Connected Car Report 2016 Will China be the fastest innovator… · Will China be the fastest innovator? PwC’s Experience Centre –China and Hong Kong 2 ... the key defining feature

Connected Car Report 2016

December 2016

www.pwc.com/digital

Strictly private and confidential

Will China be the fastest innovator?

PwC’s Experience Centre – China and Hong Kong 2

The 2016 Connected Car report creates insights for an industry in turmoil

2016 Strategy& Connected Car Report and PwC Connected Car Survey 2016

Key Facts

Business model change: How to make money from connected car services as an

auto OEM, both from direct sales of services and from indirect benefits

Market forecast: Our latest 5 years forecast on the revenue potential for auto OEMs

from the sale of connected car packages – by region, segments and type of package

Supply-side view: A perspective on the large-scale changes impacting the suppliers

of connected car technology, including new alliances, new players, new economics

and a view on what it takes to succeed

Market focus – China: A deep-dive look on China from two angles: the Chinese

consumer as the most sophisticated digital “millennial” and the Chinese internet/tech

firms claiming their stake in the digital transformation

Cybersecurity: A critical analysis of Cybersecurity in an age of technology

complexity and fragmentation – can it ever be achieved?

Future technologies: Closing off with a long-term view on how the technologies that

are in the labs and prototypes today will create the future driving experience 2030+

Main Content 5th annual Connected Car study,

developed by PwC Strategy&

Global study, focus on US, Europe, China

5 year market forecasts and detailed pricing benchmarks

>100 interviews with key industry executives: OEMs, suppliers, academia, analysts

Quantitative Online Survey with 3000 participants in China & Hong Kong as well as Focus Group Interviews in Beijing, Shanghai and Hong Kong

PwC’s Experience Centre – China and Hong Kong

B

Connectivity, autonomous driving and changing consumer behavior will enable an integrated mobility solution in the future

3

A

“Traditional” car Connected car

Integrated Ecosystem

Before 2010 Today After 2020

Source: PwC Analysis


• Revenues will shift from hardware to software, from products to services

• Revenues from mobility and digital services will grow rapidly

• Supplier revenues will shift from engines and chassis to electronics, software, cloud services, and batteries

Addressable revenue share of traditional OEMs and suppliers will decline due to emergence of new revenue streams that are beyond their capabilities

-30%

Addressable revenue for OEMs / Suppliers Addressable revenue for new entrants

Digital services firms

Mobility providers

New technology suppliers

Fintech companies

EV start-upsSource: PwC Strategy& Connected Car Report 2016

≥45%


Autonomous + Electrification

Mobility/ride-sharing/ride-

hailing

Connected Services

Digital platforms

Reduced # of physical

touchpoints

Omnichannel, eCommerce

and personalization

IT Transformation – in

particular back-end

Data analytics

Industry 4.0 – horizontal and

vertical integration

Digital EnterpriseDigital Customer

ExperienceDigital Products and

Services

#1 #2 #3

5

Technology drives a sustained shift in the design and function of the car; autonomous/electrified/connected is #1 investment priority for OEMs

Investment Priorities for OEMs

Source: PwC Strategy& Connected Car Report 2016


2017-2022 Market Forecast by Segment

The Connected Car market size is expected to almost triples until 2022 –with most growth in the volume segment – at the expense of margins

6

4.2x3.0x 2.3xVolume (78.1 bn$)Total (155 bn$) Premium (77.8%)



Autonomous driving will have the biggest potential of the total Connected Car market worldwide

7

3.5x4.0x 2.0xSafetyAutonomous driving Connected Services

Estimated revenues by product package in 2022

Functionalities that allow partial / fully

autonomous driving

E.g. Distance/park/motorway assistant, Traffic

sign detection, etc.

Functionalities that warn drivers and

prevents accidents

E.g. eCall, Automatic collision prevention,

Central danger warning etc.

Functionalities that connect the car to

outside world to enable integrated solutions

E.g. Mobility/vehicle management,

Entertainment, Navigation etc.



