Tesla’s China factory and the missed growth opportunity

Tesla made its ambition for world domination known when it announced its intention to build a factory in China. The move makes sense — China is the world’s largest automotive market. But it might be shortsighted.

By continuing to go after the higher tiers of an established market, Tesla will engage in a zero-sum game for market share instead of forging a new market of unparalleled size. Competition will be fierce as incumbents, like BMW and Audi, which are determined to hold on to their more profitable customers, respond in kind.

Instead, the larger opportunity for any automaker is to grow the overall market by way of disruptive innovation — and not in the Silicon-Valley-hype sense of the term. The architect of disruptive innovation, Harvard Business School Professor Clayton Christensen, explains that disruption happens at the low end of the market — not the end adorned with high-tech features and flashy designs.

Disruptive innovations succeed by transforming complicated and expensive products into simple and affordable ones, thereby enabling a much larger population to benefit from the offerings. And since they, by their very nature, expand the market, they constitute a wellspring of new growth.

Rather than take a page out of the disruptive playbook, Tesla is engaging in sustaining innovation. The company plans to use the new factory to build Model 3 and Model Y cars. Assuming that Tesla continues with its current positioning, these cars, like Tesla’s other models, will enter an established market to compete along existing measures of performance, like acceleration, style and luxury.

Sustaining innovations are important in that they advance an industry, but they offer little net growth, as not all consumers are able to access them. And because sustaining innovations target an industry’s more profitable consumers, we can expect leading automakers to fight tooth and nail to retain their core customers. Alternatively, a disruptive strategy offers a much easier way to tap into the Chinese market — and it’s already happening right under the noses of Tesla and other leading automakers.

Disruption happens at the low end of the market.

Chinese manufacturers of low-speed electric vehicles (LSEVs) — small vehicles that typically top out around 45 mph, have a limited driving range, and sell for as little as $2,000 — are creating a market where none existed, by primarily selling cars to people in rural China who have never owned one. We call these customers nonconsumers of cars. The measures of performance that matter most to nonconsumers aren’t speed, style or comfort, but rather affordability, accessibility and simplicity. So, as long as LSEVs meet these criteria, nonconsumers will generally be willing to buy them. After all, having a car that can’t travel very far or very fast is much better than the alternatives: bicycles, motorcycles or farm vehicles.

By targeting nonconsumers, LSEV manufacturers have steered clear of direct competition with incumbent automakers — who have at their disposal far more resources, such as capital, factories and relationships with suppliers — and effectively established a foothold that allows them to steadily move upmarket.

Taking the disruptive route has enabled LSEV manufacturers to unleash a new wave of growth that Tesla and other automakers should covet. During the decade that LSEVs have been available in China, sales have soared. According to the International Energy Agency’s “Global EV Outlook 2017” report, between 1.2 million and 1.5 million units were sold in China in 2016 — overshadowing the number of battery and plug-in hybrid electric cars sold globally that same year. Undoubtedly, further growth potential for LSEVs in China is immense — more than half a billion Chinese lived in rural areas in 2016.

Whether LSEV manufacturers manage to profitably march upmarket into higher-performance tiers of the market remains to be seen. What we can say for sure is that there is enormous untapped potential to be discovered — both in China and in other emerging markets.

Atari teams up with some startup to pretend to make blockchain-based games

Animoca Brands will produce and publish blockchain-based versions of RollerCoaster Tycoon and Goon Squad worldwide (excluding China, Hong Kong, Taiwan, and Macau); the new titles will feature the integration of non-fungible tokens (NFTs). The term of the Agreement extends through to 31 March 2022.

In honor of this exciting announcement I’d like to propose the following blockchain-based products available for license to those hunting for a quick buck:

Blockchain! The Musical
Blockchain Cereal
Blockchain Brand Kombucha
Blockchain & Me, An Alien Adventure
Blockchain Whiskey
Blockchain Soda
Blockchain The Miniseries
Blockchain Lingerie – Shake His Merkle Tree
Blockchain Brand Firestarters
Blockchain Pessaries For Her
Blockchain French Ticklers
Blockchain Getaway Cars
Blockchain Killer Apps (rumored not to exist)
Blockchain Airlines
Blockchain Margarita Mix
Blockchain Cowboy Hats
Blockchain Burgers
Blockchain Dance Studios
Blockchain Pants

Lightspeed is raising its largest China fund yet

Lightspeed China Partners, the China-focused affiliate of Silicon Valley-based Lightspeed Venture Partners, has set a $360 million target for its fourth flagship venture fund, according to a document filed with the U.S. Securities and Exchange Commission today.

