China in 2018: The coming shake-out in China’s electric vehicle market

Every January, Gordon Orr publishes a widely watched list of predictions for the Chinese economy. I sat down with Gordon recently to discuss his annual predictions in a series of short video clips. In this second of four videos, we discussed why Gordon believes China's electric vehicle market could see a shake-out in 2018, leading to the rise of one or two world-class brands.

Gordon was a Senior Partner and was also Asia Chairman of McKinsey & Company for several years. Now a Senior Advisor to McKinsey, Gordon is a Board member of both Lenovo Corporation and Swire Group.

Click here to watch the first video on the continued globalization of Chinese companies in 2018.

Please follow me so you can be notified of the next installments in this video series. You can also read Gordon’s entire list of predictions on our website here.

Watch our conversation here:

The following is an edited transcript of our conversation:

Joe Ngai: Gordon, the industry that you're particularly optimistic about in China is auto, right? So tell us more around why you think that's the case. I have a chart here that says that the supply and demand for electric vehicles in China is off the charts. What's going to happen in China in auto?

Gordon Orr: Well, the supply's definitely off the charts. It's to be seen whether demand is going to be really off the charts. We have to talk about automotive; it's such a significant sector. It's the pyramid of employing tens of millions of people going back through steel, iron ore, and the like. It tells us what the consumer's thinking; it tells us how an industry is doing. After property, it's probably the most important sector in China.

And it's going through a critical transition. The focus of shifting to clean vehicles, near electric vehicles, and full electric vehicles, is really getting to a tipping point. China's continuing to push the subsidies at the national level and at the local city level. If you want to get a new car and to bypass the line for a license plate to be able to drive it, you'd better buy an electric car.

Joe: Why is the Chinese government so fascinated by electric vehicles? I was in China in the last few months and every time I talked to a city government, they're always telling me how they've attracted a few of these electric vehicle startups to set up shop, and how this is going to be a huge industry for them. Why are they so optimistic about the future of the sector?

Gordon: Well, I think multiple things, both within China and outside. Within China, it's seen to be part of the reduced pollution initiative as a foundational leg within that.

Second, it's seen as a cluster creating industry, that if you have electric vehicle manufacturers, then you'll have battery manufacturers, then you'll have other component suppliers. You'll get an ecosystem that transitions from traditional to new industries.

And thirdly, China wants to be the global hub. It wants the rest of the world to buy electric vehicle technology, electric vehicles that are designed and made in China.

Joe: By last count, we have now 70, 80 electric vehicle startups in China. There are probably 100 by now. Is supply running ahead of demand?

Gordon: Joe, that’s only a problem if you've invested in them. For the rest of us, as a potential consumer, you've got an intensity of competition that's absolutely going to lead to massive losses, short-term value destruction, consolidation, and then I think the emergence, alongside the global OEMs who are totally committed to electric vehicles in China, of two or three world-class Chinese electric vehicle brands.

Joe: Obviously it’s a big battle between the global OEMs and some of these startups. In China, that battle is already happening and will intensify. What do you see? What's your prediction?

Gordon: I think until the Chinese really consolidate them, they're going to have a tough time competing against the established brand and scale and particularly the manufacturing experience. But when Tesla, with all its resources, has a really hard time manufacturing cars consistently of quality and to the cost they want, you know that new entrants in China are going to face similar challenges. So I think the global guys have a bit of a headstart.