The China auto market is transitioning from a period of rapid growth and expansion of individual car ownership to a future where mobility needs are served via a more diverse stream of personal mobility solutions. Personal mobility solutions now include new cars, an expanding supply of good quality used cars, as well as on-demand mobility (ODM) services (including bike sharing and ride hailing) for people who prefer a pay-per-use model over ownership.
China’s market is also quite unique with its short history of car ownership, ultra-dense urban population, and high penetration of the mobile internet. With an urbanization rate of 56%, China’s urban population now exceeds 750 million people, and the transportation needs of this increasingly urbanized population has driven the explosive demand for personal mobility. With a car population of over 190 million vehicles at the end of 2016, individuals who own cars are still far outnumbered by those who do not, and mobility needs are increasingly served through mobility services “usership” beyond just individual car “ownership”.
In this context, automakers are expanding their focus from the product (the “automobile”), to the utility that is derived from the product (“automobility”), and are challenged to create a business model and digital ecosystem optimized to provide digitally-enabled solutions for both car owners and users.
We will discuss: How are these factors shaping the auto market in China? What solutions are being developed to ease mobility “pain points” in China? How do you see these solutions impacting and shaping our everyday lives today and in the future? How will this impact the structure of the industry going forward?
Innovations such as these, originating from both traditional OEMs and new mobility solutions platforms, many of whom are Chinese, is paving the way to an entirely new business model for China’s auto industry.
Topics for discussion:
Defining the disruption in the China context – What are the disruptive trends in the world of mobility?
Big picture view of the competitive landscape – What does the new competitive landscape look like and how will it evolve?
How should incumbents respond? Disrupting or being disrupted? – What new internal capabilities are required? How to work with local start-ups: compete or collaborate?
China for the world – Will China lead to world’s development and innovation in Connected Mobility?
Prof. Dr. Jochem Heizmann, Member of the Board of Management, Volkswagen AG; President & CEO, Volkswagen Group China
Mr. Olaf Kastner, President & CEO, BMW Group Region China
Mr. William Li, Founder & Chairman, NIO
Dr. Daniel Kirchert, President & Co-Founder, Future Mobility Corporation
Mr. Bill Russo, Managing Director, Gao Feng Advisory Company
Bill Russo delivered a keynote address at the Intertraffic’s 2017 China conference at Shanghai’s New International Exposition Center. The topic was “China’s Auto Industry in the Age of Disruption: The Birth of the Automobility Business Model”.
Bill Russo, the Managing Director and Automotive Practice leader at Gao Feng Advisory Company will chair the Connected Mobility Roadshow conference in Shanghai – hosted by Messe Frankfurt.
The main players in the mobility industry are currently re-evaluating their positions, for connected mobility promises huge potential: by 2020, the market for interconnected cars is expected to have increased by 45% – ten times the growth of the general automobile market. It is estimated that in five years, three quarters of all new cars will be able to connect, and, from 2025, autonomic driving could be possible outside of protected areas.
I co-authored this article with my colleague Edward Tse, CEO of Gao Feng Advisory Company
On August 1st, Didi Chuxing (Didi)and Uber China announced a plan to merge their businesses in China, effectively placing Didi in control of their combined ride-hailing business for the China market. This deal has attracted a great deal of attention since the announcement, raising a number of critical questions which we address in this article, including:
Did the China government play any role in the merger?
Can foreign tech companies compete in China?
Did Uber China win or lose?
Could Uber China ever have become a dominant player in China if it decided to press ahead?
What will this deal mean to Uber and Didi’s global strategies?
China has become the epicenter of a disruptive wave of digital innovation, and the rapidly evolving landscape of partnerships for mobility services is a clear indication of this. For sure, we can look forward to even more exciting developments in the future.
After a prolonged price war for ride-hailing customers, Chinese market leader Didi Chuxing and its biggest rival Uber merged on Monday. Now, passengers are worried this will mean a quick end to heavily discounted trips.
Shanghai native Ma Yanyan, 29, rides with either Uber or Didi to work every day. She told Sixth Tone that she has noticed Uber is sending fewer coupons to its users. “As a consumer, I’m very realistic,” she said. “I’ll go back to taking taxis once Uber raises its prices.”
