says Lambert Bu, a McKinsey senior partner leading digital practice. "Advances in AI may erode traditional advantages in engineering talent and labor, while an aging population and a smaller, more laid-back younger generation could temper the forces that once powered growth."

Those costs arrive as thin or negative returns on invested capital (ROIC), a growing number of "zombie" companies, and misallocated capital propped up by local incentives. Cycles come to an end only when standards tighten, credit dries up, and exports meet resistance.

Oversupply is worsened by the fact that Chinese entrepreneurs rarely stay in their swim lanes. Sure, companies everywhere chase adjacent opportunities, but in China the conviction and speed of these moves are on another level. Consumer appliance makers jump into EVs (Xiaomi), online marketplaces reinvent food delivery and digital finance (Alibaba), and carmakers begin building humanoid robots (XPENG). Luckin's founders came from car rentals; NIO's from internet ventures. When a market heats up, boundaries simply vanish.

At McKinsey, we constantly debate the costs and consequences of involution. Traditional strategy says to stick to your strengths and avoid piling into crowded trends. The Chinese marketplace is full of cautionary examples, and some have been spectacularly costly. Evergrande leapt from real estate into theme parks, EVs, and even bottled water. Suning expanded from electronics into sports and hyper-markets, snapping up Inter Milan and Carrefour China. Vanke, another major developer, even tried pig farming.

But there are also spectacular successes. After a few champions crawl out of the gym, the market might stabilize—or a new cycle might start all over again. In some sectors, the structure eventually settles and profits begin flowing. But more often, the game never ends. The ambition we observe can be intoxicating. "I wanted to be the next Elon Musk," one investor tells us. And so does everyone else.

At the macro-level, the toll is heavy. China's return on invested capital (ROIC) was about 6.5 percent in 2022—well below the EU's 10.3 percent and North America's 11 percent and closer to that of Japan and South Korea—a quiet signal that money no longer works as hard in China. "From an investor's point of view, involution is a nightmare. It's messy and terrible for short-term returns," says Hai Ye, a McKinsey senior partner. "But it rewards deep understanding and long horizons."

As overall market growth slows, deflationary pressures persist. Producer and consumer prices remained unusually weak through August 2025. Together, these trends show how inward-looking competition and supply/demand imbalances are eroding returns, distorting market efficiency, and weighing on economic stability.

These lower returns aren't just a financial curiosity—they're rewriting business strategy. Companies are pulling back on investment, recruiting fewer graduates, and watching both domestic and foreign investors drift toward greener pastures. Provincial rivalries make things worse, with regions undercutting one another in a race to attract capital—often at the expense of their own returns. "Involution basically tells us that Chinese companies work super hard and make amazing things for very little return," says Karel Eloot, a McKinsey senior partner co-leading the global metals and mining practice. "Yet China is a market economy, and if there is not enough return, this will sooner or later limit further development."

This phenomenon has proven difficult to stop. A few entrepreneurs manage to sprint ahead in this corporate "Hunger Games," but many struggle just to survive, while others become zombie firms or simply disappear. "Imagine if prices suddenly shoot up in China in certain sectors. It might really hurt demand because people have become used to lower and lower prices," says Alicia García-Herrero, Natixis's chief economist for Asia-Pacific. "There could be unintended consequences if this race to the bottom ends abruptly."

Behind the numbers lie the human costs: overworked employees, overextended students, and falling birth rates. Typically, we see that consumers cannot stomach price increases, the state stays growth-oriented, and households end up financing this low-margin equilibrium through their own low-return bank deposits.

In a now-famous episode in 2024, then Chairman Qinghong Zeng of state-owned automaker GAC Group openly urged peers at an auto industry forum to stop involution and price wars and focus instead on profits, taxes, and employment. Months later, GAC's Honda joint venture was forced to execute two rounds of layoffs. EV newcomers scoffed: the legacy OEMs, they said, had been sitting on "fat profits for way too long"—and it was time for the challengers to take over.

Consolidation is nothing new in business. British textiles, US railroads, Japanese electronics, even Australian beer all saw brutal price wars. What makes China different is the sheer persistence and scale. Industry after industry has run this cycle not once but over and over.

During boom years, this pattern was challenging but manageable. Now, with slower growth, tougher export conditions, and overcapacity everywhere, the same forces have become a societal worry. Even The People's Daily has sounded the alarm, warning about the dangers of juan and calling for "high-quality development." The central government is trying to temper the excess it once fueled in certain sectors, for example, by raising standards to weed out low-quality players, pressuring provinces to halt new capacity, and pushing for consolidations and exits of money-losing ventures.

