19 Jun THE WIRE CHINA : BYD’s Big Moment

Media Source : THE WIRE CHINA

26 FEB 2023

How did the Chinese automaker become such a dominant force in the EV industry? And, perhaps more importantly, can it stay that way?

Illustration by Luis Grañena

BY ELIOT CHEN — JUNE 18, 2023

If you had to pinpoint the moment the global automotive landscape shifted, when its center of gravity settled on China for the first time, a good guess would be March 29, 2020 — the day the Chinese automaker BYD Auto introduced its Blade battery.

Given the timing — in the early and chaotic days of the pandemic — not many observers took full stock of the Blade. And something as technical as a more efficient battery design could hardly compete with the subsequent headlines about the larger automotive industry’s many pandemic crises — crippling semiconductor shortages, for instance, and lithium price spikes.

But as the pandemic dragged on and none of these various supply chain snarls touched BYD, the full weight of BYD’s accomplishments slowly came into focus. BYD went on to debut its flagship vehicle, the Han, four months after the Blade. And then, just as every other automaker seemed paralyzed waiting for parts, BYD started spitting out cars.

By mid 2021, it became clear that BYD had something no other automaker did: Almost total control of its supply chain. A new BYD car today is likely to be powered by chips and batteries made by BYD, in a factory built by a BYD construction subsidiary, and packed with metals mined by BYD. The car may even be shipped across the world in a BYD-owned cargo ship, and eventually insured by a BYD-owned provider.

The cumulative effect was that BYD’s cars weren’t just getting better, but also cheaper. Ten years ago, the BYD e6 — a boxy, ungainly hatchback that served as BYD’s then-flagship car — advertised a range of 300 kilometers at a cost of over $49,000. Last month, BYD announced that its new Seagull hatchback, with an identical range, would start at $11,000, a mere quarter of its predecessor’s price.

“BYD’s DNA is manufacturing, and they’re notoriously good at driving costs down,” says Michael Dunne, founder of ZoZoGo, an automotive consulting firm. “That was their origin story, with batteries for mobile phones, and now it’s the same for cars; they drove costs down until they were irresistible.”

A long list of superlatives shows just how irresistible BYD has become. Today it is the world’s largest producer of electric vehicles (EVs), the second largest producer of EV batteries, and China’s best selling car brand, displacing Volkswagen, which had held that title for at least 15 years. Six of the top 10 best selling EV models in China in 2022 were BYDs. And with almost 600,000 employees — half of which were added in the last year — its parent company, BYD Company Ltd., is possibly the largest privately- owned Chinese firm today by workforce size after Foxconn, the contract manufacturing giant.

BYD’s blink-and-you-miss-it expansion in the last three years has blindsided just about everyone, but it is part of a larger earthquake happening in the global auto industry. In the first quarter of 2023, China overtook Japan as the world’s top auto exporter for the first time, according to a report in Nikkei Asia. The value of Chinese passenger vehicle exports exceeded $16 billion in the first quarter — a 900 percent increase over the same period in 2020, according to data from China’s General Administration of Customs.

“We’ve moved into a world where Chinese demand [for cars] is being met by Chinese production — and then some,” says Brad Setser, a senior fellow specializing in global trade and capital flows at the Council on Foreign Relations. “For China to go from being a net importer to a net exporter in such a short period of time, that is a profound shock for the global economy.”

Or, as Ford CEO Jim Farley put it last month, “I think you can clearly see it’s a bit of a new world order.”

Five years ago, few would have predicted this new world order, and even fewer still would have predicted BYD would be leading the way. Originally a battery manufacturer for mobile phones, the Shenzhen-based company moved into EV batteries in the 2000s and gained marginal international attention in 2008 when a subsidiary of Warren Buffett’s Berkshire Hathaway invested in it. But even with that bump, the company was seen as an automotive laggard — an option of last resort for many Chinese consumers, with sales propped up by generous government subsidies. In a 2011 Bloomberg interview, Tesla chief executive Elon Musk was asked whether BYD was a source of competition; Musk simply laughed. “Have you seen their car?” he responded.

Today, Tesla is a BYD customer: The American automaker rolled out its first Tesla models equipped with BYD’s Blade batteries in Germany last month. Tesla, along with other automakers like Ford and Volkswagen, are also scrambling to follow BYD’s supply chain model and investing in upstream sectors they previously outsourced, such as critical mineral mining and processing, as well as battery production.

