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The old and new must integrate for China to become an automotive powerhouse

BEIJING – When the new meets the old, fireworks fly.

That’s what happened at one of the sessions held at the 9th China Automobile Bluebook Forum organized by Automotive Business Review (ABR) on May 5-6 in Beijing.

At a panel discussion pitting William Li, founder and chairman of Nio (NextEV), against Xu Heyi, chairman of BAIC Group, China’s 5th largest automaker, discussing the topic of upgrading of the country’s auto industry, both gentlemen had pointed words but amiably agreed that the traditional car guys and the so-called new “internet carmakers” must work together to make China a strong automotive powerhouse, an ultimate goal that was raised in China’s Auto Industry Mid- to Long-Term Development Plan released last month.

“The future of the auto industry is about the changing relationship of carmakers and their customers,” said Li, pointing out that visitors to Nio’s stand at April’s Auto Shanghai 2017 had to scan a QR code in order to get in, a move that he says is a way to put time and energy on people that really believe and has an interest in you.

One of the things that the new players enjoy an advantage in, in contrast to the traditional carmakers, according to Li, is the ability to serve and face the customer directly and offering a nice user experience.

One of the things that Nio did for the entire duration of the Shanghai Auto Show was to have senior executives up to the CEO or president level on hand at the stand doing the product demonstrations directly, rather than having lower level employees do the job.

“We don’t have a legacy in terms of how to serve our customers and giving them the best experience, so we just do it,” said Li.

Xu, who has been at the helm of BAIC Group, a conglomerate with annual revenues of over ¥100 billion ($14.53 billion), was not amused and responded by saying he was not convinced yet he envies companies like Nio because of their nimble corporate governance.

“Whatever you can accomplish we can also accomplish,” said Xu. “But I must say I envy Li’s spirit and his company’s agile structure. That only means that we as a traditional state-owned company must speed up our reform in order to compete.”

One of the disadvantages that Xu quipped about state-owned companies is they do not have the flexibility to invest huge amount of money at free will, unlike Nio, who put up millions just to take over a showroom in Beijing that once belonged to Audi and burns much more per day.

“State-owned companies just can’t afford to ‘cash burn’ at will,” said Xu. “But I do agree that it must be done when you are cultivating a brand.”

Which is exactly what Nio has done and Li says sometimes the “cash burn” is wasted intentionally for what he calls trial and error purposes.

“If I could do it all over again, 30 percent of the money that have been invested were probably wasted in retrospect, but I have to race against time,” said Li. “We had different development teams for electric motor and autonomous driving. You have to have trial and error which requires burning money.”

Li estimated that Nio’s monthly time and opportunity cost in addition to the service and R&D system add up to be around ¥1 billion.

“The most challenging thing for Chinese brands is cultivating the brand, and that is especially challenging at a state-owned enterprise,” said Xu. “We have to learn from the best, we have to incorporate overseas talent and we have to even learn from companies from this wave of new manufacturing movement.”

Xu believes the traditional carmakers must utilize and coordinate all social resources possible and form an ecosystem with the new players as well as internet and IT companies in China. He predicts that if this is done optimally and they work closely, strong players will emerge in 2-3 years.

“I believe this can only happen in China. The integration of the traditional carmakers with these new forces combining their unique advantages,” said Xu. “This is a path that could possibly shorten the time when China becomes an automotive powerhouse. It will not be about one disrupting the other but rather about alliance of the strong.”

In fact, Nio has already signed cooperation agreements with traditional carmakers including JAC and Chang’an over the past half year. Li in fact stressed that the partnership with JAC in particular is not a simple contract manufacturing partnership but rather a “manufacturing cooperation.”

“Our technical and manufacturing personnel work alongside their counterparts at JAC, and we source equipment and processes as well as quality systems together. So it’s much deeper than a contract manufacturing partnership,” said Li. “As a new startup, we don’t have the natural advantages in terms of manufacturing so we must work together with our manufacturing partners.”

Xu, in a later presentation, stressed that BAIC Group is in the midst of a transformation from a traditional manufacturing enterprise to a manufacturing service and innovation driven enterprise providing mobility services, a transformation that was officially started in August 2014. It inaugurated the BAIC Mobility Co., Ltd. in April that aims to become a ¥100 billion global mobility platform.

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