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30 October 2017

Analysis: Insights into the transport revolution

This is a version of a presentation first shown at the Corporate Venture in Brasil conference, hosted by Apex-Brasil in partnership with Global Corporate Venturing earlier this month.

Author: James Mawson, Editor-in-chief

Car sharing, ride hailing, electrification, connectivity and the rapid emergence of autonomous vehicles in passenger and industrial transportation are potentially as disruptive as the switch from horse and cart to the car and the railways, let alone rockets to Mars, flying cars with Lilium or Volocopter or the Hyperloop.

Corporate venture capitalists from a widening group of industries, including insurance, logistics and software are therefore joining the established automotive sector in seeking and backing new technologies and business models with large volumes of capital. Even vaccum cleaner producer Dyson plans an electric car in a few years.

Global Corporate Venturing has already tracked 55 autotech funding initiatives this year, a subset of the wider transport sector, with most of the big investors coming in from outside the industry, including Samsung with its new $300m auto fund and, as you heard from Amit Garg yesterday, a series of acquisitions including Harman, while Intel has also been betting heavily on the sector with investments and acquisitions.

There is a lot at stake. The costs of missing out on a revolution in transportation will be very high. Transportation is a trillion-dollar industry with a knock-on impact on other industries like no other. The future of ‘big energy’ (utilities as well as oil and gas) hinges on the direction of transportation. For the software and tech industry, transportation is a huge undiscovered new territory ripe for commercialisation.

Venturing and the future of automotive technology is the latest in GCV’s specialist reports. It follows our 2015 reports, Venturing in the Advanced Materials and Manufacturing Nexus and New Fusions in Advanced Materials Innovation and Corporate Venture Capital, both of which focused on materials innovation.

This led us inevitably to the automotive industry, in which much of the evolution has sprung from materials and where several of its corporate VCs are leading materials investors, and so to our first autos report sponsored by Denso, BP, Bright Box and others last year, and presented at the SAE autos exhibition after last year’s CV in Brasil conference.

As Tom Whitehouse, author of last year’s GCV autos report, said in its introduction: “Material innovation remains fundamental to determining the future of the automotive sector, but it is just one of several factors now at play, including the rapid spread of software solutions that connect transport and make it smarter and more efficient. We are also seeing the emergence of new business models that are turning the industry on its head.”

In September 2016, in remarks to investors reported by the Financial Times, Ford CEO Mark Fields preached what will have sounded like a new automotive religion to many of his shareholders. “We are really rethinking our business models … for years we have very much thought about the ‘thing’ and how much of the ‘thing’ we sold. Now we are thinking more about usage … and so miles travelled becomes an important metric” – as important as the number of cars sold.

Fields was perhaps too slow in this preaching as he was booted out and replaced by Jim Hackett, who this week said Ford was nevertheless following through on this promise by investing less in traditional cars. “Ford's new chief executive Jim Hackett promised to cut $14bn in costs and divert investment from traditional cars and internal combustion engines,” was the Financial Times’s assessment.

Nevertheless, these “things” have to be manufactured, assembled and delivered. How we will transport ourselves in the short and long term is open to contentious debate, but that we will transport ourselves is not if you heard Bibop Gresta from Hyperloop TT speak last night. Human beings need to move around and so do the goods we consume, perhaps at least until VR and 3D printing reaches a more advanced stage.

Or, as Bright Box’s chairman, Ken Belotsky, told Whitehouse when he sold his car: “I travel so much that having a car does not make sense”, adding: “I prefer Uber and Gett, or any other reliable local taxi aggregator. If I need a car for several days, I just rent it.”

The more you travel, the less you need a car? This is just one of the existential questions posed to the automotive industry. But some of the smartest investors think this is unlikely and perhaps worth exploring some of the complicated corporate venturing links with a story:

According to reports, China-based ride hailing company Didi Chuxing has recently been valued at more than $50bn, behind only its US peer and co-shareholder Uber.

Didi’s meteoric rise has been fuelled by more than $13bn of funding since it was founded, with a $5.5bn round led by Japan’s SoftBank completed in spring this year – for which it incidentally won Global Corporate Venturing’s large deal of the year award.

Alongside SoftBank, Didi’s backers include Chinese tech giants Alibaba, Baidu and Tencent, as well as the likes of Apple and Foxconn. The company said the latest round of funding would be used to invest in artificial intelligence technology as well as expansion into new territories.

Didi’s story is one of consolidation and collaboration in what has become one of the most competitive – and potentially lucrative – markets in tech. Didi Chuxing was created through the 2015 merger of two Chinese ride hailing platforms: Tencent-backed Didi Dache, and Kuadi Dache, which had received early-stage funding from Alibaba.

But perhaps the most significant piece of business Didi has carried out was the acquisition in August 2016 of Uber’s China operations. The deal means than Didi will control the Uber brand in China while becoming a minority stakeholder in the US firm. In return, Uber and its Chinese investors – among them, web services company Baidu – received an “economic interest” in Didi worth 20% of the business.

