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Can BYD Build China’s Dreams in the Electric Car Industry?

As car ownership skyrockets at an astonishing rate in the world’s fastest-developing nation, Chinese automakers are taking a big gamble in their bid to dominate the emerging global market for electric cars. They have low-cost manufacturing, new technology and, in the case of automaker BYD, US$232 million from Warren Buffett, who has helped speed the company’s expansion into the U.S. market. Similar to the Japanese automakers in the 1950s and Korean automakers in the 1980s, BYD faces resistance from American consumers who perceive Chinese-made goods as being cheap and of low quality. But the Chinese government has set its sights on the economic and environmental future of electric cars, which means the Chinese automobile manufacturers will have to overcome stiff competition in the years to come as they develop a global brand and test consumer confidence across the globe.

The Birth of BYD

In 1995, 29-year-old engineer Wang Chuan Fu launched a start-up with US$300,000 and 20 employees, determined to stake a claim in the world’s fast-growing electronics market. Named BYD for “Build Your Dreams,” Wang’s company embodied the new entrepreneurialism of China’s transforming economy, churning out low-cost batteries for electric shavers, toothbrushes, cameras and countless other gadgets. Within five years, BYD went from being just one of hundreds of electronics manufacturers in Shenzhen to becoming one of the world’s largest manufacturers of batteries, riding the wave of a surging global mobile phone market.

Defined by the hard-charging work ethic of the company’s young and pioneering founder, BYD quickly gained an advantage over its competitors by tapping China’s enormous labor surplus and developing a reputation for superior technology. By 2003, the company had grown to nearly 100,000 employees, and Wang was on the lookout for new opportunities. In an unexpected move, he purchased a 77% stake — about US$32 million — in faltering automobile manufacturer Zhen Chuan Automotive in Xi’an. Wang, known for his fierce entrepreneurial spirit, had discovered a new application for his cutting-edge battery technology — the electric car.

Emerging Demand for Electric Cars
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Worldwide, research and development in energy-efficient vehicles over the past several decades have been spurred largely by government support, with lagging consumer demand discouraging full-scale production. In recent years, however, a perfect storm of soaring fuel prices, increasing investment in clean technology and the poor performance of American automakers has ignited renewed public interest in, and government support for, the development of the next generation of cleaner, more efficient automobiles.

To date, Japanese and European automakers have been at the forefront of fuel efficiency and automobile technology. In 1997, Toyota introduced the Prius — the first hybrid electric vehicle (EV) to sell more than a few hundred — which now makes up nearly half of all hybrid EVs sold in the U.S. Despite the global recession, Toyota sold more than 401,300 Priuses in 2010. In Japan, it was the best-selling car among all models.

Sales of hybrid vehicles continue to climb. From 2008 to 2009, while vehicle production fell by 21.2% worldwide, hybrid vehicle sales grew by 33%, according to SBI Energy, a consultancy. In Japan, hybrid sales shot up by as much as 185% during that period, showing strong market demand and a marked shift in consumer preferences toward energy-efficient cars. In the years to come, analysts predict an upward surge in demand for EVs worldwide as government policies continue to limit CO2 emissions while offering incentives to consumers and businesses to adopt environmentally friendly modes of transportation. According to SBI Energy, annual total worldwide sales of pure electric cars will grow to 68,000 by 2014 as the market becomes increasingly segmented.

Japan and the U.S. will continue to be the largest markets, although electric car sales in emerging markets will quadruple between 2010 and 2014, according to SBI Energy. As EVs and plug-in hybrid electric vehicles (PHEV) become the optimal option for long-term policy goals across the globe, new entrants in the U.S., China, and India are emerging as fierce competitors.

Electric cars have zero-to-low emissions and are 90% more efficient than conventional fuel-powered cars, with less than one-tenth the parts of conventional cars, according to the Royal Academy of Engineering. If powered by renewable energy sources, they also have the potential to be carbon neutral. While biofuel feedstock sources continue to pose a long-term challenge for alternative fuels, the infrastructure installment for EV charging sockets is seen as widely attainable in the next 10-20 years.

