After a series of successes, BYD faces risks
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
:: Corporations
After a series of successes,
BYD faces risks
Li Wan-Yong
Business Analyst of POSCO Research Institute
C
hinese manufacturer BYD Auto’s third-quarter results for
2011 sent the market into shock. BYD’s net profits decreased
86% year-on-year. BYD sold 520,000 vehicles in 2010, far
below its target of 800,000. This is in stark contrast to the
increasing sales trend in China’s auto market in 2010.
In late August 2011, BYD shed 70% of its sales staff from its auto unit,
up to 1,800 layoffs out of 2,600 workers. There is a rumor going around that
BYD will lay off 7,000 employees in its manufacturing unit. In early August,
BYD’s vice president and general sales manager, Xia Zhibing (夏治氷), one
of the early members of the company, suddenly resigned.
Just two years ago, BYD was enjoying its heyday. Whatever happened
to the poster child of China’s new energy vehicle sector?
○● “BYD model” bolstered by the “Buffett effect”
BYD started as a battery manufacturer in Shenzhen in 1995. When it
113
Winter 2012� POSRI Chindia Quarterlyacquired a Xi’an-based car manufacturer in 2005, BYD took its first step
into the car manufacturing industry. Up until 2009, BYD grew by over
100% each year. Only three years after getting involved in the car
manufacturing business, BYD became China’s number one company in the
low-end compact car sector. BYD Chairman Wang Chuanfu (王傳福)
announced bold plans to become the largest automaker in China by 2015,
and number one in the world by 2025.
Many things factored into the success of BYD. First, from 2005, when
BYD entered the automotive industry, China’s automotive market grew at
double-digit rates. The demand for small and medium-sized cars was
particularly high; BYD’s compact car and low-cost strategies worked.
BYD’s vertically integrated business model, once called the“BYD model”
,
and a production method that relied more on workers than on machines
were effective for producing imitation models at lower prices. The“BYD
model”was considered a role model in China’s auto industry. In 2006, BYD
set out to expand the market with its F3 sedan, a copy of an older Toyota
model, and sold 100,000 units within two months after the new model was
released in the market. This was an unprecedented outcome in China’s
automotive history.
The“Buffett effect”also played an important role in the success. BYD
attracted global attention when an investment fund run by Berkshire
Hathaway bought 9.9% of Hong Kong-listed BYD’s shares for USD 230
million in September 2008. With Warren Buffett’s visit to BYD in Shenzhen
in September 2010, BYD showed off the trust it had received from the
legendary investor. There was, of course, an ulterior motive to the visit,
which came at a time when BYD was agonizing over its deteriorating
performance.
BYD also benefitted from the government’s support through policies for
the development of electric vehicles, which included subsidies for buyers of
electric cars.
114
POSRI Chindia Quarterly� W i n t e r 2 0 1 2:: Corporations
○● BYD’s failure to build its own brand
Government subsidies for consumers of small and medium-sized cars,
given to increase consumption of these products, provided a golden
opportunity for BYD. However, this opportunity did not last long. In mid-
2010, when the subsidies ended, BYD’s performance started to decline.
Factors that had led to BYD’s success ended up putting pressure on BYD.
With a lineup that consisted of copied small and medium-sized, low-cost
models, BYD failed to build its own brand. The Chinese carmaker never
rolled out a notable new model after the F3 sedan; it merely released models
with slightly altered engine displacement and exteriors.
While major global carmakers were setting their strategic priority on the
Chinese market and concentrating their resources, BYD sat on their hands.
In 2010, the F3 accounted for 51% of the 520,000 units sold. No carmaker
could survive five years with only one model.
The vertically integrated business model and the production method that
relied on workforce, the two representative characteristics of the“BYD
model”
, also played a role in BYD’s poor performance. Relying on in-house
production for most of the parts, BYD could not benefit from economies of
scale. This led to poor quality and rising production costs. The labor costs in
Shenzhen, where BYD’s major production facilities are located, were the
highest and fastest growing in China, but BYD had a reputation for low-cost
vehicles at home and abroad. BYD had no way to improve its profitability.
○● Failure to build a mass production system for electric cars
BYD showed little sense of urgency in its changing environment. It only
focused on sales and profits, disregarding relationships with suppliers. With
sales deteriorating, BYD chose to consign its inventories to dealers in March
2010. However, dealers in Hunan, Zhejiang, Beijing, Chengdu, and
Zhengzhou responded by leaving the BYD sales network, and BYD sales
deteriorated further.