Despite the ‘New normal’ of the Chinese economy, the outlook for the automotive industry is still positive

8

China automotive market overview Overall China Market

• Overall economic (GDP) slowdown

• Crackdown on corruption

• Disposable income continues to grow

Auto industry

• Sales of light vehicles still increasing thanks to

the tax stimulus

• Overall auto market is expected to grow at 8%

(CAGR) to reach ~26m units by 2020

• Premium car market is expected to grow at

about 11% (CAGR)to reach ~3m units by 2020

• In 2015, Premium car penetration rate still low

with 10%

0%

15%

30%

45%

60%

75%

-

5

10

15

20

25

2006 2008 2010 2012 2013 2014 2015

Mil

lio

ns

Passenger Car SUV LCV* Mini-Van YoY Change (R-Axis)

Source: PwC Autofacts


Three factors will drive the connected car market in China and China is expected to be in the forefront of Connected Car innovation

9

Chinese digital consumers

• 1/3 of population are millennials

• Heavy users of social networks

• 92% Chinese aged 18 to 30 own

smartphones

Government support

• ‘Made in China 2025’

• Government funding for R&D

• Subsidies for new energy vehicles

Tech firm push

• Offer mobility concepts

• Huge customer database

• BAT’s drive to enter auto industry



Connected functionality has become a key factor influencing customer’s purchase decision, more important than even price and engine performance

10

51% 46% 46%

Connected

FunctionalitiesCar Price Engine Performance

Top factors influencing purchase decision (%)

Source: PwC Connected Car Survey 2016


These features have become a key differentiator and customers are willing to switch brands even at a premium

PremiumVolume

Customers’ willingness to switch brands*

30% 40%

* if price difference is less than 20%



Most important features in China are related to traffic/parking information and multimedia streaming

Real-time traffic informationEntertainment

streaming

Internet radio

Parking service

Adaptive brake lights flashing

Music/video/game download

Smartphone interface

Park assistant/pilot

Automatic standstill braking

10%

15%

20%

25%

30%

35%

40%

25% 30% 35% 40% 45% 50%

Usa

ge

Functions availability in car

Functions that are most regularly used

Real-time traffic information

Parking Service

Top services customers are willing to pay

Entertainment Streaming


11


2025 and Beyond2020-20252015-2020

Autonomous will reshape the industry; but a full autonomous version is most likely not be ready before 2025

13

Price for Level 1 and 2 systems continues to fall

Cloud and external systems play a greater supporting role

Full autonomy is introduced; driverless cars gradually take hold

Regulatory framework development

Technology

Price

Adoption

ADAS bundles include multifunction systems

55% cars expected to have some ADAS capability by 2020

71% cars sold in 2025 expected to have some ADAS capability

By 2030, adoption of full autonomy is expected to be <30%

ADAS is expected to be

the key defining feature

of car competition

between 2020 and 2025

Adoption will start from

top premium brands but

quickly trickle down

Individual systems cost will drop, but number of systems increase; overall cost goes up

Key predictions



Chinese customers have a great trust in technology and extremely eager to own an autonomous cars

14

Eager to

have one

customers are eager to own a fully-autonomous car in China85%

Entertainment

58% 35%

Dining / time with family

32%

Sleep / rest

21%

Office work

How customers will spend their time during fully autonomous car rides



However, there are concerns where users might feel anxious, frightened and powerless when “riding” in a fully-autonomous car

15

Concerns about adopting self driving carsChina

91%

86%

83%

80%

Safetyconcerns

Cybersecurity

Legalsituation

Cost/pricesituation

customers will still

keep an eye on the

road

55%




The automotive supply chain is changing dramatically – driven by new entrants and big bets in new technology areas

Accelerated incorporation of more intelligent and connected features in the vehicle and huge demand for advanced digital technology for safety, infotainment and convenience

New entrants penetrate the

automotive industry

Traditional players partner

with tech players

Traditional players enhance

internal capabilities

Technology from other industries enters the car (e.g. Consumer electronics, software, cloud)

Players from other industries realizing scale and learning effects outside automotive industry

