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Reinventing Mobility in China Context - Citigroup Auto Conference

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This briefing paper (titled Reinventing Mobility in the China Context: Building the Internet of Mobility & Related Smart Car Technologies) was presented by Bill Russo at the Citigroup China Automotive Conference in Shanghai in November 2014.

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".

Published in: Automotive
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Reinventing Mobility in China Context - Citigroup Auto Conference

  1. 1. Reinventing Mobility in the China Context Building the Internet of Vehicles & Related Smart Car Technologies Bill Russo(罗威) Managing Director Gao Feng Advisory Company bill.russo@gaofengadv.com +86 21 5117 5853 Nov 2014
  2. 2. The China Context 2 • Following a decade of rapid growth, the China auto market sharply decelerated on2011 and 2012 - with growth slipping to 2.5% and 4.3%, respectively. This brief slowdown was followed by 14% growth in 2013,with overall sales approaching 22 million units. • While the market growth has beenspectacular, we can expectgrowth rates in the future to be more moderate and sustainable – in line with GDP growth. Therefore,growth opportunities are still abundant, but not as easy as it has been until now. • Bothforeignand domestic brand vehicle manufacturers will seek to adjust to this new growth pattern while maintaining profitability. As a result, automakers and their partners must devise strategies to anticipate market trends and diversifyprofit streams to ensure future growth. • The unique context of China’s urban transportation challenge, the high rate of adoptionof 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 technologyand related services. China is poised to revolutionize the 21st century global automotive industry, especiallyin the area of the Internetof Vehicles,making mobile vehicle connectivity the next great frontier of automotive innovation
  3. 3. 3 AUTOMOTIVE VALUE CHAIN Even as China builds a full set of capabilities, new “internet of mobility” entrants are disrupting the value chain Service Sales & Distribution MarketingManufacturingSourcing Product Development R&D Service Sales & Distribution MarketingManufacturingSourcing Product Development R&D Stage 1 Circa early to mid 1990s Stage 2 Circa mid to late 90s  Start a few, isolated production facilities  Beganto integrate production facilities within China  Beganto use China as a procurement source  Built brand for the local market and local sales & distribution Service Sales & Distribution MarketingManufacturingSourcing Product Development R&D Service Sales & Distribution MarketingManufacturingSourcing Product Development R&D Stage 3 Early 2000s Stage 4 Present to 5- 10 years hence  Build R&D and PD centers in China  Integrate China into global manufacturing network  Integrate China into global sourcing network  Transfer global best practice to China  Integrate China into global value chain Source: Gao Feng analysis
  4. 4. 4 AUTOMOTIVE VALUE CHAIN The new value chain will be multi-dimensional and disaggregated – the emergence of an entirely new Internet of Vehicles eco-system Service Sales & Distribu- tion Marketing Manufactur- ing Sourcing Product Develop- ment R&D Traditional Automotive Value Chain New Mobility Value Chain How the New Mobility Value Chain mightdiffer:  Multi-dimensional & disaggregated vs.linear  Service-focus vs. product/hardware-focus  Consumptionvs. ownership of mobility  Targeted at narrower segments vs.broad traditional broad B to J segments  Directcustomerrelationships vs. via intermediaries  Shorterproduct/service life- cycle  Inclusionof non-traditional players:internet companies, telcos,technologycompanies, etc. Source: Gao Feng analysis ILLUSTRATIVE Intersection between the Automotive and Internet Value Chains forms the New Mobility Value Chain
  5. 5. 5 Demand Structure Transformation ChineseDream Big Data & AnalyticsMobilityUrbanization New Technology Source: ACNielsen, Literature research; Gao Feng analysis http://www.bloombergview.com/articles/2014-07-15/millennials-want-apps-not-cars KEY DRIVERS A number of mega trends, some unique to China, are re-shaping how Mobility will be consumed in the future Rising affluence fuels the desire for the better things; highly-connected consumers Emergence of crowded and polluted mega- cities as more people migrate from rural areas Imposition of more vehicle ownership/ usage restrictions amidst choking congestion Data from social network and other sources enable better match of demand and supply Ubiquitous connectivity, cloud services, smart phones and mobile internet Bloomberg:Millennials Want Apps, Not Cars, 9 July 2014: "Millennials are used to consuming more than their parents," Heikkila wrote. "However, they prefer to consume experiences and services, such as traveling and eating out, rather than possessions." They travel more for pleasure than out of necessity, because they can get most of what they want on the internet. Unlike baby boomers and Generation X, it's from the internet that millennials derive their sense of freedom, not from owning cars” – referring to millennials in Finland These trends,amplified in the Chinesecontext,are likely to create a transformational changeto the traditional Automotive value chain and business models Willthishappenin China?
