Every industry has a cycle, and the ceramic tile industry is no exception. Undoubtedly, affected by the real estate sector, the tile industry has entered a downward cycle. The annual tile output has dropped from 1.026 billion square meters at its peak in 2016 to 673 million square meters, a decrease of 34.4%. This process will inevitably force some tile factories, tile brands, and distributors to exit—because the ceramic market in the downward period can hardly sustain or accommodate the huge production capacity scale of the peak period.

In recent years, the elimination and reshuffling of the ceramic industry have been visibly ongoing, with a number of ceramic factories and brands exiting or changing ownership either proactively or passively. Entering 2024, the ceramic industry has rarely launched an unprecedented price war at the start of the year. In essence, the price war is essentially a "survival-of-the-fittest competition" — major ceramic enterprises, by competing in cost control, refined management, brand accumulation, channel strength, and model innovation, are accelerating the shake-out of some ceramic enterprises and distributors with weak strength and insufficient innovation.

Estimates vary widely that this industry reshuffle will eliminate 20% to over 40% of ceramic factories and distributors, given the severe overcapacity rate of over 30%, with breaking the "involution" dilemma requiring the elimination of at least 16% of total capacity.

Recently, the China Building Sanitary Ceramics Association released the 2023 operation overview of the national building ceramic industry. Among them, several data points are worthy of attention: 1. The national tile output in 2023 was 673 million square meters, a year-on-year decrease of 8.0%; 2. The number of large-scale building ceramic enterprises in 2023 was 1,022, 4 fewer than in 2022; 3. The average annual kiln operation rate in Guangdong, a major national ceramic production area, was about 50%.

According to earlier data from the China Building Sanitary Ceramics Association, the nominal production capacity of ceramic tiles nationwide in 2022 exceeded 1.2 billion square meters, with an effective production capacity of 1 billion square meters (in 2023, a large number of new and technically upgraded production lines were put into operation, and many ceramic enterprises expanded the capacity of single production lines, so the new effective production capacity may have increased on the basis of 2022). Even taking the 1 billion square meters of effective production capacity as the benchmark, the national tile overcapacity rate in 2023 still exceeded 30%, reaching 32.7%. This means that on average, all tile production enterprises across the country need to suspend production for about 120 days to balance the overall supply and demand.

There is a universal international standard: a capacity utilization rate of over 80% means no overcapacity; 75%-80% indicates mild overcapacity; and a rate below 75% represents severe overcapacity. There is also an economic logic behind overcapacity: when the industry overcapacity is 10%-20%, survival of the fittest will occur, which is a benign competition; once overcapacity exceeds 20%—for example, the whole industry has 30%, 40%, or even 50% overcapacity—many enterprises will be caught in a slump and suffer losses, which could even lead to industry-wide losses.

Some scholars point out that industry overcapacity is reflected in three aspects: first, a relative decline in product prices; second, a significant decline in corporate profitability and an increase in loss-making enterprises; third, industry supply exceeding industry demand.

From the decreasing kiln operation rate, intensifying price wars, and increasing number of loss-making enterprises in the ceramic industry in recent years, it can be seen that the ceramic industry is facing severe overcapacity, and the situation varies more unevenly across different provinces and regions. For example, the annual kiln operation rate in Guangdong’s production area is about 50%, with a capacity utilization rate of only half, while production areas such as Jiangxi and Hubei have relatively higher capacity utilization rates.

Against the background of severe industry overcapacity and market contraction competition, how many ceramic factories and distributors need to be eliminated in the ceramic industry to break the involution dilemma of severe overcapacity and enter a state of benign competition?

As early as March 4 this year, Roosevelt Ceramic Group released a statement stating: "The 2024 round of 'elimination competition' will be launched in four dimensions: market share competition, attrition warfare, protracted warfare, and distributor elimination warfare. The final outcome may be a 40% reduction in production capacity and a 50% withdrawal of distributors."

However, calculated in accordance with universal international standards and based on the national tile output of 673 million square meters in 2023, the capacity utilization rate will only exceed 80% when the national tile production capacity drops to less than 840 million square meters. To achieve this goal, it is necessary to cut more than 160 million square meters of capacity on the current basis (excluding the long-term idle ineffective capacity, with a reduction ratio of more than 16%). Currently, there are 1,022 ceramic factories nationwide with more than 2,000 production lines.

Of course, this is only a theoretical calculation on paper. Considering that in recent years, as involution has continued to escalate, many ceramic enterprises have demolished old production lines to build new ones and upgraded small lines to large ones, leading to a situation where "capacity reduction efforts paradoxically lead to an increase in capacity". The actual new capacity of the entire industry may exceed 1 billion square meters, and the tile output may continue to decline in the future, dropping to 600 million square meters, more than 500 million square meters, etc. From this perspective, more than 160 million square meters of capacity need to be eliminated for the industry to enter a state of benign competition.