China has one big advantage in the race to build the car of the future

Key Points
  • China could set up an autonomous driving market faster than the United States could due to its ability to make regulatory decisions quickly, according to an investment advisory firm
  • Chinese automakers are also catching up on the technology by setting up research labs in Silicon Valley, according to Michael Dunne from Dunne Automotive
Delivery and public transport will drive initial EV demand in China

China could take the lead in the self-driving car market because of its ability to make regulatory decisions relatively quickly, according to an investment advisory firm.

Driver-less technology is one of several sources of disruption that traditional automakers are facing today. While many U.S. start-ups and large companies have been extensively working on this new technology, there's another important factor to consider in the nascent market, Michael Dunne, president at Dunne Automotive, told CNBC.

"There's more to it than just technology. Regulation matters a lot," Dunne said at the sidelines of Fortune Global Forum in Guangzhou, China.

Given how new driver-less technology is, regulators will have to do a lot of work to firm up laws that will govern autonomous driving in the future.

That, according to Dunne, is where China and Chinese companies have an edge because of how the decision-making process works in Beijing. He said that the "Chinese government can, and will, facilitate autonomous driving sooner than we will in the United States, for example. China could take the lead very easily because of this."

"It's not without precedent here in China that they make a decision and tomorrow morning at 6 a.m., the expressway from Guangzhou to Shenzhen is now autonomous-only. Any objections? Okay great, here we go," he explained as an example of how quickly decision-making could work in the country, which is governed by a single political party.

At the same time, Chinese companies are also catching up with their Silicon Valley counterparts when it comes to developing more sophisticated driver-less technology. That is being done through major Chinese investments into California to conduct research and development around autonomous technology, Dunne said.

For example, earlier this year, Uber rival Didi Chuxing set up a research and development center in Mountain View, California. A team of scientists, engineers and researchers will look into the use of artificial intelligence in security and intelligent driving technologies, the company said.

"I'm talking about billions of dollars, thousands of employees — getting first-class talent from Apple, Google, and Tesla to say 'Hey we'll do our R&D in California, design in California, we'll commercialize back in China.' That's the formula to look for," he added.

Chinese demand for electric vehicles

Another source of disruption to traditional automakers is the growing popularity of electric or hybrid vehicles. In China, Dunne said, the demand for electric vehicles will first come from the commercial sector, then from individual drivers.

"We will see demand, especially in taxi fleets. There's tens of thousands of taxis running in cities in China," he said. "Those will go electric first. Buses and delivery vans, watch the commercial space ... there will be demand from enterprises first, individuals later."

In September, China set a 2019 deadline for automakers to meet green-car sales targets, according to Reuters. Car makers will have to amass credits for so-called new-energy vehicles that will need to be equivalent to 10 percent of annual sales by 2019, China's industry ministry said, Reuters reported.

"The thinking from the Chinese government is you won't make money on electrics for the first five years but you'll subsidize electric demand through your sales of conventional gasoline engine cars," Dunne said. "The automakers, themselves, will subsidize this movement."

China wants to set goals for electric and plug-in hybrid cars to make up at least a fifth of domestic auto sales by 2025, Reuters reported.

Ai Qing Wang | Getty Images

Dunne said both local and foreign automakers — some of which have formed new joint ventures in the space — will likely see profitability in the electric vehicle market around 2021 and 2022. That is because automakers are still waiting for the cost of batteries to go down.

"Until then, it'll be a war of attrition. Who's the last man standing? That's what it's going to be about," Dunne said.

Chinese firms, however, have rapidly been making deals to secure supplies of lithium, which is a vital component used in batteries for electric vehicles.

According to Dunne, the demand for electric vehicles in China will start "on the very low end," and he predicted that companies inside the country might even produce electric vehicles costing less than $15,000.

At the same time, there could also be some demand from the "very high end" owing to the fact that China "happens to have the largest luxury car market in the world," Dunne explained.