Smart manufacturing at scale

China's success lies in scaling industrial innovation and timely upgrading as well as continued amelioration and flexible adaptation for high-quality development

Innovation is measured largely at the technological frontier. Nobel laureate William Nordhaus, an economist and a professor at Yale University calculated in 2004 that innovators capture about 2.2 percent of the total social surplus their innovations create. Most of the remainder ultimately accrues to everybody else. Invention is half the story. Diffusion is the other half, and diffusion is a price curve.

Entry is relatively cheap at the initial level, some local governments compete to host new producers, and hundreds of companies may compete in one promising segment. Capacity expands faster for a relative period, margins can collapse, weaker companies will disappear, and the survivors become extraordinarily efficient. According to the China Photovoltaic Industry Association annual reports, polysilicon fell from 230,000 yuan ($34,135) a metric ton to 65,000 yuan a ton in 2023 because of this systemic competition, not because anyone designed it.

A system built on entry has to consolidate eventually, and China has been trying to accelerate that process since 2025, targeting what policymakers themselves call involution-style competition. China proposed amending the pricing law to restrict predatory rat-race sales. China's market regulator met with solar industry representatives on July 31 to provide guidance on pricing compliance and the ‌implementation of industry cost-accounting standards. This will help regulate price competition in the photovoltaic industry.

In 2025, the term "overcapacity" became the word of choice in the European Union and the United States to describe the result that "Made in China" products capture greater market shares owing to their cost-effective features, but the term obscures as much as it explains. It implies unwanted goods pushed abroad as part of an export strategy. Most of the price pressure originated inside China, where companies were competing with each other for domestic market share, and the products were not unwanted. At best, "overcapacity" is a statement about margins, not about need. Measured against profitable demand in some wealthy economies, Chinese solar capacity might look excessive. Measured against billions of people worldwide lacking abundant, reliable and affordable electricity, it falls far short of what is needed.

Twenty years ago this argument would have been far weaker, and one of the reasons is about freight. Cheap production of heavy basic goods travels badly. A ton of cement is worth less than the cost of carrying it any distance, which is why cement is a regional product in almost every country on Earth. As Chinese manufacturing climbed the value chain, value density rose and the price fall began to survive the journey. The more sophisticated the good, the more of the Chinese price curve arrives intact in Lagos, Dhaka or Sao Paulo.

Chinese air conditioner exports to the EU reached $3.76 billion in the first half of 2026, up 43.2 percent year-on-year, while Chinese brands now hold about 32 percent of the European market, according to market research company Euromonitor International. It is the least important part of the story. Only 20 percent of European households have air conditioning, compared with more than 90 percent in the US, according to the International Energy Agency.

Agricultural equipment tells the same story with less noise. Customs data show that China exported 185,539 tractors in 2025, up 20 percent by volume and 33.4 percent by value. The machines that matter for smallholders are the small ones, priced 30 to 50 percent below Western equivalents, running interchangeable implements that till, sow, pump irrigation water and drive processing equipment off one engine. The constraint was never horsepower. It was divisibility.

None of this was free, and most commentary never asks who paid. The extraordinary fall in prices combined genuine engineering progress — better processes, deeper supply chains and accumulated manufacturing scale — with an industrial system willing to tolerate exceptionally low returns. Some Chinese manufacturers expand the manufacturing scale to lower the cost for more market share while producer prices fall. Some of the global discount is therefore financed at home through Chinese factories' serious competition and their acceleration of equipment upgrading and fast adaptation to more detailed requirements from the domestic market as well as the international ones. Besides, diffusion creates enormous social value, but innovators still need to retain enough of that value to finance the next round of innovation.

Furthermore, the manufacturing knowledge accumulated along the way remains. Once the world has learned to build a module for nine cents a watt, China may have reached the next level and be ready to lead another round of cost-effective AI-empowered industrial practice.

The rest of the world therefore should realize that China's success lies in its scaling industrial innovation and timely upgrading as well as continued amelioration and flexible adaptation for high-quality development. Looking forward, it is believed that China can rebalance itself to keep inventing — and remaining competitive enough for the gains to keep spilling outward.

The author is the CEO of Stonal, a European technology company based in Paris, and a columnist for the French magazine L'Express.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.