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Build Your Dreams with 'Made in China' BYD

BYD global strategyBy Ajay Viswanathan, Jaseem Pookandy, Luca Rassenti, Pragya Uprety, Tsu-Yu Hsia and Vivek Mehta

Shenzhen: Li is driving a group of passengers in his shiny new BYD E6 to the Bao’an International airport. Heavy traffic has depleted his E6 of all the charge and, to his dismay, he cannot find a single charging station in the 10-mile stretch to the airport. Li soon realizes he will face this problem each day, his business being severely impacted by the lack of infrastructure in his city. He has paid a steep price for an electric vehicle (EV) but now regrets the investment.

San Francisco: Micheal, a Silicon Valley entrepreneur is evaluating options for his new "green car" purchase. At the top on his list is the Prius, but he also is contemplating waiting a little longer for new entrants from Nissan and the new Chinese auto giant, BYD. He is slightly skeptical due to the negative perception in the United States about Chinese automobile manufacturing and BYD’s problems and chooses the Prius hybrid, which works out just fine for the long weekend trips with his girlfriend.

These scenarios sum up the problems for BYD and the electric vehicle (EV) industry at large. While it seems as though the technology is promising, China is not ready for it. China’s income levels and infrastructure cannot yet support the paradigm shift to EVs at this point in time.  While the west is much more ready for the shift to EVs, it seems as though BYD is not prepared for the quality and safety demands Western markets will impose.  The negative perception of “Made in China” will not be changed overnight.

Building Dreams

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Wang Chuan-Fu, Founder and Chairman of BYD Corporation Ltd started the company with $37,000 in 1995 and has grown it to a $ 6 billion enterprise in the past 15 years. BYD’s superior process engineering in battery manufacturing allowed it to become the world’s largest mobile phone battery manufacturer.  Next, Mr. Wang decided to take on the challenge of the automobile industry.  BYD purchased Tsinchuan Automobile Company in 2002 and quickly propelled BYD’s auto brand to one of the largest in China. BYD has set the company goals of becoming China’s largest automaker by 2015 and dominating the world market by 2025. These expectations are largely built on its expected dominance in the electric vehicle (EV) market. Battery technology being the largest obstacle in the commercialization of EVs, many perceive that BYD’s superior battery technology positions them to win the global market and meet their ambitious expectations. Rapid commoditization of conventional mobile device batteries has prompted the company to innovate and invest heavily in the development of Ferrous and Lithium Iron Phosphate batteries which are recognized industry wide as the leading technology for EVs. In line with this, the company has invested $732 Million in a new manufacturing facility dedicated to Ferrous batteries in Huizhou, China. The company’s foray into diverse, yet synergistic sectors attracted an investment of $232 million from Warren Buffet in September 2008.  Since then, the stock has soared to a fourfold increase. BYD and its investors are betting heavily on the success of their EVs powered by their superior battery technology to achieve their ambitious growth goals.

Dreams Differed in China

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BYD and its investors viewed the EV segment as a fast growth opportunity with potential to generate massive revenues over the next 5 to 15 years and compensate for any market share loss in the battery division. BYD began selling the F3DM, plug in hybrid, to the public in March of 2010 and was only able to sell 28 units in the first 3 months.  In November, BYD released a report stating it had sold 300 units of the F3DM to date.   These sales figures fall far short of the company’s expected 4,000 to 10,000 units.  The unmet projections in automobile sales caused their stock to fall by 40%.  The lackluster sales in hybrid and EVs can be attributed to several factors.  The vehicle performance of the F3DM is such that it can deliver 62 miles when driven at 31 miles per hour, reports BYD.  Compare this to the vehicle output of a conventional vehicle and few people will be won over by these performance statistics.  A hybrid’s lack of performance when operating in electric mode means that for the majority of the time, people will choose to operate it as a normal gas vehicle.  That being said, the cost for a F3DM is about 100% more expensive than BYD’s conventional vehicle, the F3, which is China’s most popular compact vehicle.  China’s growing wealth is encouraging vehicle consumption but may yet not be suitable to support the premium cost for EVs or hybrids.  Besides performance and cost, infrastructure is the major obstacle limiting EV sales in China.