Wang Mengyan, 25, is a frequent user of ride-hailing apps, and she is afraid the merger will mean higher prices. “As a consumer,” she told Sixth Tone, “we want to see competition between Didi and Uber so that we can enjoy the best discounts.”
Yang Mengyi, 28, told Sixth Tone she spends about 150 yuan (about $22) on Didi every week, but that she thought the merger wouldn’t have much of an impact. “Taxis will always be another option,” she said, adding that she prefers cabs because they are more strictly regulated.
Online, many net users echoed Yang’s opinion, saying that if prices rise too high, they will just go back to using regular taxis. News of the merger — and the possible end of discounted fares — has cab drivers delighted.
Chen Yugang, a taxi driver in the northern coastal city of Tianjin, expressed his relief after Monday’s news. He told Sixth Tone that he used to earn about 5,500 yuan per month before the emergence of car-hailing apps. His current monthly income has decreased to less than 3,000 yuan. “Why would passengers take a cab and pay me 20 yuan when they can ride with Uber for as low as 5 yuan?” he said.
Chen said that companies like Uber have disturbed the market, and he hopes the merger will bring consumers back to traditional taxis.
Bill Russo, an automobile consultant at Gao Feng Advisory Company in Shanghai, told Sixth Tone he estimates pricing may move somewhat higher after the merger, but that “it can’t be much higher for the simple reason that ride hailing services need to compete with taxis.” He added that, to Uber and Didi, the real purpose of the merger isn’t to increase prices, but to decrease costs in the form of incentives given out to passengers and drivers in order to win market share.
Full-time Shanghai-based Uber driver Xing Zhiwei told Sixth Tone that the news of the merger has him concerned. “In less than a year, the allowance for 12 rides has dropped from 150 yuan to 40 yuan,” said Xing, adding that he fears such driver subsidies will drop even further.
Zhuang Chunhui, a communications manager for Uber China, told Sixth Tone on Tuesday that the incentive policy for drivers will not change after the merger. She said that the amount of subsidies varies in different cities at the different times. “The discounts we offer to our users will also change from time to time,” she added, “but this has nothing to do with the merger either.”
Wang Mingze, a public relations manager for Didi Chuxing in Shanghai, said the merger will enable the company to increase the efficiency with which it accepts orders, and that this “can eventually increase the drivers’ incomes.” As for passengers, Wang said price is just one part of the service. “What’s more important is whether users can book the car and enjoy a comfortable ride whenever they want,” he said.
Two of China’s biggest household brands have teamed up to create what they call “the world’s first mass-produced car on the internet.”
E-commerce giant Alibaba and SAIC Motor, the country’s biggest car manufacturer, will launch the Roewe RX5 on Wednesday, a sports utility vehicle (SUV) featuring smart technology from Alibaba’s operating system YunOS. First unveiled at the Beijing Auto Show in April this year, the RX5 is reportedly YunOS’ first auto partnership.
YunOS was created in 2011 and is used by several prominent Chinese smartphones brands, including Meizu and Duowei.
In April, Alibaba said YunOS was the third-biggest operating system (OS) in the world with 40 million users as of 2015, adding that it would soon replace Apple’s iOS as the second biggest in the mainland, according to local media reports at the time. Google’s Android remains China’s most popular OS.
Connectivity, electric power and autonomous driving were the three principal themes for the auto market as it increasingly merged with the internet industry, Bill Russo, managing director at Gao Feng Advisory Company, told CNBC’s “The Rundown“.
The RX5 is a clear example of how car makers are employing big data to improve driver’s daily needs and mobility habits.
SAIC and Alibaba have promised that the car’s data capabilities would transform stressful driver experiences, such as negotiating traffic or undertaking maintenance, into enjoyable moments.
“The RX5 will be able suggest alternate routes in the case of road closures or traffic as well as a more personalized experience in the car,” Russo said.
Already the world’s largest car market, China is set to become a key adopter of these trends, but there’s already heavy competition to win the hearts of mainland consumers.
In fact, the real rivalry in the car market was no longer between car makers, Russo said.
“It’s a battle for the connected-car operating system,” he said, pointing to YunOS, iOS and Android Auto as examples.
