China Price War Heightens Need for Upstream Supply Chain Testing

China’s factory-gate prices fell again in July, extending producer-price deflation to a 34-month streak and underscoring a deep price war across the manufacturing sector.

However, while falling prices may look like a win for buyers abroad, they also signal mounting quality risks.

The two main drivers of falling prices are overcapacity from years of heavy investment and market crowding as factories shut out of the U.S. pivot to smaller destinations, undercutting competitors to win their clients. In July, exports to the U.S. dropped 21.7% from a year earlier, while shipments to Australia, the EU and ASEAN all climbed.

A furniture company in the southern city of Foshan told Reuters it “barely breaks even” after suppliers that once sold to the U.S. shifted into its main market of Australia.

These factors help push China’s factory utilization rate down to 74% in the second quarter, well below the roughly 80% level many economists view as healthy. On the ground, this means many factory lines are sitting idle with too much inventory to move.

To shift these goods, factories cut prices further. And they’ve been doing this for about two years. China’s producer prices fell more than expected in July, the 34th month in a row.

Beijing has noticed. The central authorities last month proposed amendments to a decades-old pricing law to curb what they call “disorderly low-price competition.” The draft would make it harder for companies to sell things too cheap just to push out rivals, stop shady pricing tricks, and increase fines for breaking the rules.

Quality Issues

Low prices can look like a win for buyers, but they can mask lurking quality risks. Cheaper quotes can mean cheaper parts — and not always the parts you agreed to.

Anker recently recalled more than 1 million power banks after reports of overheating and fires. The U.S. Consumer Product Safety Commission logged 19 fire and explosion reports, two minor burn injuries, and 11 property damage cases. The problem was traced to an upstream supplier swapping materials without permission to save money. Several other power bank brands followed with recalls.

Cut corners like these are easy to miss. A factory may clear all quality inspections, while one of their suppliers (or even a supplier’s supplier) could be quietly swapping in cheaper parts, loosening specs, or skipping quality checks to save a few bucks. Products may look flawless initially, but later bring a wave of returns or, in the worst case, a front‑page recall.

Regular testing against past performance benchmarks is the best way to spot problems early, and it is always wise to add a margin above the legal threshold to allow for manufacturing tolerances. Companies without in-house capability should hire a test engineer to design a targeted inspection plan.

Supply chains also require deeper scrutiny, including checks on sub‑suppliers’ materials, processes and any changes they make.

Hiring Opportunities

Yet, price wars don’t just cheapen materials — they cheapen labor. Employment has remained broadly stable on paper,but there are widespread reports of factories shortening shifts and putting workers on unpaid leave — what economists politely call “underemployment.”

Underemployment is hard to measure and is not tracked in official data. However, it leaves traces: weak consumer spending and deflation in the consumer sector as households cut back because they have less money. Both are already pressing on China’s economy. The country’s consumer prices were flat in July from a year earlier.

It also swells the ranks of job seekers, even if they are not captured in the unemployment rate. That is hardly surprising: when an employer cuts wages, the first instinct is to look elsewhere.

“The number of active candidates in the market has doubled compared with last year,” said Cece Tang, head of recruitment firm Hays’ Guangzhou office. “This year, more than 40% say they do not feel very secure in their current job … They are actively in the market, looking for better opportunities.”

Anecdotally, many candidates interviewed by Kinyu in recent months said they began searching after their companies cut back or folded. Most say the one thing they want most is stability.

“More people are looking for permanent roles because they want an employer with a long-term plan in China,” Tang said. “They want salaries that comply with regulations, and they want the company to pay social insurance.”

This means companies may find that now is a rare chance to attract sought‑after specialists in test, supplier quality, reliability and cost engineering, thanks to a more competitive hiring environment. Better pay and greater stability can be strong incentives in a softer job market.

Strangely, China’s price war spiral is doing two things at once: making reliability expertise more essential, and more available.

Actionable Advice for Overseas Buyers

• Step up incoming testing. Compare every batch with previous runs and field returns to spot problems early. Pull bigger samples on risky parts like batteries, chargers, chips, metals and adhesives while the price war drags on.
• Check the suppliers behind your supplier. Audit tier 2 and tier 3 makers of key parts. Make sure specs, paperwork and traceability all match — and catch any quiet swaps before they hit your line.
• Put boots on the ground. If you do not have a quality engineer or QC team in China, hire one. They can spot trouble faster, confirm fixes and enforce change control rules that often slip when price cutting is this fierce.