One aspect of infrastructure that must be addressed is the need for maintenance stations.  Before purchasing a new breed of vehicle, the consumer must be confident that there will be adequate service stations and the cost of maintenance will be near equivalent to conventional vehicles.  BYD must invest in creating its own service stations or educating those operating existing stations.  The creation of service outlets for hybrid and electric vehicles will take time and is not in line with BYD’s aggressive sales projections.  The infrastructure problem is compounded by the lack of charging stations.  This is a complex issue that requires the involvement of several parties.  Because the demand for charging stations is dependent on the sale of EVs and the sale of EVs is dependent on the supply of charging stations it becomes a question of who leaps first.  The Chinese government has yet to make a quantifiable leap of faith.  “Range anxiety” amongst consumers necessitates these charging stations at regular intervals.  While public charging stations are essential, once home, the plug in situation is not any easier.  China’s boom is generating a massive new class of white collar workers eager to purchase vehicles.  Because China’s economic growth is centered in the major industrial city centers where much of the new middle class find themselves living in high rise buildings with public/shared parking lots. Many of China’s largest cities are facing severe parking issues and are rapidly trying to organize construction of above ground and mechanical facilities.  Currently, parking lot construction is overseen by local governments’ communications departments.  Outside transportation experts believe that in order for parking issues to be resolved, the industry must be industrialized as it is in many developed countries and removed from the hands of the government.  Even when the parking space issue is overcome, which may be years, it is highly unlikely that the parking solutions will consider the needs of electric vehicles.  This is a major deterrence for the purchase of an electric vehicle in China and a solution will only develop over time with concerted planning efforts.

American and European Dreams

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BYD Chairman Wang Chuan-Fu Wang stood beside California Governor Arnold Schwarzenegger and Los Angeles Mayor Antonio Villaraigosa outside LA’s City Hall and unveiled the company’s grand plans to establish its North American headquarters in downtown L.A. Although 83% of BYD’s sales today are derived from China, the company is keen to move to the western markets, Europe and the US, who maintain higher household incomes, more suitable infrastructure, and substantial institutional support.  The median household income in the United States is approximately $50,000 and in most European countries is in the range of $35,000-45,000.   This provides a larger customer base for purchasing these more expensive automobiles. BYD’s promising E6, all electric vehicle, is slated to hit the markets at about $ 44,000 in 2011.  A population of western consumers with a greater disposable income is more likely to make a purchase of a hybrid or EV which many view as a luxury.

The routine of plugging your car into the wall after you pull it into your garage or carport is easily imaginable in the west.  The ease in recharging provided by the existing housing structures in the US and Europe make the switch to EVs much easier for the average westerner.  The number of single family homes in the US is 80 million. In addition, the US has over 75,000 km of highway and 4 million paved roads- infrastructure much stronger than that in China. Furthermore, BYD is forging strong relationships with governments and companies to provide public recharging stations.  It has established a strong foothold in Germany by signing an agreement with the German utility, RWE Effizienz GmbH, which has commissioned 450 charging points in Germany and plans to extend the number significantly throughout Europe over the next five years. Once again, the availability of charging stations is crucial to the success of EVs in any market and BYD seems to be making strong inroads in this arena.

Dreams Dashed- Again

BYD faces some major challenges in westward expansion as they look to offer an economical EV.  The EV revolution faces many of the same obstacles in the west as it does in China.  BYD is counting on its technological superiority, especially in battery technology, and low cost to win market share in the west.  BYD’s conventional vehicles in China are successful largely because of their relatively low price.  In China, their differentiated products, hybrids and EVs, are not finding the same success largely because of their premium price.  While the western markets may be able to afford higher price tags for automobiles, it will be done on a comparative basis.  BYD’s EV’s will have to compete with those of American, Japanese and Korean manufacturers.  The already established manufacturers have an advantage of understanding western taste and safety standards which BYD must develop over time.  BYD’s F3DM EV mode performance while superior to that of Toyota Prius may still not be compatible with the distance and speed demands of the average western consumer. Delloite Consulting conducted market research and found that 70% of potential US buyers would require a 300 mile range before purchasing an EV.  The company is planning on an American launch of the E6, an all-electric car, at a price point of $44,000 and a range of 205 miles. The question is how many buyers will purchase a relatively unknown Chinese brand over premier automobiles, such as BMW and Lexus.  In the EV segment, GM’s Chevrolet Volt and Nissan Motors’ Leaf sell for $ 41,000 and $ 33,000 respectively.  For $50,000 a buyer may purchase a high performance electric sports car made by Tesla motors.  The Toyota Prius which is the most popular hybrid electric vehicle is priced in the range of $22,000-$28,000. Availability of such strong substitutes at attractive prices are a potent threat to BYD’s aggressive sales figures in the US and Europe.

