Reinventing Mobility in the China Context

Building the Internet of Vehicles &

Related Smart Car Technologies

August, 2014

The China Context

2

•  Following a decade of rapid growth, the China auto market sharply decelerated on 2011 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 been spectacular, we can expect growth 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.

•  Both foreign and 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 diversify profit streams to ensure future growth.

•  The unique context of China’s urban transportation challenge, the high rate of adoption of 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 technology and related services.

China is poised to revolutionize the 21st century global automotive industry, especially in the area of the Internet of Vehicles, making mobile vehicle connectivity

the next great frontier of automotive innovation

3

Typical Mid-Sized Sedan

§  Over-engineered to meet almost all conceivable needs for transporting people and cargo over both short and long distances

–  Weighs 20x as 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

Personal Urban Mobility Device

§  Designed specifically for city-use to transport a few people and light cargo over short distances –  Lower driving speeds in cities and V2V crash

avoidance technology reduce crash protection requirements and enable smaller and lighter vehicles

§  Demand for urban 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

China’s unique urban transportation challenges could create the potential for ultra-small personal urban mobility devices

Consumers are now presented with several options to satisfy their mobility needs – driven by disruptive yet innovative service providers

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

Source: Gao Feng Analysis

4

5

Regulatory requirements for sustainable development and consumer demand preferences will drive seven technology innovation frontiers

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

6

The China government plays a key role in shaping industrial development

Government’s  Support  to  Auto  Industry  

Infrastructure  Development  

§  Government  has  been  con/nuously  guiding  and  suppor/ng  the  industry’s  development  across  manufacturing  and  distribu/on  

§  Highway  network  development  provides  founda/on  for  more  motor  vehicle-­‐based  based  transporta/on  

§  China  is  inves/ng  in  infrastructure  to  support  industry  development  

Government  is  inves9ng  to  ensure  the  con9nuous  growth  of  auto  and  emerging  technology  industries  

Vehicle    Manufactures  

Infotainment  

Facility   Tele-­‐  communica9on  

Content  Provider  Mobility  Internet  

Source: Gao Feng Analysis

7

Promoting “smart traffic” solutions is an important agenda for the Chinese government

1995  

§  The  concept  if  “Smart  Traffic”  is  first  introduced  to  China.  Mr.  Shi,  current  chief  of  China  smart  traffic  commiGee,  is  one  of  the  people  touch  this  new  concept  

1997  

§  In  Apr.  1997,  the  fist  “Smart  Traffic”  forum  in  China  is  ini/ated  in  Beijing  

2002  

§  Government  started  to  put  “Smart  Traffic”  into  the  country  development  plan  “9th  5-­‐yr  plan”.  2  small  projects  were  related  to  this  topic  

§  More  aGen/on  on  “Smart  Traffic”,    government  upgraded  the  scale  to  medium  level  project  in  “10th  5-­‐yr  plan”  

2006  

2010  

§  In  Na/onal  People  Rep.  commiGee,  government  formally  iden/fies  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

8

Infotainment System Vehicle Connection Platform Smart Traffic

-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 from China 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

And the Chinese internet giants are vying to create the ecosystem for the connected “Smart Car”

Source: Gao Feng Analysis

9

For the future auto market, mobile connectivity will be “standard” for new models which attracts players from different fields

§  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 of players 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

10

Recently, major Chinese internet services companies have cooperated with local and global automakers on IOV products

Auto Brands Internet 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

11

Aggressive internet and technology companies will rapidly develop the market and the relevant IOV technologies

Global IT firm’s focus on IOV and 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

12

Like O2O for other markets, IOV O2O will bring online customers to offline businesses

Navigator/ Map Beyond basic route navigation, information about the shopping, parking, and other surroundings will bring online customers to offline, such as Baidu Maps for Baidu CarNet

Insurance

Others

Aftermarket Service

Car owners will purchase insurance based on the driving record which can be diagnosed by the in-vehicle system

Embedding aftermarket service information into in-vehicle systems will be an efficient connection for both car owners and service providers

IOV applications will be the extension of today’s mobile device O2O Apps, which will be also an major extension of e-commerce

For future, more O2O applications will be developed once the IOV products become

more completed and more widely used, and currently this

is still an emergent market

Functions of IOV O2O for Future

IOV O2O Functions for future

O2O

Source: Gao Feng Analysis

O2O = Online to Offline

13

Currently many major Asian and Western auto OEMs are focusing on mobile connectivity and IOV (1/2)

§  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 Intouch MZD Connect

Asian OEM’s Work on Mobile Connectivity and IOV

Source: Gao Feng Analysis

14

Currently many major Asian and Western auto OEMs are focusing on mobile connectivity and IOV (2/2)

§  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 SYNC AppLink technologies, and allowed consumers to control their favorite smart phone apps through voice commands

Ford

Onstar SYNC iDrive

Western OEM’s Work on Mobile Connectivity and IOV

Summary & Conclusion:

•  A structural shift of economic power from West to the East is taking place, with stunning economic growth most evident 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, especially in the densely populated urban centers in China.

•  As the leading automotive market, China is poised to revolutionize the global automotive industry, especially in the area of the Internet of 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 commercial aggressiveness of China’s internet giants

will create conditions conducive to the rapid commercialization of smart connected car technologies.

Such developments will dramatically alter not just feature content of vehicles, but also usher in a revolution to the business model of the automotive industry

15

16

Gao Feng’s heritage and our deep roots in China

§  Our name Gao Feng 高風 is taken from the Song Dynasty Chinese proverb Gao Feng Liang Jie 高風亮節

§  Gao Feng denotes noble character while Liang Jie refers to a sharp sense of integrity

§  We believe this principle lies at the core of management consulting – a truly trustworthy partner who will help clients tackle their toughest issues

§  Officially launched on April 1st, 2014, Gao Feng is a pre-eminent strategy and management consulting firm with roots in China and global vision, capabilities, resources and network

§  Specialized in helping clients to address their most difficult and strategic issues, e.g., game-changing strategy, alignment of global operating models with local China conditions, addressing transformational needs and challenges, bridging gaps across different cultures for effectiveness, and assisting Chinese companies to become international

§  Examples of high-impact work led by our team of experienced advisors: -  Organization and process design for leading luxury auto OEM -  Due diligence on Chinese business operations for a leading Japanese OEM -  Commercial vehicle entry strategy for a leading commercial vehicle maker in China -  China strategic planning for a major global automotive parts supplier

17

Please feel free to contact our automotive team leaders: Bill Russo Managing Director and Auto Practice Leader bill.russo@gaofengadv.com Edward Tse Founder and CEO edward.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