When it came to China, Alibaba and SAIC’s biggest competitor was Apple, he added.
Apple’s investment in Didi was a strategic move to position a potential Apple car in China, Russo continued, noting that while Google had invested in Uber, it was not a threat because the search engine remains blocked in the mainland.
Bill Russo will be a keynote speaker at the plenary session of the Electric & Hybrid Vehicle Technology Expo (Day 1, Track 1) on September 13 in Novi, MI on the topic China Drives the Future of Personal Mobility.
China has emerged as the world’s largest automotive market since 2009 and remains the growth engine of the global automotive industry.
The world has entered a new era since 2008, with over half of the world population now living in cities, and this increasingly urbanized world challenges the established set of paradigms for personal and commercial transportation, especially in the densely populated urban centers in China.
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 new and innovative solutions and business models for personal urban mobility
Shaped by several forces, China is already the largest EV market in the world and will continue to grow exponentially. Several scenarios will be described that are shaping the market dynamics, government policies, and competitive landscape.
West Bund Art Center
2555 Longteng Ave, Xuhu
The Big Data Behind the Internet of Vehicles
The traditional automotive industry, where technology innovation has primarily been focused on powertrain and safety systems, must now contend with new forms of mobility services that are transforming the manner in which we experience the product. The particular conditions of urbanization, an ever-expanding middle class population, pollution, and congestion are uniquely challenging in China, which may create opportunities for innovative new mobility solutions for China.
The conventional hardware-centric, sales-driven, asset-heavy and ownership-based business model with sporadic customer interactions is now competing with a connected, on-demand, and often personalized mobility experiences. This new form of “connected mobility” is driving new technologies in the world of navigation, analytics, driver safety, driver assistance and information virtualization.
Innovations such as these, originating from both traditional OEMs and new mobility solutions platforms, many of whom are Chinese, could pave the way to a an entirely new business model for China’s auto industry.
Dr. Markus Seidel, Vice President, BMW Group Technology Office China
Ms. Celine Le Cotonnec, Head of Connected Services, Digital and Mobility for PSA Peugeot Citroen China
Mr. Bevin Jacob, Head of Business Development, APAC, Continental Intelligent Transportation Systems
Mr. Bill Russo, Managing Director, Gao Feng Advisory Company
On May 13, Apple announced a USD 1 billion investment in China’s leading on-demand mobility (ODM) service, Didi Chuxing (Didi). Didi’s legal name in Chinese means “little orange”, and an internal announcement made to Didi’s employees literally welcomed the apple to the orange family.
To understand the logic of this investment, it is important to first understand the popularity and explosive growth of such services in China – along with the role that Didi plays inside the expanding ecosystems of its largest investors, Tencent and Alibaba.
Originating from separate taxi-hailing services in 2012, Didi is now a one-stop mobility solutions provider that provides a variety of services including taxi-hailing, private-car hailing, on-demand bus, peer-to-peer ride-sharing, designated driver and test driving. Didi currently has 14 million registered drivers, completing over 11 million rides per day in over 400 cities across China. With over 87 percent share of the Chinese private car-hailing market, Didi is far larger than all the other ODM service providers in China, including Uber.
As a global leader in smart connected device technology, Apple has been exploring opportunities to expand the reach of its iOS ecosystem. It is an “open secret” that Apple is working on its own vehicle program, code-named Project Titan, investing billions in R&D and poaching talent from leading automakers including Tesla, General Motors and Ford. As a manufacturer of intelligent devices, Apple is a “serial disruptor” of industries ranging from media to telecommunications, and views smart transportation as a key target.
The logic of this collaboration is quite evident: the premier global smart device maker (Apple) has set its sights on disrupting transportation in partnership with the dominant mobility services platform (Didi) in the world’s largest car market with the largest number of mobile internet users. Through this partnership, Apple and Didi will have the opportunity to shape the connected mobility ecosystem for China as well as the rest of the world.
A Collaboration Model for Connected Mobility Innovation
The traditional owner-centric business model of the car industry is being disrupted by shared ODM services. As a result, we have witnessed the rapid emergence of a user-centric business model served by mobility services platforms dominated by Uber and Didi. Apple’s investment in Didi will ensure that they will be able to access China’s dynamic internet and mobility ecosystem.
