Lessons Learned from Chinese Automakers Retaking the Domestic Connected Car Market from Foreign OEMs

Traditionally, Chinese original equipment manufacturers (OEMs) operated as merely manufacturing sites to their foreign Joint Venture (JV) partners. They became more self-dependent in the past five to ten years and started looking for ways to compete against their incumbent Western counterparts, often embracing Electric Vehicle (EV) technologies. Largely due to strong government support, the country has seen a boom of EV startups, such as NIO and BYD, offering high-tech vehicles with cutting-edge in-vehicle experience and sophisticated connected vehicle services tailored to regional preferences.

Not long ago, foreign OEMs would bring their global solutions to the Chinese market with only minor modifications to maximize efficiencies and reduce costs as much as possible. However, the strong and sometimes superior local competition has forced incumbent foreign players to reformulate their strategy or exit the market.

Government support played an important role in nurturing the local automotive industry. However, the factors behind the success of Chinese carmakers go beyond that. As these carmakers had no legacy to maintain, they could easily invest in vehicle architectures that allow for sophisticated IVI (in-vehicle infotainment) applications and user experience, which are vehicles' main selling point in China. Integrated digital cockpit is now prevalent in the Chinese market, and the migration to domain controller and zonal architecture is faster than in other regions.

Aware that customers expect car companies to behave like mobile companies, Chinese OEMs developed a uniquely fast software development cycle, delivering new features at a similar speed to the mobile market. While development cycles last around three years in other countries, Chinese OEMs, such as NIO, have shortened it to 18, 12, or even 9 months. They achieve that by:

• Delivering the IVI system development to the most prominent Chinese internet companies such as Baidu, Alibaba, and Tencent (BAT) and increasingly relying on their instant/mini-program app ecosystem (e.g., Tencent WeScenario) that considerably speeds up development.
• A distinctive organizational set-up resulting from software engineers hired directly out of the mobile world, long working hours, and agile structure.
• Willingness to launch software before it reaches its final version and provide optimization via Over-the-Air (OTA) updates.

Moreover, the proximity with internet giant companies, often avoided by its Western counterparts, allows Chinese OEMs to offer IVI systems with a smartphone-like interface and popular smartphone applications (e.g., WeChat, QQ Music, and Alipay) tailored to local preferences and needs. These internet giants not only have a large ecosystem of local services providers but an even larger end-user base (WeChat currently has one billion users) that the Chinese OEMs expect to attract by offering their applications.

Brand reputation has proven not enough to compete against local players in China. Hence, traditional foreign carmakers in China are being forced to emulate some of the unique features of Chinese OEMs to remain competitive. They are abandoning the mindset of offering global solutions with minor modifications to offering IVI systems customized to Chinese preferences. To do so, companies like BMW and Audi engaged in partnerships with Tencent, Baidu, and Alibaba, something they are still reluctant to do in other countries.

Nevertheless, they still have to catch up with the fast development cycles and quick time to market. To speed up development, they must:

• Avoid enforcing non-Chinese legal frameworks and business practices, such as delivery schedules, maintenance, and documentation practices.
• Tailor company processes to fit the speed of China, including being flexible concerning proofing time.
• Work with a Minimum Viable Product (MVP) approach (i.e., a product with just enough features to be usable by early customers who can then provide feedback for future product development) to quickly identify whether a solution is fitting to the Chinese environment and the critical problems to address before release.
• Make investments to speed up the migration to digital cockpit controller architecture with enough headroom to allow for OTA updates, despite their legacy architecture.
• Convert their mindset from a one-time product sell to an operation model, meaning to push out products with unfinished software or reduced feature sets, and provide software optimization OTA after the vehicle sale.

So far, Suzuki and Renault have exited the passenger vehicle segment in China in 2018 and 2020, respectively, due to low sales. More foreign OEMs risk joining this group if they cannot quickly adapt to the local market dynamics.

Many successful Chinese carmakers, especially EV OEMs, are looking to expand abroad. While their first regions of choice are other emerging economies, more and more are looking to expand to Europe and North America. Thus, the next step is to take the competition to the foreign OEMs' home markets. Xpeng, BYD (both of which are already in Norway), SAIC (which purchased the British brand MG), Geely/Polestar (which is already well established in Europe), Nio, and BAIC are some carmakers to watch.