Prologue

The movie begins with the ringing of a large bell, in Gao village, causing the villagers to all gather in the village square. They await the return of Chuanbao, the village militia sergeant, and the village elder. The twosome arrive with Chuanbao carrying the village elder on his back. The village elder explains that they were attacked by Japanese forces in the middle of a meeting and has been seriously wounded as a result. With a few parting words instructing his successor, Laozhong, to "keep holding on", he dies.

First confrontation

The movie then cuts to a fighting scene between large numbers of Japanese and Chinese forces. Against superior firepower, the main Chinese army retreats while leaving local resistance militias in place to harass the enemy. Local villagers hide in tunnels below the surface of the village in order to escape the Japanese attackers. The Japanese seem to have some familiarity with this tactic as they search for and attempt to kill the occupants of these tunnels. The attack concludes with capture of a number of villagers and a flaming village being burnt as a result of raiding by the Japanese.

Some time afterward, Chuanbao and a few militia are shown discussing their next course of action against the Japanese. One of the soldiers complain about having "too few people and too few weapons" but Brother Gao manages to restore the confidence of his men by rallying them for an attack. However, he is stopped by a middle aged woman, Xia Lin, who seems to hold authority over him. She tells them to meet back in the village for a village meeting.

After reading aloud On Protracted War, a military strategy text by Mao Zedong, the villagers decide to begin digging extensive tunnels beneath the village in preparation for more fighting against the Japanese.

Meanwhile, the Japanese hear of these resistance plans and plan a night raid on the village. The Japanese are almost able to sneak in completely undetected, but were accidentally discovered by Laozhong while he was outside for a stroll. Laozhong is able to ring the village bell, sounding the alarm, allowing the rest of the villagers to enter into the safety of the tunnels. The Japanese raiders surround Laozhong and the Japanese Company Commander Yamada shoots Laozhong. Before he dies, Laozhong is able to use a grenade to kill several Japanese soldiers.

The Japanese are initially unable to find anymore villagers so they begin to look for the tunnels by digging into the ground. Upon finding the tunnels, they pour water, spew smoke and potentially poison gas into the tunnels. After trying to plug up the smoke and gas, Chuanbao realizes that they can't hold out forever. In consultation with Xia Lin, he decides to go to the surface through a secret tunnel in order to draw away the Japanese. He secretly shoots at Yamada's hip, wounding him. Meanwhile, other nearby villages come to give aid by setting off fireworks which mimic the sounds of gunfire in order to intimidate the Japanese. Collaborationist Chinese Army General Binghui suggests that the Japanese retreat and Yamada grudgingly agrees.

Second confrontation

Some days later, Chuanbao is shown to be surveying the damage done to his village by the Japanese raid. Chuanbao despairs at the destruction but meets Uncle Pingyuan and is comforted by him. After conversing with Uncle Pingyuan, Chuanbao resolves to see the conflict through to the end and is advised by Pingyuan to read more of Mao Zedong's works on military strategy. As Chuanbao reads the literature, he is inspired by a quote "To protect yourself is to better destroy the enemy. To destroy the enemy is to better protect yourself." He brings this concept before the rest of village and receives unanimous support. They decide to try making the tunnels into an offensive option against the Japanese soldiers instead of only using them as hiding places. Over at least one winter season, the tunnels develop defensive sophistication meant to defend against flooding, poison gas and infiltrators. Additionally, there are offensive capabilities devised in order to attack Japanese soldiers on the surface. The tunnel design is taken on by several neighboring villages. Additionally, the villagers are told that communist reinforcements are also returning to the area.

The Japanese hear of this and use the opportunity to send in spies posing as the communist reinforcements in order learn more about the tunnel defenses. The impostor reinforcements plan to gather all the local resistance leaders and then capture them all by surprise. However, before they are able to initiate the plan, Chuanbao realizes their plot. He tricks some of them to split up and enter the tunnels and kills the spies one by one in the enclosed space. During this time, the real Communist forces arrive and apprehend the remaining spies. Japanese troops arrive to facilitate the capture, but are swiftly repelled by the Communist's reinforcement regiment. With all the major elements of the Chinese forces present, the Chinese forces prepare for an imminent counterattack by the Japanese. The ensuing engagement between 300 Japanese forces and local militia result in a total victory for the Chinese. Initially, the Chinese militia are overwhelmed by Japanese artillery, but the Japanese infantry take heavy casualties when trying to finally take the village and are forced to retreat.

Final confrontation

In the aftermath of the previous victory, the militia continue expanding the tunnel network. They begin to expand outside the village and eventually reach the vicinity of the Japanese villages; all the resistance villages are also interconnected. Chuanbao makes a joke about "undermining" the entire Japanese base. Meanwhile, the Japanese forces have fortified and reinforced their base positions making direct assault by the Chinese forces extremely difficult. The Chinese try to draw out the dug in Japanese with a diversionary attack on a lesser defended base. However, General Yamada of the Japanese sees through the plot and, hoping they'll score an easy victory at the village, directly attack the militia village,

The communist command realizes the Japanese plan, but is confident that the forces stationed in the village are sufficient for defense. They instead use the absence of the Japanese main force as an opportunity to assault the previously fortified Japanese base. In preparation for the inevitable Japanese retreat, the Chinese prepared troops to ambush the Japanese on the way. In the tunnels beneath the Japanese base, the Chinese militia place explosives to take out key defensive positions. With preparations complete, the primary Chinese army commences with the assault. As predicted, the Japanese main force begins to retreat upon hearing of the Chinese assault and are caught directly in the ambush in the open fields. Hundreds of armed Chinese militia are shown to be attacking the surprised Japanese forces. By the end, General Yamada is shown to be trapped in a brick kiln. Surrounded by Chinese forces and all alone, it is implied that the Japanese forces have been completely routed. The movie concludes with a festive celebration by the victorious Chinese.