Automotive R&D Ecosystem in China: The Road Ahead

14 Dec 2017
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Rishabh Saraswat

Consultant DRAUP

Automakers around the globe are investing in, and taking substantial strides ahead in connectivity, electric cars and self-driven cars. However, the industry has a long way to go to achieve a globally distributed R&D footprint. The world’s largest automotive market, China, has been a central attraction for global automakers for sales, but there still exists a plethora of unexplored R&D potential in this region. With strong growth in engineering talent located in Shanghai, Beijing and Guangdong, China is poised to become an auto R&D hub.While traditional engineering hubs like Michigan, Japan and Western Europe have strong R&D infrastructure, they face challenges when it comes to scalable skilled talent hiring and new regulations for pollution norms. It is becoming clear that a localized R&D system is not sustainable in the long run. The saturating engineering talent in western countries is increasing the R&D cost of innovations like Electric Vehicles. The efforts of European automakers to increase their presence in Poland and Romania have not been too successful in offsetting costs levied by EU pollution standards, due to the limited engineering capability of these regions to deliver globally.

To answer this innovation logjam, automakers are expanding their R&D presence to scalable locations like India and China. DRAUP did a study on Global R&D spenders, to analyze the maturing automotive R&D ecosystem in China, which is witnessing increasing investments in cities like Shanghai and Beijing. The study showed that while the engineering capability of China is still not as strong as traditional hotspots like Michigan, Asia has observed tremendous automotive R&D growth of 75% since 2008, putting it ahead of North America, Europe and Japan. The major share of this R&D spend goes to China, reaching $12 billion in 2015.

The Automakers in China continue to embrace their mature global R&D capability across traditional areas like body engineering, powertrain and infotainment. In a race for agile process development through digital transformation, they are augmenting their traditional capabilities with local software and embedded talent. There is a significant shift in the center of gravity of the industry’s R&D activity towards China, with a total of 84 centers established here in the last 12 years. More and more MNCs are shifting their R&D decision making centers i.e. the Hubs and Satellites, closer to the Chinese market. This is evident from the fact that 8 Engineering Hubs and 39 Satellite R&D centers were set up in China during this period.

Given the promise of such a disruptive ecosystem, automakers are investing heavily in China. GM in China has set up an Advanced Technical Centre (ATC) which is similar to its facility in Detroit, and has hired 300 engineers in Shanghai. This will support GM’s operations around the world. European peer Daimler has employed nearly 100 engineers for its technology focus on advanced Machine Learning and Driver Assistance, in Beijing. BMW has set up a technology tracking center in Shanghai to keep a close eye on disruptors with a high focus on identifying and testing prototypes, and transferring viable prototypes to production. In the past 3 years, automakers have extended the R&D pipeline into Tier-2 cities like Guangdong and Jiangsu. This is to combat pressures of high costs and competition in Tier-1s for new age software skills, from Chinese Internet companies like Baidu & Tencent. Average salaries in Tier 2/3 cities are 20–30% lesser as compared to that in Tier-1 cities. Bosch and Continental have highly leveraged engineering talent working out of these low-cost locations.

The ecosystem led by start-ups, universities and accelerators has opened new business opportunities such as alternative ownership and ridesharing. China is a close second to the US for automotive start-up investments, and has always been at the forefront of new age technologies. Internet and tech giants like Baidu and LeEco are investing heavily in Electric vehicles, Mobility and Driver Assistance. Baidu is determined to develop its own Electric car. LeEco has not only invested in US-based Electric vehicle start-up Faraday Future, but has also partnered with Aston Martin and unveiled its electric concept vehicle in the Beijing auto show last year. Ride-sharing start-up Didi Chuxing books over 11 million rides a day and has significant R&D focus on using advanced Machine Learning algorithms for route optimization. Apple’s $1B investment in Didi is well aligned, with the former’s data access strategy for self-driving cars, and the ride-sharing company being vital for mining millions of vehicle data points.
Automakers have taken notice and broadened their engagement strategy with these disrupters through partnerships, accelerators and venture arms as well as talent scouting through endeavours like hackathons. Last year, Daimler China’s CIO -Marc Lampe- announced a partnership with Plug and Play, to co-invest in Chinese start-ups. GM has recently invested in Chinese start-up Yi Wei Xing Technology focused on car rentals. Others are sure to follow and in 2017, we expect more automotive start-ups to raise funds through OEMs.

Incumbents are also running mentorship programs for fresh talent graduating from universities, to help commercialize new age technologies. To expand their core capability, these players are focused on hiring top talent from Tier-1 universities such as Peking and Tsinghua University in Beijing. Toyota Motor and Tsinghua University conducted a joint research on air pollution, wherein Toyota’s hybrid vehicle technology provided data related to exhaust emissions to Tsinghua. PACE which is an alliance between GM and other multinational corporations established its center in Hunan University in 2015, collectively donating $280M worth of software and hardware resources. These companies have also hired top Chinese leaders who are experienced in automotive R&D, to leverage their close university connects.

There are some roadblocks for global data platform players in China. The regulatory conditions in China allows local defense companies to use their proprietary navigation systems in order to compete head-to-head with the US in areas such as the connectivity and Industrial IoT. Though governed by local regulatory and safety requirements, automakers in China are highly incentivized by the government to commercialize innovations in early stage. While western companies take products to market through regression testing and revalidation of the product, the Chinese government is changing the equation by encouraging automakers to test concepts directly in the market following a data-driven R&D approach. Can this R&D policy disrupt the automotive industry? It depends entirely on how automakers respond and react.
Amidst a large automotive market, a good education hotbed and an innovative policy which is actively shaped by the government, automakers should leverage this new R&D paradigm on the other side of the world to build the “Car of the Future”.

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