Apple gains a Chinese partner not only with a strong mobility services brand, but also with a proven market sensing capability and keen understanding of how to address mobility pain points. Apple can leverage this to launch a car that delivers the perfect connected mobility user experience, and this can be leveraged both inside and outside of China. Didi will benefit from being affiliated with the world’s premier smart device company, and also gains a major global strategic partner to help penetrate into overseas markets and compete globally with Uber.
While not the primary motivation, Apple’s investment in Didi can also help foster goodwill in China, signaling a willingness on the part of Apple to collaborate with leading Chinese companies. The importance of maintaining such goodwill was underscored recently when Chinese regulators shut down access to some of Apple’s online media stores, triggering concerns among investors. In addition, Didi expects to turn a profit next year and eventually list their shares, which could provide Apple with a fast return on their capital investment.
The recent loss of momentum in Apple’s profit growth and share price performance has raised concerns among investors that the Apple may not be able to recover its shine. The deal with Didi brings hope that Apple can disrupt the auto industry in the world’s largest auto market.
From Connected Mobility to Connected Lifestyle
However, connected mobility is just one segment of the larger “connected lifestyle” opportunity. The convergence of disruptive technologies such as autonomous driving, artificial intelligence and virtual reality will have the power to transform our everyday lives.The implications of this go far beyond mobility, which is just one of the spaces where we will be connected through a smart device or platform.
Cars will increasingly become smart, connected, electronic and autonomous – and increasingly accessed through a mobility service. A logical interpretation of Apple’s strategy is that it views the car as a “third place” after home and office where people are connected to the internet. Its investment in Didi should be viewed as a strategic opportunity for Apple to capture a larger share of a mobility user’s time online, thereby generating recurring revenue. By creating a more personalized mobility solution, Apple also hopes that the users of such a mobility service would eventually prefer an Apple hardware platform when they are on wheels.
More than just a taxi-hailing service, Didi is a technology-enabled platform. With advanced algorithms to match supply and demand, surge pricing and real-time route optimization, Didi is efficiently moving people and things by maximizing the utilization rate of vehicles. More importantly, with big data and machine learning capabilities, Didi’s competitive advantages are constantly evolving and being reinforced.
Like WeChat and Alipay, Didi has emerged as one of the few “Super Apps” holding a vital part of Chinese consumers’ daily connected lifestyle. These Super Apps typically start by addressing a major pain point and eventually evolve into ecosystems of connected lifestyle services for potentially billions of users.They possess valuable “big data” on a user’s mobility patterns that are of high commercial value.
“Apple + Didi” vs. “LeEco + Yidao”
In fact, the “Apple + Didi” model is already being experimented by LeEco, a leading Chinese internet media company founded (as LeTV) in 2004. Last year, LeEco purchased a 70 percent stake in another Chinese car-hailing app Yidao Yongche. LeEco is also the principal investor in Faraday Future, a U.S.-based electric vehicle startup that is featuring a “subscription model” where users can enjoy the flexibility and convenience of mobility on-demand without having to own the vehicle. Apple’s recent monthly paid iPhone subscription program indicates that they may already be considering such a business model for other smart devices.
The usage-based model effectively eliminates the problem of up-selling features to individual owners by allowing the businesses that generate revenue from the device to cover the cost for adding the technology.
LeEco’s vision is to cover all aspects of consumer’s connected lifestyle by establishing an extensive business portfolio with mobile internet, e-commerce, sports, internet finance, entertainment and others. It is rapidly building a vertically-integrated ecosystem comprised of “Content, Devices, Platforms and Applications” offering premium user experience across multiple screens (i.e. mobile, tablet, computer, cinema, TV and cars).