At the time of the transaction, which has been seen as key to Didi establishing its dominance of the ride-hailing market in China, Cheng Wei, the company’s CEO, said: “Didi Chuxing and Uber have learned a great deal from each other over the past two years in China’s burgeoning new economy. As a technology leader deeply rooted in China, Didi Chuxing is constantly pushing the frontier of innovation to redefine the future of human mobility. This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level.” 

Jeffrey Li, managing partner of Tencent Investment, has had a strong association with Didi since his company put money into Didi Dache in 2012. Li told Global Corporate Venturing for our Awards supplement last month that the merger of Didi Dache and Kuadi Dache, and the more recent acquisition of Uber, had put Didi Chuxing in an excellent position in both domestic and international markets. “We helped them a lot with those two merger transactions and that has released Didi from the competition in China and given them freedom into other verticals,” Li explained.

As well as ride hailing, Didi offers a wide range of other services, from bus and minibus transportation to social ride sharing through the Didi Hitch platform and the Didi Express carpooling initiative.

Li said Tencent played a crucial role in Didi’s early development by helping the company encourage both drivers and customers to engage with its app.

“In all the companies we invest in, we try to build a cooperative, mutually beneficial relationship,” Li said. “When Didi got into the market, their initial user acquisition was pretty difficult. They had to go to the airport and the train station to persuade drivers to install the app. That was very time-consuming, and after doing so not many of them used the app.

“Even among the people who used the app, they only used it to call the cars – they did not use it to make the payment.”

This presented a significant problem for Didi – if transactions were not completed using its app, the company would be bypassed and its business model would not be effective.

“It was vital to Didi at that time that the business was a closed loop and the final transaction happened through the app.”

Tencent’s solution was to offer users who paid through the app what is known as a “red envelope” – a small sum of cash, randomly awarded, as an incentive, through its WeChat messaging service. “This is very popular in China and a lot of people use it,” Li explained. “Users were familiar with the rules of the red envelope, so they started using the app to make transactions rather than using cash. For Didi, that had a huge network effect.”

In recent months, Didi has announced collaborations with the likes of Volkswagen – with which it has established a strategic partnership aimed at improving vehicle safety – and rental group Avis.

As a sign of its international expansion intentions, Didi has also this year become a strategic investor in Brazil’s largest local ride-share company 99, signed a strategic partnership with Taxify to invest in and support the Estonia-based firm’s growth in the European and African transportation markets, backed the Middle East’s Careem, and Grab to tackle the Southeast Asia market, which in turn has last month backed bike-sharing service OBike.

Didi has also invested in bike sharing service Ofo in China but the point of this list is to show the speed and scale of the expansion.

So one question for local attendees is whether 99 could do the same trick? Founded in 2012, 99 has built an app-based ride hailing service spanning both registered taxi drivers and peer-to-peer lift sharing. It has more than 14 million registered users and more than 200,000 drivers in its network.

Mobile chipmaker Qualcomm and venture capital firm Monashees invested an undisclosed sum in 99, then known as 99Taxi, in 2013, before it raised $25m from Qualcomm’s corporate venturing arm Qualcomm Ventures, Monashees and Tiger Global Management two years later.

However, 99’s peer, Cabify, the Spain-headquartered company that is one of 99’s biggest rivals in Brazil, raised $100m of a round it has aimed to close at $500m. So if the Didi/Softbank playbook works out perhaps there could be a merger of 99 and Cabify to come and reduce subsidisation?

Incidentally, Didi’s investment in 99 came before a $100m extension led by Softbank and it is worth continuing this story with a look at possibly the most disruptive force in this whole sector.

SoftBank, which reached the $93bn first close of its Vision Fund, is one of the most prominent investors in the on-demand ride industry and now holds shares of 99 as well as Didi Chuxing, Singapore-based Grab and India-based Ola (with a $2bn round just being reportedly closed) and potentially deciding between Uber and Lyft for its US portfolio (the former more likely now given Uber’s board compromise this week).

David Thévenon, managing director at SoftBank, said at the time of the 99 deal: “We see strong growth and a great outlook for the mobility solutions sector in Latin America.

“The 99 team has made impressive progress in Brazil, now operating in more than 400 cities and bringing positive changes to millions of users. We are committed to supporting local champions like 99, and look forward to participating in their long-term success.”

Doing back-of-the-napkin math on this 20% internal rate of return (IRR, a measure of annual performance) target by Softbank for its Vision Fund – whether over seven years or a more traditional 10-year timeframe — Connie Loizos at StrictlyVC estimated this would translate into between $130bn and $430bn for SoftBank’s investors — minus its initial investments, management fees, and the debt that makes up roughly $44bn of Vision Fund’s total holdings.

That’s a whole lot of capital to generate for limited partners, so how will the fund do it? SoftBank thinks it can get there largely through ride-sharing allied to its bigger bet on the forthcoming singularity and how data and sensors will affect society and economics. More specifically, Connie said SoftBank was counting on the smooth evolution of today’s ride-share companies into vast networks of self-driving taxis.

The question for attendees at next month's digital energy and mobility events by Global Corporate Venturing is what the impact will be and who will be saying the most prayers?

• Houston, Texas, on the energy sector on 1 November 

• London, UK, 14 November 2017 – future of mobility

 

 

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