Hop out of your electric car and click a button on your smart key. Instead of struggling to manoeuvre your car into a tiny space, you sit back, relax and watch your empty car effortlessly move into a parking slot all of its own accord.
Such a scenario is no longer science fiction; partially automated electric vehicles became a reality a few years back. They are largely for the wealthy as they can each cost at least $80,000 and, sometimes, double that or more – sums that are not easily affordable for most people.
However, in the eyes of He Xiaopeng, the electric vehicle (EV) market should encompass a broader group of people. And that is a market his company is targeting.
The 41-year-old Chinese entrepreneur is co-founder and chief executive of XPENG Motors, a five year-old intelligent EV startup that is at the forefront of efforts to mass-produce affordable electric cars.
XPENG’s flagship sport utility vehicle G3 sells for only Rmb155,800 ($23,180) each, making it one of the most affordable pure electric cars available in China. The company started selling its EVs in December and has so far delivered about 2,000 cars.
To this end, the Chinese startup is taking on a business model that has not yet proven successful. Tesla, the US electric car manufacturer whose products are often seen as a sign of luxury, remains the only company in the world currently delivering its products in bulk.
That’s not to say that it has not already been attempted – other Chinese automakers have attempted to sell electric cars at cheap rates in recent years – but rather that the market hasn’t yet taken off.
MORE MEANINGFUL DATA
For He, the success of future EVs rests on getting the right data and connectivity – both crucial elements to develop intelligent features and autonomous driving technologies.
“We target China’s middle market because we believe mid-market customers will be able to generate meaningful data for us to improve our products and enhance customer experience,” He told FinanceAsia in an exclusive interview in XPENG’s headquarters in Guangzhou.
XPENG is betting on the massive untapped potential of China’s electric vehicle market as the country gradually transitions from conventional gasoline-powered vehicles to internet-connected smart cars chock-a-block with high-tech features such as autonomous driving, voice control and automatic parking.
New-energy vehicles, a broad concept that includes both pure electric and hybrid cars, is one of the seven strategic emerging industries that Beijing aims to develop to help drive future economic growth.
It is also a priority in the “Made in China 2025” grand plan, according to which Beijing aims to ensure electric car sales account for 20% of all car sales in just over half a decade’s time.
Despite being a latecomer to EV production, China is already the world’s largest market.
With only 14,000 pure electric vehicles sold across the country in 2013, the number grew exponentially to top the world at 984,000 last year. It is expected to grow further at a compounded annual growth rate of 30% in the next five years to reach 4.2 million by 2024, forecasts the China Association of Automobile Manufacturers.
Along with this transition is the change in consumer preferences. While conventional car owners tend to prioritise vehicle performance stats such as horsepower, speed and acceleration, EV users tend to focus on smart features that offer them a whole new mobility experience.
And that is why He prefers to refer to XPENG as a technology company rather than an as automaker.
“In the foreseeable future, there will be fundamental changes in the automobile industry where cars will be seen as more than a piece of hardware,” He told FinanceAsia. “Internet-connected cars will be able to interact with the surrounding environment and objects, and users can increasingly feel their cars can perform [many] more functions than they can imagine.”
The ability to constantly develop new smart features and upgrade existing functions lies in the power to collect and analyse a wealth of data – from driving and charging habits to journey and location records.
XPENG’s He founded China’s largest mobile browser UCWeb (sold to Alibaba in 2014) before joining the EV company. As a seasoned internet entrepreneur, he believes the most valuable and relevant data in the EV sector will be generated by mass-market users, not high-end users.
“In the mobile industry, users who pay the highest fees generally make a lot of calls and use little data, while those who pay the least use relatively more data and seldom make calls,” He said. “I think the same logic applies to the EV industry that the most valuable data comes from mid-market users.”
Another common phenomenon is that luxury car buyers tend to hire drivers instead of driving themselves, which would severely impact the veracity of big data analytics, according to He.
High-end buyers typically have weaker engagement because they own more than one car and so spend less time in each. And since the number of users in the mass-market is naturally bigger than the luxury market, EV developers are able to extract bigger data value from this group.
“That is why we target young buyers of around 25 to 35 years old,” He said. “This is an age group that is willing to explore new things, have high engagement and interact with us frequently to share feedback on new features.”
In addition, XPENG customers are predominantly second-time car owners who are able to compare their new car with their first, usually conventional, vehicle.
“In the beginning they will encounter difficulties like charging and auto parking,” He said. “But once they get used to it, they will find it hard to turn back.”
According to this business model, XPENG aims to create an ecosystem with high user engagement and product stickiness so as to extract extra economic value from new feature launches and software updates. That gives the company another source of income on top of car sales and maintenance services.