Disrupt or Be Disrupted
Going forward, we expect to see increasing levels of co-opetition, and more cross-border, cross-industry collaborations:
Co-opetition: Google is an early investor in Uber while Baidu is a strategic investor in Uber China. Alibaba is a major investor in Didi. Meanwhile, Ant Financial Services Group, Alibaba’s affiliate that runs Alipay and other financial services, has partnered with Uber to enable Alipay globally. Apple’s deal with Didi could potentially challenge both Uber and Google. In addition, Didi is a member of an “anti-Uber alliance” including Lyft in the U.S., Grab (formerly GrabTaxi) in Southeast Asia, and Ola in India. With Didi’s aspiration to become a global company, Apple could eventually extend strategic partnerships to other companies in the alliance as well.
Cross-border: China (Beijing) and U.S. (Silicon Valley) will be the leading innovation hubs for connected mobility and beyond. The Chinese government is keen to promote electric vehicles adoption and digital transformation to improve urban mobility and address environmental issues. China could leapfrog and become the epicenter for connected mobility innovation on a global scale, with its massive population serving as a fertile ground for technology commercialization, as well as connected lifestyle. Permutations and combinations of cross-border alliances for connected lifestyle will create tremendous value for Chinese internet users as they trade-up for better products and services.
Cross-industry: The boundary between automotive and internet technology industries will become increasingly blurred. General Motors, as one of the most forward-looking incumbents, has formed a strategic partnership with Lyft, acquired self-driving start-up Cruise Automation and established a new business division named Maven to experiment with new mobility services. Other automakers are also catching up by piloting ODM services, including Daimler’s Car2Go, Ford’s Go!Drive and Ford Pass, BMW’s DriveNow, and Audi On-Demand. We have already seen emerging “disruption clusters” in China, including (1) LeEco, Faraday Future, Aston Martin and Yidao Yongche, (2) Future Mobility, Tencent and Foxconn, (3) NextEV, Tencent and JD.com, and (4) Alibaba and SAIC.
A Partnership to Reimagine Mobility
China is at the epicenter of a disruptive wave of automotive innovation and beyond. The mobility experience is being redefined with innovative usage-based business models. Incumbents and new players must re-evaluate their connected mobility strategies with a new lens for delivering the perfect connected mobility experience. Past success in the old automotive game is not a guarantee for future success. In fact, one would surmise that past legacy could often become a barrier for swift and innovative moves going forward. It is time for the leading companies from China and Silicon Valley to join forces to re-imagine mobility and the marriage between Apple and Didi could offer the promise of doing just that.
For the early part of the 21st century, China has been the growth engine of the global automotive industry. Despite a recent slowdown, China will surpass 25 million units in annual car sales in 2016 and has become the battleground for dominance of the global auto industry.
Several driving forces, which are particularly evident China, are disrupting the status quo of the automotive industry:
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 solutions.
Disruptive new entrants into the mobility solutions competitive landscape, who draw insights about customers based on their online behaviors and mobility habits in order to offer a diverse pool of new revenue-generating solutions.
The confluence of these forces are changing the landscape of how mobility needs can be served in a rather fundamental way, touching off a wave of experimentation among both traditional automotive and new mobility solutions providers.
The Origins of Disruption
Disruptive business models typically originate from outside the core set of industry players. Traditional Original Equipment Manufacturer (OEM) business models rely on selling products through an established business-to-consumer (B2C) channel, often through an intermediary sales partner that is either owned or franchised to represent the OEM brands in the marketplace. Consumers pay to own the asset outright.
The entry point for disruption is through the “pay-per-use” service-based business model. While this channel has existed for some time in the form of services managed through centralized professionally managed fleets (rental car companies, taxi and chauffeur services), digitally disruptive companies such as Uber, and China’s Yidao Yongche and Didi-Chuxing (created from a merger between rival mobility services from Alibaba and Tencent) have gained rapid and widespread market acceptance.
Once an entry point is established, these services-centric Information and Communications Technology (ICT) disruptors are able to leverage their big data and analytics capabilities to gain insight on consumers and their mobility patterns and behaviors. Essentially, these disruptors view connected mobility services as a natural extension of their ecosystem platform and are viewing the traditional services and perhaps even the OEM hardware business as a way of expanding their ecosystem. Serving the “Mobility on Demand” market is merely the point of entry for an entire suite of Internet-based mobile connectivity services which may include navigation, route planning, e-commerce, vehicle repair and maintenance, usage based insurance, and other very lucrative “owner services” which are very important to today’s OEM business.
