Song Zhiping: 3 production models to help enterprises maintain cash flow and escape price wars

Song Zhiping, President of the China Association of Public Companies, Chief Expert of the China Enterprise Reform and Development Research Association Currently, China's market economy has entered a new stage of high-quality development. This year's government work report clearly proposed to strengthen anti-monopoly and anti-unfair competition, reinforce the rigid constraints of fair competition review, and comprehensively use means such as capacity regulation, standard guidance, price enforcement, and quality supervision to deeply rectify "involution-style" competition and create a good market ecology. The core essence of this requirement is to break down barriers to disorderly market competition, curb irrational competitive behaviors such as blind expansion and low-price dumping, and guide enterprises to return to the essence of value, achieving sustainable development through compliant operations and model innovation. This aligns closely with the legislative spirit of the Anti-Unfair Competition Law, which encourages fair competition and protects the legitimate rights and interests of operators and consumers, providing fundamental guidance for enterprises to solve development dilemmas in the context of an excess economy. Different production models determine whether enterprises efficiently convert resources into profits or fall into involution amid blind expansion. In the context of an excess economy, there are three mainstream production models: production based on sales, production based on efficiency, and production based on current conditions. There is no absolute superiority or inferiority among these three models; the key lies in whether they accurately match the enterprise's strategic positioning, product characteristics, and market environment. I once gave a speech on the theme of anti-involution at the China Iron and Steel Industry Association, and I was particularly impressed by the association's "Three Determinations and Three Avoidances" operational principles: Production based on sales, do not turn cash into inventory; production based on efficiency, do not incur operational blood loss; production based on current conditions, do not turn cash into accounts receivable. I find this principle particularly pertinent as it can guide enterprises to escape the involution dilemma through self-discipline, collaboration, and precise operations, moving towards a new stage of high-quality development. In a shortage economy, production based on sales may work because whatever is produced can be sold, and market demand can easily absorb the enterprise's production capacity. However, once entering an excess economy, the market supply-demand relationship is completely reversed, and it is necessary to adopt a production model based on sales. Production based on sales, as the name implies, refers to organizing production activities based on actual orders obtained from the market or accurately predicted demand. It is a business model that starts with customer demand and ends with precise delivery. This is a typical pull-based production model, and its core logic is that there is a market first, followed by factories. It requires enterprises to shift their operational focus from front-end production to back-end market insights and customer connections. In this model, the production system becomes agile and flexible, pursuing not maximum scale but precise delivery at zero inventory or near-zero inventory, thereby minimizing resource misallocation and capital occupation, fundamentally avoiding price wars and involution caused by overproduction. Production based on sales, do not turn cash into inventory, is the most critical aspect of the "Three Determinations and Three Avoidances" operational principles. According to data from the first half of 2025, China's steel industry maintained low steel inventory and basic supply-demand balance through self-discipline in production control, which is the core reason for the improvement in industry profits. Regionally, in East China, where crude steel production decreased year-on-year in the first half of 2025, steel sales prices were the highest nationwide, and profits continued to grow, while the Southwest region, where crude steel production increased, faced the most severe losses It can be seen that blindly increasing production not only does not increase efficiency but instead leads to losses. In the industrial goods sector, the demand for certain products is inelastic, and market demand does not increase in tandem with an increase in production by companies. In other words, the market only needs a certain amount each year; blindly overproducing means that excess products can only pile up in warehouses, incurring storage costs and occupying working capital, and may even lead to forced price reductions due to the urgency to clear inventory, falling into the trap of losing both volume and price. Over the years, I have researched many companies and found that the more an industry falls into internal competition, the more likely it is to exhibit the inertia of production-driven sales. In order to dilute fixed costs and seize market share, companies pull their production capacity to the maximum regardless of whether demand can keep up, ultimately leading to high inventory levels and frequent price wars across the industry. In contrast, companies that adhere to sales-driven production often manage to stabilize their position amid industry fluctuations because they do not