From home appliances and automobiles to catering and liquor, all fields have been caught in a fierce price game. However, the price war is not a simple price reduction competition, and it involves complex industry logic and corporate strategies. This paper deeply analyzes the causes, impacts, and real strength of enterprises to participate in price wars from the two key dimensions of “entry barriers” and “exit barriers”, reveals the business wisdom and risks behind the price war, and provides a unique perspective for understanding the current market phenomenon.
In recent years, the “price war” has spread to various industries, and the price war of home appliances, automobiles, catering, clothing, beauty, daily necessities, etc. has been extremely fierce.
Since the beginning of this year, the price war in many industries has continued to escalate. For example, the air conditioning industry has fallen into a rare price war in recent years, and “thousand-yuan machines” have emerged in batches; Looking at the automotive industry, BYD took the lead in launching a sharp price reduction activity at the end of last month, and a number of companies followed suit, and a new round of automobile “price war” panicked the industry, triggering many departments to speak out against the price war; In the catering industry, many catering brands have lowered the unit price of dishes, and even launched “9.9 yuan special meals” and “poor ghost packages”; There is also the liquor industry, during this year’s 618 period, the prices of high-end products of many leading liquor companies have “dived”, and some prices even broke through the wholesale price……
However, just as “every drop of rain does not think it has caused flooding”, the companies that initiate or participate in the price war never admit that they are involved in the price war, and even if they do, they are forced to get involved, and they are even very opposed to the price war.
A study of the price wars in various industries will find that the reasons for price wars are quite complex:
some are indeed the decline in the overall product price of the industry brought about by technological progress; some are initiated by leading enterprises, with the intention of squeezing out small and medium-sized players; some are initiated by new entrants, trying to quickly seize the market and gain a firm foothold; There are also incumbent players who try to keep prices low so that potential competitors can be deterred.
What does a product manager need to do?
In the process of a product from scratch, it is not easy to do a good job in the role of product manager, in addition to the well-known writing requirements, writing requirements, writing requirements, there are many things to do. The product manager is not what you think, but will only ask you for trouble, make a request:
View details >
The price war is so complicated, but there are two words that are key to sum up: entry barriers and exit barriers.
For example, if a company takes the initiative to initiate a price reduction, if its price reduction is based on the extremely low unit cost brought by the advantages of technology and economies of scale, coupled with the customer lock-in brought about by its differentiation, then it has a “moat”, it is difficult for you to subvert it with a lower price, and it is difficult to steal its customers, which prevents you from entering the industry to divide market share and obtain profits.
Many large companies take the initiative to launch price wars, sometimes it is also an “entry threat” – to let potential entrants see that the industry has been very well done, even if your price is very low, it is difficult to enter.
And what about quitting? It is whether the initiator of the price war can “stop the war with war”, that is, the initiation of a price war can eliminate small and medium-sized players in the industry and concentrate market share in large players.
But the obstacle here lies in the “exit barriers”, such as asset-heavy industries, the investment is too large, and the loss of continuing production is always smaller than the exit loss.
In this way, the “blitzkrieg” has become a “protracted war”, and if the internal strength of the initiator of the price war is not deep, it is easy to be dragged down.
Therefore, it is easier to understand the price war from the perspective of “entry barriers” and “exit barriers”. These two aspects are also related to whether the price war initiator can succeed.
01 Start with the industry where the price war is the most fierce
If we look at it in a longer time and mention the “price war”, the first thing that comes to mind is the color TV industry.
Because the color TV industry is the earliest industry in China to fight price wars, and it has been fought the most times, from the 90s to the present.
Changhong was the first to launch a price war, and in March 1996, it announced that its entire line of color TVs would make unified profits across the country, with a maximum of 30%, igniting the fuse of the price war in the whole industry.
On the one hand, Changhong launched this price war to “repel foreigners”, at that time, the technologically advanced and more famous Sony, Philips, Samsung and other foreign color TVs poured into the domestic market, and domestic brands were difficult to resist, and Ni Runfeng, then director of Changhong factory, said at a company meeting:
“Emergencies must be treated with emergency medicine, and there is only one way, which is to use your own price advantage to fight out the other party’s brand advantage.”
On the other hand, there were more than 200 TV companies in the country at that time, and small and medium-sized enterprises could be eliminated through price wars and resources were concentrated in the hands of large enterprises.
