Bill Russo to Brief US Investors on China Auto Market Trends

New York & San Francisco, October 1-3, 2014

Bill Russo will brief institutional investors on the recent developments and trends in the China Automotive market.   Topics addressed in this customized briefing will include:

Part 1: Status of the China Auto Market
Part 2: Auto JVs in China
Part 3: Competitive Landscape of China Auto Market
Part 4: Emerging Trends of China Auto Market
Part 5: Plausible Scenarios in 2025
Part 6: Key Insights

Mr. Russo and his colleagues at Gao Feng Advisory Company are experienced experts on doing business in China, and would be happy to develop a customized briefing on the industries or topics you view as critical to your business.

For further discussion, please contact:

Bill Russo
Managing Director,
Gao Feng Advisory Company


This is the second article in this 2-part series

Four key trends of the connected car paradigm

The connected car is changing the way we perceive our driving experience. We have identified four key areas of connected car technology that are shaping the industry future, driving new business models and creating a new technology paradigm.

  1. Navigation and parking

While navigation technology has become a standard feature in premium vehicles, the interactivity with other drivers and users is becoming more common and it is expected to be a standard feature in new vehicle models. Start-ups such as Waze were a key driver for the mass adoption of social platforms by drivers and it could be suggested that they were the pioneers of the connected car revolution for the wider industry. Waze was recently sold to Google for over $1B and is being integrated into Google maps providing intelligent crowdsourced information to millions around the world. Connectivity is also changing the world of parking, with a number of start-ups using smart algorithms to predict parking behaviour in real time as well as providing availability maps for drivers and municipalities. One of the key challenges in both navigation and parking analytics is the monetization of these services and we can expect to see some business model innovation in this area.

  1. Vehicle analytics

In-vehicle analytics is also creating significant opportunities for technology players. Initially this technology was mostly being used for large fleets in commercial vehicles making it possible to manage driver performance and vehicle diagnostics in real time and helping improve fleet safety and reduce maintenance costs significantly.  The positioning of such an offering for the mass consumer market has not been established, but we can expect to see this technology impact the way we maintain and insure our cars as well as features for monitoring our own family driving patterns and behaviors.

  1. Wearables

Another important factor in the connected car paradigm is the use of wearable devices and the information extracted from them. These items can be expected to assist in creating additional connectivity and in the short term will allow for connectivity for drivers in non-connected cars. For example the use of smart glasses can provide access to augmented reality navigation prior to the installation of a HUD or virtualization projector. Using data from wearable and mobile devices will provide a wealth of personalized data and will allow the vehicle to become contextually aware and therefore respond to specific driver needs better.

  1. Driver safety and autonomous driving

In the world of sensors and driver safety we have seen companies using various technologies including laser, cameras, night vision and radars to create smart driver assistance and collision avoidance systems. While initially these systems have been used for parking assistance and collision warnings for premium models, we can expect mass adoption of these systems while gradually moving toward full autonomous driving. This area is likely to be heavily guided by regulation and government policy and we can expect the adoption of full autonomous driving to be gradual and limited to specific areas.

These four key trends are an indication of the wealth of opportunities in the connected mobility space, however, while connectivity provides multiple benefits, it is also a vulnerability to core vehicle systems through its multiple wireless entry points (RDS, GPS, cellular, IR, WiFi, etc.). As vehicles become ‘smarter’, all systems become interconnected via the vehicle CANbus providing direct access to critical vehicle systems. Most recently, there has been a significant amount of work conducted around understanding the future threats in this area from simple auto-theft to more advanced cyber terrorism. A number of automotive specific cyber firms have been setup in order to build up expertise for tackling such challenges and ultimately to provide us with vehicle firewalls and other cyber security mechanism.

Connectivity driving new players into the Auto industry

While vehicle connectivity has been relatively slow to enter the global auto sector, the Chinese auto industry has shown strong commitment and vision in this area. In fact, China has already made fundamental moves to ensure that it will be a global leader in the auto mobility paradigm.