  6. 6. 6 TypicalMid-SizedSedan  Over-engineered to meetalmost all conceivable needs fortransporting people and cargo over both shortand long distances – Weighs 20xas much as its driver – Can travel 300 miles without refueling – Is able to attain speeds well over 100mph – Requires more than 100ft2 for parking – Is parked more than 90% of the time PersonalUrban Mobility Device  Designed specifically for city-use to transport a few people and light cargo over short distances – Lowerdriving speeds in cities and V2V crash avoidance technologyreduce crash protection requirements and enable smaller and lighter vehicles  Demand forurban mobility will rise – 25 Megacities >10M inhabitants, doubling every 15- 20 years – Traffic jams have increased by 188% from 2007 to 2011 Source: Reinventing the Automobile (Mitchell, Borroni-Bird, Burns), Press Research, Gao Feng Analysis KEY DRIVERS China’sunique urban transportation challenges could create the potential for ultra-small personal urban mobility devices
  7. 7. Alternative Ownership Concepts Ownership Leasing / Long Term Rental  Focus on ownership  Focus on purchase price & residual value  Full car availability  Focus on total cost of ownership and residual value  Full car availability Dealers, brokers Leasing, Fleet Management companies Traditional OEM business Rental/Non-traditional OEM business Pay-per-use Traditional short term rental Taxi / chauffeur service Non-car individual transport; e.g., scooter, bike Car sharing / alternative ownership forms 7 KEY DRIVERS Consumers will be presented with several optionsto satisfy their mobility needs – driven by disruptive yet innovative service providers Source: Gao Feng Analysis
  8. 8. 8 Innovation Drivers Green mobility must be driven by regulatory push… …while in-vehicle connectivity, safety and infotainment technologies are very much driven by consumer pull Innovation in the seven technology frontiers can be accelerated with an overall vision and investment to create the ecosystem for smart, green, connected vehicles Source: Gao Feng Analysis KEY DRIVERS Regulatory requirementsfor sustainable development and consumer demand preferences will drive seven technologyinnovation frontiers
  9. 9. 9 Government’s Support to Auto Industry Infrastructure Development  Government has been continuously guiding and supporting the industry’s development across manufacturing and distribution  Highway network development provides foundation for more motor vehicle-based based transportation  China is investing in infrastructure to support industry development Government is investing toensure the continuousgrowthof autoandemerging technology industries Vehicle Manufactures Infotainment Facility Tele- communication Content Provider Mobility Internet Source: Gao Feng Analysis KEY DRIVERS The China government plays a key role in shaping industrial development
  10. 10. 10 1995  The concept if “Smart Traffic” is first introduced to China. Mr. Shi, current chief of China smart traffic committee, is one of the people touch this new concept 1997  In Apr. 1997, the fist “Smart Traffic” forum in China is initiated in Beijing 2002  Government started to put “Smart Traffic” into the country development plan “9th 5-yrplan”. 2 small projects were related to this topic  More attention on “Smart Traffic”, government upgraded the scale to medium level project in “10th 5-yr plan” 2006 2010  In National People Rep. committee, government formally identifies it as the strategic focus of its next 5 years economic planning View of the Chinese Government  The central government continues the investment in the development of the Internet of Vehicles (IOV) - target of reaching the scale of 200M “Smart Vehicles” in 2020  Tier-1 and some tier-2 cities, including Beijing, Shanghai, Guangzhou, Wuhan, Shenzhen, and Xiamen all start to initiate the policy in Internet of Vehicles Source: MIT Press, Press Research, Gao Feng Analysis KEY DRIVERS Promoting “smarttraffic” solutions is an important agenda for the Chinese government
  11. 11.  Taxi service: 11  Fractional car rental: EmergingThemes:  Innovative service concepts enabled by smart phone apps can now seamlesslymatch demand formobility with supply efficiently  Ability for both self-drive and non self-drive models to evolve  Utilization of privately-owned vehicles are rising alongside with the ability of owners to bettermonetize their asset  Real-time big data, analytics, enhanced location-based technologyetc.will enable further innovative of mobility services CONCEPT: MOBILITYON DEMAND Ability to match demand for mobilitywith supply has already created a large buffet of customized mobility services OWNED BY FLEET PRIVATELY-OWNED Didi Kuaidi Yidao Uber/优步 NONSELF-DRIVESELF-DRIVE  Car rental/leasing:  Car sharing:  Ride sharing/ Limo service: Zipcar Car2go PP car rental Relay Rides China Auto Rental eHai Source: Gao Feng analysis Get Taxi