Despite high consumer demand for EVs, an affordable model has yet to come to market. Battery technology continues to pose the greatest hurdle for automobile manufacturers, which are searching for ways to increase storage capacity, shorten charge times and improve safety. Batteries are the most expensive components in electric cars, making up as much as 50% of the total cost. In response to these needs, a host of battery manufacturers and auto makers are now working in tandem to lower costs, increase battery range and improve safety in a range of climates. The competitive landscape has grown increasingly cut-throat, with newcomers such as BYD and Tesla Motors competing fiercely, each equipped with unique battery technologies.

In addition, once relatively unknown companies from emerging economies such as China’s Chery, and India’s Reva now aim to compete in the U.S. with long-standing auto makers such as Nissan, Ford and Chevrolet. In a sprint to market the first affordable electric car in the U.S., each of these companies hopes to release electric models by 2011. Tesla’s Roadster, priced between US$109,000 and US$129,000, is the only highway-capable EV in current production in North America and Europe. The company sold 1,200 Roadsters worldwide in July and August 2010. By 2011, Nissan hopes to release the Leaf, retailing for US$32,780. By the end of 2012, Chevrolet will have its own version, the Volt, selling for US$41,000.

BYD and Warren Buffett’s Gamble

Against this backdrop, BYD’s 2003 foray into the Chinese auto market was well-timed, garnering intense interest and speculation from analysts and Wall Street investors alike. BYD’s metamorphosis from battery manufacturer to car manufacturer has also attracted the attention and scrutiny of industry experts. The company is the only vertically integrated car manufacturer that makes its own batteries. As Henry Li, a Chinese venture capitalist who invests in electric car technologies, points out, “BYD has the full package: charger, battery, car.”

With seven models now on the market — two electric and five conventional — BYD is currently ranked sixth in sales in China, the world’s largest market for automobiles. In 2009, BYD sold 450,000 vehicles there. During the first half of 2010, the F3, a conventional four-door sedan, was China’s top-selling car. BYD was also the first company to release a plug-in electric model in China. The F3DM, a technological breakthrough for the company, has a range of 330 kilometers and a battery that can be fully charged in an hour. It retails in China for US$22,000.

But with seven plants across China, BYD continues to be primarily a battery manufacturer. The company, the world’s fifth largest manufacturer of batteries for cell phones and other electronics, claims its expertise in batteries is its competitive advantage in electric cars, an industry it plans to dominate through aggressive expansion in the coming years. The company’s bold corporate culture takes cues from its dynamic leader, Wang, who claims that “Build Your Dreams” stands for the company’s grand ambitions. In a 2009 interview with CNN, Wang described his designs to make BYD China’s first international brand with a reputation for quality: “For new energy vehicles, China is on the same level or even leading other countries. In the field of new energy cars, China hopes that Chinese companies can catch up with the rest of the world.”

In October 2009, Warren Buffett invested US$232 million — a 10% equity stake — in BYD, catapulting the company into the international spotlight. This investment from Mid-American Holdings, 87%-owned by Berkshire Hathaway, gave the company not only the capital to consider global expansion but also the credibility to test the waters in a foreign market. Prompted to take a bold step outside China, in April 2010 the company opened an R&D center and a sales office in downtown Los Angeles, a move greeted with much fanfare by the media and political leaders. As California governor Arnold Schwarzenegger noted, “Like California, BYD is a company of firsts. They are leading China and the rest of the world into a cleaner, more sustainable future with their automobiles and renewable energy products while creating jobs and saving consumers money.”

By establishing its headquarters in one of the most developed car markets in the world, BYD aims to leverage government incentives geared toward electric cars. The U.S. government offers up to US$7,500 in tax credits for electric car owners and is investing millions of dollars to develop a network of charging stations. California, the heart of the U.S.’s largest and greenest car market, offers a US$5,000 rebate to electric car buyers and is home to half the nation’s charging stations.

Already looking toward the future, BYD plans to use the U.S. as a stepping stone for expansion elsewhere. Paul Lin, BYD’s corporate marketing manager, said in an interview that the company plans to enter Western Europe in the next three years while maintaining its market share in China: “We hope to be a top-three manufacturer in China by the end of the year and the world’s largest manufacturer by 2025.”

With plans to release its first lot of cars into the U.S. in late 2010, BYD has yet to overcome several large hurdles, including developing a branding strategy to meet the tastes of U.S. consumers and identifying a distribution network of dealerships. “We don’t have a price set yet,” Lin said, “but we’re designing a car especially for the American consumer, with lots of space. Also, it needs to be more powerful to deal with hilly landscapes.”
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