by Bill Russo and Edward Tse

Over the past several years, app-based digital services have exploded in China, with its over 800 million mobile internet users.  China’s digital economy is providing affordable and convenient access to products and services, which typically involve some form of people and/or goods movement.  This presents a new challenge to the traditional automotive industry and its very deeply rooted business model, with its reliance on retail sales to individual car owners.  In mature markets like the United States, 90 percent of households have access to a personally owned vehicle.  This is not the case in China or any other emerging market, where far more people ride than drive.

Several discontinuities are now particularly evident in China:

• Rapid expansion of mobile internet usage which is changing lifestyles and creating a surge in demand for digital services
• Digital disruptors with strong ecosystem capabilities have emerged as new participants in the “Internet of Mobility” value chain
• Mobility-On-Demand (MOD) services have become a new entry point for serving mobility needs in a market where riders far outnumber drivers

In our recent article Competing in the Digital Internet of Mobility[1] we explained how the automotive value chain is being transformed by new technology, and how disruptive new entrants are utilizing big data to draw insights about users of mobility devices in order to offer new solutions based on their movements and digital consumption patterns. In this article we also introduced the Internet of Mobility (IoM) Stack framework illustrated in Figure 1.

This new “Digital Internet of Mobility” business model has fundamentally altered the value chain of the automotive industry and shifted power from the supply-side (carmakers and suppliers) to demand-side (mobility and digital services) aggregators. Demand aggregators such as Didi Chuxing and Alibaba’s Cainiao focus on the delivery of services and seek to eliminate the inefficiencies associated with moving people and moving goods.  Such platforms deploy solutions which dynamically match services demand with equipment supply, thereby optimizing asset utilization, while minimizing the total cost of operation of their fleets. Commercialization of ICV (Intelligent Connected Vehicles), EV (Electric Vehicles) and AV (Autonomous Vehicle) technology is accelerated based on its favorable impact on the economics of the digital services ecosystem.

Figure 1:  Internet of Mobility Stack

Traditional automotive brands are supply aggregators with infrequent (measured in years/months) transactional relationships with owners, and offer a limited range of revenue generating services beyond those related to the ownership experience. These “Old Game” automotive players monetize at the sale or during service of the hardware.

Demand aggregators have a frequent (measured in days/hours) transactional relationship with their service users, and learn from their “big data” consumption including their mobility patterns to enable delivery of customized and differentiated services. These “New Game” players monetize based on the utility derived from the hardware, usually in the form of pay-per-use mobility and other digital services enabled by the smart hardware platform.

In markets like China, where prospective customers do not have a multi-generational habit of car ownership and where the consumption of app-enabled services are growing exponentially, this creates a tremendous opportunity to profit from the “New Game”.  However, in such a game, China’s digital ecosystem players have an absolute competitive advantage in capturing digital services revenue growth. In addition, the shift toward MOD likely favors local carmakers who would likely have deeper business-to-businesses (B2B) and business-to-government (B2G) relationships with local fleet management businesses, mobility service providers, mobile businesses, other services-based companies, and local city governments.

The new “automobility” business model is altering the traditional industry profit model where profits rely on new unit hardware sales, towards a future where revenue and profits are increasingly derived from the top of the “Digital of Internet Mobility” Stack.  We anticipate that by 2030, profit opportunities will shift from the physical hardware to the digital services (see Figure 2).

Figure 2:  Internet of Mobility Profit Opportunities

The Rise of Autonomous Mobility on Demand (AMOD) in China

China is moving faster than the rest of the world towards shared mobility and is evolving with unique characteristics.  The rapid embrace of app-enabled services, along with far lower per-capita car penetration than in mature markets, have made MOD far more disruptive to traditional carmakers in China than in most other countries.

In addition, demand-side aggregators are seeking to eliminate inefficiencies associated with moving people and moving goods, seeking to deploy solutions which dynamically match mobility demand with equipment supply, optimize asset utilization, and minimize total cost of operation of assets in service.

As a result, China’s digital ecosystem players including Baidu, Alibaba, JD, and Meituan are investing heavily in technologies that enable Autonomous Mobility on Demand (AMOD) in order to expand their user base and attack inefficiencies in their demand fulfillment processes.  These economic forces are unlocking a massive wave of investment from digital players and their investment partners into Connected, Electric and Autonomous vehicle technologies, aimed at eliminating these inefficiencies and increasing the productivity of mobility devices deployed in service fleets.

AMOD platforms with new form factors that are purpose-built for goods and people movement were featured in our article titled Reshaping the Future of Mobility[2].  Autonomous technology attacks the inherent inefficiency of the IoM business model by eliminating dependence on driver availability, reducing driver and vehicle operating costs, while simultaneously freeing up the design orientation from a driver cockpit to a productive space for moving people and things.

We believe AV adoption for goods movement will develop faster than for people movement due to the need for China’s digital ecosystems to maximize asset utilization and minimize order fulfillment time, along with the lower occupant safety risk inherent with goods transportation leading to a more favorable set of AV regulations.

The rise of AMOD devices for people movement will require more time to develop, but we believe their penetration into the car population will eventually reduce unit sales significantly beyond 2025.  We believe expanding unit sales of shared autonomous vehicles could reach parity with a declining consumer market for owned vehicles by 2030. In our view, a ~30 percent penetration of shared by 2030 will contribute 70% of the passenger distance traveled (measured in passenger kilometers of movement or PKM) (see Figure 3).  We believe that virtually all of MOD services will be replaced by AMOD by 2040 due to favorable economics resulting from higher asset productivity and lower operating cost.

