Drive I/O | The battle for leadership in car software

From social media to online shopping, China’s biggest tech companies have gone head-to-head for the attention of the country’s internet users. Now, they’re also fighting for dominance in a new area: car software.

A battle between automakers and tech giants is emerging for control of car software—the foundation for self-driving vehicles and in-car infotainment. Whoever gains the upper hand could see their profits skyrocket, as vehicles become more software-heavy in the leadup to a connected, driverless future. 

China’s biggest automaker SAIC, as well as Volvo’s parent Geely, are attempting to reinvent themselves as tech-savvy, next-generation car manufacturers. They select some parts of what the tech companies offer, while ramping up efforts to develop their own in-car software, attempting to elbow tech companies out of the equation.

Market potential

The global automotive software market is on an upward trajectory. Software subscriptions are expected not only to become an important source of revenue and a more profitable business than car manufacturing, but to drive significant growth of components including sensors and chips to meet the changing consumer preferences for in-car experience. 

• The global automotive software market is expected to more than double to $84 billion in 10 years from now, with self-driving, infotainment and, connectivity functions taking most of the market, according to analysis from McKinsey & Company.
• This figure is only a fraction of the $3.8 trillion the global auto market is expected to be worth in 2030. 
• As the transition towards autonomous, connected cars accelerates, experts believe it will also drive growth in demand for electronic components including sensors. McKinsey expects this market to reach $469 billion in 2030.
• Some observers say legacy carmakers are struggling to avoid simply becoming low-margin manufacturers in a fight against tech monsters. “It’s going to be a tough fight, [….] and when the war is over, there must be someone who will be the Apple with others becoming another Foxconn,” Wang Yao, a director from China Association of Automobile Manufacturers said during a conference in August, 2019 (our translation).

The tech giants

Considered the most prominent players in the China’s car software market, Alibaba, Tencent, and Baidu have for years competed for passengers’ attention. But they’ve made slower-than-expected inroads into China’s massive automarket, hindered by automakers’ concerns over working with them. Here’s where China’s tech companies stand. 

Alibaba: China’s biggest e-commerce group has for years disrupted a slew of brick-and-mortar markets. It hasn’t seen the same success in its pursuit of the auto industry. The company lost its early-mover advantage after two years of in-fighting with its partner, China’s biggest automaker, SAIC.

• Alibaba aims to deploy its car operating system AliOS in 10 million vehicles over the next three years, Chinese business site LatePost reported last month, citing company sources. This represents around one-sixth of China’s auto sales and means its install base would have to grow tenfold in three years.
• The Hangzhou-based online retailer made advances into the car software market much earlier than its competitors. It has deployed its OS as part of an exclusive agreement with SAIC since mid-2016. A year later, when Tencent and Baidu had just launched their own car OS’, more than 400,000 of SAIC’s Roewe-branded crossovers came equipped with AliOS.
• Alibaba’s joint venture with SAIC has been at a standstill since late 2018, as the two shareholders reportedly fell out after disagreeing whether to sell the software to other car makers. The companies settled the dispute earlier this year after restructuring the JV with Alibaba as a majority shareholder. Alibaba had denied claims about the fallout. 
• The company has installed its software in 1 million cars. Just 16 of every 100 new vehicles sold between January and July this year that shipped with an OS from the BAT trifecta came equipped with Alibaba’s OS. Meanwhile, Tencent accounted for 35 of the 100, and Baidu accounts for nearly half of the total, IHS Markit said in a recent report (in Chinese).

Baidu: Often touted as China’s leader in artificial intelligence, Baidu has focused on self-driving cars and voice recognition technology for nearly 10 years. China’s answer to Google expanded its reach in the auto industry in July 2018 by releasing DuerOS for Apollo, an Android-based, voice-controlled car operating system. The company has gained some market share in this field since last year.

• Baidu is ahead of Alibaba and Tencent after forging partnerships with more than 70 automakers. 
• Baidu’s in-car voice recognition technology is now available in more than 600 vehicle models, according to the company. IHS Markit estimates nearly 1.8 million new cars sold will be equipped with Baidu’s voice speech technology in 2022, more than Tencent and Alibaba combined. 
• Nevertheless, this is only a fraction compared with the true leader in the market; iFlytek, In June 2018, the Chinese speech recognition firm blacklisted by the US government, announced it had pushed its voice recognition services into 15 million vehicles. Currently, iFlytek holds more than 40% of China’s in-car voice recognition market, compared with Baidu’s 5%, Chinese market intelligence firm Shujubang said in a post (in Chinese) last month.
• In September, Baidu’s voice assistant DuerOS reached 5.3 billion voice queries per month, the company said in its earnings results. But it didn’t reveal details about the devices used to make the queries. Average daily in-car usage reached 40 times per day per person, the company told TechNode on Wednesday, compared with Xpeng’s 25, and Ford’s 13.
• Auto majors including Geely worry about deploying Baidu’s operating system as a whole in their cars. Instead, they have opted to use Baidu’s AI capabilities either with embedded code or as a third party service. Great Wall Motors and Chery are among a dozen automakers currently using Baidu’s full OS.

