You know about Google's driverless cars, under the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) umbrella. You may even know that car companies such as General Motors (NYSE: GM) and Ford (NYSE: F) are getting in on the action. But there's another new entrant into this already-crowded field.
No, I don't mean Apple -- although rumors abound that Apple's "Project Titan" is working on a driverless car. It's actually China's biggest Web search company, Baidu (NASDAQ: BIDU). And it has a distinct advantage that should concern investors of these American companies hoping to dominate this exciting, emerging market.
Baidu is a big company, with a current market cap of about $55 billion: larger than Ford's $47 billion and GM's $45 billion. Of course, all are dwarfed by Alphabet's $488 billion, but Baidu certainly has the size and clout to enter the market.
Baidu also has the big ambitions to go with its big size: The company hopes to have driverless cars in 10 Chinese cities within three years. By comparison, Google has been working on the technology since 2009 and only has driverless cars on the road in two cities -- Austin, Texas, and Mountain View, Calif. Ford has driven a driverless test vehicle at Mcity, a simulated city at the University of Michigan, while GM hopes to begin road testing one on its campus by the end of this year. None of these American companies have taken any steps toward testing in China.
Baidu, on the other hand, has already begun fully autonomous tests on various road types in multiple simulated weather conditions in China using a modified vehicle from its partner BMW. And this rapid pace of development isn't the only thing that should make Ford and GM shudder.
When in China
While Ford, GM, and Google are focusing primarily on the U.S. market for their driverless vehicles -- and U.S. roads for their tests -- Baidu is focusing on China, where the market for autonomous vehicles could be nearly as large as North America's by 2035, according to data from IHS Automotive. Indeed, according to a recent University of Michigan survey, 96% of Chinese drivers would be interested in purchasing an autonomous vehicle, compared to only 66% in the U.S.
But it may be difficult for American automakers to enter the Chinese market when their technology has been developed for North American roads. Differences in traffic patterns, laws, and conditions that might be easy for a human driver to comprehend could stymie a machine.
Not that Baidu has the Chinese market to itself. Chinese automakers BAIC, SAIC, and Chongqing Automobile Co.- which has a joint venture deal with Ford-are also developing driverless technology. However, Baidu is the first to test an autonomous vehicle on Beijing's roads and has made big investments in the artificial intelligence needed to pilot a driverless car.
Don't hate: regulate
Of course, with driverless technology challenging the existing driving systems, new laws and regulations need to be enacted. In the U.S., these laws have resulted in a patchwork of state and municipal policies on whether and how driverless vehicles can be operated. Most states don't have any pertinent laws on the books at all.
China, on the other hand, with its top-down legislative structure (local regulations are not allowed to contravene national laws) and one-party system, can create a nationally friendly environment for development of driverless vehicles and technology. It may have already begun to do so.
Last year, the Chinese State Council developed a plan to use technological innovation to juice the flagging Chinese economy. Transportation was one of the areas identified in the plan.Chinese President Xi Jinping reportedly considers autonomous vehicles and digital technology key areas of opportunity for Chinese manufacturers.
And Baidu has stepped up to the plate, making a presentation to the president about driverless-car technology. If China's national government dictates that municipal governments allow Baidu free rein in bringing driverless cars to China's cities, it will be a huge advantage for Baidu in the Chinese market.
The Foolish bottom line
GM and Ford, in conjunction with their Chinese partners, control a large portion of the Chinese auto market. Last year alone, GM and its partners sold a record 3.6 million vehicles in China. Ford and its partners sold 1.1 million. However, their autonomous vehicle efforts are centered in the U.S.
Baidu, through a combination of Chinese government support, a China-centered vehicle development plan, and its own ambitious investments in driverless technology, is poised to bring a fully driverless car to the Chinese market before its American competitors. That could eat into GM's and Ford's gains in the China. And, with a higher percentage of Chinese than Americans interested in buying a driverless car, China is a vital market for these cars of the future.
None of this is a guarantee that Baidu will prevail globally, of course, or that it will even end up as the dominant player in China. But serious competition from an unexpected competitor in an important market is the last thing an embattled U.S. automaker needs right now.