China’s automotive industry has entered an age of unprecedented disruption powered by vehicle ACES (autonomy, connectivity, electrification, and shared mobility) standards; carbon neutrality commitments; and carbon peak goals. This continuous progress in regulation, technology, and commercialization is paving a fast track for the development of autonomous driving, which is a key area for intelligent and connected vehicles (ICVs). Automotive OEMs and suppliers should revisit their autonomous-driving strategies—including their development paths, ecosystem architectures, and talent planning—so as not to miss this critical window of opportunity.
Autonomous driving will disrupt people’s usual mobility patterns and choices. Debates about a new technology are normal when its prospects are uncertain, and governments, OEMs, suppliers, consumers, and institutional investors that have been closely following the autonomous-driving trend have presented diverse opinions on when and how it will become a reality. After in-depth monitoring and analysis of related industrial chains, we believe China’s autonomous-driving industry will accelerate over the next three years.
Clear regulatory frameworks and local governments have been taking the wheel
Technological breakthroughs have led to increasingly sophisticated autonomous-driving vehicles. Level 3 (L3) vehicles are conditionally automated, which means they can perform automated dynamic-driving tasks, although a human must be ready to take over within seconds. L3-ready vehicles, however, differ in that they have the hardware installed to perform Level 3 functionality, but that functionality is not yet activated. This could be because the software is not yet fully validated or because regulation for that functionality is not yet in place. Level 4 (L4) vehicles, or highly automated vehicles, can drive completely autonomously in designated areas, such as highways, and bring themselves into a safe state in case of a system failure. A human driver is not required to take over the vehicle, but they are still required to drive if the vehicle leaves its operational design domain (ODD).
Strategies to integrate these vehicles on the streets have already been set in motion. In 2020, China’s National Development and Reform Commission, the Ministry of Industry and Information Technology (MIIT), and 11 other ministries and commissions jointly issued a strategy for the innovative development of autonomous vehicles, which set the following goals for 2025:
- Intelligence. The large-scale production of L3 vehicles and the market launch of L4 vehicles in selected scenarios will be realized.
- Connectivity. Long-term evolution vehicle-to-everything (LTE-V2X) area coverage will be realized, and fifth generation–V2X (5G-V2X) network coverage featuring high-precision space-time benchmarks will be enabled in some cities and on some highways.
- Standardization. A set of Chinese standards for autonomous driving will be fairly comprehensive.
In July 2021, MIIT issued opinions on market access for ICVs and products, laying a foundation for the mass production of L3 and L4 autonomous vehicles.
Local governments at all levels also strongly support autonomous driving. By the end of 2021, local governments had built more than 20 new ICV test zones and had designated more than 3,500 kilometers of road for autonomous-car testing. Governments also created regulatory pilots that integrate market access, data security, accident handling, and design specifications in their tests.
More importantly, the regulatory system is getting more sophisticated. To develop autonomous-driving laws and regulations, the central government sets an agenda for local governments, which is implemented through pilots. Governments subsequently use the information gathered in these pilots to create policy.
On this point, local governments can take a pragmatic approach when promoting and optimizing regulatory systems. For example, when the Shenzhen Municipal People’s Congress passed the first law in China regarding autonomous driving, it ensured end-to-end regulatory coverage during testing and provided a yardstick for determining responsibility in traffic accidents.1 This approach has led to greater legislative support: on August 1, 2022, Shenzhen permitted self-driving cars on the road, a milestone in the development of autonomous-driving technology.