have an obsession with scaling up. They always align production with demand, which not only avoids inventory pressure but also maintains price stability, laying the foundation for future profitability. In the traditional clothing industry, most companies adopt a production-driven sales model, predicting trends six months in advance and placing large orders with distant factories, then praying that the goods will meet market demand months later. If the forecast is incorrect, the consequence is a mountain of inventory and constant discount sales. This is precisely the typical root of internal competition in the clothing industry, where homogeneous products are produced in large quantities over a period of time, and only price wars can clear the inventory. ZARA has completely overturned this model, taking sales-driven production to the extreme. Its business model resembles a globally covering sensitive radar system. Each store manager must report daily sales data using handheld devices while also recording customer feedback, such as liking a style but wanting shorter sleeves or wanting a suit in a different color, which is transmitted in real-time to ZARA's data center in Spain. Its design team and highly automated factories quickly decide to place small batch reorders for a best-selling style or make rapid modifications to a promising style based on this real-time data. From design to shelf, ZARA can take as little as two weeks. It also deliberately reduces the quantity of each style delivered to each store, creating a sense of urgency with limited stock, which not only lowers inventory at individual stores but also stimulates customers to visit frequently through constant new arrivals. Through this sales-driven production system, ZARA successfully achieves extremely low inventory risk; it does not need to bet on a potential hit in advance, thus avoiding catastrophic inventory buildup and rarely offers discounts because products are produced based on the latest market demand and in limited quantities. Therefore, ZARA seldom needs to conduct large-scale end-of-season promotions like its competitors. It quickly tests and adjusts style designs based on customer purchasing behavior, always staying at the forefront of trends. Sales-driven production is not just an adjustment of production plans but a transformation of the entire business model. It requires companies to establish a strong information feedback network and a flexible supply chain, transmitting market changes in real-time to the production end, achieving synchronous resonance with the market. Before Dell's rise, the mainstream model in the personal computer industry was production-driven sales, with giants like Compaq and IBM mass-producing standardized computers and pushing them to the market through layers of distributors This not only leads to high inventory costs and slow capital turnover but also isolates these giants from end customers, making it impossible to meet personalized demands. The direct sales model pioneered by Michael Dell is a made-to-order model in manufacturing. Dell eliminated intermediaries, allowing customers to place orders directly with Dell via phone or online; the order is the only instruction for Dell to initiate production. Upon receiving an order, Dell's system immediately sends a list of required components to suppliers around the world, who must deliver the parts to Dell's assembly plants in a very short time. Once all components are received, the factory quickly assembles computers that meet specific configurations and delivers them directly to customers. The entire process from order to delivery takes only a few days. Dell's direct sales model theoretically achieves zero inventory of finished products, with the warehouse storing only generic components rather than complete machines, resulting in minimal capital occupation. Since customers pay upfront, Dell pays suppliers for the components afterward, effectively operating with the money from customers and suppliers, creating a remarkable negative working capital model while completely avoiding mismatches between production and demand, with each computer corresponding to a real demand. Through business model innovation, made-to-order has changed the competitive rules of an industry. It has shifted companies from selling what they can produce to producing what customers need, and producing as much as needed, thus opening up a blue ocean in a red sea. The traditional software industry was once deeply trapped in internal competition, with everyone wanting to sell software CDs at once. To pursue revenue growth, companies had to continuously invest huge marketing expenses to find new customers; after market saturation, price wars would occur among peers. At the same time, the frequent issue of software being cracked caused significant losses to the industry. Under the Software as a Service (SaaS) model, companies no longer sell permanent licenses for software but provide subscription and internet access services. Its production involves developing and maintaining cloud software services, while its sales revolve around continuously obtaining user subscription fees. Companies do not need to produce any physical CDs, and all their development resources are focused on how to attract and retain paying users. User growth, especially the retention of paying users, directly determines how much resource should be invested in product iteration and server expansion. Users pay annually or monthly, and if the service is poor, they will churn. This forces companies to continuously