Smart cars: Picking up speed

Driving a car means processing vast amounts of information - information about the state of the vehicle, road conditions, the weather, and other drivers. Right now that information is largely transmitted through a network of analog and mechanical sensors and processed by an organic computer: the human brain. 

But various new technologies are challenging this century-old model. In the Tesla Model S, for example, an onboard computer collects data on the battery's charge capacity, transmits it over the internet to a remote center for analysis, and directs the driver to visit a service center without any command on his or her part. The connection goes the other way, too, with onboard navigation systems that automatically download maps as the driver moves between areas.

For Alibaba Group and SAIC Motors, this merging of internet and automobiles isn't a question of if, but when. The Chinese e-commerce giant and the car maker announced a RMB1 billion ($160 million) fund this month to invest in the development of connected cars. In addition, the two companies will launch a joint venture to build vehicles with Alibaba's hardware and software built in.

They are far from the only investors to see internet-enabled automobiles as the future. Intel Capital launched its $100 million connected car fund in 2012, and Nokia announced its own $100 million fund last year. However, as this is the first such fund launched by a Chinese firm, it is seen as confirmation that consumers in Asia are just as eager for the next era of driving as are those in the rest of the world.

Advantage Asia?

Jessica Archibald, managing director at Top Tier Capital Management, a US-based venture capital fund-of-funds, says she would not be surprised if VCs in Asia turned out to be more willing to invest in automobile-related projects than those in Western countries.

"If you think of a traditional venture capital investment in the US, it's either healthcare or it's software and hardware. It is rarely anything that deals with heavy manufacturing, like a car," Archibald says. She believes that investors in Asia, where VC is a younger field, may not face the same psychological barriers. By extension, they could see opportunities that their Western counterparts would be more likely to overlook.

On top of this, China is the largest and one of the fastest-growing car markets in the world, with nearly 20 million passenger vehicles sold last year. It is an irresistible draw for many Asian start-ups. "Most hardware firms in China, I think, when they first think about where they're going to attack the market, it would be in China first," says Jenny Lee, managing partner at GGV Capital, a Sino-US venture capital firm.

The maker of the finished car is not the only company that can profit from this growth. Contractors can sell their technology to manufacturers to be included in the finished product and earn money that way.

"If you can have three little sensors in every car that's being sold, that's a huge market," Archibald says.

In her view, those sensors represent the most likely path for near-term rewards. Though Tesla, Google and other car makers are trying to capture consumers' imaginations with promises of self-driving cars, those are long-term projects. However, manufacturers can begin adding technology to their products immediately.

The changes that will see the most immediate response are expected to be those that cater to consumers' growing demand for information. "There's a whole kind of phenomenon or migration going on where people want information now. They want a lot of information and they want it very quickly," Archibald adds.

Instant access

That demand has been building for decades, as consumers have been trained to expect information to be available instantly, in ever-growing quantities and contexts. Uninterrupted internet access became the standard first in businesses, then in homes. Finally, the creation of the smart phone made the internet a thumb-flick away. In some ways the car is the logical next step for internet access.

"The automobile represents the only device platform that today is largely unconnected," says Thilo Koslowski, vice president at technology consultancy Gartner. "For many consumers, such digital content is becoming an expression of their lifestyle, which they want to connect to throughout the day, including when driving a vehicle."

That expectation is no less in China, and in some ways the unique circumstances of the country present unique opportunities. For instance, the blocking of Google Maps creates an opening for local services to supply cars with the data that, in other countries, they could just download from Google.

According to GGV's Lee, who says her firm is also considering opportunities in China's connected car sector, as developers become more familiar with the technology they will be able to stretch its applications further. In particular, businesses have potential to find very creative uses. For example, a rental car company could link a customer's car to his smart phone, allowing it to start automatically when approached and ensuring that nobody without the phone could operate it.

While Lee and Archibald caution against overexcitement about what is still evolutionary change, Gartner's Koslowski says investors need to be prepared for the long-term effects as each innovation gains acceptance.

"By 2020, there will be 150 million connected vehicles in the world," he says. "This new automotive era of smart mobility will lead to significant changes that will impact the fabric of the automotive industry and create new value and supply chains that expand across multiple industries."

The automobile and the smart phone both reshaped the world around them. Now the connected car stands to do the same thing. Investors will need to make sure they stay in the driver's seat.

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• Topics
• Technology
• Early-stage
• Venture
• Technology
• Venture
• GGV Capital
• Top Tier Capital Partners