In addition, to garner such a price tag, BYD must prove its quality and safety.  BYD has yet to do so, not making its vehicles available for 3rd party testing as of yet.  Even if the quality of the vehicles proves to be excellent, there remains a stigma that “Made in China” means poor quality. This perception will not quickly subside; gains in market share will be slow if at all.  If BYD looks to move production to the West to improve upon this perception of quality it will lose one of its major competitive advantages, low labor costs.  However, the labor cost advantage is set to diminish in the near future, as Chinese government must allow the Yuan to appreciate.  Chairman, Wang Chuan-Fu admits “The Yuan rising would certainly have an impact on our exports. I believe that if the appreciation would not be rapid, the impact would be minimal.” Mr. Chuan-Fu downplays the effect this will have on his western expansion, but at an upper end price point within the EV segment, the market is unlikely to accept any forwarding of the increased production costs for the E6.  These macro-economic conditions further the likelihood of an underwhelming western market performance.

Dream Wiser

A company must dare to dream.  It must be bold in what it believes it can accomplish and inspire the organization towards its grand goals.  But what it cannot do is promise these bold dreams to the world.  Mr. Wang Chuan-Fu and his company cannot be faulted for being slow in innovation or even company expansion.  From BYD’s beginnings 15 years ago they have achieved incredible feats.  They are an inspiring company on the verge of challenging goliaths in the automobile industry.  The dream that they sold the world was that they could produce electric vehicles in a way that solved all the problems with their advanced battery technology.  The projections of the company were those of rapid market domination especially in the EV segment.  BYD has made some modest retractions in their sales expectations.  However, if they do not make clear “grand” retractions of their perceived market dominance, their repeated failure to meet investor’s expectations will cause investors to flee, a crash in its stock, and, worst of all, a loss of faith in the company.  BYD must make a concerted effort to publicize a more modest set of company goals coupled with the acknowledgment of current market limitations.  Doing this will protect the future of this truly vibrant and innovative company.

References

  1. BYD Company Limited- Annual Report 2009
  2. Advanced Storage Battery Market- SBI, March 2009
  3. Electric Vehicle & Plug In Electric Vehicle Markets Worldwide- SBI, March 2010
  4. BYD Swot Analysis- Just Auto
  5. Driving into China’s parking mess- Yu Liang, China Business Weekly , December 14, 2010 <http://www.chinadaily.com.cn/english/doc/2004-09/04/content_371610.htm>
  6. BYD’s American Dream- Ding Wenlei, Beijing Review, February 11, 2010 <http://www.bjreview.com.cn/quotes/txt/2010-02/11/content_246563.htm>
  7. BYD- Will America buy it?- ALEXG, Contrarian Value Investing, May 21, 2009 <http://www.contrarianvalueinvesting.com/2009/05/21/byd-will-america-buy-it/>
  8. China’s BYD plans to dominate global hybrid market, September 21, 2009 <http://www.hybridcars.com/news/china-byd-plans-dominate-global-hybrid-market-26121.html>
  9. http://club.battery.com.cn/thread-83629-1-1.html
  10. China to lead electric car charging boom by 2015- Josie Garthwaite, GIGAOM, June 23, 2009 < http://gigaom.com/cleantech/china-to-lead-electric-car-charging-boom-by-2015/>
  11. http://wenku.baidu.com/view/83824a225901020207409c44.html
  12. China Car Reports http://www.chinacarreports.com/cars/bmw_3-series
  13. Buffet Backed BYD puts US battery car unit in Los Angeles- Alan Ohnsman, Bloomberg Business Week, April 30, 2010 <http://www.businessweek.com/news/2010-04-30/buffett-backed-byd-puts-u-s-battery-car-unit-in-los-angeles.html>
  14. CNBC Interview with Mr. Wang Chang FU http://www.gurufocus.com/news.php?id=113823
  15. Is China’s Electric Car a Pipe Dream?- ChinaStakes, May 17, 2010 <http://www.chinastakes.com/2010/5/is-chinas-electric-car-a-pipe-dream.html>
  16. Secret to succeeding with Chinese consumers: Reflections on BYD- Helen H. Wang, December 2010 http://helenhwang.net/2010/09/secret-to-succeeding-with-chinese-consumers/
  17. BYD  F3e-all electric car dies in infancy- Amanda Zheng, Automotive News, December 2010 <http://autonews.gasgoo.com/china-news/byd-f3e-all-electric-car-dies-in-infancy-101206.shtml>
  18. Berkshire’s Investment in BYD: A Bet on Wang Chuan Fu- Rational Walk, March 2010 http://www.rationalwalk.com/?p=5620

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.