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Business Impact

The World’s Largest Electric Vehicle Maker Hits a Speed Bump

China’s BYD has huge market share and the backing of Warren Buffett, but a recent drop in government subsidies is hurting sales of its electric cars.

At BYD’s manufacturing plant in the southern Chinese city of Shenzhen, 600 workers and a host of robots mount tires and dashboards into electric cars that roll off the final assembly line every 90 seconds. “It could be every 45 seconds,” says factory coördinator Jun Li as he points to a long line of freshly welded and painted car bodies. “We can make 900 a day in peak production. Now we’re making 500 a day.”

After years of double-digit growth, sales have dropped sharply for BYD, the world’s largest electric vehicle maker and a well-known brand in China (see “How Other Battery Manufacturers Could Help Tesla Reach Its Own Goals”), since the government lowered subsidies for electric vehicles. BYD’s popular and inexpensive Qin hybrid sedans have led to its 31 percent share of China’s electric vehicle market, according to China-specialized research firm JL Warren Capital.

Now BYD, which had revenue last year of $14.5 billion from cars and a variety of other battery-powered products, is trying to figure out how to cut the cost of each car without killing its profits. Its solution is to expand its fleet of electric vehicles, selling more electric buses, trains, and taxis to local governments, and to expand its overall production to drive down manufacturing costs. 

Low costs are how BYD got its start. Founder chemist Chuanfu Wang launched the company in 1995 with $300,000 raised from family. He and a team of 20 employees studied patents of other battery makers and then dismantled their batteries to see the components and how they were put together. They had to figure out the proportions of all the chemicals and the right manufacturing environment, and it took them half a year to determine how to manufacture without the kind of humidity controlled dry rooms that rivals like Sanyo used.

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Using cheap labor, Wang designed a system of semi-automated production, and by 2002, he was employing 17,000 workers, and BYD was one of the world’s top manufacturers of nickel-based batteries and lithium-ion batteries.

As the battery market for electronics matured and BYD faced increasing competition in China with the entry of new Chinese rivals, Wang branched out into cars, seeing the nascent sector as a way to leverage its manufacturing capabilities, and in time develop electric vehicles that could be powered by BYD’s batteries.

Initially Wang followed the same copycat method he’d used with batteries, developing BYD’s first model, the $6,000 F3 compact sedan, by having a crew of engineers take apart the Toyota Corolla to see how the engine and body might be re-created. The F3, a pretty good copy of a Corolla for less than half the price, became one of the best-selling cars in China, and within about five years BYD was outselling big names like Volkswagen and Toyota (see “China’s New Green Machine”).

Soon engineers created a “dual mode” plug-in battery and gasoline engine vehicle that was cheaper and more efficient on a single charge than the Toyota Prius at the time. This one didn’t require reverse engineering. BYD already knew batteries, electric motors, and controlling systems, so it combined all the technologies together to form its own homegrown hybrid. 

BYD’s timing was perfect. Trying to thwart slowing economic growth, in 2015 government leaders announced the “Made in China 2025” initiative focused on a few key sectors, one of them clean energy vehicles (see “China Wants to Replace Millions of Workers with Robots”). Their target is to sell seven million over the next decade, two million of that by 2020.

Are government subsidies a sustainable way to support clean transportation?

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Chinese leaders created large subsidies for electric vehicle purchases, sparking an electric car revolution in China. BYD’s auto sales have increased roughly 45 percent annually over the last two years.

Last year 507,000 electric cars were sold, a 53 percent increase over the year before, though that’s still a small part of China’s 28 million car market, according to the China Association of Automobile Manufacturers.

Yet in January, when the government cut funding for electric vehicle purchases in an attempt to force consolidation of the industry by weeding out smaller, subsidy-reliant companies, BYD’s first-quarter profit fell 29 percent to $88 million (605.8 million RMB), and sales dropped 34 percent. Now BYD is hoping its slump will be solved by a global expansion with new products like buses, garbage trucks, and trains eventually providing a full suite of clean-energy urban transportation. Subsidies will again play a role, and the company is investing in bus factories in France and Hungary.

Outside of Shenzhen, in a new district called Pingshan, a version of this clean energy ecosystem is nearly a reality. Taxi drivers in compact cars supplied by BYD drop off passengers on “BYD Lane,” where the company’s headquarters look like a parody of modernity, with thousands of nearly identical cars all parked outside matching monolithic office and parking structures, topped with BYD solar panels and connected by a BYD elevated monorail.

“Do you know the biggest industry that’s subsidized by the U.S. government? Transit bus,” said BYD’s vice president of the Americas, Micheal Austin, adding that 80 percent of all capital expenditures on U.S. bus transit are funded by the federal government. In Lancaster, California, Austin leads a team manufacturing around 300 electric buses a year for the U.S. market. He says he has 100 orders for electric port vehicles and is working on electric airport tugs.

The plan has critics. Alvit Wang, an equity research analyst at JL Warren Capital, says BYD has “zero” innovative technology in its monorail design, and the public transportation sector is already saturated. The number of cities looking for new energy public transportation is limited, and BYD will have to work hard to convince local governments to spend $800,000 on a green-tech bus, says Jack Perkowski, former CEO of Asimco Technologies.

But BYD is rocketing forward. It has just spent $725 million developing its sleek, white, bullet-nosed monorail, equipped with BYD batteries. Parked just outside the office, no one is riding it yet. It still must pass final testing. But when it does, BYD says it once again will be the low-cost provider, as low as 120 million RMB ($17.4 million) for a one-kilometer project. By comparison, the Las Vegas Monorail cost around $654 million for seven kilometers when it opened in 2004.

And company executives like to point out that BYD has reinvented itself before.

Keep up with the latest in China at EmTech Digital.
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