Figure 3:  Shared Mobility Impact on China Sales and Car Population 

Goods Movement: The Fast Path to AMOD Commercialization 

As previously noted, we also expect to see experimentation and adoption of AV technology in goods movement faster than for people movement. Typically, it is much more attractive for traditional carmakers to focus on AV technologies for people movement, as most branded car sales are through traditional retail channels (B2C) to individual car owners. However, we believe goods movement AMOD will commercialize faster for several reasons:

• The economic benefits of higher asset productivity that accrue to China’s digital ecosystem players, causing their investment in new AMOD form factors
• The willingness of these digital ecosystems to deploy capital and experiment in AV technology, backed by deep-pocketed investment partners
• Lower safety and regulatory hurdles for transportation of goods
• More predictable routes for goods movement with higher potential geofencing
• Simpler top hat designs and lower manufacturing costs (due to savings from cabin-related costs and increased hauling efficiency)
• Higher asset utilization versus people movement creating better economics

Most traditional carmakers have not yet pivoted to focus their AV development on goods movement.  However, we are already seeing evidence in China of AV solutions providers such as tuSimple, UISEE, Pony.ai and AutoX, who are prioritizing the commercialization of AV solutions with a focus on goods movement (see Figure 4).

Figure 4:  Chinese AV tech companies (and their partners) 

Competing in China’s AMOD Future 

As the world’s largest car market and the engine for growth for the auto industry over the past two decades, the implications of the new business model and power shift cannot be overstated.  Original Equipment Manufacturers (OEMs) must become Transportation Solution Providers (TSPs) and build a Chinese ecosystem to secure a competitive position in the AMOD future, while extending capabilities by also joining smart city ecosystems.

Simply stated, new vehicle sales will shrink as more of the car population becomes penetrated with more productive, shared mobility devices.  Car ownership will still exist but be a narrowing lane for a more “gentrified” class of car enthusiasts who seek to retain the personal ownership and driving experience.  We see this lane being occupied by a smaller number of brands offering a more premium value proposition.  Beyond 2025, the only growth will be in the segment of AMOD devices that are purpose-built for people or goods movement as well as other use cases such as new retail, medical, hospitality and other services that can be migrated from fixed brick-and-mortar to mobile platforms.

To compete in this market in China, AV solution providers must understand the requirements for participation in China’s intelligent transportation and smart city development, and tailor their solutions to the requirements of the local market.

In an increasingly bifurcated global technology world, we also expect local sources of AV technology such as vehicle to infrastructure (V2I), smart city data, and AV platforms to develop.  In China, local governments are actively promoting and supporting the development of smart cities, which follow a layered structure which includes a smart city infrastructure and network systems, backed by a “City Brain” that collects and analyzes data from public utilities, such as the transportation network, infrastructure and other city services, including an ecosystem of businesses (see Figure 5).

Figure 5:  Three Layer Smart City Model in China

China will invest in smart city infrastructure and we can expect that local municipalities will actively regulate mobility and promote “localized” champions.  Partnering with municipalities at the local level will become the key to the future development and adoption of AV technologies.

To capture growth and remain relevant in the race to the AMOD future, carmakers and AV tech companies must be prepared to participate in these smart city and smart infrastructure development projects and be willing to tailor their solutions to the Chinese market.

There is a very bright future ahead as the industry is transformed by technology.  However, traditional industry must be willing to adapt and embrace a new and more collaborative approach that brings relevant connected, electric and autonomous vehicle technologies to a market that will be increasingly influenced by the choices and preferences of digital service ecosystems operating in a smart city and transportation environment where service users are less likely to choose their mobility device.

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About Automobility 

Automobility Limited is a strategy and investment advisory firm helping its clients to create the future of mobility. Mobility needs, previously satisfied through product “ownership”, are increasingly being served through mobility services “usership” with profound implications not only for traditional businesses within the value chain, but also for new entrants – as they compete to deliver services. Connected mobility, which we define as “technology-enabled on-demand mobility services for moving people and goods from point A to B”, has become a disruptive, paradigm-changing development in the automotive industry. It requires a complete rethinking of the way to deliver value to the market. To succeed, companies must expand their focus from the product (the automobile) to the utility derived from the product (“automobility”), and create a business model and digital ecosystem optimized to provide digitally enabled solutions for both car owners and mobility services users.

About Gao Feng Advisory 

Gao Feng Advisory Company (www.gaofengadv.com) is a professional strategy and management consulting firm with roots in China coupled with global vision, capabilities, and a broad resources network.  We help our clients address and solve their toughest business and management issues — issues that arise in the current fast-changing, complicated and ambiguous operating environment. We commit to putting our clients’ interest first and foremost.  We are objective and we view our client engagements as long-term relationships rather than one-off projects.  We not only help our clients “formulate” the solutions but also assist in implementation, often hand-in-hand.  We believe in teaming and working together to add value and contribute to problem solving for our clients, from the most junior to the most senior.

About the Authors 

Bill Russo is the Founder and CEO of Automobility Limited. His over 35 years of experience includes 15 years as an automotive executive with Chrysler, including 14 years of experience in China and Asia. He has also worked nearly 12 years in the electronics and information technology industries with IBM and Harman. He has worked as an advisor and consultant for numerous multinational and local Chinese firms in the formulation and implementation of their global market and product strategies. Bill is also currently serving as the Chair of the Automotive Committee at the American Chamber of Commerce in Shanghai.

Contact Bill by email at [email protected]

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company.  A pioneer in China’s management consulting industry, he built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years.  He has consulted to hundreds of companies – both headquartered in and outside of China – on all critical aspects of business in China and China for the world.  He has also consulted the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas.  He is the author of over 300 articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version «创业家精神»).

Contact Dr. Tse by email at [email protected]

[1] Competing in the Digital Internet of Mobility, by Bill Russo, Bevin Jacob and Edward Tse

[2] Reshaping the Future of Mobility by Bill Russo, Bevin Jacob, Emily Wang and Amber Shu