China, the world’s largest automotive market in the world, is exhibiting its strong ambition to drive new demand from its domestic consumers and improve innovations as it embraces new challenges in a tricky market. 

In 2018, the country’s auto scene saw a sudden drop; the passenger car sales went down for the first time in recent decades, with a 2.8% drop (year-over-year). Next year, the decline expanded to an estimated 8%, according to data provided by the China Association of Automobile Manufacturers (CAAM). 

Contrary to this, China has become the largest Electric Vehicle market, representing more than half of the sales in 2018. The burgeoning market is expected to maintain healthy growth, along with used car sales and aftermarket. 

China is a country with a relatively low car parc per thousand people (173, in 2018), compared to leading markets such as the US (837), Australia (747), Italy (695) and Canada (670), and even emerging markets like Malaysia (433) and Russia (373).

This considerable gap creates significant opportunities to improve and move towards a mature market. Robust demand is set to drive the market forward. Technological innovation around mobility services, autonomous driving, digitalization and electrification is spawning along the way.

Good examples in the battery industry are BYD and CATL, two of the top five players worldwide. Talents are abundant, meanwhile, for example, cross-industry entrepreneurs William Li and He Xiaopeng transferred from the Internet industry to auto, who founded NIO (NIO:NYSE) and Xiaopeng Motors, respectively. 

Shanghai, one of the most shining centers of manufacturing and finance of the country, is the home to Tesla’s challenger NIO, and, from our perspective, will see the next line-up of automotive and mobility giants. 

Below is a map illustrating Shanghai’s most valuable VC-backed startups. Although we do not see much billion-dollar companies among these yet, we are expecting them to contribute their power in the race towards the car of tomorrow. 

How has the auto and mobility industry progressed through 2019?

Despite the significant uptick in Shanghai’s automotive and mobility-related Venture Capital (VC) activity in 2017, the industry has inevitably endured its period of  turnaround in the last two years, due to macroeconomics, market correction and concerns on commercialization over cutting-edge technologies. As shown in the graph below, the aggregate deal value dropped by 14.7% (Compound Annual Growth Rate), with a significant slash in terms of the number of deals closed (from 87 to 29). 

The consequences of the funding compression will be dramatic with structural changes in the local auto industry

Along the value chain, car manufacturing & hardware has been playing a critical role, with the most money pouring into this sub-sector since 2017. Unicorn stampede (for instance, WM Motors and NIO) is driven by a surge in mega-deals from 2015 to 2019. 

Mobility and transport saw a boom in terms of dollars invested in 2016 due to Uber’s Chinese division. Hellobike, a brand that has survived between the competition of two then-giants ofo and Mobike by focusing on tier-two and tier-three cities, only captured its Series A from investors like GGV Capital and Joy Capital in 2016. 

Counterintuitively, Shanghai comprises a smaller chunk of China’s autonomous driving (AD) unicorn table in comparison to Beijing, where there is a group of big pure-play and later-stage AD technology companies. Beijing’s attraction can be attributed to the talent and innovation environment, with a selection of L4 companies such as Momenta, TuSimple and Pony.ai. In Contrast, Guangzhou has gathered a group of Waymo challengers like WeRide, probably due to the city’s fast pace in opening for autonomous vehicle road tests. 

The modern automotive industry is moving from an era of manual control to one of advanced driver assistant systems (ADAS) and later autonomous technology. The shift requires a significant technological improvement in artificial intelligence (AI) algorithms, sensors, processors and electronic components. In Shanghai, there is NASN, Motovis and Zong Mu, who are researching on ADAS. NASN focuses on electronic control units (ECU) at the same time. Hesai makes Lidars for autonomous vehicles and robots.

Investors' expectations about the timing and scope of autonomous driving deployment diminished as urban settings have been proven tough to conquer after years of effort. The appeal of low-speed options has started to become compelling. Regardless of different types of domains, the transition relies on the integration of all kinds of components – all the players participating in the new AD ecosystem have a chance to profit from the part of the value chain they are involved in. 

Given the trend towards autonomous vehicles, players need to strengthen B2B sales and aftermarket revenue

Automakers/dealers need to think about how to reclaim aftermarket revenue; mobility companies, on the other hand, have already shown ambition around the aftermarket (for instance, DiDi’s Xiaojuchefu). 

When players change their value propositions from ‘manufacturer’ or ‘mobility service provider’ to ‘integrated mobility service provider,’ primary markets react to the change. From the graph below, we see a relatively high average amount of late-stage deals in aftermarket sub-sector. Startups like Tuhu, AutocloudPro and Haoqipei and Lechebang are leveraging software systems to change this fragmented and underdeveloped industry and provide customers with standardized and high-quality maintenance, repair and insurance services.