Is the future of Cartech in China ?
In recent years, it has been amazing to how China has become the most innovating country in the e-commerce world. This happened for several reasons. First, since the physical retail infrastructure was not well developed in China, digital advances were able to help accelerate the growth relative to the West. Then, mobile quickly scaled and became ubiquitous in China while the delivery infrastructure continued to stay at low cost. Furthermore, friction-less mobile payment become a norm, and the leaders of this digital economy were more open than in the West to build an ecosystem where everybody wins. These favorable elements merged into a whole ecosystem that we can qualify as “Silicon Valley of E-commerce”, and has resulted in massive growth driven by vivid innovations. E-commerce will soon represent around 30% of the commerce in China, and China is now also reinventing retail itself as a secondary effect.
What is Cartech? This is the new technologies that will be embedded into the self-driving vehicle of the future. These self-driving vehicles will be connected to a full ecosystem of new services related to new mobility, entertainment, or predictive maintenance. To accomplish this, you need both new technologies embedded in the car and the ability for these technologies to operate with the digital ecosystem platforms existing outside of the car.
There has been a shift in commerce, and now there is a shift occurring in the domain of automotive vehicles. Can China also be the Silicon Valley of Cartech? We observe that a series of elements are aligning to give China the opportunity to be a new giant in the Cartech industry very soon:
1/ When considering China, while we first see that China is currently the largest car market in the world in term of units sold, they are also the most demanding of innovation as the average buyer is only 38 years old, compared to 53 in the US. Given that, China has both the largest market in the world and the biggest appetite for new innovative, connected offerings.
2/ China is also the only country where there are more people that are ready to buy a car than able to own one in real life. For instance, it is currently extremely hard to register a new car in Beijing as the number of cars is limited due to regulation. Many large towns have more traffic congestion relative to the rest of the world, and pollution is also more of a problem for inhabitants in China than in most countries. So, there is a real need and certainly favorable ground to develop the innovative services needed to enable new forms of mobility, in a country where ubiquitous ownership of mobile phones offer access for people. By the way, it’s clear that all the mobility services of the Western world have already their equivalent in China : a great example is bicycle-sharing as China has made it an on-demand transportation alternative, with it catching onto the Western world.
3/Electric Vehicles (EV) are on the rise in China as they are estimated to have more than 5 million electric vehicles on the road by 2020, with sales estimated at 3 million vehicles next year. The Chinese government is now considering the exact time frame of when to forbid petrol and diesel cars while also considering a massive plan on how to roll out new energy related infrastructure to sustain the high demand of electricity. Now that fancy petrol and diesel engines that have been historically one of the biggest barrier to entry for new entrants disappearing due to power of the government, the massive shift towards EV unlocks new competition in the automotive industry. With the force of the Chinese government paving the way, the very large and demanding Chinese market coupled with a lower cost structure relative to Silicon Valley to innovate provides an amazing opportunity for a whole new ecosystem to emerge and with the ability to innovate at scale with a new longstanding business model. On the contrary, the current financing of the Cartech industry in the Western countries often appears as more speculative.
4/ China has the technical capacity to develop multi-level autonomous driving solutions including deep learning, HD mapping, and all the other elements needed for the AI to operate flawlessly. In addition, when looking at the massive efforts undergoing in China to develop AI and the results they have already accomplished, we can only agree with a recent article published in the MIT Review that the future of artificial intelligence is probably taking shape in China. As an illustration, Cathay Innovation is an early investor in Momenta, currently the hottest company in the Chinese nascent self-driving industry which was founded by graduates from Tsinghua University who have worked also in companies such as Microsoft. It is so amazing to see how fast companies in China are catching up, with many of them starting two years after their Western peers. In addition, an increasing number of US educated foreign Chinese students are opting to return to China as they look to start something back home.
5/ On top of point 2, where we noticed that China was a great ground for the expansion of mobility services, we can also say that the less developed network of infrastructure, such as aftermarket garages, will enable China to leapfrog one generation in services when compared to the Western world. The way people will buy used cars, maintain them, share them etc., will harmonize with the technology capabilities brought by the 21st century. For instance, Lechebang, a company we invested in, is the leader of the digital car aftermarket in China. Lechebang is already aggregating over 20% of the Chinese 4S shops onto its platform, and offers a full mobile one-shop-stop experience to enable people to maintain their cars easily, at the right price, and soon also in a predictive manner. Such new services develop at much slower pace in the Western countries because people are complacent with their current easy access to less modern ways.
It appears clearly that, as with e-commerce, China has many of the ingredients to be a leader in the reinvention of the car industry in the 21st century. However, the situation is not exactly the same.
In the e-commerce world, Google, Amazon, and its peers didn’t have the right to easily operate in China, which created a vacuum filled by the local internet industry. In cartech, we can identically see the existence of similar barriers to entry as new autonomous cars will have to work with platforms that utilize HD mapping of Chinese roads and/or connect millions of Chinese people, which the Chinese government will be reluctant to provide to just any market participant. However, there is one big difference in the case of cartech — there is demand for the same car model globally. While media, interfaces, and social network depend a lot on the culture, Chinese, American, and French people all appreciate and drive the Mercedes-Benz in the same way. So, to succeed in cartech, products need to be global as one cannot escape the global competition in the automotive industry.
The car industry is not only global, it is also much more optimized than the phone industry: for the price of only 10 small iPhones, you can have a car with operating software, chips, sensors, tires, seats, brakes, engine, and many other things. The car will even be so reliable that it won’t reboot while on the highway! Because the barrier to entry to producing amazing products at the right cost is so much higher in the car industry than in the telecom industry, the global industry shift will be different. In order for China to succeed to the global cartech market, there are two points that China needs to quickly consider in order to access the needed speed to become a true leader: (1) the need to think/act globally on day one to avoid producing only local cars and (2) the need to have an optimized enough supply chain to produce high quality cars at competitive costs.
If a player could bring the last needed pieces in the equation while remaining Chinese, they would surely be very useful for the whole ecosystem. When we thought about this with our strategic partners, we figured out a solution — in our Innovation VC fund, we blended both leading industrial players such as Valeo, and large local entities such as China Development Bank, while concurrently leveraging our global US/China/Europe footprint. The presence of industrial players as Valeo, Michelin, etc. that support our companies with advice, partnerships, testing, and purchase orders can really help our invested startups develop competitive solutions faster in areas where vertical specific details matter so much. The presence of large Chinese institutions, among other things, help ensure that our whole ecosystem could be accepted as both useful and considered as Chinese, and thus letting the competition on product & service decide the winner. And finally, our global platform enabled our Chinese invested companies to see what is being done in the rest of world, start scouting for more Western partners and customers earlier, and link with other actors in their field that they would have not known otherwise.
We are convinced that this approach is an excellent driver for the reinvention of cars in the 21st century and is especially very well adapted to China, where we can be an efficient catalyst. However, our platform is more a tool to be used in conjunction with our strategic partners and investors — without them, the tank is empty. Our strategic partners and investors now can leverage the platform to build eventually large size initiatives, and we will provide our commitment to learn from them to be able to empower their bold initiatives.
The more we evolve and act in the Chinese ecosystem while being involved in the car industry globally, the more we are convinced that the future of cartech is in China.