If the target is reached, the fund will be Lightspeed China’s largest yet, per PitchBook. Lightspeed China’s previous two funds each closed on $260 million. The VC raised $168 million for its debut China-focused fund in 2013.

Lightspeed China is led by David Mi (pictured). Mi, an investor in multiple billion-dollar Chinese companies, was previously the director of corporate development at Google, where he helped lead the search giant’s investment in Baidu. He joined Lightspeed in 2008 and established the firm’s China presence in 2011. Yan Han, a long-time Lightspeed investor and co-founder of the Chinese branch, is also listed on the filing.

Lightspeed China has backed e-commerce platform Pingduoduo and loan provider Rong360, a pair of Chinese “unicorns” that both completed U.S. initial public offerings since 2017. Typically, the firm makes early-stage investments in the internet, mobile and enterprise spaces. 

Earlier this year, Lightspeed Venture Partners filed to raise a record $1.8 billion in new capital commitments. This month, it tacked five new partners onto its consumer and enterprise investment teams, including Slack’s former head of growth and Twitter’s former vice president of global business development.

Lightspeed didn’t immediately respond to a request for comment.

BMW’s premium ride-hailing service is now live in China

BMW has joined a handful of automakers to compete with transportation upstart Didi Chuxing, which bought Uber’s Chinese business in 2016. Last Friday, the German luxury carmaker launched a premium ride-hailing service in Chengdu, the capital of China’s Sichuan Province with over 14 million people.

The new offer is part of BMW’s ReachNow carsharing brand that kicked off an electric vehicle rental business with a local partner last December. The new ride-hailing venture manages a crew of trained drivers to chauffer riders in a fleet of 200 BMW 5 Series, out of which half are plug-in-hybrid, according to the company.

“We are excited to offer our new premium ride-hailing service in Chengdu, one of the largest ride-hailing hubs in the world embracing mobility solutions for a sustainable urban future,” said Peter Schwarzenbauer, member of BMW AG’s board of management, in a statement.

ReachNow trips appear to be pricier than those on Didi’s “luxury” feature — which is currently only available in China’s top-tier cities of Beijing, Shanghai, Shenzhen, and Guangzhou — that also deploys BMW Series 5 and the likes of Mercedes-Benz E-Class and Audi A6. A 23-kilometer ride in Chengdu, for instance, costs 468 yuan or $68 at 3 p.m. on Monday. That’s about $3 per kilometer.

bmw ride hailing china

By comparison, a trip of similar distance in Shenzhen via Didi Luxury costs 210 yuan, or $30, at a rate of $1.3 per kilometer on a Monday afternoon.

didi compared to bmw

BMW’s new move comes shortly after it became the first global carmaker to nab China’s ride-hailing operating license in late November and at a time when the country’s biggest player Didi faces public and government backlashes following two passenger murders.

Following the Didi incidents, Chinese authorities have applied deeper controls over the verification process in both drivers and their vehicles to step up safety for riders, leading to a shortage in both drivers and vehicles for Didi and its ride-hailing peers.

China’s transportation rules stipulate that drivers must hold two certificates — one for themselves and one for their vehicles — to be eligible to take passenger requests on ride-hailing apps. That turned a lot of part-time drivers away as they either don’t want to invest the time and money preparing for exams or scrap their passenger cars after eight years.

To cope with regulatory changes, Didi has introduced training programs to help drivers obtain the desired licenses. The mobility giant has also partnered with carmakers to make “purpose-built” vehicles for on-demand rides, although that process had started before the passenger deaths.

Like BMW, China’s oldfashioned carmakers also have their sights set on the car-hailing market. Among them are Volkswagen’s local partner SAIC Motor and Geely, which is partnering with Daimler to roll out a new ride-hailing venture.