As China becomes a global power, Chinese companies have been increasingly influential internationally. Interestingly, the formula of success for the likes of Lenovo, Huawei and Xiaomi appears to be identical – focusing on mid-market customers.
That is also one of the thoughts on He’s mind as he looks ahead to a time further in the future when he might expand take the company overseas.
“It is difficult to bring a high-end, luxury brand into the international market because even if you find success at home, you need to start from scratch in every market you explore,” He said, referring to the time and resources required to build brand awareness and reach premium clients.
In contrast, mid-market products are easier to penetrate into new markets because consumers look for competitive price, functionality and good value for money.
“Be it online services or automaking, you rule the world when you win the mass-market,” He said. “And that is why we don’t see ourselves as a direct competitor against the likes of Tesla because we adopt a distinctly different model.”
INNOVATION
With data and connectivity at its heart, XPENG is spending the bulk of its resources on research and the development of new software products and technologies that can differentiate its electric vehicles from others.
About 70% of XPENG’s 3,000 total staff are engaged in R&D at its Guangzhou headquarters – an extremely high percentage probably never seen before in the automobile industry. In contrast, the company spends a relatively smaller portion of its capital expenditure on marketing and promotion.
Walk into XPENG’s Guangzhou office and you would not believe it is an auto company. In fact, it is no different from a typical internet company where everyone walks around in a spacious office and works with a laptop. There is no sign of any production line for cars or car parts.
Production and hardware manufacturing is outsourced to Haima Automobile Group, a Shenzhen-listed automaker and a former partner of Japan’s Mazda, in its highly automated facility in Zhengzhou.
According to He, such a business model allows XPENG to focus on developing software solutions instead of juggling with production and assembly.
“Our philosophy is to design all key technologies in-house,” He said. “Innovation is important in the EV industry because we don’t only compete on performance but on the mobility experience that can be enhanced by smart cutting-edge features we develop through proprietary R&D.”
One of XPENG G3’s bespoke smart features is a 360-degree rotatable, hand gesture-controlled roof camera that allows the driver and his companions to stop by at any point of a journey to take selfies.
In each XPENG G3 there is an interactive voice-control assistant to help the driver find locations and play songs without having to glance at display screens, let alone having to manoeuvre them, whilst driving.
After rolling out in-car karaoke functions, XPENG is in the process of developing driver fatigue alerts and seamless payment solutions using facial recognition technologies.
XPENG’s auto-parking technologies are tailormade for China’s complicated parking conditions. While many automakers use ultrasonic radars and thus only good at detecting obstacles, XPENG uses self-developed senor-fusion technology that combines inputs from cameras and ultrasonic radars, allowing the car to both detect obstacles and identify empty spaces.
To keep up with innovation, XPENG plans to maintain at least half of its workforce in R&D as it plans to add some 5,000 staff this year to ramp up production, including about 2,500 temporary workers. Some of them will help build a new manufacturing facility in Zhaoqing, which is expected to complete by the end of this year.
The company has so far raised more than $1.5 billion in funding from prominent institutional investors including Alibaba, Foxconn, IDG and Hillhouse, as well as tech gurus such as Xiaomi founder Lei Jun and Meituan-Dianping founder Zhang Tao.
A LEVEL PLAYING FIELD
China’s plan to put an end to the government subsidy on EV purchases is poised to shake up the entire industry. Beijing has announced plans to cut the subsidies – launched in 2010 at an average of about $10,000 per vehicle – by 30% this year and to completely scrap them by the end of 2020.
While acknowledging that government subsidies were strategically important in promoting EVs when the industry was in its infancy, He believes they have also created difficulties for smaller, privately held startups.
Over the years, government subsidies have disrupted EV makers’ cash flow and put heavy pressure on their balance sheets because they can only receive the compensation two-to-three years after selling the cars.
As the government plans to gradually remove the subsidy, privately owned EV manufacturers like XPENG are set to benefit in the long run, reckons He.Naturally, privately held EV makers were hit particularly hard compared with their state-backed, cash-rich rivals.
“In the past few years China’s EV sales are mostly concentrated on models that receive large subsidies,” He said. “With the subsidy cut EV makers will focus on differentiating their products, the market will be better categorised and consumers will have more choices.”
At the same time, the end of the government subsidy also signals a further opening up of the EV industry to encourage innovation.
“China has nurtured many innovative enterprises because it has been less restrictive in terms of regulation,” He said. “By removing the subsidy, it is set to create a level playing field between homegrown and foreign companies, and between government-owned and private enterprises.”
