China became the largest automotive market in 2012 and the largest EV market in 2015. Beijing intends to strengthen its lead by surfing on the global mobility megatrends, i.e. electric, autonomous, connected and shared, and by leveraging talents abroad. The central government has imposed an accelerated electrification of its market and limited access to autonomous driving companies. It is also facilitating the creation of new players backed by Chinese funds, especially from its domestic internet companies. In an asymmetrical move, these players are tapping Silicon Valley’s mobility ecosystem and brain pool to accelerate their emergence. Conversely, Western companies are given limited access to the Chinese mobility market. Let’s analyze what is happening.

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Beijing plans to strengthen Chinese leadership

Close to 28 million vehicles were sold in the Middle Kingdom in 2017 vs 17m in both Europe and the US with a total of 95m globally. China’s leadership is even more remarkable in electric mobility: 600k light plug-in vehicles were sold there in 2017 (though a large number were cheap, low range cars) vs 310k in Europe and 200k in the USA. China has established agressive regulations to maintain its leadership in EVs, recognizing this may give its domestic players the upper hand in tomorrow’s clean global mobility. On one side, the New Energy Vehicle policy sets a gradual increase in the minimum proportion of plug-ins each OEM must sell. On the other side, corporate ownership regulations impose Chinese majority shareholding in automotive ventures, along with full access to foreign IP for the Chinese partner. There are no good options for foreign OEMs: either you play and share your tech, or you sit on the sideline and let domestic players build momentum domestically which they will then use to attack you in other markets.

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Tencent, Baidu and Alibaba lead the investment charge in new OEMs

In an effort to build momentum, the Chinese government has granted car-production licences to new players backed by Chinese money. Since the existing domestic OEMs did not seem to have what it takes to spearhead Beijing’s strategy, the central government has let Baidu, Alibaba, Tencent and others invest in mobility. They have already poured billions in either new OEMs, autonomous driving startups or new mobility players. They obviously see a big upside as the automotive market will evolve from selling cars to selling subscriptions for / rides in internet-equipped autonomous cars. Most of these new entities have established engineering centers in Silicon Valley to leverage the local ecosystem, including its skilled engineers, testing environment and university research programs.

 

Several such new Chinese-funded OEMs have set up shop in California. Backed by Tencent and Baidu (Tencent recently led a $1bn round), Nio has about 450 people in San Jose, CA as well as a team in Munich. They introduced ES8, their first product, in China in January 2018. Founded about 10 years ago as a battery manufacturer, Lucid is finalizing the Air sedan for a 2019 launch. The product development is taking place in Newark, CA where the company has about 300 employees. At its peak in 2017, Faraday Future had over 1,000 employees in Los Angeles to develop the FF91 sedan. The startup was initially funded by China’s LeEco’s owner and recently received fresh funds from a Hong Kong investor. Byton intends to launch the electric SUV they presented at CES, first in China in 2019, and later elsewhere. The product is being developed concurrently in Santa Clara, CA, Munich and China. Byton has raised about $250m from China to date. Lastly, SF Motors, a subsidiary of Chinese auto supplier Sokon, has also established engineering offices in Santa Clara, CA and Ann Arbor, MI.

 

Chinese investors are also going after existing players. Tencent bought 5% of Tesla for $1.8 bn in March 2017. Geely bought Volvo Cars and has acquired large stakes in Volvo Trucks, Daimler as well as Lotus. Wanxiang Group, a major Chinese auto parts supplier, acquired the assets of defunct US startup Fisker Automotive in 2016, renamed it Karma Automotive and put a US executive team at its helm. For reference, Wanxiang also acquired U.S. lithium-ion battery maker A123 in 2012.

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Chinese money also goes to autonomous driving and Silicon Valley

This investment trend is also happening in the autonomous driving space, though not as visibly. The impact of driving autonomy on shared mobility is potentially very significant as it will largely reduce ride cost — roughly by a factor of 3 assuming European or US driver cost. However, China is protecting its market by preventing non-Chinese companies from creating the 3D maps necessary for autonomous vehicles (AVs) to self-localize. This limitation will in essence allow local players like NavInfo or Momenta to close the gap vs Western players (e.g. Here, TomTom or Mobileye) and then to fully control the huge Chinese market. It must be noted that NavInfo and Tencent’s plan to become shareholders of Here was derailed by a U.S. national security oversight board in Sept 2017. China cannot have it both ways, asymmetrical treatment has its limits!

 

Nevertheless, several Chinese companies have established offices on the US West Coast to leverage local expertise and develop the hardware and software needed to operate AVs. The battle for the necessary AI expertise is red hot. This is certainly the case for most of the emerging OEMs mentioned above. This is also the case for Baidu, which last year established Apollo, an open AV platform for the development of HW and SW, and announced a $1.5bn fund for this effort. Over 80 partners have signed on for the platform, including large incumbents such as Bosch, Daimler, Ford, Continental, Delphi, and ZF. However, I suspect this is more about monitoring the Chinese AV market and being ready to make timely moves with the right partners than about sharing expertise! At CES, Baidu revealed the Apollo Computing Unit, an AV platform featuring Apollo Pilot and map services, going head-on against Nvidia’s Drive PX. Some of Baidu’s AV development work is done in their Silicon Valley office.

 

This cross Pacific approach is not just used by large players. A number of Chinese-backed AV startups have also established offices in Silicon Valley. For instance, TuSimple is building an autonomous truck solution. The three-year-old, 150 employee company develops and tests its solution in both China and the US West Coast. Pony.ai, which recently closed a $112m round led by a Chinese VC, is co-located in Guangzhou and Silicon Valley with Chinese automaker GAC as a strategic partner. Similarly, PlusAI, whose main financing round was led by a Chinese VC, operates in both China and Silicon Valley and has Chinese OEM SAIC as a strategic partner.

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It all comes together as shared mobility

US ride-hailing companies have also been the beneficiaries of Chinese investment. Baidu invested in Uber, and Alibaba in Lyft. Didi, the world’s leading ride-hailing platform, put money in Lyft — as well as in Ola (India), Grab (S. East Asia) and Careem (Middle East). Didi and Uber own stakes in each other as a result of Uber selling its Chinese operations to Didi in 2016. However, the only real significant non-Chinese investment made in Didi comes from Apple, with $1bn in 2016. Again, we have here a largely asymmetrical situation. 

 

Chinese players are definitely planning on playing a major role in tomorrow’s mobility market. And they are using their huge financial resources to buy foreign assets and leverage talents, with a particular interest in Silicon Valley

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Marc Amblard

Managing Director, Orsay Consulting

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