Update: The headline has been corrected.

Nvidia’s limited China connections

Another round of followups on Nvidia, and then some short news analysis.

TechCrunch is experimenting with new content forms. This is a rough draft of something new – provide your feedback directly to the author (Danny at [email protected]) if you like or hate something here.

Nvidia / TSMC questions

Following up on my analyses this week on Nvidia (Part 1, Part 2) , a reader asked in regards to Nvidia’s risk with China tariffs:

but the TSMC impact w.r.t. tariffs doesn’t make sense to me. TSMC is largely not impacted by tariffs and so the supply chain with NVIDIA is also not impacted w.r.t. to TSMC as a supplier. There are many alternate wafer suppliers in Taiwan.

This is a challenging question to definitively answer, since obviously Nvidia doesn’t publicly disclose its supply chain, or more granularly, which factories those supply chain partners utilize for its production. It does, however, list a number of companies in its 10-K form as manufacturing, testing, and packaging partners, including:

To understand how this all fits together, there are essentially three phases for bringing a semiconductor to market:

  1. Design – this is Nvidia’s core specialty
  2. Manufacturing – actually making the chip from silicon and other materials at the precision required for it to be reliable
  3. Testing, packaging and distribution – once chips are made, they need to be tested to prove that manufacturing worked, then packaged properly to protect them and shipped worldwide to wherever they are going to be assembled/integrated

For the highest precision manufacturing required for chips like Nvidia’s, Taiwan, South Korea and the U.S. are the world leaders, with China trying to catch up through programs like Made in China 2025 (which, after caustic pushback from countries around the world, it looks like Beijing is potentially scrapping this week). China is still considered to be one-to-two generations behind in chip manufacturing, though it increasingly owns the low-end of the market.

Where the semiconductor supply chain traditionally gets more entwined with China is around testing and packaging, which are generally considered lower value (albeit critical) tasks that have been increasingly outsourced to the mainland over the years. Taiwan remains the dominant player here as well, with roughly 50% of the global market, but China has been rapidly expanding.

U.S. tariffs on Chinese goods do not apply to Taiwan, and so for the most part, Nvidia’s supply chain should be adept at avoiding most of the brunt of the trade conflict. And while assembly is heavily based in China, electronics assemblers are rapidly adapting their supply chains to mitigate the damage of tariffs by moving factories to Vietnam, India, and elsewhere.

Where it gets tricky is the Chinese market itself, which imports a huge number of semiconductor chips, and represents roughly 20% of Nvidia’s revenues. Even here, many analysts believe that the Chinese will have no choice but to buy Nvidia’s chips, since they are market-leading and substitutes are not easily available.

So the conclusion is that Nvidia likely has maneuvering room in the short-term to weather exogenous trade tariff shocks and mitigate their damage. Medium to long-term though, the company will have to strategically position itself very carefully, since China is quickly becoming a dominant player in exactly the verticals it wants to own (automotive, ML workflows, etc.). In other words, Nvidia needs the Chinese market for growth at the exact moment that door is slamming shut. How it navigates this challenge in the years ahead will determine much of its growth profile in the years ahead.

Rapid fire analysis

Short summaries and analysis of important news stories

Saudi Arabia’s Crown Prince Mohammed bin Salman. FETHI BELAID/AFP/Getty Images

US intelligence community says quantum computing and AI pose an ’emerging threat’ to national security – Our very own Zack Whittaker talks about future challenges to U.S. national security. These technologies are “dual-use,” which means that they can be used for good purposes (autonomous driving, faster processing) and also for nefarious purposes (breaking encryption, autonomous warfare). Expect huge debates and challenges in the next decade about how to keep these technologies on the safe side.

Saudi Arabia Pumps Up Stock Market After Bad News, Including Khashoggi Murder – A WSJ trio of reporters investigates the Saudi government’s aggressive attempts to shore up the value of its stock exchange. Exchange manipulation is hardly novel, either in traditional markets or in blockchain markets. China has been aggressively doing this in its stock exchanges for years. But it is a reminder that in emerging and new exchanges, much of the price signaling is artificial.