Still, consolidation is politically charged. Provinces rarely want to let their own firms die; social stability and jobs come first. In many countries, bankruptcy wipes the slate clean; in China, propping up weak companies delays the kind of shakeout that could lift efficiency across the board. That's how such firms manage to stagger on—kept alive not by strength but by local protection and credit rollovers. What can look like resilience is really capital being misallocated. And with local officials wary of being blamed for failures on their watch, a reckoning for many already doomed enterprises gets pushed down the road.

Still, some sectors are cooling, with clear winners emerging. In chemicals, repeated rounds of involution have already produced "last-man-standing" outcomes. In vitamins, NHU now controls roughly 35 percent of the global market and posted a 12 percent net margin in 2024, even as much of the chemicals industry lost money. Chinese producers collectively supply about 85 percent of global vitamin demand. Similar patterns have played out elsewhere: Lomon in titanium dioxide; Meihua in amino acids. The payoff is capability. Today, US bio-industrial start-ups working on precision fermentation often turn to companies such as Meihua to scale and industrialize their products—not because they're the cheapest option but because it's hard to find others that can execute as well at industrial volumes.

Other sectors, by contrast, remain stuck in open warfare. Coffee chains, EVs, and consumer internet platforms continue to attract waves of entrants, imitation, and price competition. Some industries cool; others simply reset and start the cycle again. In 2025, just when the internet battles seemed settled, Alibaba, JD.com, and Meituan reignited another costly free-for-all in "instant retail," or sub-one-hour delivery.

By the way, this mechanism doesn't always lift capabilities. It works best where scale and speed matter—and less well in fields that depend on long-cycle scientific research and accumulated know-how. Jet engines, high-end machine tools, and parts of the semiconductor supply chain remain notable gaps.

Is it really more competitive today? "China has always been like this," says Yibing Wu, China CEO of Singapore's Temasek Holdings, one of the country's most influential investors. "In the 1990s, PC assemblers fought it out—that was the first generation. Then internet entrepreneurs reshaped the economy, followed by ByteDance and Pinduoduo capturing share. Now we have a fourth generation of entrepreneurs competing in AI. The winners from the PC era are only in their sixties, and they're still hungry. It's the Chinese way—a congestion of entrepreneurs and companies fighting in a very compressed period of time."

Excess competition? Natural evolution? Involution? Creative destruction? There's no consensus on how to characterize China's hyper-competitive industries, and we see people use these terms interchangeably. In theory, involution has a specific meaning: competition so intense that it destroys profit margins, creates oversupply, pushes prices downward, and keeps zombie firms alive. Lower returns may simply be China's new equilibrium—something investors must accept—but within that landscape, standout firms can still thrive.

On the ground, involution feels both brutal and strangely logical. One client compares it to a movie theater where the first row stands, forcing every row behind them to do the same: "No one sees any better, but no one dares to sit down." Entrepreneurs echo the same mindset, as they consume little and fight year after year to develop cheaper drones, a greener EV, or a skin lotion that promises to reverse aging: "We can go without sleep for two years. We need little to survive. We will outlast the rest."

Playing in this theater is often highly rational for the individual player—a predictable response to an intoxicating mix of tax incentives, abundant capital, government support, national ambition, and the lived memory of personal wealth and glory. Over three decades, China has seen the fastest wealth creation in its commercial history: Alibaba and Tencent in digital, Anta and Li-Ning in sportswear, Xiaomi and Oppo in electronics—and countless regional fortunes in everything from local hotel operators to provincial shoe distributors.

Some business practices practically invite involution—especially in asset-light industries such as software, e-commerce solutions, digital media, and knowledge-based services, where price can become an important lever. Consulting is a case in point. Joe recalls one bid process for a banking project in Beijing: the bank's procurement team invited five consulting firms for a proposal, or what they called a "beauty contest."

Two were immediately eliminated on qualifications, and the remaining three—including McKinsey—were ushered into a conference room and told that we all qualified, but that winning the project would come down to price. The client's procurement leader announced the lowest bid at that point. Sitting across the table from their competitors, Survivor-style, firms resubmitted their fees. One more was cut. For the final round, McKinsey and the remaining firm called their investment committees for approval to slash fees further. McKinsey lost. The winning bid? Twenty percent of the initial proposed fee.

