CITIC SEC: AI-Driven Commercialization Accelerating, 2025 Smart Driving Tipping Point Is Coming

CITIC SEC has released a research report stating that smart cars, as an important application of AI, are expected to show "non-linear" growth in terms of penetration rate increase and experience breakthrough. In terms of penetration rate, the entry of BYD Company Limited in 2025 is expected to be the biggest variable in the domestic smart driving industry, potentially driving the sales volume of L2+ level cars from 1 million to 10 million, increasing the penetration rate of L2+ from 14% to 30%, achieving more than double growth. In terms of experience, AI is driving the transformation of smart driving experience from "usable" to "easy to use", and user willingness to pay is increasing. The turning point for smart driving is approaching in 2025, and the mass production of high-end smart driving models is expected to drive investment opportunities for whole vehicle manufacturers, domain controller module manufacturers, and component companies. Key points from CITIC SEC: China's passenger car market has entered a new stage of steady growth, with AI empowering the industry for high-quality growth. Looking back at 2024, from January to November, China's passenger car sales reached 24.35 million units, a year-on-year increase of 5%. The bank expects that the full-year sales of passenger cars in 2024 will exceed 27.5 million units, once again setting a new historical high. With the support of the "scrappage for new" policy, the bank expects the full-year sales in 2025 to reach 29.24 million units. In the medium term, China's automotive market has entered a new stage of "steady growth", where the pursuit of "quality" development outweighs the pursuit of "speed". Chinese car companies have a technological advantage in intelligence - especially in the field of AI large models, which is expected to continue to enhance the product strength and competitiveness of domestic car companies. In 2025, the implementation of AI at the application level is highly anticipated, with smart cars being one of the four major focus areas for AI landing alongside Siasun Robot & Automation, smartphones, and AI glasses. There is expected to be a non-linear growth in commercial implementation (penetration rate) and experience breakthroughs. Chinese leading car companies entering the market in 2025 are expected to drive the sales volume of L2+ cars from 1 million to 10 million. Review of the development stages of high-end smart driving: 1) Introduction phase: in late 2019, Tesla initiated localization in China, which led to rapid iteration of the domestic intelligent driving industry and established a sales base of around 600,000 high-end smart driving cars. 2) Development phase: from 2022 to 2024, Chinese new forces like "We Xiaoli" have all achieved full deployment of NOA functions, with a total sales of 910,000 cars in 2024. 3) Explosive phase: technology companies like Huawei and Xiaomi, with a strong foundation in the consumer electronics field, have ventured into the automotive industry, significantly enhancing the intelligence configuration of high-quality models and increasing consumer awareness of smart driving functions. After fully validating the necessity of smart driving functions, leading domestic car companies are entering the market. The entry of leading domestic car companies is expected to be the biggest variable in the domestic smart driving industry in 2025, driving the rapid increase of sales volume for L2+ level cars to 10 million units, and promoting the popularization of high-end smart driving by more domestic car companies, accelerating the increase in L2+ penetration rate. Penetration rate: In 2025, the penetration rate of L2+ is expected to double, with the sales proportion of high-speed/city NOA models expected to increase to 30%. L2+ functions refer to products with NOA functions. In 2024, the mainstream in the industry was L0, L1, and L2 level cars. According to the bank's calculations, the total sales proportion of L2 and below cars reached 86% in 2024; although the penetration rate of L2+ functions experienced rapid growth, in 2024, the penetration rate was only 14%, with high-speed and city NOA penetration rates calculated at 6% and 8%, respectively. It is expected that the penetration rate of L2+ will see a steep increase in 2025, rapidly rising from 14% in 2024 to 30%, with a doubling in sales volume. The growth of high-speed NOA is particularly notable, increasing from 6% in 2024 to 15% in 2025, with a potential 160% year-on-year growth in sales; the penetration rate of city NOA is expected to increase from 8% to 15%. In the long term, BYD Company Limited is expected to drive more "mainstream brands" to enter the market, with Honda expected to adopt Huawei's smart driving solution and Mercedes-Benz partnering with Nvidia, Momenta, and others for smart driving technologies. By 2030, the penetration rate of L2+ may increase to 80%. End-to-end promotion of smart driving experience from "usable" to "easy to use", increased user willingness to pay, and computing power upgrades becoming industry trends in 2025 The development of AI large models has expanded from the "language model" field to smart driving in cars. Taking Tesla as an example, in March 2024, the company released the FSD V12.3 version, using an end-to-end neural network algorithm to reduce information transmission losses between traditional modular systems; through training using over 10 million Clips, FSD has achieved better simulation of human driving behavior and reduced the willingness to take over control. As the functionality transitions from "usable" to "easy to use", consumer willingness to pay is increasing. From April 2024, Tesla introduced a $99 per month FSD subscription model; according to Yipit data, as of July 2024, the estimated subscription rate for FSD payment (excluding outright purchase) in North America increased from 2% to 12%. In China, companies like NIO, XPeng, and Huawei charge for smart driving functions as additional options during vehicle sales. The installation rate of smart driving features for various companies in 2022-2024 has significantly increased, with the sales of the above enterprises' smart driving versions exceeding 50%. In 2025, smart driving functions will be extended to lower-priced cars. According to reports from HiEV, ChipFlow Automotive, and XPeng's Mona product launch event, BYD Company Limited and XPeng will use "smart driving empowerment" as a means of differentiated competition to continue growing their sales and market share. Investment strategy: The turning point in smart driving is approaching in 2025, with the mass production of high-end smart driving models expected to drive investment opportunities for whole vehicle manufacturers, domain controller module manufacturers, and component companies.The barrier is higher than before.2) Domain controller & chip: Computing power is the core foundation of intelligent driving, closely cooperating with top chip manufacturers, leading in product matching, and having a strong position in the tier-1 supply chain. 3) Intelligent components: Benefiting from the increase in penetration rate of high-level intelligent driving, upstream components in the supply chain are expected to follow the trend of increased production. Risk factors: Risk of declining sales in the automotive industry; slower than expected adoption rate of new intelligent driving technologies; less government support for intelligent driving than expected; cost reduction of intelligent driving not meeting expectations; occurrence of serious accidents related to intelligent driving.