US and Israeli capital is helping to drive China’s AV market

US and Israeli capital is helping to drive China’s AV market

One way Chinese AV champions obtain know-how is by deploying R&D centers in Silicon Valley, where AV technology still reigns supreme.

China’s trailblazing AV companies are driven by the challenge of producing the next generation driverless vehicles and scaling globally

China could see autonomous vehicles (AV) account for as much as 66 per cent of the passenger-kilometres travelled in the country by 2040, generating market revenue of US$2 trillion, according to McKinsey.

China’s policymakers see the AV industry as a pillar that is crucially important in the country’s plan to transform its economy from traditional manufacturing to a leader in artificial intelligence (AI) by 2030.

But the road to making driverless cars a reality is long and winding. Many of China’s finest entrepreneurs admit that the country does not currently have the talent for the research and engineering needed to put all of the pieces of autonomous driving in place.

The magnitude of the effort to bridge the yawning gaps is forcing Chinese tech incumbents and upstarts alike to creatively seek know-how and “smart capital” primarily in the US and Israel, which they do by taking a variety of steps.

One way Chinese AV champions obtain know-how is by deploying R&D centers in Silicon Valley, where AV technology still reigns supreme. Another tactic pursued by Chinese carmakers and Tier-1 suppliers that supply parts and systems directly to the carmakers is to align with Israeli and American start-ups that build the eyes, brains, and connectivity for driverless cars.

Surprisingly, cross-border VC activity between the US and China – and specifically US investor participation in financing rounds in China-based companies – peaked in 2018 despite the trade war. The figures tell a striking story of the rising appetite of Chinese companies for US capital and the additional value it brings.

US investors provided capital for over 64 per cent of the cross-border investment deal volume in 2018 with 355 deals between US-based investors and China-based companies, a sharp reversal from 2016, when 63 per cent of cross-border deal volume came from China-based investors financing US-based companies.

China’s trailblazing AV companies are driven by the challenge of producing the next generation driverless vehicles and scaling globally. There are indications that they are at the forefront of those turning to American VC funds for their customer-access and experience of expanding in both China and the US, and as conduits to America’s deep, liquid capital markets.

Examples are plentiful. Pony.ai, a China-based unicorn, was started by former executives at the self-driving car unit of Baidu, China’s search giant. The company, approved by the California Department of Motor Vehicles in 2017 to test its self-driving vehicles in the state, employs 100 engineers in Fremont, California, near Tesla’s car factory.

The BYTON K-Byte Concept is made for the age of autonomous driving.

Byton, a subsidiary of Nanjing-based Future Mobility, with about 300 employees in its North American headquarters in Santa Clara, California, intends to integrate elements of autonomous driving into its new electric vehicles by 2020 through a partnership with Aurora, a Silicon Valley-based driverless start-up founded by former employees of Google, Tesla and Uber.

Pony.ai last year raised a total of US$214 million from a mix of Chinese and American investors. The round was led by China-based ClearVue Partners and Eight Roads Ventures, an affiliate of Fidelity Investments. Sequoia Capital China and Redpoint China Ventures, both affiliates of their California-based VC namesakes, are expected to provide Pony.ai with some of the momentum the company needs to launch autonomous cars in China and the US.

China lagging US in self driving cars but gap is narrowing, says start-up Pony.ai

Guangzhou-based carmaker Xpeng Motors, a self-proclaimed Tesla challenger, raked in about US$600 million from big Chinese tech names such as Alibaba Group Holding, Foxconn and Xiaomi. Xpeng [Xiaopeng in Chinese] also took money from GGV Capital, hoping to leverage the Sino-American VC firm’s portfolio of next generation auto and energy storage companies that are based in both China and the US, Drive.ai and X-Charge.

One big name contender is Shanghai-based Nio, founded in 2014 by William Bi, dubbed the Elon Musk of China, who led his company to raise US$1 billion on the New York Stock Exchange last September. Before that, Tencent Holdings led a US$1 billion private round of funding, in which Baidu, China’s search giant, and Sequoia also took part. Nio employs about 400 people in San Jose, California and that number is likely to double in size.

Electric vehicles lined up in front of the New York Stock Exchange leading up to the initial public offering of NIO Inc., a Chinese electric-vehicle company, in New York, 12 September 2018. Photo: EPA-EFE

Nio’s CFO, Louis Hsieh, recently told Bloomberg that the company will be in Silicon Valley because “you need LiDar for Level 4 autonomy. Most of the talent in the area is in Silicon Valley.” LiDar is a sensing method that uses laser to create a three-dimensional image or map of a surrounding area. Level 4 autonomy in automotive parlance means high car automation with hands-off driving for long periods of time.

The sheer size of the Chinese auto and next-generation mobility market – just shy of 24 million vehicles were sold in 2018 – makes it too big to ignore for Israeli tech start-ups. Several hardened Israeli founders reared in Silicon Valley are spending precious time and resources – including money raised from US and Israeli VC’s – on forging relationships with business partners and setting up offices and operations in China.

Omer Keilaf, founder and CEO of Innoviz, a provider of remote-sensing solutions for AV’s that was selected by German auto giant BMW Group for its AV production in 2021, has partnered with Beijing- based Tier 1 supplier, HiRain Technologies.

Arbe Robotics is a Tel-Aviv based maker of high-resolution 4D imaging radar for AVs, with a main sales and customer service presence in New Jersey. The company’s co-founder and CEO, Kobi Marenko, told me late last year that they opened an office in Beijing with an Israeli country manager. “Our Beijing office supports around 10 relationships we have in China with car brands and auto part suppliers,” he said.

Hagai Zyss, CEO of AutoTalks, an Israeli chip set maker that helps reduce collisions on roadways and improve mobility, thinks China is the best place for scaling up technology. In a panel discussion last November in Tel Aviv, Zyss said, “In China, 90 per cent market-ready is good enough, whereas in Silicon Valley you need to be 100 per cent ready with the product before taking the plunge.”

It is unclear whether these moves by China’s AI pioneers in smart mobility are a concerted effort, meticulously planned out in advance, or are frantic ad hoc steps that are at best trial and error. The challenge is of such epic proportions that in the process ambitious founders are de facto building a new breed of cross-border auto companies with American and Chinese characteristics.

While the US is the world’s leader in AI discoveries, China is the leader in AI implementation, says Kai-Fu Lee , founder of Beijing-based Sinovation Ventures, in his book . In his opinion, fully autonomous vehicles are the most coveted of all AI products.

One thing is clear, in the coming years China’s ability to implement AI will be tested in autonomous driving on a scale thus far unseen.

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