A multi-billion RMB bet
Thegiantglobalautoindustryisexperiencingunprecedenteddisruptionasits130-year-oldbusinessmodelisturnedcompletelyinsideout.SuchchangesarehappeningfasterinChinathanintherestoftheworld,wherethesizeandscaleoftheurbanpopulationandthesheer numbers of virtuous connected consumers are much greater than other markets. In China, about 170 million people use ride-hailing apps, according to an estimate by consulting firm McKinsey Co. As Chinese cities become increasingly congested and polluted, new business models and technologies are emerging to address the mobility challenge.
In such an environment, China’s internet giants BAT (Baidu, Alibaba, Tencent) along with mobility disruptors such as NextEV and LeEco are vying to deliver an increasingly connected, electrified, smart and personalized mobility experience. In order to stay competitive, the country’s automakers and foreign OEMs have taken actions and some have already joined the race.
Thanks to a sheer size of mobile internet users, government efforts crackdown on corruption and advanced technology from mobility players, the growth of mobility service in 2016 was remarkable.
Huge potential of mobility service in China
It’s inevitable migration from the old business model to ride sharing/hailing will transform the still vibrant car business into a highly regulated and intensely price competitive utility.
The reason is math. Traditionally, automakers have relied on selling the hardware: the car and their simple metrics is units sold and average selling prices. Last year, 80 million cars were sold in the world at an average price of $19,000, for a total of $1.5 trillion. The mobility model places the emphasis on miles driven. Last year in total around 5.4 trillion miles were driven at an average cost of around $1, for a total of $5.4 trillion.
A total of $5.4 trillion, what does it represent? Toyota runs the biggest car business in the world with sales of about $250 billion, which shows global mobility service will be a business 20 times that size.
According to the Boston Consulting Group, about 600,000 vehicles would generate $12.3 billion in added value in China by 2021, through new mobility services including long- and short-term rental and short trips with private drivers. According to the research, the bulk of this revenue is likely to come from light users who need a car for occasional trips. While car ownership is considered to be a symbol of social status in second-tier cities and smaller towns in China, the urban population is moving towards ride sharing. However, China is still far behind compared to other Southeast Asian countries in the car sharing segment, with a 0.4 percent market penetration. This indicates that despite competition and several players looking to enter this space, there is a huge potential for mobility services providers to establish presence in the Chinese car-sharing segment. As the country looks for solutions for road congestion and pollution, ride sharing is likely to pick up in the urban areas. According to Accenture statistics currently nearly 3,000 shared cars operate in the Chinese market which translates to 0.2 out of 10,000 of the overall car ownership. In the U.S. car sharing percentage is 1 out of 10,000, which was reached after a decade of promotion. Accenture estimates the car fleet size in China to increase to 10,000 units by 2020.
Chinese young consumer in the driver’s seat
According to estimates from Goldman Sachs, people born between 1980 and 1990 made up roughly 30 percent of China’s total population in 2015. The post 80 and 90 generations are growing more urban and more affluent – and rapidly adopting new technologies. Almost two-thirds of Chinese customers shop online once a month compared with just 22 percent of customers in the U.S., according to PwC’s Total Retail Survey 2016. And more and more shop on their mobile devices. On Singles Day (China’s Black Friday) in 2016, consumers spent a total of ¥120.7 billion ($17.54 billion) on Tmall.com, the country’s largest online retailer. Consider the young, highly connected and increasingly wealthy Chinese consumer.
And these connected consumers are now turning their attention to the country’s automotive market. Already, China has the youngest premium car buyers in the world, and these tech-savvy customers are demanding connected cars at far higher rates than elsewhere. Several surveys have shown that Chinese customers are more concerned about a car’s in-car technologies than its design or performance when making purchasing decisions. According to a 2016 connected car report by PwC, they are willing to pay more as well. More than 75 percent of Chinese customers would be willing to spend more for safety features, and more than 60 percent would pay more for vehicle management features that track usage, run diagnostics and record accident data. More than 85 percent of Chinese customers in the volume segment would be willing to switch to a different brand of car if it offered more connected features at a reasonable price. These consumers rank safety-related features such as danger warning, collision prevention and emergency calling highest on the list of connected car offerings they would like, followed by such features as navigation, infotainment, e-calling and vehicle status and maintenance, according to the GFK Insights Blog.
Though car ownership is considered to be a symbol of social status in China, it’s not a big concern for the young generation. They prefer ride sharing and would be willing to change brands for better connectivity.
Who’re the big players in China in 2016?