As soon as Changhong lowered the price, Konka, TCL, Panda, etc. competed to reduce prices, all of which were two or three thousand cheaper than imported color TVs with prices of tens of thousands, so that domestic brands quickly regained lost ground and had a market share of more than 80%.
After this battle, many enterprises have felt the powerful power of the price war, and will continue to use the price war as an effective means to expand market share in the future.
According to incomplete statistics, in less than 5 years after Changhong launched a price war in March 96, there were 5 more price wars in the color TV industry.
(The initiator of the price war in the color TV industry from 1997 to 2000, compiled by the author based on public information)
At that time, there were even shopping malls selling TVs by pounds, and more than 10 brands of TVs were only sold for 30 yuan per kilogram, which was much cheaper than selling the whole TV.
However, such a large-scale price war has brought two consequences: first, huge inventories and accounts receivable erode many enterprises in the industrial chain; Second, under extremely low profits, enterprises have no funds to invest in technology research and development.
In 2001, China’s color TV industry suffered an industry-wide loss for the first time. At that time, there were media reports that the boss of a color TV company believed that the price war caused the actual loss of the entire industry by at least 20 billion yuan.
In stark contrast, foreign brands took advantage of the price war of domestic brands and had no profits and leisure to innovate, and quickly completed localization, they not only relied on technology to obtain high profits, but also learned to blitz with price reductions, making domestic brands mired in losses unable to cope.
The market share of foreign brands has rapidly expanded from about 10% in the past to more than 30%, and profits account for 50%.
The two color TV giants that fought the most frequent price wars, Changhong and Konka, became the biggest victims, not only did not achieve a decisive victory through the price war, but were burdened with heavy financial pressure, and their market share continued to decline in many price wars launched by their opponents, coupled with the failure of betting on new technologies and excessive diversification, and finally fell into a situation of loss.
Around 2013, LCD TVs have gradually replaced picture tube TVs in China, at this time LeTV, Xiaomi, Baofeng TV and other Internet companies have launched “Internet TV”, their opening method is still low price, claiming to sell according to the “cost price”.
However, the TVs launched by Internet companies have not brought new technologies to the color TV industry, and some still need traditional TV factories to OEM, while online video content, games and other value-added services are actually not so attractive to users, they mainly rely on price wars.
Later, after more than 10 years of development, the strength of China’s color TV industry has increased greatly, TCL, Hisense, Xiaomi have all ranked among the top 5 global TV brands, in addition to these brands themselves, but also thanks to the rise of TV accessories companies represented by displays and chips, so that China’s color TV industry is no longer “lack of cores and screens”. For example, BOE has the first market share in the global LCD panel industry.
In recent years, there is still a price war in China’s TV industry, but it is gradually turning to high value-added products and high-end technology competition, and the penetration rate of large-size, Mini LED and energy-efficient products continues to rise.
According to data from Aowei Cloud, the retail sales of China’s color TV market in 2024 will be 30.86 million units, a slight decrease of 1.8% year-on-year, but the retail sales will increase by 15.7% year-on-year, which means that the product structure of the color TV industry is upgrading.
Moreover, it is all big brands that participate in the competition of high-tech and high-value-added products, such as Mini LED TVs, Hisense, TCL, and Xiaomi have a market concentration of 85%, and they have formed relatively high barriers to entry through the accumulation and competition of technology and brands.
It can be said that the 40-year development history of China’s color TV industry is also a price war apocalypse.
02 Two key words: entry barriers and exit barriers
In addition to the color TV industry, almost every industry will have price wars in the process of development, but the intensity is different.
A study of the price wars in various industries shows that the reasons for their occurrence are quite complex.
The most commendable price war is the price war brought about by technological upgrading and supply chain optimization, and the entire industry can develop benignly.
Some price wars are “knockout matches” initiated by leading enterprises, and they often face a market with low concentration, serious product homogenization, and oversupply, trying to squeeze out small and medium-sized enterprises in the industry through price wars to complete the concentration of resources.
Some price wars are initiated by new entrants, who have no historical baggage and can exchange short-term losses for market share.
There are also some high-end brands whose original track growth has peaked, and they have sunk by opening up lower-priced sub-brands, and many brands have imitated and followed up, resulting in price wars.
Of course, there are quite a few reasons.
But there are two words that are very important in the complexity: entry barriers and exit barriers. These two words are also related to whether the price war initiator can succeed.