provide valuable services; otherwise, revenue will immediately decline. In this model, a company's revenue is closely linked to the value it creates for users, avoiding the service complacency that may arise after a one-time sale in traditional software. Since the software is in the cloud, there is also no piracy issue. Meanwhile, stable subscription revenue provides companies with predictable cash flow, allowing for longer-term product planning rather than engaging in vicious competition for short-term sales revenue. The SaaS model establishes a virtuous business closed loop based on continuous value delivery, allowing competition to return to product experience and service quality itself, thus breaking free from the internal competition dilemma of the traditional software industry. Production should be determined by efficiency, and there should be no operational losses; this is the fundamental essence of the "three determinations and three prohibitions" management principle. Efficiency is the core measure of production, and we must not let operations fall into the dilemma of losing money while trying to gain attention. It emphasizes viewing production from the perspective of operational efficiency. This reminds me of an event in the second half of 2011, when Zhejiang and Jiangsu faced power shortages and implemented power restrictions. Many cement companies were initially anxious, fearing it would affect their output. However, unexpectedly, the reduction in cement production due to power restrictions alleviated the market supply-demand relationship, leading to a price increase of over 100 yuan per ton of cement. Although less cement was produced, the companies' profits significantly increased. That year, the entire cement industry’s profits astonishingly exceeded 100 billion yuan. Many companies then realized that it turns out that producing less can still yield high profits; the key is to maintain a price bottom line and let efficiency speak, rather than blindly pursuing output. When output and efficiency conflict, prioritizing efficiency can actually achieve higher operational goals. What I want to discuss about determining production by efficiency differs from the perspective of the China Iron and Steel Association, which looks at production from the standpoint of operational efficiency. I am viewing production from the perspective of operational efficiency, where companies should take operational efficiency as the core principle and starting point for organizing production. This pursuit of determining production by efficiency is not simply based on the quantity of orders but rather through continuous optimization of processes, innovation in technology and management models, maximizing resource utilization efficiency. When a company establishes a structural cost advantage based on efficiency, it gains a certain degree of market pricing power. At this point, pricing is no longer a passive reaction to competitive pressure but a natural manifestation of the company's strong internal competitive strength, serving as a powerful fulcrum for the company to break out of the cycle of internal competition. After World War II, the Japanese automotive industry faced a dilemma of resource scarcity, a small market, and diverse demands, making it impossible to replicate the Ford-style mass production model of a single variety. The Toyota Production System, pioneered by figures like Eiji Toyoda and Taiichi Ohno—lean production, is about determining production by efficiency, with its core being how to organize production activities with the highest efficiency and the least waste. Unlike traditional factories that accumulate mountains of component inventory, Toyota's production lines require suppliers to provide necessary parts at the necessary time and only in the necessary quantities. This completely eliminates inventory, the biggest waste in manufacturing, freeing up massive amounts of working capital while forcing the entire supply chain to enhance responsiveness and product quality. Toyota's automation is not simply about machines replacing human labor but empowering machines to detect anomalies and stop automatically. Once a problem arises, the production line immediately halts, and the issue must be identified and resolved on the spot to prevent defects from flowing into the next stage. It pursues the ultimate quality efficiency of getting things right the first time, avoiding the enormous costs of rework later. Toyota encourages frontline employees to identify and solve waste issues around them, whether it’s reducing an unnecessary turning motion or optimizing the placement of a tool. This culture of incremental improvements makes efficiency enhancement an ongoing movement involving everyone. By determining production by efficiency, Toyota achieved far superior capital turnover rates and per capita efficiency compared to its competitors. While competitors are still burdened by high inventory costs and frequent rework expenses, Toyota leverages its advantages to provide more reliable quality and competitively priced products. ** It does not need to deliberately initiate a price war; its very existence sets an efficiency benchmark for the industry, forcing companies within the industry to either improve efficiency or be eliminated. The airline industry is a typical high fixed-cost, homogeneous competitive sector. Major airlines compete on routes, meals, and seat comfort, often falling into price wars, while Southwest Airlines has taken a different approach by adopting an efficiency-based production