A law firm in the trenches against media unions – Andrew McCormick writes in the Columbia Journalism Review how law firm Jones Day has taken a leading role in fighting against the unionization of newsrooms. The challenge of course is that the media business remains mired in cutbacks and weak earnings, and so trying to better divide a rapidly shrinking pie doesn’t make a lot of sense to me. The future — in my view — is entrepreneurial journalists backed up by platforms like Substack where they set their own voice, tone, publishing calendar, and benefits. Having a close relationship with readers is the only way forward for job security.

At least 15 central banks are serious about getting into digital currency – Mike Orcutt at MIT Technology Review notes that there are a bunch of central banks, including China and Canada. What’s interesting is that the trends backing this up including financial inclusion and “diminishing cash usage.” Even though blockchain is in a nuclear winter following the collapse of crypto prices this year, it is exactly these sorts of projects that could be the way forward for the industry.

What’s next

More semiconductors probably. And Arman and I are side glancing at Yelp these days. Any thoughts? Email me at [email protected].

This newsletter is written with the assistance of Arman Tabatabai from New York

Starbucks adding delivery services to more than 2,000 stores via Uber Eats

Starbucks is expanding its partnership with Uber Eats to more than 2,000 stores in the United States next year, about a quarter of all of the company’s locations in the country.

The relationship bolsters Uber’s mission for its on-demand food delivery service, Eats. Uber has said it plans to cover more than 70 percent of the U.S. population by the end of 2018. The partnership with Starbucks, while it won’t start in earnest until next year, will help the delivery service meet or even exceed that goal as it battles Postmates for market share.

Starbucks first launched its program, Starbuck Delivers, as a pilot in September, serving people in Miami and Tokyo. Its coffee delivery roots actually began in China through a partnership with Alibaba and on-demand food delivery service Ele.me. The company also piloted a delivery service through two supermarkets in Shanghai and Hangzhou.

It’s an experiment that appears to have had some success. Starbucks Delivers has reached 2,000 stores across 30 cities in China since launching three months ago, the company said at its investor conference Thursday.

Now it’s taking what it learned in China and applying it to the U.S.

China’s BYD further drives into Chile with 100 electric buses

Over the past few years, Chinese automaker giant BYD has been on a partnership spree with cities across China to electrify their public transportation systems, and now it’s extending its footprint across the globe. On Thursday, BYD announced that it has shipped 100 electric buses to Santiago, the capital city of Chile.

The step marks the Chinese firm’s further inroads into the Latin American country where a green car revolution is underway to battle smog. BYD’s first batch of vehicles arrived in Santiago last November and the Warren Buffett-backed carmaker remains as the only electric public bus provider in the country.

Chile is on the map of China’s grand Belt and Road Initiative aiming to turbocharge the world’s less developed regions with infrastructure development and investments. “With the help of ‘One Belt One Road,’ BYD has successfully entered Chile, Colombia, Ecuador, Brazil, Uraguay and other Latin American countries. As the region accelerates its electric revolution, BYD may be able to win more opportunities,” said BYD in a statement.

byd chile 1

President of Chile Mr. Sebastián Piñera rides the BYD electric bus. / Credit: BYD

The 100 buses embarked on a 45-day sea voyage from BYD’s factory in eastern China to land on the roads of Santiago. They sport the Chilean national colors of red and white on the exterior and provide USB charging ports inside to serve a generation who live on their electronic devices.

The fleet arrived through a partnership between BYD and Enel, a European utility juggernaut that claims to make up 40 percent of Chile’s energy sales in 2017. Enel has purchased the fleet from BYD and leased them to local transportation operator Metbus while the Chilean government set the rules and standards for the buses, a BYD spokesperson told TechCrunch.

Local passengers graded BYD’s electric vehicles at 6.3 out of 7, well above the 4.6 average of the Santiago public transportation system, according to a survey jointly produced by Chile’s Ministry of Energy as well as Ministry of Transport and Telecommunications. Respondents cited qualities such as low noise level, air conditioning and USB charging that the buses deliver.

