5 reasons why automotive innovation will shift to China

Original article can be found here (source): Artificial Intelligence on Medium

5 reasons why automotive innovation will shift to China

A company visit at Mobility Asia (Volkswagen China)

Looking into the future of automotive innovation globally, there are few places to visit as Volkswagens in 2017 established subsidiary for smart mobility, Mobility Asia. The company develops digital solutions for both captive and non-captive partners. The solutions developed by Mobility Asia include everything from charging, parking, payment, navigation to voice recognition, that tech-savvy consumers will expect in the future.

Mobility Asia is a striking example of how China developed first from a manufacturing hub to a consumer society and now to a source of innovation for foreign companies. It is furthermore a response to the changing landscape of the automotive industry. As a senior manager working in the automotive industry in China said, “today it is not the engineering of the engine, but digitization that creates consumer value”. Thus, Mobility Asia is a response to stop outsourcing digital innovations to automotive suppliers or leave the playing field to tech companies) and to develop own digital capabilities.

How Mobility Asia operates

Mobility Asia is not what one would expect within a traditional multinational organization such as Volkswagen Group, which globally generated revenues of $265 billion in 2017. The subsidiary takes the second floor in a hip shared office space owned by the largest shared office space provider WeWork. In the first floor, employees can mingle with entrepreneurs and can freely access Italian coffee and beverages. Employees can even sign up for Yoga classes.

The employees are mostly in their 20s and 30s and have previously worked in Chinese tech companies including Alibaba (the largest e-commerce company in China), Baidu (the largest Chinese search engine) and foreign companies including McKinsey (a Management consultancy) and IBM. Hierarchies are flat, and the teams are organized within teams of 8–10 people focused on one development area (e.g. parking) acting as quasi startups within the firm. Following the so-called scrum method, the teams are developing several products in two-week intervals which are consequently pitched to senior management and colleagues.

When asking employees why they decided to join the firm, it is particularly the impact they have on shaping future products. The development of the connectivity services applications of the infotainment system for the new electric vehicle series produced by Volkswagen Group China only took six months and Chinese consumers will be able to access a broad bundle of functionality including voice recognition and effortless smart parking, i.e. parking will be automatically paid. Additionally, consumers will receive recommendations for the activities they can pursue during the time of charging their vehicles.

The drivers behind the shift of automotive innovation to China

1) China represents the largest automotive market globally.

The likelihood of recouping the initial costs for R&D are significantly higher in a larger market like China, as even a small percentage of market share translates into a larger potential scale and thus lower costs per unit. In 2017, 24.72 million passenger vehicles were sold in China compared to 17.13 million in the United States and 15.63 million in the European Union.

2) China produces the by far largest technology workforce while significantly increasing the quality of its labor force.

China produced 4.7 million graduates in science, technology, engineering and mathematics (STEM), which is more than in any other country in the world. The figure is more than eight times the figure in the United States (568,000) and 24 times the figure of Japan (195,000). Chinese universities are constantly improving and some institutions such as Tsinghua University are ranked among the leading institutions in engineering and computer sciences globally. Next to the academic system, China’s large technology industry, 9 out of the 20 most valuable technology firms globally are located in China, is a breeding ground of a large workforce equipped for developing cutting-edge technologies.

3) The central government supports the research and development of automotive companies.

To a large extent, the policies of the central government fuelled the development of the automotive industry in China. During the Chinese economic reforms in the late 1970s and 1980s, foreign companies were mandated to form joint ventures with Chinese companies. Later, high tariffs were applied to cars which succeeded a certain percentage of foreign-supplied components. Today, a specified percentage of research and development has to take place in China, which necessitates the operation of R&D activities in China, if automotive companies want to continue to access the Chinese market.

4) Chinese consumers are more tech-savvy than consumers in most Western societies.

In 2017, Chinese consumer spending through Google Play, the iOS App Store, and third-party Android stores amounted to $33 billion, which is equal to 38% of the global market. Only in the last two years spending increased by 270%. The high expenditures are fuelled by the large number of Chinese smartphone users is not only fuelled by the enormous number of smartphone users in China, 775 million (2018), but also by the high usage of smartphones in China. Compared to the global average of 80 apps people downloaded on their phones, Chinese consumers have on average over 100 apps on their phones. Additionally, they spent more time in apps than most other countries, with a total of 225 billion hours in 2017.

5) The quickly evolving university landscape drives automotive innovation

The times in which China’s university education lacked behind to international standards is over. Today, already several universities including Tsinghua University, Peking University and Fudan University rank among the top 50 universities globally. Especially, in technological disciplines, e.g. computer science and engineering Chinese universities fare well, with Tsinghua University being ranked number 1 in both the disciplines globally. An example is Volkswagen, which donated several chairs at Tsinghua University and engages in a range of R&D and hiring partnerships with the university.