The unique context of China’s urban transportation challenge, the high rate of adoption of mobile device connectivity, combined with the rapid and aggressive introduction of alternative mobility and ownership concepts will compress the time needed to commercialize smart, connected car technology and related services.

However, while China holds a tremendous ability to scale the manufacturing of its auto industry, its corporate structures lack the flexibility required for the development of new ‘out of the box’ technology and therefore it requires an external source of innovation to support this area of growth.

Prof Steven Spiegel of UCLA presented a model of ‘Importing Innovation’ from small innovative nations to large industrial superpowers. He presents the notion of economic complementarity between the US and small countries such as Israel, Singapore or Finland as drivers of ideas and innovation.

By way of example, Israel, dubbed the start-up nation, is known for its disproportional number of successful start-ups, doctors, scientists, engineers, registered patents and NASDAQ listed companies and could offer a unique development platform for major industrial countries such as the US or China. Israel’s experience in developing world class military technology combined with its leadership in mobile technology makes it a unique potential partner for the Chinese Auto industry in its quest for seamlessly integrating connectivity into cars.

Such collaborations could act as a powerful springboard for the Chinese industry in its path to establish global leadership in the auto industry.


End of Part 2 (of 2)

Click here to read Part 1

For further discussion, please contact the authors:
Bill Russo
Managing Director,
Gao Feng Advisory Company

Chee-Kiang Lim
Gao Feng Advisory Company

Guy Pross
Managing Partner,
31ºNorth Innovation Exchange 

Uri Kushnir
Managing Partner,
31ºNorth Innovation Exchange 

How Connected Mobility Technology Is Driving The Future Of The Automotive Industry – Part 1

After over 20 years of advances in the world of mobile connectivity, big data and social networks, technology is now rapidly infiltrating the traditional realm of the automotive industry and shaping it to be at the forefront of global technology.

This new form of “connected mobility” is driving new technologies in the world of navigation, analytics, driver safety, driver assistance and information virtualization.  The challenge of understanding the opportunities and the threats (both cyber and physical) of this new industry will set the scene for a new competitive environment for both traditional OEMs and non-traditional players looking to establish themselves as the global leader of connected mobility.

At the same time, the rapid emergence of markets like China has changed the nature of competition in the 21st Century global auto industry as well as the commercialization pathway for such technology frontiers.  The rapid embrace of mobile connectivity by Chinese mobile device users, combined with the commercial aggressiveness of China’s internet giants will create conditions conducive to the rapid commercialization of smart connected car technologies.  As the leading automotive market, China is poised to revolutionize the global automotive industry, especially in the area of the Internet of Vehicles, making mobile vehicle connectivity the next great frontier of automotive innovation.

Traditional industries remain unchanged across 10 decades…

For over 100 years, our global economy has been reliant on traditional industries for fuelling our economies and for the production of goods and services.  From energy, through water and resources we have seen little change in these sectors since their inception, many of them using the same fundamental technologies. However, in recent years we have seen technological advances slowly being deployed across these industries, a trend that we expect will impact the very foundation of these sectors.

While much of our traditional industry backbone has been trapped in the industrial era of the early 1900’s, more modern sectors have shifted through the Information Era of the mid 1900’s to the knowledge era of the 2000’s.  This lack of progress can mostly be attributed to the conservative nature of traditional industries as well as the general lack of reform and cost and complexity for transitioning from old legacy platforms.

After 20 years of technological advances, traditional industries are shifting…

Following 20 years of significant advances in technology, the market conditions are now in place for a fundamental shift in industrial technologies.  Four key technological game changers are driving this transformation – cloud computing, big data, social networks and mobile/connected technologies.  The convergence of these technologies is expected to revolutionize business, society and industry, disrupting old business models and creating new ones.

A transformational impact on the automotive industry

The industrial technology revolution is particularly visible in the automotive industry, an industry that for 100 years relied on engineering innovation and is rapidly becoming more dependent on digital demands and mobile connectivity.  This is on top of traditional industry challenges such as cost pressures, diverging markets, and a shifting industry landscape.