model, becoming one of the most profitable airlines in the United States. It has long only used Boeing 737 aircraft, a decision that has led to remarkable efficiency improvements, allowing pilots and cabin crew to interchangeably operate any flight, greatly enhancing scheduling flexibility, simplifying maintenance inventory types, significantly reducing maintenance costs, and standardizing training systems for ground and flight crews. All of this translates into extremely low operating costs. Unlike other airlines that rely on hub airports for transfers, Southwest Airlines focuses on point-to-point direct flights, avoiding long wait times at hub airports due to flight connections, greatly increasing aircraft utilization per day. The more time an aircraft spends in the air, the lower the fixed costs allocated to each seat. It also does not offer assigned seating, meals, or inter-airline baggage transfers; these subtractions may seem to lower service levels but actually greatly speed up aircraft turnaround times on the ground. Its goal is to reduce aircraft ground time to 15-20 minutes, meaning that the same aircraft can fly one more flight per day compared to competitors. Through this efficiency-based production model, Southwest Airlines has reduced costs to the lowest in the industry. It does not compete for the more popular routes but instead leverages its low-cost advantage to explore second-tier markets that have been overlooked by major airlines. It competes not on luxurious seating and meals but on safe, timely, and reasonably priced transportation services. Trumpf is a German family-owned company focused on the sheet metal processing field, producing high-precision laser cutting machines, punching machines, and bending machines. By adopting an efficiency-based production model, Trumpf has completely stepped out of the traditional model of producing machines and customers paying to take them away. Trumpf requires customers to pay based on efficiency, similar to purchasing electricity, paying for each hour of actual laser beam work or each unit produced, directly linking Trumpf's revenue to the production efficiency of its customers. While other companies are still competing on machine cutting speeds, Trumpf is already demonstrating to customers how much it can reduce overall operational costs and increase capacity, elevating the competitive dimension from single equipment parameters to overall operational efficiency. It can create additional value for customers that far exceeds the price of the equipment, so customers are willing to pay far more than for ordinary equipment. Trumpf's pricing basis is the efficiency value it creates for customers, rather than the production costs of its own equipment plus the industry average profit. The efficiency-based payment model has formed a community of interests between Trumpf and its customers; the higher the production efficiency of the customers, the higher its revenue, which in turn drives continuous innovation to ensure that the equipment remains in optimal condition, thus creating strong customer loyalty and ongoing technological iteration momentum. In the efficiency-based production model, "efficiency" refers to cash flow, emphasizing the arrangement of production around cash flow, clearly accounting for funds, avoiding excessive capital tied up in inventory, and ensuring the safety of the company's cash flow. In an oversupply economy, cash flow is more important than profit because if profit is merely paper profit corresponding to large amounts of inventory and accounts receivable, the company will eventually fall into a financial predicament Setting production based on current cash flow means aligning production operations with cash flow, allowing funds to be utilized effectively and avoiding products becoming dead capital. This is an important guarantee for enterprises to resist risks, break free from internal competition, and achieve sustainable operations. It is a business philosophy based on survival wisdom; in market competition, profits can be on paper or in the future, but cash flow is real and immediate. Setting sales based on current cash flow means not turning cash into accounts receivable, which is the core essence of the "three determinations and three prohibitions" business principle. This is actually aligned with what I mentioned about setting production based on current cash flow; both aim to protect cash flow. Setting production based on current cash flow requires establishing a cash flow early warning mechanism to track inventory capital occupation and accounts receivable recovery in real-time. Once funding tightness is detected, production plans must be adjusted promptly. For example, the core purpose of setting limits on inventory capital occupation and red lines for accounts receivable turnover days is to establish an effective production adjustment mechanism: when the capital corresponding to inventory exceeds the limit, production should be immediately reduced; when the speed of payment slows down, production speed should be slowed down to prioritize inventory digestion. Through these mechanisms, setting production based on current cash flow transforms from passive adjustment to active management, ensuring the safety of the enterprise's capital chain. As a leading company in the global port machinery market, Zhenhua Heavy Industries produces large port cranes worth hundreds of millions. Due to the long cycle and significant capital occupation of such large equipment manufacturing projects, the internationally accepted practice