115
Winter 2012� POSRI Chindia QuarterlyAs BYD failed to build a mass production system for electric vehicles,
BYD’s future became bleaker. Since 2008, BYD has invested RMB 5
billion in research and development of electric cars (including fuel cells),
but it has invested little in traditional vehicles. So far, BYD has sold only
1,000 electric cars.
Another problem for BYD is its substandard technologies. BYD was
lagging far behind Korea and Japan in fuel cell technology, which is the
foundation of BYD’s business and the core technology of electric cars. BYD
has almost no patents related to electric vehicles in the USA, the largest
automotive market. With high prices and a lack of infrastructure, the
commercialization of electric cars has been delayed.
BYD’s management responded poorly to risks. About a year ago, when
a great number of dealers left the BYD sales network, the chairman of BYD
gave a vague explanation that reducing the number of dealers was meant to
improve the profitability of the remaining dealers. BYD management gave
an equally vague explanation for the laying off of its sales workforce: that
BYD’s excessive expansion strategy had led its sales division to become
disproportionately large. Other companies rushed to scout workers
discharged from BYD, which gives the impression that the BYD chairman’s
remarks were mere excuses.
When unfavorable public opinion did not seem to be recovering, BYD
opened its fuel cell plant to the public for the first time in order to improve
its image. However, this had the reverse effect, because BYD disallowed
press release of any news stories or photos.
The rumor of Buffett’s withdrawal of BYD shares also became a burden
on the company. Whenever BYD shows poor performance, Buffett’s
potential withdrawal of BYD shares becomes a hot issue. The price of BYD
shares once rose to HKD 85.5, but nosedived to HKD 15.36 as of the end of
October 2011, an 85% fall from the record price, giving more credence to
the rumor of Buffett’s withdrawal.
116
POSRI Chindia Quarterly� W i n t e r 2 0 1 2:: Corporations
○● Delayed commercialization of electric cars as the
greatest obstacle
Beleaguered BYD Auto debuted its E6 full-electric crossover on
October 26, 2011. BYD believes that the new model is better than any
existing electric car in terms of driving range and fuel economy.
The problem with the E6 is its price. The E6 is sold for RMB 370,000,
which is equivalent to the price of an imported midsize sedan. Even with
government subsidies, the price exceeds RMB 300,000. BYD claimed that
this price would be
offset by improved
mileage, but this claim BYD is at the end of its rope. For the
is questionable. For company to revive, it is imperative to
every 100 kilometers, realize its commercialization policies
for electric vehicles and create a
the E6 costs RMB 14,
profitable model.
while a traditional
internal combustion
engine (ICT)-powered
automobile costs RMB 70. The E6 gets five times better mileage, but in
reality, it can save only RMB 56,000 after running 100,000 kilometers.
Because BYD has failed to equip itself with mass production facilities,
the price of its parts is also very high. The E6 also suffers from frequent
malfunctions because of its low technology readiness level. Considering
other problems, including insufficient infrastructure, and rising power
prices, the E6 has little hope of cost-competiveness. For this reason, some
claim that the E6 is a gamble for BYD, not a self-rescue measure.
JD Power and Associates, a global marketing information services
company in the USA, projected that sales of battery electric vehicles
(BEV’s) and plug-in hybrid electric vehicles (PHEV’s) will reach 5.2
million units by 2020, just 7.3% of the 70.9 million passenger vehicles. JD
Power asserted that the era of electric vehicles will not come within the next
117
Winter 2012� POSRI Chindia Quarterlydecade without increased standards for tax systems and fuel economy, and
the support of public policies. Germany’s Bosche projected that it will not
be until 2020 that electric cars will become widespread in China, and that
sales will account for only 5-10% of the total vehicle sales.
The Chinese government has put all its efforts to nurturing battery
electric vehicles in order to make up for China’s disadvantage as a latecomer
in traditional ICT-powered vehicles. However, it has projected a change in
policies in the face of BYD’s delayed commercialization and export plans
for electric cars.
IHS Consulting, a consulting firm specializing in the auto industry, has
announced that the government will shift the focus of its goals for new-
generation vehicle technology from BEV’s to energy-saving technologies,
including plug-in hybrid electric vehicles.
BYD must repay debts of RMB 31 billion by the end of 2012. BYD is
highly likely to spend all of its RMB 6 billion in corporate bonds, which are
supposed to be issued to invest in the electric car sector, to repay its debts.
BYD is at the end of its rope. For the company to revive, it is imperative
to realize its commercialization policies for electric vehicles and create a
profitable model.
118
POSRI Chindia Quarterly� W i n t e r 2 0 1 2You can also read