There is also a growing sentiment that OEMs cannot simply turn to their traditional toolbox. OEMs will need to review and adjust their strategic priorities, deploy the appropriate investments and resources, and develop new skills to execute these strategic objectives.  Accordingly, we have seen the automotive industry focusing on innovation more than ever before with fourteen automakers among the top 50 most innovative companies (in BCG’s 2013 survey) with the focus on innovation in four areas: power train, lightweight materials, connectivity, and active safety/assisted driving.

We have also seen OEMs working with open innovation as a paradigm to drive external ideas and internal incubation.  Using open innovation platforms, OEMs are boosting innovation capacity and harnessing the talents of people outside their organisations.  This method is enabling OEMs identify new requirements, unarticulated needs or existing market needs, accompanied by innovative solutions in the form of new technologies, new services or new uses of existing technology.

The challenge for OEMs will be to effectively develop processes for integrating technology into their product lines and through this to find new ways of achieving a competitive advantage in the marketplace.  This will also uncover the need for supporting new business models and vehicle ownership trends (such as vehicle leasing models or car sharing schemes).  One mega-trend we are seeing in the market is the development of connected car technology.  This technology is already revolutionizing the auto industry and is likely to be one of the key differentiators in the auto industry of the next few years.

End of Part 1

For further discussion, please contact the authors:
Bill Russo
Managing Director,
Gao Feng Advisory Company

Chee-Kiang Lim
Gao Feng Advisory Company

Guy Pross
Managing Partner,
31ºNorth Innovation Exchange 

Uri Kushnir
Managing Partner,
31ºNorth Innovation Exchange 

Hunting for deals on wheels in China’s developing used car market

Nikkei Asian Review. September 11, 2014

SHANGHAI — Zhu Xiaohong closely examines a 4-year-old Volkswagen Touran, using the flashlight on his mobile phone. The gray VW sits in what looks like a multistory parking lot but is in fact the Shanghai Used Car Trade Market, the largest of a cluster of secondhand dealers on the city’s Zhongshan North Road.

Zhu’s conclusion: “I want to buy this car.”

Zhu, who has bought used cars twice before, said he cannot afford to buy new. But while used cars are significantly cheaper than new ones in China, prices are higher than in developed overseas markets, and there is often greater uncertainty about quality.

Yasuhiro Konta, a senior manager responsible for secondhand sales at Dongfeng Nissan Passenger Vehicle, explained that it is rare to see a standard going rate for a used car in China. “Each price is decided by negotiation,” he said.

This informal system reduces the pressure on sellers to keep prices down, according to Cameron Macqueen, general manager of Southern Cross Warranty, the Chinese arm of Australian financial company Presidian.

“Pricing in China is a lot higher than in the U.S. or Australia — maybe up to 30% or more for some makes and models,” Macqueen said. He estimated average secondhand sale prices at 60,000 yuan ($9,770) nationally, but added that the figure rises to 200,000 yuan in big cities such as Shanghai, where top-end luxury cars are popular.

Trust issues

China’s used car market has expanded alongside a dramatic rise in demand for new cars. Sales of new passenger vehicles hit 17.92 million in 2013, according to Deloitte’s 2014 China Auto Finance Report, confirming China’s status as the world’s largest car market.

Bill Russo, managing director of consultancy Gao Feng Advisory, said the supply of used cars is increasing as owners sell into the market rather than handing on vehicles to other family members. Demand, Russo said, is picking up as younger drivers become more comfortable buying preowned.

On the other hand, Russo pointed out that the ratio of secondhand sales to new car sales is much lower in China than overseas, suggesting that there is a lot of room for growth. In the U.S., three used cars are sold for every new car purchased, whereas in China only one used vehicle is sold for every four new ones.

While those numbers could change, the used car market faces considerable challenges. For a start, growth in new car sales appears to be slowing, although it is still high by Western standards. Deloitte, which tracks the industry closely, says it expects annual growth in China’s new passenger car sales to fall from 15% in 2013 to 7% over the next few years, with the expansion of the used car market slowing from around 20% a year to 15%.

Used car sales are also hampered by a lack of transparent vehicle records, which often makes buying a matter of chance. Sometimes, sellers cross the line into outright fraud.