ICT disruptors are leveraging connected mobility services as a means to disintermediate the value chain of the automotive industry and capture a profitable services ecosystem. OEMs are at risk of their business model being relegated to a high-risk, asset-intensive, commoditized, business-to-business (B2B) channel for delivering hardware to the profitable ecosystem of the mobility services providers.
Reimagining Personalized Mobility
The motivation for many ICT disruptors to invest and compete in this market is to unlock the services revenue that encircles each user. It is not the mobility service itself that justifies the investment, but rather all the things that we (and our cars) do when mobile. Making such experiences feel more and more “personalized” to our individual needs and lifestyles, which become apparent based on our mobility habits, will ensure the loyalty of the user to the service provider’s ecosystem.
ICT disruptors are leveraging their core value propositions to deliver a more personalized mobility solution. These disruptors may not see the car industry as their destination, but are rather “travelling through mobility”. They view mobility services as a channel for enrollment of users into their broader ecosystem-based platform offering a range of other services. Chinese ICT disruptors aiming at this “personalized mobility” solutions space include LeEco, Future Mobility, and NextEV.
The table below offers a glimpse of how major Chinese players aim to leverage their core while expanding to and beyond mobility as a service. Beyond manufacturing smart, connected, electric vehicles or building technology-enabled infotainment systems and mobility services, these visionary companies are reinventing the mobility experience as a whole. Moreover, they are reimagining mobility as a transaction between a user and an ecosystem services provider, which stands in stark contrast with the traditional model of a transaction between an owner and a manufacturer.
It is important to keep in mind that as cars become mobility service platforms, the technology on board will become more sophisticated and tailored to the individual end-user’s needs. ICT disruptors may in fact decide to contract out the actual production of vehicles to an ecosystem partner, with an end-game of earning recurring revenue by providing car owners with data products and Internet services. While some tech companies may profit from selling hardware, the main focus is on the services that flow through the hardware.
Disruptions typically originate from outside the traditional industry players, which is clearly illustrated in this case. We are approaching an inflection point where the deployment of personalized mobility solutions will expand exponentially and thereby alter the competitive landscape and business models of several adjacent industries.
Over the past few years we have witnessed how ICT disruptors have pioneered new business models and are in the process reimagining mobility as a service. The emergence of Chinese disruptive mobility solutions players such as Didi Chuxing and LeEco, with their innovative ecosystem-based strategic approach, offers clear evidence that something new is happening. This, coupled with the Chinese government’s determination to push new-energy vehicles and build a sustainable transportation infrastructure, demonstrates the potential for China to become the major breeding ground for automotive innovation.
Tech disruptors including AppleAAPL +0.12%, GoogleGOOGL +0.50%, LeEco, NextEV, and others may be garnering the most attention, but as we have observed, they are typically “travelling through mobility” as a means to enroll users into their broader service ecosystems. On the opposite flank, traditional OEMs, who will not easily cede their over 100-year dominance in the auto industry, are pivoting into mobility services.
New players will inevitably join this emerging landscape of competition. Alliances are also being formed among new and traditional players seeking to access complementary strengths and seize a competitive advantage.
The battle will likely be won by those who understand the true potential of connected mobility services and thereby deliver value to the user in the most personalized, convenient, comfortable, and cost-effective manner. It is a battle where profits will be won by offering differentiated mobility-related services through a hardware platform that is most suited to the lifestyle of its end user.
Success will accrue to those companies that are best able to reimagine mobility in the context of a place like China: where mobility needs are uniquely challenging, where innovative mobility experiments are being driven by entrepreneurial activity, and where dreams of exponential business growth become reality.
I am the Managing Director and the Automotive Practice leader at Gao Feng Advisory Company based in Shanghai. With 15 years as an automotive executive, including over 11 years of experience in China and Asia, I have had the pleasure of working with multi-national and local Chinese firms in the formulation and implementation of their global market and product strategies. I was previously the Vice President of Chrysler North East Asia, responsible for the business operations for the Greater China and South Korea markets. In addition, I have 12 years of experience in the electronics and IT industry, having worked at IBM Corporation and Harman International.
The author is a Forbes contributor. The opinions expressed are those of the writer.