Chinese consumers remain enthusiastic about autonomous driving
Consumer acceptance in China has continued to be shaped by the accelerated adoption of ICVs and the increasing accessibility of autonomous-driving fleets. The December 2021 McKinsey Center for Future Mobility (MCFM) survey shows that Chinese consumers are more likely than Western consumers to embrace autonomous driving, more enthusiastic about autonomous functionalities, and more willing to pay—all of which has culminated in a high interest in purchasing L4 pilot vehicles (Exhibit 1).2
The fast expansion of China’s electric-vehicle (EV) market in 2021 raised consumers’ perceptions of autonomous driving to a new level. EVs have more potential to accommodate autonomous functionalities than internal-combustion-engine (ICE) vehicles, and by the end of 2021, the penetration rate of EVs in China had exceeded 20 percent. New entrants and local premium new-energy-vehicle (NEV) brands have enabled the mass production of L3-ready vehicles loaded with high-definition maps, AI chips, and light detection and ranging (LiDAR), which remotely senses distances using lasers. This has driven the retail price of L3-ready vehicles down to about 200,000 to 300,000 renminbi.3 2022 has already marked the beginning of the mass production of L3-ready vehicles in China.4
Since 2020, the trial operation of robo-taxis has occurred in several ICV demonstration zones in Beijing and Shanghai, triggering strong consumer enthusiasm. And by 2021, various tech and mobility companies had launched trial versions of robo-taxis. In the ICV demonstration area in Anting, Shanghai, for example, at least four autonomous-driving companies have commercially road tested between 100 and 200 cars, which is estimated to be more than 10 percent of local e-hailing vehicles.
Our field study shows that Anting residents have become accustomed to robo-taxi services. Traditional cabs still queue up for passengers along the roadside, but today, customers can choose to hail a robo-taxi through a mobile app. The town now averages more than ten daily orders for self-driving cabs, catching up with other e-hailing cars. Furthermore, our field study in Suzhou found that a provider of shared-mobility services has begun to generate revenue from its robo-taxi pilot by charging customers for rides. Although the service is still building publicity, curious and interested consumers have already made a significant number of orders.
A complete, local autonomous-driving ecosystem is in place to support technology stack development
A lot of software and hardware technology stacks are needed across the autonomous-driving industry value chain, and each one can be an opportunity for local vendors. Some businesses have already grown strong enough to be tier-one or even tier-0.5 suppliers in the core value chain. Meanwhile, several local vendors in areas such as core algorithms, LiDAR, and AI chips have become leading international players.
In the field of private autonomous vehicles and robo-taxis—as well as in commercial application scenarios for advanced driver assistance systems (ADAS) such as line-haul logistics, ports, and mines—Chinese start-ups continue to emerge.
Some start-ups may face difficulties commercializing their products in the short term, but China’s local start-ups may grab more opportunities in the global competition as application scenarios grow.
OEMs are at the center of this rapid change. OEMs must act quickly to identify their strategic position in the autonomous-driving landscape and create plans regarding the three critical issues outlined below. In turn, suppliers of technology stacks must closely follow the changes in their OEM clients’ decisions.
The strategic focus of autonomous-driving engagement
The entire industry recognizes the importance of autonomous driving, but its strategic role for different OEMs may vary. OEMs must first define the overall strategic focus of their autonomous-driving engagements. Is autonomous driving at the core of a company’s competitive edge, a must-have to stay in the game, or something in between? OEMs must give a well-defined answer before considering the three priorities that follow, which might lead different OEMs to diverge vastly in designing their strategies.
But before L4 or higher vehicles can hit the road, OEMs need to base their strategies on customer experience. They must map out concrete approaches to develop and differentiate their own autonomous-driving features from competitors. For example, they may distinguish their cars from competitors’ by designing for the application scenarios and operational design domains of a target audience, rather than implementing technological features indiscriminately.
Priority one: Strategies to develop L3 and L4
In the short run, development programs for L3-ready and L3 vehicles must be aligned with go-to-market time arrangements and regulatory requirements (Exhibit 2). L3-ready vehicles started hitting the road in July 2022. This means that OEMs need to act fast to reach the critical window against the competition if they haven’t already begun to localize imported algorithms or conduct independent R&D. They may consider making procurement and commercial cooperation strategies or embedding hardware based on time-to-market arrangements. As of July 2022, the Chinese government hasn’t been clear about L3 regulations, so OEMs must follow regulatory moves closely.
In the long run, L4 vehicle developers must pick a path that suits their own situation. OEMs may start with ADAS and proceed from there, or they could simultaneously deploy robo-taxis and carry out independent R&D using robo-taxi data to develop L4 autonomous driving. Each OEM needs to consider its strategic focus and its technical capabilities in a comprehensive assessment of the pros and cons of the two approaches.