“The Blade is arguably the most advanced battery in the world right now,” says Dunne. “Whereas Tesla started as a carmaker and is working backwards, BYD is a battery powerhouse and an automotive dark horse.”

The question now is how far BYD will go. Buoyed by its success in China, the company is embarking on an ambitious global expansion. Last year, its cars became available in Australia, Brazil, Thailand and Japan, and this year, the company is doubling down in Western Europe. In North America, BYD is already an active competitor in commercial vehicles, with factories in southern California and Ontario that produce electric buses and trucks.

With a potential spin-off called RIDE, BYD is even quietly laying the groundwork for a U.S. expansion. America is currently scrambling to nearshore auto production and beef up its own national champions in the automotive sector, but BYD has made cautious steps to secure contracts with local school districts as part of a $5 billion federal program to electrify America’s school buses.

U.S. wariness about Chinese companies could hurt BYD’s chances in the world’s second largest auto market, but experts say anyone who ignores or writes off BYD does so at their own peril.

As Bill Russo, founder and CEO of Automobility, a Shanghai based auto consultancy, notes, “If you’re not racing with the best horse, you’re racing slower.”

THOMAS EDISON + JACK WELCH

When Berkshire Hathaway decided to take a stake in BYD in 2008, it took many by surprise. BYD had only just moved into the automotive sector six years earlier, when Wang Chuanfu, the company’s founder, decided to purchase a failed state-owned automaker in order to acquire its production license.

“Out of the gate, things did not go well at all,” says Dunne about BYD’s foray into cars. “They cobbled together poorly designed cars powered by Japanese engines, sold to people who couldn’t afford something better. In the early days, they were not a highly respected auto maker.”

But two of Buffett’s closest lieutenants, David Sokol and Charlie Munger, saw something unique in Wang. The famously curmudgeonly Munger lavished effusive praise on Wang, describing the battery chemist as “a combination of Thomas Edison and Jack Welch” in an interview with Fortune. They went on to invest $230 million, giving Berkshire Hathaway a 10 percent stake in BYD.

The initial pivot to cars notwithstanding, Wang had had a successful track record. With early investments from a state-owned enterprise and a conglomerate owned by Wang’s cousin, Lü Xiangyang, Wang founded BYD in 1995 as a supplier of batteries for mobile phones. Just three years later, BYD — which stands for Build Your Dreams — became the largest rechargeable battery maker in China, supplying clients like Motorola and Ericsson. The company also has a longstanding relationship with Apple, having been a supplier to the famously demanding technology firm for over a decade.

“Being able to be a long-tenured supplier of Apple should be an indication to the technology folks,” says Tu Le, founder of Sino Auto Insights, an automotive consultancy. “Apple will mature you very quickly or you’ll break. Having that experience in technology prior to the pivot to EVs was invaluable.”

But even as BYD succeeded, Wang and senior management all resided in staff quarters on BYD’s corporate campus — a sign, those who know him say, of his legendary frugality. On a trip to the Detroit Auto Show one year, Wang reportedly stuffed his company’s 30-person delegation into a single house to save money on hotel rooms. Several analysts close to the company also recalled a time that Wang seemed to finally splurge on a top-of- the-line new Mercedes — only to order his engineers to dismantle it in order to study its parts.

Still, it took years for the company to improve the quality of its cars. Sales of its first flagship EV, the e6, released in 2011, came primarily from the Shenzhen government, which absorbed the vehicles into its taxi and police fleets. Generous government subsidies (more than $2 billion between 2008 and 2022, according to company financial records) and protectionist policies helped the company stay afloat.

Wang also did what he could to help usher in the EV renaissance. While BYD continued to hone its manufacturing processes and bottom line behind the scenes — establishing a partnership with the lithium mining arm of Youngy Co., a conglomerate owned by Wang’s cousin, for example — the company worked to address its image problem.

In 2017, it hired Wolfgang Egger, formerly head designer for Audi Group, and tasked him with giving the company’s lineup a much-needed facelift. The result, experts say, was impeccably timed with the Blade rollout and culminated with the Han.

“The Han was their first actually good looking car, and the Blade, of course, was revolutionary,” says Taylor Ogan, CEO of Snowbull Capital, a hedge fund that is invested in BYD. “The industry didn’t really have a ‘sexy’ battery — there weren’t batteries developed for EVs. But when BYD released Blade, it came out of nowhere and people were shocked. The form factor was completely new.”

