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China is competing fiercely to develop the autonomous driving technology that is set to change the automobile industry.   © Illustration by Michael Tsang
Business Spotlight

China guides its self-driving startups into the fast lane

Shifts in the regulatory landscape are a boost for a key tech sector

NIKKI SUN, Nikkei staff writer | China

HONG KONG/ PALO ALTO, U.S. -- When AutoX said in December that it had become the first Chinese company to test fully self-driving vehicles on open roads in the country, the result took a back seat to the fact that the test took place at all.

The boast of 4-year-old Auto X about its test in Shenzhen -- no other Chinese company has removed the backup driver and remote controller during road tests -- shows how quickly the regulatory ground on autonomous driving is changing as Beijing does its best to put its foot to the floor on development of a key technology.

Theoretically, the law in China does not allow such advanced tests of autonomous driving. But as Beijing strives to promote the strategic autonomous vehicle sector, companies are being allowed to operate in a legal gray area, condoned at a high level.

In January, the Ministry of Industry and Information Technology published a proposal that encourages local governments to open more roads for testing self-driving cars. "The development of autonomous driving technology in our country has entered a fast lane. The industry has a strong demand for testing cars in a real-time traffic environment," the ministry said.

Analysts see authorities' willingness to allow aggressive experiments for new technology as a major advantage in China's fierce competition with the U.S. for the most advanced autonomous driving technology, which many believe will change the automobile industry.

AutoX said in December that it had become the first Chinese company to test fully self-driving vehicles on open roads. (Photo courtesy of AutoX)

"China missed out on manufacturing top quality cars. The industry is being transformed ... Chinese policymakers are very keen to be the first and best doing autonomous driving," said Mark Schaub, a tech industry lawyer and partner with law firm King & Wood Mallesons.

China has grown to be the world's largest car market and produces tens of millions every year. But few domestic automakers have mastered the core technologies for combustion-engine cars, an area led by the U.S., Japan and Germany. China's most popular cars have often been produced through joint ventures with leading foreign automakers such as Volkswagen, General Motors and Toyota.

China wants to turn the tables with autonomous driving technology, which would also transform taxis, buses, trucks and delivery vehicles. China's target is for vehicles with at least partial self-driving functions to account for 50% of new auto sales in five years, according to a blueprint published by a government research body in November.

Just as the country grew its internet economy by allowing companies to test new business models first before it started imposing regulations, the government is helping the growth of domestic self-driving companies by being flexible in law enforcement and letting them try first.

Road tests are crucial to train artificial intelligence-based algorithms so cars can handle extreme situations in different environments. Companies in the U.S. and China are racing to accumulate miles and improve test results to help commercialize self-driving cars.

"Autonomous driving technology is probably the largest disruption in the auto industry in 100 years," said Egil Juliussen, formerly the lead automotive technology analyst for research company IHS Markit. "China wants to be a leader in autonomous driving technology for its domestic market and future export ... Understanding the need and encouraging disruption bodes well for the evolution and deployment of China's AV strategy."

In the case of AutoX, the Alibaba-backed company said officials in Shenzhen's Pingshan district gave it a green light, even though the city transportation bureau told Nikkei Asia that a backup driver is still required in the road tests.

Besides AutoX, search engine operator Baidu, -- which is backed by Sequoia Capital and Toyota -- and WeRide, backed by the Renault-Nissan-Mitsubishi alliance, have each rolled out pilot robotaxi programs in major cities. Ride-hailing company Didi Chuxing is testing autonomous vehicles in Shanghai.

China stepped up its support for the AV sector a year ago when 11 ministries jointly issued a comprehensive development plan, including an aim to achieve mass production for vehicles able to drive themselves under certain conditions by 2025. The level of cross-department involvement also shows there is agreement that autonomous vehicles will impact essential sectors, including electronics, software, chips, mapping, telecommunications and transportation, Juliussen said.