“I would say the majority of cars have their odometer wound back, and therefore credibility issues are rife,” Macqueen said. “Chinese are not yet up to speed with how to look after their cars, so it is normal for a customer not to trust the history, the quality, of the car they’re looking at, or the dealer.”

Turning pro

The hit-and-miss nature of the used car market reflects the dominance of independent dealers and brokers.

Wang Meimei’s corner of the Shanghai Used Car Trade Market is taken up by a BMW, a Mercedes-Benz and a Volkswagen Passat. “Sometimes I sell a car a day, sometimes a car a week. It varies,” said Wang, who is preparing to retire after 10 years on Zhongshan North Road.

The market is changing, however. Alibaba Group, China’s largest e-commerce company, recently announced plans to launch a platform for selling used cars online. Conventional dealers are also beginning to offer warranties on preowned vehicles, prodded by companies such as Southern Cross.

New car dealers, known in China as 4S shops, are increasingly moving into the secondhand business, bringing more professional marketing and sales techniques.

Martin Kuehl, a spokesman for Audi China, said the company expects the preowned market to continue to grow and has set up 290 licensed used car dealerships — including 60 that sell only Audis. Dongfeng Nissan began selling used cars at some of its 4S shops five years ago; last year it sold around 20,000 through more than 60 dealers.

New government regulations that take effect in October are likely to accelerate the trend toward greater professionalism. Authorized dealerships will be free to sell a range of brands, rather than being tied to a single marque. Industry experts say this will give a further boost to the better-run 4S shops, whose more transparent pricing and marketing practices are likely to put pressure on independents to raise their standards.


Potential buyers check out vehicles at the Shanghai Used Car Trade Market. Preowned cars tend to be pricier in China than in other major countries. © Photo by Mark Andrews

“I see a trend toward businesses who want to build a brand name — meaning the quality dealers are getting more and more business,” Macqueen said.

Some problems will remain, though. Many cities, including Beijing and Shanghai, have implemented measures to try to limit car numbers, usually by restricting the supply of license plates. Many of the cars on sale at Zhongshan North Road carry suburban “Hu C” plates, which do not allow the vehicles to be driven into the city center.

Emission standards also vary between cities and provinces, hampering the creation of a national market, or even of large regional markets.

When a new Ford Fiesta was introduced to China in 2009, models sold in Beijing and Shanghai were compliant with the fourth-generation national emission standard, equivalent to the European Union’s Euro IV standard. Models destined for other parts of the country met only the older China III standard.

Today, registering a China III car is difficult nationwide. As a result, those Fiestas are hard to sell.

Click here to read the article at Nikkei Asian Review


Reinventing Mobility in the China Context

We are pleased to share with you a briefing paper titled Reinventing Mobility in the China Context: Building the Internet of Mobility & Related Smart Car Technologies.  With the auto industry developments and the increasingly prevalence of the wireless internet and mobile devices, we expect that the Internet of Vehicles will create discontinuous opportunities for product and business model innovation.

We believe the conditions in China – the world’s largest auto market and the market with the largest number of both internet and “smart phone” users – will likely make it the incubator for rapid commercialization of such innovations. China’s urban transportation challenge, the high rate of adoption of connected mobile devices, combined with the rapid and aggressive introduction of alternative mobility and vehicle ownership concepts from new entrants, will ultimately compress the time needed to commercialize smart, connected car technologies and related services. Such developments will dramatically alter not just the feature content of vehicles, but may also usher in a revolution to the business model of the automotive industry – where a model focused on “users of mobility services” could emerge as a real alternative to the traditional model of “car ownership”.

We welcome your comments and feedback on our briefing paper or in general about our firm. This briefing paper simply serves as a “teaser” document on this topic.  We would be glad to meet you in person to share our data and perspectives in a fuller manner. Please let us know if you are interested in meeting.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Best Regards,

Dr. Edward Tse
CEO, Gao Feng Advisory Company

Bill Russo
Managing Director, Gao Feng Advisory Company

Chee-Kiang Lim
Principal, Gao Feng Advisory Company

Click here to view the presentation:
Reinventing Mobility in the China Context

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