Tencent: A late starter, the company has adopted a more collaborative attitude than its peers. The tech behemoth launched the first generation of its Android-based OS in a partnership with Chinese automaker Chang’an in late 2018.

• A broad range of offerings from music streaming to social networks has given Tencent an edge in providing seamless personalized information and entertainment services in vehicles. The company claims users can sync music and audiobooks, among other media, playing on their smartphones to a car’s stereo. The feature allows users to pick up in their car where they left off on another device.
• Tencent has another advantage—WeChat. China’s most popular messaging app has automakers scrambling for in-car access to the app on their vehicles’ dashboards. 
• The reaction from car buyers has been positive. Chang’an’s CS75 Plus SUV, the first mass-production model equipped with a voice-operated version of WeChat, racked up 200,000 sales within a year of hitting the market. A spokesperson from Great Wall Motors recently told Chinese media that more than 80% of its owners have used WeChat’s in-vehicle app and it plans to embed the service into all new and revamped models.

Huawei: China’s most contentious tech company is emerging as a dominant player in the country’s auto industry. Huawei aims to become a full-stack hardware and software provider in the booming auto software market. Many industry insiders expect Huawei to eventually compete head-to-head with Bosch as a leading auto supplier.

• Huawei has a much broader range of offerings for cars than the likes of Alibaba. The company is capable of providing a feature-rich digital dash, but also deeper functions such as vehicle operations.
• These include features like 5G communication for data transmission between a car and a cellular base station, and a digital cockpit platform powered by its flagship Kirin chipset to handle natural language processing and object classification.
• Huawei has created HiCar, a platform built on the company’s Android replacement HarmonyOS. Similar to Apple’s CarPlay and Google’s Android Auto, HiCar mirrors features from a Huawei device to a car’s dashboard.
• The company said it has made deals with 20 car makers, including EV giant BYD, to launch the HiCar system in 150 car models and expects the platform to come installed in more than 5 million cars by 2021. Currently, state-owned BAIC and Chang’an are among several carmakers that intend to use Huawei’s entire hardware and software solution.
• Chinese carmakers worry that Huawei aims to make vehicles itself, which would likely disrupt the country’s traditional car manufacturing industry. The Shenzhen-based tech company recently restructured its car business, but reaffirmed that it has no intention to build its own cars.

Automakers

A number of Chinese automakers have allowed big tech companies to take control of their cars’ screens. Others, though, are not handing over the reins so easily. Instead, these companies have accelerated their push into intelligent, connected vehicles by building their own car software teams. They want to keep selling new services to customers without sharing the margin with tech companies.

Old-school crowd: Industry watchers largely shrugged off these moves, given traditional carmakers are still wedded to old car technologies.

• Geely: China’s biggest private car company appears to have pulled ahead among the country’s traditional automakers. In 2016, the manufacturer formed Ecarx, its connected car subsidiary, launching its Android-based operating system GKUI two years later. The OS has been installed on more than 40 car models, mostly under the lineup of the Zhejiang-based carmaker, and comes embedded with Baidu’s voice recognition technology and apps. In October, Ecarx closed an RMB 1.3 billion ($198 million) Series A led by Baidu. 
• SAIC: Volkswagen’s Chinese partner wants two strings in its bow. The company has forged an alliance with Alibaba to develop an infotainment system based on AliOS and in July made its in-house software team of 500 engineers an independent business unit. The company is following the lead of its German ally, with plans to focus on developing a new software architecture and expand its software team size fourfold to 2,200 employees by 2022.
• Experts are bearish on legacy carmakers: They lack the determination to abandon the current vehicle structure, and don’t have the senior talent to fully define the technology requirements of new systems. “Traditional automakers are really not as open to switching over to being more software-dominated, and they need to bring all the software development in house,” Tu T. Le, founder and managing director of business intelligence firm Sino Auto Insights, told TechNode.

The new kids: Young, tech native US-listed EV makers, including Nio, Xpeng, and Li Auto, are more agile and better prepared to respond to changing customer demands than traditional automakers, experts said. 

• Although still in their youth, the three companies have developed Android-based operating systems for infotainment in-house, and are surpassing established automakers by developing cutting-edge technologies including self-driving features for China’s urban highways. 
• Nio and Xpeng currently each have in-house research and development teams of more than 2,000 engineers and scientists, followed by Li Auto with around half that number. The three companies have already raked in billions, or are raising more money from new stock sales to extend their lead.
• Xpeng said it would likely reevaluate the pricing of its assisted driving system in its future car models. This change is expected to contribute “a considerable portion” to the company’s overall revenue going forward, Dennis Lu, Xpeng’s vice president of finance, said during a November earnings call.

The future of car software

China’s auto industry is quickly evolving into a market led by software development. The shift from traditional manufacturing is growing more urgent: car sales worldwide have plunged into recession since last year.

Legacy automakers are not good at developing software. That will have to change if they want to retain control over a user’s experience of their vehicles and hold onto brand loyalty from customers in the long run. 

But as smartphones and car software converge, the opportunity for the BAT trifecta is growing. One thing that China’s tech companies are good at is taking control of screens, and it might just be a matter of time before they’ve taken over car dashboards.