- A step-by-step journey, starting from ADAS. An OEM may develop ADAS as a competitive advantage for a specific product while collecting data, either through independent research or close cooperation with partners, to iterate algorithms. However, in the long run (more than five years), when robo-taxis hit the road, the company will face the challenge of changing mobility patterns and their impact on private-vehicle sales.
- Two parallel approaches. OEMs can develop L4 vehicles through independent R&D when the technology is more mature and offer robo-taxi services to fund L3 vehicle R&D. The development potential of robo-taxis is immense, and planning in advance can provide a head start. However, currently, independent R&D for L4 vehicles tested via robo-taxis requires significant investment, and the outlook of its commercialization is not clear in the short term.
Priority two: Strategies to build an ecosystem of autonomous driving in China
Constructing an autonomous-driving ecosystem is critical because it supports OEMs in becoming product leaders and creating differentiated experiences. The challenge for OEMs will be to build a symbiotic partnership to bring about win–win outcomes. For example, OEMs need to address how they will redefine rules for suppliers and procurement and how they will make data open and accessible while protecting intellectual-property rights. Some OEMs have partnered with algorithm vendors to find a common path of development. While friction is inevitable going forward, we believe it is possible for these partnerships to find the right path because all parties share the same goal of cobuilding eco-capacities and disrupting traditional transportation.
In addition, for global OEMs, the autonomous-driving technology stack needs to be localized to different degrees depending on the legal and regulatory requirements, consumer habits, road conditions, and infrastructure plans in China. OEMs should design autonomous-driving solutions based on their own focuses and strengths (Exhibit 3) while considering the possibilities of independent R&D, local cooperation (such as strategic partnerships, strategic investment, joint ventures, and M&A), or sourcing so they can maintain their product competitiveness in the long run. For China’s local industry value chain, there are new opportunities: foreign OEMs and suppliers may leverage their presence in the Chinese market to engender global competitiveness in autonomous driving, and local suppliers can also take the chance to enter the overseas market.
Priority three: Strategies to compete for talent
There is a large shortage of autonomous-driving talent around the world, and top talent is increasingly becoming globalized. The shortage is expected to range from 13,000 to 37,000 people by 2025. Some OEMs continue to scout talent at home and abroad, and their autonomous-driving teams have each hired more than 1,000 people, further intensifying market competition. Companies with high expectations for independent autonomous-driving R&D need to recruit talent and train their teams as early as possible (Exhibit 4).
Considerations for suppliers
OEMs are fostering rapid development of the autonomous-driving industry, which provides a big market for suppliers. However, OEMs’ definitions of autonomous-driving strategies and their approaches to the three strategic priorities will have a profound impact on suppliers. Suppliers must undertake in-depth analyses of these approaches, iterate their strategic decisions, and keep advancing their technical capabilities, all while keeping the following issues in mind.
Positioning in the value chain
Suppliers have many questions they need to answer in the short term. For example, suppliers must ascertain the implications of OEMs’ current strategic decisions for their long-term business growth. For the customer base, they must determine if their core selling points involve mainly autonomous driving or some other feature. Given the significant trend of OEMs increasingly investing in independent R&D, it is uncertain whether external suppliers will survive in the long run. Suppliers should consider whether they can move from being a system solution provider to being a module provider for a specific technology stack—or whether they should seek to gain customers whose strategy in autonomous driving is to follow trends rather than lead them. Suppliers could also ask themselves whether they should expand their value chain coverage to become robo-taxi companies.
Business and operating models and iteration
Suppliers must make necessary adjustments to their businesses and operating models, choosing different models for each type of OEM based on a clear focus on the value chain. They must consider where to position themselves along the supply chain—tier one, tier two, or tier 0.5. They must also learn to handle the “friend and foe” relationship with other parties in the autonomous-driving ecosystem and realign commercialization, post-delivery maintenance, and other specific activities accordingly. Finally, suppliers need to address requirements and challenges for the organizational structure, talent team, and capabilities to support these changes.
China has several factors in place to successfully develop autonomous driving, including active regulatory support, enthusiastic consumers, a complete industrial chain, and ambitious local start-ups and OEMs. As autonomous driving becomes a reality, the companies in China’s industrial chain can strategically position themselves to play a part in creating a safe, convenient, and accessible future for drivers.