China’s deflation-fighting strategy has ushered in a new era of policy focus—what the government calls “anti-involution.” This set of policies is designed to address persistent overcapacity across key industries, with the aim of restoring profitability and stabilizing prices. For investors, this shift could present significant opportunities, particularly among market leaders positioned to benefit from consolidation.
Targeting Overcapacity: A Policy-Driven Shift
The term “involution” refers to excessive, unsustainable competition that erodes profit margins. China’s anti-involution strategy seeks to combat this through regulatory tools such as production caps and reduced subsidies for unprofitable firms. These measures are expected to phase out weaker players, giving stronger companies room to grow.
However, the policy’s success will depend heavily on improving consumer demand—still lagging due to low confidence. Based on previous deflation cycles, we estimate it could take at least two years for results to materialize.
Nevertheless, certain industries are already poised to benefit. While many companies in the targeted sectors are already fairly valued, we want to highlight those that will likely benefit in the long run. Some EV firms remain undervalued, and for those fairly valued players, any pullbacks could present an attractive entry point, particularly for exposure to companies poised for greater market share, utilization rate, and profitability once China implements its proposed anti-involution campaign.
Electric Vehicles: Clear Beneficiaries of Policy Support
Electric vehicles (EVs) stand at the forefront of China’s anti-involution agenda. The sector’s low entry barriers and explosive growth have led to intense price wars and profit dilution. Policy-led consolidation will likely benefit the most efficient and scaled players.
BYD, Geely Auto, and Nio are three companies Morningstar believes are best positioned. BYD, rated ★★★, is China’s largest new energy vehicle (NEV) maker by volume. Its vertically integrated model—including in-house battery production—supports strong margins and brand recognition. The company has transitioned entirely to NEV production and continues to dominate across various vehicle segments.
Geely Auto (★★★★) has steadily grown market share to 8% as of 2024, thanks to a diversified product mix and a strategic pivot toward electrification. While it faces increasing competition, Geely’s brands—Geometry, Galaxy, and premium offering Zeekr—give it a robust multi-segment presence.
Nio (★★★), meanwhile, differentiates itself with a premium focus and battery-as-a-service model that lowers upfront vehicle costs. While still loss-making, its innovative approach and global expansion plans—especially through battery swap infrastructure—could drive profitability by 2027.
Battery Leader CATL to Gain Despite Valuation
Battery giant CATL (★★★), which holds a 38% share in the global EV battery market, is another likely winner from sector consolidation. With deep investments in R&D and production capacity—including expansion into Europe—CATL remains a critical supplier for major automakers like Tesla, Nio, and Geely.
Although its shares are currently fairly valued, its strong technological edge, including innovations in solid-state and high-nickel batteries, ensures long-term competitiveness. By 2028, we expect NEVs to comprise over 60% of China’s total passenger car sales—a major tailwind for CATL.
Cement and Solar: Quiet Winners in Consolidation
Beyond EVs, other sectors burdened by excess capacity are also in line to benefit from restructuring. In cement, Anhui Conch Cement (★★★) stands out. As one of the world’s lowest-cost producers with a strong presence in Eastern China, Conch is well-positioned to expand market share as smaller, less efficient rivals exit the industry.
The real estate slowdown poses near-term headwinds, but Conch’s healthy balance sheet and vertically integrated operations offer resilience. we expect the firm to weather the downcycle better than peers and emerge stronger – but keep in mind that this is more of long-term play given that consumer confidence remains subdued in China.
In solar, upstream players face significant overcapacity following the 2021–2022 polysilicon boom. Tongwei Company (★★★), the world’s largest polysilicon and solar cell manufacturer, suffered from price collapses in 2024. However, its scale, technology leadership (especially in next-gen TOPCon solar cells), and growing module exports set it apart.
Tongwei’s downstream expansion, though facing stiff competition, is a strategic move to capture more value along the supply chain. With only 10% of module revenues currently generated outside China, the company is aggressively pursuing international markets, which tend to offer higher margins.
Lithium’s Recovery to Lag
While lithium mining could eventually benefit from anti-involution policies, the current global oversupply and weak commodity prices have dampened prospects. We expect a slower rebound for the sector, with recovery hinging on demand stabilization and a shakeout among higher-cost producers.
Investment Outlook: Selective Opportunities Amid Uncertainty
We maintain High to Very High uncertainty ratings across many of these stocks, reflecting exposure to policy changes, commodity price swings, and weak consumer sentiment. Nevertheless, undervalued or valued names with structural advantages—such as market leadership, vertical integration, or innovation capabilities—could offer compelling entry points.
Here’s a snapshot of key companies covered
Conclusion
China’s anti-involution campaign signals a clear shift in industrial policy—one that prioritizes profitability, scale, and innovation over unchecked competition. While the journey to full recovery may take time, investors should keep a close eye on leading players in EVs, cement, and solar, as these companies stand to benefit most from the unfolding consolidation wave.