is to make phased payments based on a certain percentage of the total contract price. Zhenhua Heavy Industries adheres to the production model based on current cash flow, adopting a "3331" phased payment method: after signing the contract, 30% is received as a deposit, 30% is received as progress payment during production, 30% is received as delivery payment upon delivery, and 10% is retained as warranty money after delivery. This upfront and continuously flowing cash is the lifeblood and directive for Zhenhua Heavy Industries' production activities, with its production plan closely linked to the client's payment rhythm: once the deposit is in place, raw material procurement and basic production are initiated; upon receipt of the progress payment, the manufacturing and assembly of large structural components are advanced; and so on. Its production is entirely driven and secured by cash flow. Through this model, it successfully transfers most of the funding pressure of projects to clients or their banks, avoiding the burden of huge debts from individual projects. Because of this, it can operate multiple large projects simultaneously without facing the fatal risk of cash flow breakage. Zhenhua Heavy Industries' core competitiveness lies in its irreplaceable technology, quality, and brand, which makes clients willing to accept strict payment conditions. It does not need to resort to lowering down payments or extending payment terms, which would harm its own cash flow, to seize orders, thus breaking free from the vicious cycle of advance funding, low prices, and bad debts common in the low-end equipment manufacturing sector. The traditional jewelry industry is a capital-intensive and high-inventory sector. Jewelry stores often need to stockpile large amounts of gold and jewelry, occupying huge amounts of capital, while sales heavily rely on brand premiums and craftsmanship additions, leading to fierce competition, with many brands falling into discount promotions and internal competition. The model introduced by brands like Chow Tai Fook, which separates pricing by gram and processing fees, is also a form of production based on current cash flow. Gold itself is a hard currency with publicly available, international real-time prices. When Chow Tai Fook sells gold jewelry priced by the gram, it is essentially an exchange of cash for quasi-cash (gold). Its profits no longer rely entirely on speculative stockpiling and markup of gold itself but come from clearly marked processing fees that reflect craftsmanship value In this model, its dependence on gold raw material inventory is reduced, allowing for flexible adjustments to procurement strategies based on real-time gold prices and sales conditions, thereby lowering the risk of inventory devaluation caused by fluctuations in gold prices. The core assets of the enterprise have shifted from hoarding gold to brand, design, and craftsmanship, greatly optimizing the cash flow structure. This transparent pricing method guides competition from vague and chaotic discount sales to a clearer dimension, namely the level of craftsmanship and brand reputation. This encourages companies in the industry to return to enhancing the intrinsic value of products and operational efficiency, rather than getting mired in price wars. Chow Tai Fook's production based on current orders separates its business growth from the cash-intensive hoarding of raw materials, allowing cash flow to be more closely linked to its value-added services, thus achieving stronger financial stability and a healthier competitive landscape. As a global giant in industrial robots and CNC systems, one of the most striking features of Fanuc's financial statements is the long-term accumulation of over $10 billion in cash and cash equivalents. This is not due to management inaction, but rather a proactive choice of the company’s production based on current orders strategy. The manufacturing industry generally has strong cyclicality, and Fanuc views cash reserves as a food supply to cope with industry winters. When the economy declines and orders decrease, ample cash is sufficient to support its continued high-level R&D investment and personnel maintenance, waiting for the next round of economic upturn without resorting to layoffs or price cuts that would undermine the company's long-term capabilities. When disruptive technologies or excellent acquisition opportunities arise, Fanuc can readily utilize its cash reserves for strategic investments without undergoing lengthy financing negotiations, thus seizing fleeting opportunities. This capability itself is a powerful competitive advantage. Fanuc stores the substantial profits generated from operations in cash form, rather than investing everything in production at market peaks to aggressively expand capacity, as blind capacity expansion can become a huge burden during economic downturns. Fanuc's capacity expansion decisions are very cautious, always limited to not affecting the safety line of cash reserves. It does not engage in short-sighted market speculation, nor does it sacrifice product quality or conduct price promotions due to short-term performance pressures. While competitors are exhausted by cyclical fluctuations, it can calmly continue to climb the technological peaks, using the certainty of cash to respond to market uncertainties, achieving true counter-cyclical development. △This article is excerpted from "Countering Involution: From Malicious Competition to Value Co-Creation," authored by Song Zhiping, published by the Machinery Industry Press