The Blade battery uses the same basic chemistry as other lithium iron phosphate (LFP) batteries, but the way that it’s assembled is innovative: traditionally, the electrodes in a battery are assembled in a winding process, whereas in the Blade, the electrodes are stacked like a sandwich, which has the advantage of being more energy dense. In the world of electric vehicles, that means you can pack more charging power into less space.

“It’s relatively easy to make a large cell, but BYD’s main innovation was that they were able to make such a large cell work well inside of an EV,” explains Max Reid, a senior research analyst specializing in EVs and battery supply chains at WoodMac, a research and consultancy group. “They could think it through all the way from the chemistry to the EV pack engineering, because they produce their own cells.”

The sandwich-like design of the cells also means more safety. In a widely circulated video, BYD shows the Blade beating the so-called ‘nail test’ — a notoriously challenging safety test wherein a machine stabs a nail through a battery pack. After being gored by the nail, the BYD Blade holds stable, while a rival nickel and cobalt-based battery (the type used in most Teslas pre-2022, for example) bursts spectacularly into flames.

To many, the feat underscores Wang’s long standing battery chops. A 2009 Fortune magazine profile describes Wang drinking a cup of battery fluid to prove to investors that BYD’s batteries were safe. (“Doesn’t taste good,” was his review.) Indeed, far from the laughing stock Musk treated it as in 2011, BYD now has the definitive edge over Tesla, especially on its home turf where it outsold the American manufacturer last year by a margin of four to one.

Having established itself as a compelling budget option for Chinese consumers, BYD is now gunning for the more premium segments of the market. Since the start of this year, it has unveiled two new brands, Yangwang (meaning “looking up”), a luxury brand whose offerings include an off-road SUV and a supercar, and Fang Cheng Bao (which translates literally to “formula leopard”), which is positioned somewhere in between. 3 All in all, the company has over a dozen models either announced or currently on the market.

“They have so many models on the market and more coming — it’s crazy,” says Xing Lei, an independent consultant and co-host of the China EVs & More Podcast. “I don’t think people expect the sheer number.”

As the de-facto national champion, BYD boasts its shuijun (water army) in China, an aggressive fan base that is known to affix Chinese flag decals to their cars and is quick to defend the company against any perceived slights. Analysts note that Chinese customers are particularly fond of small details that reflect BYD’s Chinese DNA, like an onboard computer that connects seamlessly with WeChat — something that Tesla still struggles to do.

“In the past, if you ask the average consumer if they wanted a BYD, most people would’ve never considered a Chinese brand,” Ogan says. “That’s something that has been the biggest shift. The sense of nationalism didn’t really exist before.”

That sense of nationalism, however, could also limit BYD as it looks to expand abroad.

RIDE ON

The Han and the Seagull aren’t yet available in the U.S., but in Santa Barbara County, California, elementary school students get to experience one of BYD’s most promising products: the electric school bus.

In 2022, BYD USA announced a partnership with the Los Olivos Elementary School District to supply a single electric school bus for its fleet. The company — which also manufactures utility vehicles like semi trucks and garbage trucks — is gearing up to bid on more contracts this year as part of the Clean School Bus Program, a $5 billion, five-year federal initiative administered by the Environmental Protection Agency (EPA) to electrify school bus fleets.

But BYD USA faces tough headwinds thanks to worsening U.S.-China relations. In 2019, Congress passed a provision in its 2020 National Defense Authorization Act (NDAA) that blocked Federal Transit Administration funds from going to companies with links to China, effectively shutting BYD out from large swathes of the U.S. market for electric transit vehicles.

Because it’s administered by the EPA, the Clean School Bus Program doesn’t have these same restrictions, but BYD seems to be making moves to stay ahead of the issue and to get back into the larger transit market.

Around March, a website that looks almost identical to BYD USA’s debuted for RIDE, which stands for “Real Innovation Delivered with Excellence.” The site copies much of the language and layout from BYD USA’s site, albeit with no mention of BYD itself. Even BYD’s logo has been edited out of many of the pictures. Lawyers for BYD also filed a trademark for RIDE in March 2022, and staff at BYD North America switched to RIDE email addresses in April.

Several people familiar with BYD’s plans told The Wire that RIDE is part of a planned spinoff of BYD USA that will see it take on new American investors and adopt a majority American board. The BYD parent company will end up with a minority stake, sources say, while RIDE will continue to manufacture electric transit vehicles in California using BYD’s technology.