Since 2018, when China opened the way for road tests for autonomous vehicles, 26 Chinese cities and provinces, including Shanghai, Beijing, Wuhan, Guangzhou, Shenzhen and Hainan Province, have published detailed rules for road tests. Many local governments also provide generous subsidies and favorable policies to lure companies.

Beijing, Guangzhou and Changsha appear to be among the more aggressive promoters of autonomous driving. They allow self-driving vehicles to be tested with remote support rather than a human driver. But none of these cities has allowed fully autonomous driving, where both remote controls and backup drivers are removed.

"In China, if you always wait till the law comes into effect, you are six months to a year behind what the regulators are saying," Schaub said. Unlike most Western countries where authorities enforce the strict letter of the law, he said, there is a lot of discretion in China.

The regulatory approach is expected to put foreign players at a disadvantage in competing with local players in the age of autonomous driving, because "Chinese companies know better how to navigate the legislation and the laws," he said.

Many of the leading Chinese companies are also testing relentlessly in the U.S., which still leads the world as a testing ground for autonomous vehicle technology. Among the 40 states that have passed AV-related legislation, California has the most comprehensive regulations, according to global law firm Dentons, helping attract companies from all over to test self-driving cars.

A Waymo vehicle being demonstrated in the U.S. California is seen as having comprehensive autonomous driving legislation.   © Reuters

As early as 2013 California started enacting laws to govern the testing and deployment of driverless cars. Waymo, a sister company of Google, won its first fully driverless testing permit in 2018. Last year, California regulators approved a permitting process that will allow companies to charge fees for autonomous vehicle rides, paving the way for the technology's commercialization.

Chinese companies are improving their test results quickly in the annual California Department of Motor Vehicles report on autonomous driving tests in the state. AutoX, WeRide, Didi and made it to the top 10 in 2020 in a category known as "disengagement." Fewer disengagements per mile indicate a car requires less human intervention, which many see as signifying a safer and more advanced autonomous vehicle. Baidu and AutoX are among the six California permit holders eligible to test driverless cars.

But unlike China's top-down regulatory approach with national guidelines and a strategy promoting and supporting autonomous driving technology, the U.S. lacks a federal regulatory framework, which could hamper the technology's commercialization there, said Eric Tanenblatt, global head of the public policy and regulation at Dentons.

"When a car crosses state lines you don't want to have to try and figure out, 'What are the rules here in this state?'" he said. "It's going to require the [federal] government to step in and regulate."

While good test results in the U.S. boost companies' reputations and help raise funds from international investors, Chinese self-driving companies are increasingly shifting their focus to their home turf.

From a technological point of view, many believe that the AI algorithms guiding the vehicles can be better trained in more complicated traffic conditions in Chinese cities. In addition to the more supportive policies, higher public acceptance of self-driving in China can also pave the way for the commercialization of driverless vehicles.

In a 2019 consumer confidence report conducted by Deloitte, only 25% of Chinese respondents expressed the view that autonomous vehicles may not be safe, compared with 50% of Americans and 47% of Germans.

"The Chinese public appears receptive to using such vehicles, particularly younger generations," Philip Ng Partner and Head of Technology KPMG in China said in a research report. "China is evolving quite fast on national-level policies and new standards. It's a very high priority."

Still, leading figures warn that large-scale application of full self-driving is a long way off.

Tony Han, co-founder and CEO at WeRide, noted one accident can tarnish the image of the entire industry. The consequences for Uber after one of its self-driving cars was involved in the death of a pedestrian in Arizona in 2018 was "disastrous," he said. Uber quickly halted its test program and late last year completely abandoned its plan to develop self-driving cars. The safety driver in the car has been charged with negligent homicide.

"People asked me why we haven't achieved the commercialization of full autonomous driving by now," Han said. "I think the most fundamental reason is that the technology is not growing fast enough, and itself is not stable enough.

"When our technology reaches that stage, we will actively apply for the permit of operating full self-driving vehicles. But both the developments of the technology and relevant policies in China are unpredictable -- we can't tell you when."

Additional reporting by Yifan Yu

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