Tesla’s full self-driving rivals are in China

China already dominates electric-vehicle technology. Now it seems to have caught up with the West in the bumpy race to automate driving, too.

After years of frustrated hopes, the excitement around driver automation is building again. Tesla Chief Executive Elon Musk is largely responsible, having zeroed in on the company’s driver-assistance technology as the best answer to its growth woes. Google-owner Alphabet’s driverless-taxi project Waymo also has shrugged off concerns caused by a high-profile accident at its struggling rival Cruise, which is controlled by General Motors. Waymo recently signaled its confidence by opening its doors in San Francisco to anyone who downloads the app.

But there has arguably been more progress in China, judging by the sheer number of companies with technology at or close to the cutting edge.

Tech company Baidu, often called China’s Google because of its search engine, has a driverless-taxi project similar to Waymo and it isn’t the only one. Meanwhile, the driver-assistance systems of Chinese EV makers, including U.S.-listed XPeng, Li Auto and NIO, are evolving rapidly. This month XPeng, a pioneer of the technology in China, is pushing out an over-the-air upgrade that will make its flagship self-driving package available on all public roads in China. Sanctioned technology giant Huawei, which integrates its system into vehicles manufactured by other brands, is considered another market leader.

Users report that XPeng’s flagship package, XNGP, has similar functionality to Tesla’s so-called “full self-driving” (FSD) software. Both companies are betting on artificial intelligence to make progress rather than exhaustive mapping and coding. XPeng also appears to be following Tesla down the road of dispensing with expensive lidar technology for perceiving the vehicle’s surroundings. The approach is more reliant on cameras but will improve the economics of commercializing the technology if it works.

These are still only “Level 2” systems, according to the standard industry classification, because they require the constant supervision of a human driver. But Chinese regulators appear open to the crucial next step. Last month, China’s Ministry of Industry and Information Technology said it had approved nine automakers, including EV giant BYD, to trial “Level 3” automated driving on public roads. This means the human driver no longer needs to pay attention, subject to certain conditions, passing liability to the automaker.

Mohit Sharma, an analyst at technology research company Counterpoint, expects China to dominate the rollout of Level 3 vehicles in the coming years. Mercedes-Benz and BMW are starting to sell highly conditional Level 3 systems in Germany, and the former has launched its system in the U.S., but they are moving ahead much more slowly than their new Chinese rivals.

Driverless taxis count as Level 4 technology—they drive themselves without human supervision, or the speed and other restrictions that define Level 3. Because they are expensive to make and operate within tight geographic areas, their revolutionary technology doesn’t show signs of triggering an industry revolution. The shift from Level 2 to Level 3 on vehicles consumers can actually buy is potentially more meaningful.

Tesla pioneered EV technology, but Chinese companies, led by BYD, are now taking the lead in commercializing it at scale. Something similar might now be happening with driver automation. Faced with a price war, Chinese EV brands are desperate to attract wealthier consumers with the latest gadgetry. Beijing is only too happy to support the development of advanced technology.

In fact, Tesla may be one of the tools the Chinese government can use to help its domestic industry. Beijing signaled tentative support for the rollout of FSD in China when Musk made a surprise visit to the country in April. The stock jumped as investors anticipated software sales in the company’s second-largest market, where it currently only sells a limited version of its flagship driver-assistance package.

But China could gain too. Tesla will have to work with local partners such as Baidu for mapping. The U.S. company also seems likely to be required to keep its Chinese driving data, which is potentially valuable for training its self-driving system, in China.

The construction of Tesla’s Shanghai plant in 2019 is credited with jump-starting the Chinese EV supply chain, paving the way for today’s dominance. A deal between Beijing and Tesla over FSD might similarly help close any remaining gap in self-driving technology, and even foster China’s AI ecosystem.

Write to Stephen Wilmot at stephen.wilmot@wsj.com