Presumably, BYD hopes this setup will allow the company to supply the U.S. market — and it has a shot. BYD USA was established in 2011 and has a factory in Lancaster, California, that employs more than 750 unionized workers. As Xing Lei, the independent consultant, notes, “BYD America has been studying the U.S. market for years. They’re in a position to say they’re a local American company hiring for local American jobs.”

But the contortions of RIDE also illustrate the scale of the challenge facing BYD. While other Chinese brands have pursued a number of strategies to publicly distance themselves from their home offices — TikTok and Shein, for example, established new headquarters overseas — a restructuring of BYD USA that would see the parent company’s stake diluted is a step further than other Chinese multinationals have taken.

And it still might not be enough to satisfy policymakers.

“Just about every car produced today is a smart car,” says Scott Kennedy, chair in Chinese business and economics at the Center for Strategic and International Studies, a Washington, D.C. think tank. “It wouldn’t take a lot of imagination to think that there will be some in the U.S. government who would be concerned about Chinese automobiles collecting and transmitting data.”

BYD did not respond to multiple requests for comment.

Other Chinese auto brands have tried to disguise their “Chinese-ness” when going abroad. State-owned automaker SAIC Motor Corp., for example, sold more than half a million vehicles overseas last year under the storied British brand MG, which it acquired in 2007. Geely, meanwhile, sells well-reviewed performance EVs made largely in China under its Polestar brand, a joint venture with Volvo. About one-fifth of Polestar sales in the first quarter went to U.S. customers.

But Chinese brands still have a long way to go in overcoming negative public perceptions, and as China’s de-facto national champion, BYD might have a harder time than most. 4 Since August, Berkshire Hathaway has repeatedly moved to sell down its stake in BYD. Analysts note that the move is consistent with Berkshire’s apparent risk aversion when it comes to East Asia: the investor also recently sold down its stake in TSMC, the Taiwanese chipmaking behemoth. But the moves have nonetheless rattled the company’s stock price and raised questions about its growth potential.

Ironically, the fierce EV competition in China could also be hurting BYD’s chances to eventually crack the U.S. market. Analysts note that a price war in China has caused many of China’s weaker competitors to be squeezed in their home market, forcing them to turn to export markets to bump their sales.

“The brands under the most pressure to sell overseas are the ones with overhanging capacity, and that’s a big problem for China as a whole,” Russo says. “If you’re not repping with the best, it’ll be like an albatross for the good brands.”

As the current leader, BYD is also facing problems at home as its rivals in China make moves against it. Just this month, the state-owned Great Wall Motors alleged that two of BYD’s bestselling plug-in hybrid EVs were in violation of emission standards. Great Wall filed complaints with three state ministries, including China’s top market regulator. Some have interpreted this as a shot across the bow by BYD’s state-owned competitors — and a reminder that, in Xi Jinping’s China, a private company as large and as vertically integrated as BYD is on shaky ground.

For now, though, analysts say that BYD is riding high — and wearing its confidence on its sleeve.

“I’ve talked to several advisors in China who say: ‘What we’re seeing [with BYD] is exactly what U.S. companies did when coming into China — acting as know-it-alls,’” says Dunne.

As a novice to the international market, Dunne says BYD’s overconfidence could result in it misunderstanding its customers. But while BYD may be a novice when it comes to foreign markets, its biggest advantage — its price — is also the one that translates best.

“It’s worth noting that within months of entering Thailand and Israel, they’ve already become the number one EV brand,” says Sino Auto Insight’s Le. “They’re connecting quickly.”

This should be a wake-up call for BYD’s competitors — if they are wise enough to hear it. At the recent Shanghai Auto Show in April — the first for Western auto executives since the pandemic — many attendees noted that the crowds voted with their feet: Throngs of onlookers mobbed the booths of Chinese automakers, while legacy brands barely registered a glance. Russo, from Automobility, recalls seeing some German auto executives “looking at the Seagull, slamming doors, and chuckling that [BYD] can’t make doors like [they] can.”

“But you know what,” Russo notes. “They don’t know how to make an $11,000 car.”

Eliot Chen is a Toronto-based staff writer at The Wire. Previously, he was a researcher at the Center for Strategic and International Studies’ Human Rights Initiative and MacroPolo. @eliotcxchen

SOURCE: https://www.thewirechina.com/2023/06/18/byds-big-moment-byd-electric-vehicle/