Santiago currently has 7,000 public buses running on the road, among which 400 get replaced every year. A lot of the new ones will be diesel-free as the Chilean government said it aims to increase the total number of electric vehicles by tenfold in 2022.

LemonBox, which brings US vitamins to Chinese consumers, raises $2M

LemonBox, a Chinese e-commerce startup that imports vitamins and health products from the US, has raised $2 million to develop its business.

The company graduated from Y Combinator’s most recent program in the U.S. and, fuelled by the demo day, it has pulled in the new capital from 10 investors which include Partech, Tekton Ventures, Cathexis Ventures, Scrum Ventures and 122 West Ventures.

LemonBox started when co-founder and CEO Derek Weng, a former employee at Walmart in the U.S, saw an opportunity to organize the common practice of bringing health products back in China. Any Mainland Chinese person who has lived or even just visited the U.S. will be familiar with such requests from family and friends, and LemonBox aims to make it possible for anyone in China to get U.S-quality products without relying on a mule.

The service is primarily a WeChat app — which taps into China’s ubiquitous messaging platform — and a website, although Weng told TechCrunch in an interview this week that the company is contemplating a standalone app of its own. The benefit of that, beyond a potentially more engaging customer experience, could be to broaden LemonBox’s product selection and use data to offer a more customized selection of products. Related to that, LemonBox said it hopes to work with health and fitness-related services in the future to gather data, with permission, to help refine the personal approach.

LemonBox’s team has now grown to 20 people, with 12 full-time staff and 8 interns, and Weng said that the new funding will also go towards increased marketing, improvements to the WeChat app and upgrading the company’s supply chain. Business, he added, is growing at 35 percent per week as LemonBox has adopted a personal approach to its packaging, much like Amazon-owned PillPack.

“This is the first time people in China have ever seen this level of customization for their vitamins,” Weng told TechCrunch.

Members of the LemonBox team with Qi Lu, who heads up Y Combinator’s China business

Qi Lu, the former Microsoft and Baidu executive who leads YC’s new China unit, said he is “bullish” about the business.

“What LemonBox offers resonates with me and is serving a clear China market needs. Personally, I travel a lot between China and the U.S, and I often was asked by my relatives to help purchase and carry them similar products like vitamins,” he said in a prepared statement.

“More importantly, what LemonBox can do is to build an initial core user base and a growing brand. Over time, by serving their users well, it can reach and engage more users who want to better take care of their broader nutrition needs, use more data and take advantage of increasingly stronger AI technologies to customers and personalize, and become an essential service for more and more users and customers in China,” Lu added.

What China searched for in 2018: World Cup, trade war, Apple

Soon after Google unveiled the top trends in what people searched for in 2018, Baidu published what captivated the Chinese in a parallel online universe, where most of the West’s mainstream tech services including Google and Facebook are inaccessible.

China’s top search engine put together the report “based on trillions of trending queries” to present a “social collective memory” of internet users, said Baidu. 802 million people have come online in China as of August, and many of them use Baidu to look things up daily.

Overall, Chinese internet users were transfixed on a mix of sports events, natural disasters, politics, and entertainment, a pattern that also prevails in Google year-in-search. On Baidu, the most popular queries of the year are:

  1. World Cup: China shares its top search with the rest of the world. Despite China’s lackluster performance in the tournament, World Cup managed to capture a massive Chinese fan base who supported an array of foreign teams. People filled bars in big cities at night to watch the heart-thumping matches and many even trekked north to Russia to show their support.
  2. US-China trade war: The runner-up comes as a no surprise given the escalating conflict between the world’s two largest economies. A series of events have stoked more fears of the standoff, including the arrest of Huawei’s financial chief.

  3. Typhoon Mangkhut: The massive tropical cyclone swept across the Pacific Ocean in September, leaving the Philippines and South China in shambles. Shenzhen, the Chinese city dubbed the Silicon Valley for hardware, reportedly submitted more than $20.4 million in damage claims after the storm.

  4. Apple launch: The American smartphone giant is still getting a lot of attention in China even as local Android competitors like Huawei and Oppo chip away at its market share. Apple is also fighting a legal battle with chipmaker Qualcomm which wanted the former to stop selling certain smartphone models in China.