First of all, let’s talk about “entry barriers”, which is actually what Buffett called the “moat”, that is, the ability to block others from entering, dividing market share, and obtaining profits.
For enterprises, the fewer players in the industry, the better. Many leading companies launch price wars that are actually a “threat to entry” – let potential entrants see that the industry has done very low costs, and it is difficult for you to cut in through low prices.
The price war in the color TV industry was so fierce in those years, largely because there were constantly new entrants entering the game, and in 2013, Internet companies entered the industry through low prices, and the price war became an “infinite war”, and the head companies did not build a high enough barrier to entry.
How is the barrier to entry obtained?
There are generally three ways:
- Cost advantage on the supply side, cheaper goods provided through exclusive raw materials, unique channels, and proprietary technology;
- The demand advantage on the demand side is brand building, product specificity and differentiation, so that your product has a unique brand mentality;
- The advantage of economies of scale is that as production increases, new products can share more fixed costs, thereby reducing the average unit cost of products.
It is easier to misunderstand that “economies of scale” are not the same as scale and market share.
For example, if you open 100 stores, it may be worse than 50 economies of scale, because the corresponding fixed costs such as rent, management, and labor are increasing, and the cost allocated to each product may actually increase.
In this way, you can find out why the color TV industry has not entered the barrier in those years.
On the supply side, their production equipment and key components are basically imported from Japan, South Korea, and even from the same manufacturer, and the difference is only in semi-bulk assembly (SKD) or full component assembly (CKD). On the demand side, consumers at that time generally believed that their products were not much different at the same price.
Changhong won nearly 30% of the market share of China’s TV market by virtue of the price war, but analyzing its financial indicators at that time can find that its expenses also increased by the same magnitude, and the average unit cost of products did not decrease with the increase in output.
Many companies may try to use price wars to play low prices and scale, so as to obtain entry barriers, but in fact, they are the opposite, without a deep moat, even if they gain market share in a short period of time, it is difficult to hold on.
Let’s look at the exit barriers.
Many of the price wars launched by leading enterprises are to increase market concentration, encroach on the market share of weak and poor profitability, and force them to withdraw. Part of the reason why Changhong initially fought the price war was to reshuffle more than 200 TV companies across the country.
But there may be exit barriers here, on the one hand, asset-heavy industries such as steel and automobiles, which have invested huge fixed costs in the early stage, and also have strong specificity.
On the other hand, in the development of the industry, local governments will give local automobile companies more preferential treatment than foreign enterprises for the consideration of increasing taxes and employment, even if the business conditions are not good, they are not allowed to withdraw, and even through investment, bank credit and other measures to provide assistance.
Changhong did not quickly eliminate poorly managed small and medium-sized enterprises when fighting the price war, but began to counterattack, causing Changhong’s market share to decline. The reason is that TV factories everywhere have the support of the local government, and they all hope to use TVs to drive the development of other industries.
There is also the development of the photovoltaic industry, when it is hot, 18 provinces and more than 100 cities have taken solar energy and wind energy as the pillar industries of the city, also known as the “number one project”, and the exit barriers of the photovoltaic industry are extremely high for a long time.
In recent years, the new energy vehicle industry has also frequently experienced the dilemma of “increasing revenue but not increasing profits”, and the more you sell, the worse you lose, which is also related to the difficulty of “zombie car companies” withdrawing from the market and the large number of car companies caused by local protection.
Therefore, if there are high exit barriers in the industry, the “blitzkrieg” that tries to rely on price wars to increase market concentration is easy to become a “protracted war”, and if the internal strength of the price war initiators is not deep, it is easy to be dragged down.
Therefore, I think it is easier to see clearly whether an enterprise has the strength to fight a price war from the perspective of entry and exit barriers, that is, to see whether its own entry barriers are high, whether the industry’s exit barriers are low enough, and can quickly complete the improvement of industry concentration through price wars.
In this way, few companies have such strength, so the vast majority of companies that initiate price wars have been defeated.
Because the price is not just a number, behind it is a series of strategies related to the company’s profit maximization, and profit is the lifeline of the company, even if the price war is fought, it is necessary to have a very thorough understanding of the industry and itself, and it is necessary to really have such strength.
So some people exaggerate a little:
“In war, atomic bombs and prices have the same limitations: both can only be used once.”