Didi Chuxing: With over 90 percent share of the Chinese private car-hailing market, Didi Chuxing is far larger than all the other ride-hailing services providers in China. Didi Chuxing hosts 20 million rides a day in 400 Chinese cities with a monthly turnover around ¥2 billion. Didi currently has 14 million registered drivers and 300 million users across the country.
Originating from two separate taxi-hailing service platforms backed by Tencent and Alibaba respectively in 2012, they have scaled up aggressively by offering price subsidies to customers. In February 2015, they merged and have extended their service to taxi-hailing, private-car hailing, on-demand bus, peer-to-peer ride-sharing, designated driver and test driving.
On May 13, 2016, Apple announced a $1 billion investment in Didi Chuxing. As a global leader in smart connected device technology, Apple has been exploring opportunities to expand in the auto industry. It is an “open secret” that Apple is working on its connected vehicle program, codenamed Project Titan. The logic of this cooperation is quite evident: Apple has set its sights on transportation in partnership with the dominant mobility service platform (Didi Chuxing) in the world’s largest automotive market with the largest number of ride-hailing users.
Didi Chuxing has benefited from being affiliated with the world’s premier smart device company, and it has helped Didi Chuxing compete with Uber. In August Didi Chuxing acquired Uber’s China operations after a price war. It cemented its dominance in the domestic market with a worth of about ¥255.5 billion at the end of 2016.
As CEO Cheng Wei once described, “Didi Chuxing aims to create a mobile transport ecosystem that will displace private car ownership and become a part of the daily life of Chinese citizens,” it is part of Chinese people’s daily life now. More than just a one-stop mobility solutions provider, Didi Chuxing is a technology-enabled platform. With advanced technology of matching supply and demand, pricing and real-time route optimization, it is efficiently moving people and maximizing the utilization rate of vehicles. Didi Chuxing’s competitive edge also includes its big data and machine learning capabilities.
Yidao Yongche: In 2015, LeEco purchased a 70 percent stake in another Chinese car-hailing app Yidao Yongche. LeEco is a leading Chinese internet media company founded (as LeTV) in 2004 and ranking second in ride-hailing service in China with a total worth of ¥35 billion. And LeEco is also the major investor of two U.S.-based electric vehicle startups: Faraday Future and Lucid Motors, and it also presented in September last year its LeSEE super car model featuring a “subion model” where users can enjoy the flexibility and convenience of mobility on-demand without having to own the car. Understanding the importance of the charging infrastructure, LeEco also placed large investment into Beijing Dianzhuang Technology Co., a startup that builds and rents charging poles, in September 2015.
In addition to the above two big players, other automakers are also catching up by piloting mobility services, including Daimler’s Car2Go in Chongqing. BMW has also expanded its car-sharing service ReachNow into China.
In September, Volkswagen, the biggest automaker in China, said it has agreed to explore a strategic partnership with Shouqi Group Co., a Beijing-based car-leasing company. In addition, the company is in separate talks with other Chinese companies, including Didi Chuxing, to set up a ride-hailing joint venture. At Auto Guangzhou 2016 last November, Volkswagen Group China signed a mobility strategic partnership with Shouqi Group and Didi Chuxing. Volkswagen said these collaborations are an important step in the company’s move toward becoming a mobility services provider. “To reach this goal we will forge cooperation with strong partners from different sectors of the trendsetting mobility services in China,” said Jochem Heizmann, chief executive of Volkswagen China.
In similar moves, General Motors also invested in a Chinese car-sharing technology platform provider called Yi Wei Xing to gain insights on specific car sharing needs of the Chinese market.
Morgan Stanley analysts think autonomy is the tipping point and they believe shared and autonomous cars can deflate the cost per mile to as little as 20 cents, triggering a doubling of global miles travelled by 2030. At that cost, it no longer makes sense for consumers to buy vehicles. So, selling a car is no longer making economic sense. Mobility services such as ride-hailing, especially for short trips, becomes more cost competitive. The roles throughout the automotive supply chain will be regrouped, and it is critical that every player understands where it stands, and where it should be heading to capture its fair share of value in this swiftly changing market.
The mobility service market has strong growth potential in China and it’s different from the other markets in several aspects. Tier-1 cities in the region have number plate restrictions and limited parking space, and car rentals and designated chauffeurs are essential in these areas. Tier-2 cities are being considered to expand into the car sharing segment.
But as promising as the Chinese market is, and certainly will be, challenges remain. Not just for existing Chinese ride-hailing companies and tech companies, but also for every global automaker and supplier that wants a share of this huge market.
The original version of this article appeared in the April 2017 (Vol. 12, No. 4) issue of China Automotive Review (CAR), our monthly tabloid magazine in English on the Chinese auto industry.
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