  5. The story of Yanxi Palace: The historical drama of backstabbing concubines drew record-breaking views for its streamer and producer iQiyi, China’s answer to Netflix that floated in the U.S. in February. The 70-episode show was watched not only in China but also across more than 70 countries around the world.

  6. Produce 101: The talent show in which 101 young women race to be the best performer is one of Tencent Video’s biggest hits of the year, but its reach has gone beyond its targeted young audience as it popularized a meme, which made it to No. 9 on this list.

  7. Skr: A buzzword courtesy to pop idol Kris Wu who extensively used it on a whim during iQiyi’s rap competition “Rap of China,” prompting his fans and internet users to bestow it with a myriad of interpretations.

  8. Li Yong passed away: The sudden death of the much-loved television host after he fought a 17-month battle with cancer stirred an outpouring of grief on social media.

  9. Koi: A colored variety of carps, the fish is associated with good luck in Chinese culture. Yang Chaoyue, a Produce 101 contestant who the audience believed to be below average surprisingly rose to fame and has since been compared to a koi.

  10. Esports: Professional gaming has emerged from the underground to become a source of national pride recently after a Chinese team championed the League of Legend finals, an event regarded as the Olympics for esports.

In addition to the overall ranking, Baidu also listed popular terms by category, with staple areas like domestic affairs alongside those with a local flavor such as events that inspire national pride or are tear-jerking.

This was also the first year that Baidu has added a category dedicated to AI-related keywords. The search giant, which itself has pivoted to go all in AI and has invested heavily in autonomous driving, said the technology “has not only become a nationwide buzzword but also a key engine in transforming lives across the globe.” In 2018, Chinese people were keen to learn about these AI terms:

Robots, chips, internet of things, smart speakers, autonomous driving, face recognition, quantum computing, unmanned vehicles, World Artificial Intelligence Conference, and quantum mechanics.

China’s second-largest gaming company to sell comics assets to rival

China’s online youth entertainment platform Bilibili said it has agreed to buy major assets from the comics arm of gaming giant NetEase, which helped introduce Marvel’s first batch of Chinese superheroes in May.

The deal announced on Wednesday will see Bilibili acquire the copyrights of a large number of popular storylines from NetEase to beef up its content offering for a community of anime, comics and gaming users — or collectively known as ACG fans.

Nine-year-old Bilibili raised $483 million from a U.S. initial public offering in March.

“The addition of [NetEase Comics’] extensive library of well-known content deeply enriches our online comic offerings. It not only complements our core users’ growing appetite for premium licensed ACG content, but also solidifies our leading position in China’s ACG industry,” said Carly Lee, chief operating officer of Bilibili, in a statement.

Update: A NetEase spokesperson provided the following comment:

“We are positive about the deal between Bilibili and NetEase Comics. NetEase will continue its exploration in the ACG industry and operation of Marvel and other works from our licensing partners. In the future, we will further launch deep partnerships with Bilibili in the ACG field,” a NetEase spokesperson told TechCrunch.

The move comes as China’s game publishers struggle with a title approval freeze starting March that has hammered the stock prices of the market’s leader Tencent and second fiddle NetEase.

Like Tencent and NetEase, Bilibili generates a bulk of its income from games, which accounted for 69 percent of its total revenues during the third quarter.

Until recently, Bilibili’s services to its mainly young user base centered around videos, live streaming, and mobile games. In November, the company launched a comics-specific mobile app that would demand heavy content investment to net new users. A lineup of rivals await Bilibili as it plugs itself into the online comics market. Leading the race is Kuaikan Manhua with smaller players including Tencent Comics and NetEase Comics trailing behind, according to an app ranking by market research firm Analysys.

Tencent’s comics app topped 120 million monthly active users last December, said Zou Zhengyu, general manager of Tencent Comics and Animation, at a company event.

Bilibili has also leaned on partnerships to grow its reservoir of gaming titles. In October, it struck a deal that would allow it to run more Tencent games on its own platform. The tie-up followed a $318 million investment from Tencent in Bilibili that lifted Tencent’s ownership to around 12 percent of Bilibili’s total issued shares.