Gain access to relevant new technologies

Make up for gaps in the technology portfolio and the innovation pipeline through acquisitions or partnerships

Capability gap around software development and artificial intelligence

Rapid innovation process for software in sync with hardware

Trial and error mentality vs. security culture

16Source: PwC Analysis


Especially tech players have substantial advantages of scale and learning curve benefits against traditional auto players in the digital space

17

The first Chinese company to finish its first fully self-driving test

in Beijing

Baidu

Joined hands with Foxconn and China Harmony Auto to develop smart

electric cars

Tencent

Partnered with SAIC for internet-connected car. Launched their first

“internet car” in 2016

Alibaba

Tech players benefit from their experience in the digital / technology industry and the deep knowledge of the

customer preferences



Partnerships are pushing industry boundaries in China creating extremely complex new auto ecosystems

18

Multiple investments by

OEMs and suppliers

OEMs need to decide: all-in

or get out

Difficult for OEMs to learn

the tricks of service

platforms

Uncertain revenue models

and margin potential

Key ObservationsLyft

Apple invested $1 billion in Chinese ride-hailing company Didi, which partners

with Lyft

VW hired the head of

Apple’s car project who previously worked at Daimler

Daimler

VW

DFKI

Daimler invested in

Blacklane, an app for booking

chauffeurs

VW, BMW and Daimler partnered to buy

Nokia’s HERE maps

VW invested $300 million

in taxi-hailing company

Didi acquired China operations

of Uber

High resolution 3D

map

Cooperation focused on vehicle

information systems, Audi all models would be combined with

WeChat MyCar services

Cooperation with Baidu is mainly for smart car, car networking services and big

data

Tech company

Mobility solution providerOEMs

Investment Partnership Personnel move Failed talks

Development of autonomous car

Internet car



Internet companies cannot succeed in connected cars all on their own. Making

and selling cars requires special capabilities, which tech companies don’t have.

It would be difficult for them to match the quality, reliability, and safety standards

the OEMs have already achieved.

- Prof. Dr. Keqiang Li

Director, Research Centre for Intelligent &

Connected Vehicles, Tsinghua University

“


ElectricVehicles

Fuel Cell

Cars

Energy Saving

Cars

The government plans to support domestic companies working on connectivity and new energy technologies

20

‘Made in China 2025’

Initiative

Intelligent Connected Cars

• To reduce traffic accidents by more than 30 percent

• Reduce traffic fatalities by more than 10 percent

• To set safe autonomous driving speed at 120 km/h

• To save energy consumption by more than 10 percent

• Reduce emission by more than 20 percent



OEM/Supplier view Customer view

Expensive and complex pricing

Complex / poor UX / uncool / HMI not competitive

Malfunctions / insufficient quality

Poor description

Blurry value add compared to smartphones

Today’s connected car services fail to meet expectations of involved stakeholders and customers

21

High investments

Long time to market-readiness

Uncertain RoI

Totally differing skill sets

Challenges with impact on all company operations

New suppliers / competitors



Sale of Connected Car Packages

Attractiveness

Use of Connected Car data

Increase Customer lock-in

/ loyalty

Establish an ecosystem of

services

Monetize digital customer base

22

+ + + +

Connected Car Value Creation Levers

OEMs need to understand the trade-offs between monetization levers; in particular, long-term opportunities are different from short-term cash cows

Mostly one-off

bundled with the car

(e.g. Infotainment)

Use data to increase

efficiency and

product

differentiation

Provide

differentiated

connected services

Comprehensive

ecosystem of

consumer services,

with revenue sharing

Mobility services and

multi-modal

transportation

options

Today‘s Cash Flow Opportunity



ThanThank you! 谢谢！Thank You! 谢谢！

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please seewww.pwc.com/structure for further details

Marco Fischer

Director, PwC Experience [email protected]+86 (10) 6533 7119

For more information, please contact

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Connected Car Report 2016 Will China be the fastest innovator… · Will China be the fastest innovator? PwC’s Experience Centre –China and Hong Kong 2 ... the key defining feature