  12. 12. 12 CONCEPT: CONNECTED VEHICLES Connectivity will transform the automobileto an intelligentplatform for a explosivevariety of in-vehicle and external services EXTERNAL Active Safety Assisted Driving/ Parking Remote Diagnostics Navigation Platforms CONNECTIVITY V2VV2I EV Eco-system V2X VEHICLE Traffic Coordination Environment Sensing Traffic Analytics Telematics Congestion Manage- ment Parking Information System Autonomous Vehicles In-vehicle Navigation V2V: vehicle to vehicle - increased safety as vehicles can communicate with each other and pass warning messages on dangerous situations such as wet roads V2I: vehicle to infrastructure – sensing the road infrastructure, e.g. traffic jams, red lights, paying tolls, etc. V2X: vehicle to external communication – communication with any Internet capable device V2E: vehicle to enterprise – connect to all existing and future ecosystem players, from gas stations, car park operators, to music streaming, navigation, insurance providers and new web services V2E Source: Gao Feng analysis
  13. 13. 13 CONCEPT: AUTOMOBILE AS A PLATFORM TO WORK,LIVE AND PLAY Connected mobility will also facilitate targeted location-based e-commerce, dynamic social networking, etc. ENTERTAINMENT Continue with the movie you didn’t finish on your laptop HEALTHCARE Connect to wearables; alarm and respond to emergency situations SHOPPING Plan the best shopping trip based on traffic, price and stock level etc. SPORTS Finish a 20-minute training LIVING Access to electronics at home and vice versa
  14. 14. 14 CONCEPT: AUTOMOBILE AS A PLATFORM TO WORK,LIVE,AND PLAY Emergence of autonomy and connectivity could enable the automobile to become an extension of the home and office WORK LIVE PLAY  “Smart office” suite of productivity tools for the car  In-vehicle Tele-Presence – attend important meetings while on the move  Health sensors in-built into the car seat  “Virtual Classroom” – attending lectures on the move  Seamless connectivity between car and home  In-vehicle movie theatre  In-vehicle virtual reality gaming  Online shopping/ e-commerce on the move  On-demand video and radio content
  15. 15. Network solution needed Drivers need a full network solution including energy management and billing Connectivity is on its way! …will be a natural step for creating a network to support NEVs Battery cost Batteries add $15,000 to the upfront cost of an electric car Battery costs are dropping …improving the economics of NEVs Range anxiety Today’s batteries can only drive 150km between charges Battery rangeis improving …increasing the potential market size of NEV 0 100 200 300 400 500 600 700 800 900 2010 2015 2020 2025 2030 AUTOMOTIVE BATTERY PRICE1 $/kWh Barriers to electrification The auto industry is driving connectivity and removing one of the major barriers to electrification CONCEPT: NEWENERGY VEHICLES ARE FUNDAMENTALLYCONNECTED Connectivity as a platform for accelerating the electrification of cars 15
  16. 16. 16 Online  Third-party portal  OEM’s own portal  Dealerportal Offline  OEM brand experience centers  Dealershowrooms  Credit  Financing  Leasing  Extended Service Contracts  Accessories  Insurance  Tax  Title and Fees  …  Socialmedia  Word of mouth  OEM Brand websites  Automotive Portals  Advertising platforms  … Drive DecideShop CloseNegotiationVisit Research EmergingThemes:  Internethas empowered consumers to researchtheir automobile purchase away from high-pressure showroom,and shop for the bestprices  OEMs,dealers and third- party players can set up their own e-commerce portals to attract potential buyers,and they can complementeachother by targeting differentsegments  Brand experience has to originate on the web and align with the showrooms CONCEPT: DIGITAL TECHNOLOGIES DISRUPT TRADITIONAL AUTO RETAIL MODEL Traditional Brick-and-Mortar dealership formatswill need to evolve as car buyers increasingly conducttheir research online online offline Source: Gao Feng analysis
  17. 17. 17 Financing  With the emergence of fractional ownership and potential decline of outright vehicle ownership, financing arrangements will need to evolve Insurance Remote Diagnostics Aftermarket parts and service  Car owners will purchase insurance based on the driving record which diagnosed by in-car system  A whole new slew of “pay-by-the-km” and “pay-by-the-hour” business models for tires, brakes, and service etc. are now possible  Value-added service to inform vehicle owners of schedule maintenance and pre-empt problems before they occur If cars of the future are autonomous/self-driving and majority of the human-caused accidents are eliminated, auto insurance products needs to be designed differently After-Sales service of the Future CONCEPT: AFTER-SALES SERVICE Traditional insurance, financing, parts and accessories productscould look very different as well With technology to track usage and risky behaviors (e.g. speeding), could car insurance rates be pegged to driver’s behavior? Source: Gao Feng analysis