Brutal, yes. Nevertheless, the progress is right in front of us across both asset-light and asset-heavy industries: logistics networks that mastered on-demand delivery at near-zero fees; ride-hailing networks that rewired urban mobility through iteration; an EV ecosystem that drove down battery cost and sped up global adoption; a coffee battlefield that converted a nation of tea drinkers into digitally native coffee consumers; and even steel—steel!—that emerged greener through automation and technological renewal.

In some sectors, involution has reset industry baselines and produced an environment in which companies that survive can even thrive. For example, Chinese steel sells at 30 to 50 percent below US prices while industry margins are only a few percentage points lower, according to our colleague Sheng Hong, a McKinsey senior partner leading the global energy and materials practice. In advanced compressors, a high-value segment of industrial machinery, Chinese products are 50 to 80 percent cheaper, yet industry profits trail US peers by only 10 to 15 percent. This mix of extreme cost advantage, modest profit compression, and a complete manufacturing ecosystem positions Chinese firms to compete globally. As Sheng puts it, "I joke that I'd never buy an industry index in China—the sector will always compete itself to death—but the leader makes healthy margins."

China's pressure-driven efficiency doesn't just benefit domestic players. It expands global access to advanced technologies. For example, waste-to-energy plants, once affordable only to high-income countries, are now viable in markets with a per capita income as low as $3,000. In China itself, plant adoption has scaled so quickly that capacity has overshot demand—the country is literally running out of garbage to burn.

We understand the challenge the China market poses. How do foreign entrepreneurs and multinationals build in a place where workaholism is a badge of entry and the primary weapon seems to be cutting prices until rivals starve? Is this a game anyone, much less outsiders, wants to play? And can anyone realistically build durable competitive advantages here?

Of course, for end users downstream of an involuted industry, there's no better place in the world to be. For Chinese consumers: new EVs every few years; 9.9 RMB ($1.4) coffees; a subsidized refrigerator; two-for-one robot vacuums! For professionals: a noodle lunch that costs less delivered than eaten at the restaurant; a collared shirt for the price of four metro rides!

And the great irony is that even companies squeezed by involution in their end markets benefit in procurement upstream; automakers might get steel on the cheap, battery makers scoop up discounted chemical inputs, and appliance firms source components cheaper this year than last. The marketplace shimmers with hungry suppliers.

For industry players, especially the multinationals accustomed to less intense competition and fatter margins in other markets, the choice around whether to stay and how to play can feel agonizing. "Auto companies say it's not an option not to be in China, but at the same time, it's not a great option to be in China," says Ruth Heuss, a McKinsey senior partner in Berlin and co-leader of the Firm's global operations practice. Economist Alicia Garcia-Herrero puts it bluntly: "You decide not to invest, you lose faster. You invest, and then you're in the gym—some people call it a prison. You can't tell everyone 'I'm getting fit,' because the reality is you're getting beaten up."

Our view is straightforward: multinationals can't simply walk away now. China is the only single market that's large enough, with an abundant supply of talent, a comprehensive supply chain, and the infrastructure to enable sustained competition. Other economies might be too small, too fragmented, or lack industrial depth or logistical capacity to offer the same opportunity. To compete here is to get "fit for the fight that's coming to your other markets," as McKinsey's retired senior partner Franck Le Deu puts it. "You can't just say, 'I'm sorry, this race is too difficult and everyone else is too good.' For many global companies—especially in industrial sectors—performing successfully in China is what helps make you globally competitive."

Two final points are worth emphasizing. First, for all the talk of exhaustion and involution, entrepreneurs remain fundamentally optimistic about the market's long-term vitality and potential. They keep piling in because they genuinely believe there's upside, while in stagnant or declining markets, no one bothers to enter. So while it's easy to lament China's intensity, the real warning sign would be if entrepreneurs stopped wanting to invest their capital, reputations, and time.

Second, this is the toughest gym in the world. We've seen companies carve out real success by competing on cycle time, choosing defensible niches, co-developing with customers, or simply resetting their margin expectations for China. Outcomes can be powerful: consumers get higher-quality products at lower prices, companies sharpen their capabilities, and industries move up the value chain. Call it a Joseph Schumpeter–style "creative destruction with Chinese characteristics." Many Chinese companies now carry that confidence and those capabilities abroad.

The Chinese marketplace moves with the restless energy that no middle-aged economy possesses. This ecosystem can be unforgiving, but it's also generative, and those who endure leave stronger than when they entered.