  18. 18. 18 InfotainmentSystem Vehicle Connection Platform SmartTraffic -As listed in the strategic focus of national development plan, government will provide up to 10B RMB subsidy in first batch to invest in this industry- Officer fromChina Industry & Info Tech Ministry -Telematics is the perfect integration of modern auto and service industries. There will be a new auto- based platform by which service is provided- Chen Ke Wu, Chairman of Shanghai Navigation & Tech Development Committee Source: Gao Feng Analysis WHO ARE THE PLAYERS? The Chinese internet giantsare vying to create the ecosystem for the connected “Smart Car”
  19. 19. 19  In-car intelligent technologies (infotainment and wireless internet connectivity) are not standard equipment today  Some major automakers have already introduced the in-car intelligent systems, such as Onstar by GM, Sync by Ford and iDrive by BMW Automakers 1  Strong players such as Baidu, Google and Apple are actively entering into the IOV market  Smaller-sized companies are pursuing IOV technology as well. One example: Qihoo 360, well known for antivirus software, is now developing IOV products. Internet Technology Companies 2 In-car System Manufacturers 3 Main types ofplayers in IOV industry  Most were the manufacturers of in-car navigation, entertainment and diagnostic systems. Now they calling themselves "IOV companies”, but they are most likely to be viewed by OEMs as traditional component suppliers. Comments  Automakers have led initiatives to develop in-car intelligent systems, mainly led by Tesla, BMW, GM and Ford  IOV is an big opportunity for IT companies to leverage consumer relationships and technology platforms to extend their reach into vehicles  The entry barrier of IOV technology is high, and smaller size companies do not have the capability to develop sophisticated products…and automakers tend to work with technology leaders  Manufacturers began to develop IOV products, but it is difficult to play an important role in major IOV market because of weak branding Source: Gao Feng Analysis WHO ARE THE PLAYERS? For the future auto market, mobile connectivity will be “standard” for new models which attracts players from different fields
  20. 20. 20 Auto BrandsInternet Companies Embedding Alibaba online functions into some of the SAIC products such as navigation, online entertainment systems, online shopping, and other information systems The product will enable a data connection between a mobile device and a vehicle with a Bluetooth or USB interface, allowing users to control the various applications through the device Major Functions Internet Car CarNet Smart Device Link (SDL) Product Type Internet Car Intelligent Interconnect products CarNet can be operated by an app on a mobile device, and the contents will be shown on the screen in car, and more functions will be developed based on this connection Open-source version of Ford’s AppLink system Project Names Source: Press Research, Gao Feng Analysis WHO ARE THE PLAYERS? Recently, major Chinese internet services companies have cooperated with local and global automakers on IOV products
  21. 21. 21 Global IT firm’s focus on IOVand intelligent technologies The auto-related network infrastructure is being deployed More IT players will come into IOV field Higher level technologies for auto will be developed by the internet giants  Apple and Mercedes-Benz, Ferrari, BMW announced an in- car networking and multimedia platform called CarPlay  Microsoft launched its first automobile industry innovation center in Changchun. The center will focus on the R&D of auto information system, cloud-based mobile Internet solutions, and big data applications  China Unicom has formed a strategic cooperation with Tesla, and will offer 3G and 4G service for cars sold by the Tesla in China  Tecent released its first Internet of Vehicles (IOV) hardware product Lubao box at the GMIC, and Lubao is an auto diagnosis system  Qihoo 360 is a software company known for its antivirus software, and they are developing similar products for in-car systems  LeTV and BAIC are proposing a cooperation on connected cars  As direct competitors, both Google and Baidu are developing driverless vehicles and the related Vehicle to infrastructure technologies  Currently both companies have developed in-car network systems, and cooperated with several major automakers Source: Press Research, Gao Feng Analysis WHO ARE THE PLAYERS? Aggressive internet and technology companies will rapidly develop the market and the relevant IOV technologies
  22. 22. 22  The content and functions directed to the 8-inch screen includes the most frequently used applications, such as navigation maps. A selection of vehicle-centric apps is pre-loaded onto the system. Owners can also download, update and sync personal apps through their smart phones and USB drives Infiniti CASE STUDY G-Book  “MZD Connect” system is a consumer device based telematics solution that builds on a 7-inch touch screen display. By connecting a smart phone, the system can provide services like navigation, internet browsing and a weather application Mazda  Toyota and Lexus have demonstrated a 4G Wifi G-Book concept to illustrate its 4G strategy. The 4G-Wifi hotspot inside the vehicle allows up to the eight mobile devices to be connected to the internet and stream movies and videos while on-the-go Toyota/Lexus Infiniti IntouchMZD Connect Asian OEM’s Work on Mobile Connectivity and IOV Source: Gao Feng Analysis WHO ARE THE PLAYERS? CurrentlymanymajorAsian and Western auto OEMs are focusing on mobile connectivity and IOV (1/2)
  23. 23. 23  The Mini in-car intelligent system (Paceman) which offers smart phone integration in the vehicle and gives access to Mini specific applications such as Mission Control, Dynamic Music, Driving Excitement and Minimalism Analyzer MINI/ BMW CASE STUDY  OnStar by GM has introduced an upgraded voice recognition system, a new generation mobile connection App with a new visual design and a new security service  The upgraded voice recognition system includes the new “Traffic on Demand” service that enables subscribers to obtain real-time traffic information by voice GM  Ford has introduced its SYNC and AppLink technologies, and allowed consumers to control their favorite smart phone apps through voice commands Ford Onstar SYNCiDrive Western OEM’s Work on Mobile Connectivity and IOV WHO ARE THE PLAYERS? CurrentlymanymajorAsian and Western auto OEMs are focusing on mobile connectivity and IOV (2/2) Source: Gao Feng Analysis
  24. 24. 24 BUSINESS MODEL INNOVATION IOV will catalyze Business Model Innovations, bringing non-traditional players into the Ecosystem Theme Business Model Players from automotive and other industries Middleman/ Match- maker Linking demand & supply of mobility and charging a fee for the service Yidao, PP rental, Uber, Airbnb Advertising Free mobility service financed by advertisement Didi, Kuaidi, Taobao, Baidu, Facebook, Google Financing arbitrage For car rental or fractional usage mobility services, fleet owners finance the vehicles with loans and they in turn charge higher rental to cover loan plus operational expenses China Auto Rental, eHai, Zipcar, Car2go Platform player Infotainment/connectivity systems that charge upfront fees to users or percentage of revenues from service/content providers Amazon, Apple (iOS), Google (Android) Content provider For in-vehicle video/music etc. entertainment CCTV, Disney, Netflix, Zynga Others… ILLUSTRATIVE Source: Gao Feng analysis
  25. 25. Summary & Conclusion: • A structural shift of economic powerfrom Westto the East is taking place,with stunning economic growth mostevident in China over the past 20 years. • 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, especiallyin the denselypopulated urban centers in China. • As the leading automotive market, China is poised to revolutionize the global automotive industry, especially in the area of the Internetof Vehicles,making mobile vehicle connectivity the next great frontier of automotive innovation. The rapid embrace of mobile connectivity by Chinese mobile device users, combined with the commercialaggressiveness of China’s internet giants will create conditions conducive to the rapid commercializationof smart connected car technologies. Such developments willdramatically alter not just feature content of vehicles, but also usher in a revolution to the business modelof the automotive industry 25
  26. 26. 26 Please feelfree to contact our automotive team leaders: Bill Russo Managing Directorand Auto Practice Leader bill.russo@gaofengadv.com EdwardTse Founderand CEOedward.tse@gaofengadv.com Chee Kiang Lim Principal ck.lim@gaofengadv.com Or, contact us in Beijing, Hong Kong and Shanghai at: Contact us Hong Kong: Gao Feng Advisory Company Level 3, Three Pacific Place 1 Queen’s Road East Admiralty, Hong Kong Tel +852 2588 3554 Fax +852 2588 3499 Shanghai: Gao Feng Advisory Company Level 20, The Center 989 Changle Road Shanghai 200031, P.R. China Tel +86 21 5117 5853 Fax +86 21 5116 6899 Beijing: Gao Feng Advisory Company Suite 703, Tower B, Winterless Center 1 West Dawang Road Chaoyang District Beijing 100026, P.R. China Tel +86 10 8557 0676 Fax +86 10 8557 0670

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