BYD Supersizes in US as Sales Slim Down in China

BYD Supersizes in US as Sales Slim Down in China

Emmi Laine

Date: Sun, 10/01/2017 - 21:23 / Keywords: BYD, Tesla
BYD Supersizes in US as Sales Slim Down in China
BYD Supersizes in US as Sales Slim Down in China

(Yicai Global) Oct.1 -- BYD Motors Inc., a subsidiary of BYD Co. [SHE:002594; HK:1211] partly owned by Warren Buffett’s Berkshire Hathaway Inc. [NYSE:BRK], will unveil its expanded manufacturing facility for electric transit buses in Lancaster, California, US on Oct. 6.

BYD -- short for ‘Build Your Dream -- originated as a Shenzhen-based car manufacturer, and has been the world’s best-selling new-energy vehicle (NEV) brand for two years.

BYD’s US factory will unveil a new wing in a few days, which will enlarge its current coach and bus production space from 8,000 to 450,000 square feet. This expansion will allow BYD to produce up to 1,500 electric buses annually and hire 700 full-time workers for its production line.

The opening ceremony invitations ensue just days after news broke that BYD had plunged to a domestic sales nadir after the Chinese government slashed electric vehicle subsidies. BYD has now shifted its strategy, turning its gaze toward local governments abroad. While competition in electric passenger cars revs up at home, BYD’s solution is to grow its fleet of electric vehicles, and sell more electric buses, trains and taxis to local governments, both at home and abroad, and to increase its overall production to drive down manufacturing costs, as Technology Review explained in May.

BYD’s US arm has already delivered all-electric buses to customers that include the Los Angeles Metro (LA Metro), the Los Angeles Department of Transportation (LADOT), Stanford University, the University of California at Los Angeles and the Antelope Valley Transit Authority.

BYD opted to build stateside factories to be closer to the US market, said its spokesman Li Yunfei.

Did The US Market Invite BYD to Come Any Closer?

Upon the first opening the Lancaster factory in 2013, BYD had planned to build as many as 1,000 plug-in electric buses per year, but underwhelming US demand has dashed these hopes. After delivering its first batches of K9 electric buses to Long Beach Transit and the LA Metro, only about 50 BYD’s buses were operating in the US in 2015. Despite testing fleets of K9 electric buses in Manhattan and E6 taxis in Chicago, BYD projected it would only fill as few as 200 bus orders that year, as Bloomberg News reported. BYD had, moreover, built only about 300 electric buses in the US as of February, as gas2.org reported.

Contrary to the company’s expectations, the ‘made in the US’ tag did not move BYD buses as quickly as expected, partly because of the hefty USD660,000 price tag for a 40-foot K9 all-electric bus, despite their vehicles’ cheaper long-term maintenance than diesel-fueled buses.

Is The Expansion Simply Hubris Manifesting BYD's American Dream, Devoid of a Sound Economic Basis?

BYD’s US expansion started from October 2009, when Warren Buffett invested US$232 million in it, taking a 10 percent equity stake. This investment from Mid-American Holdings, 87 percent-owned by Berkshire Hathaway, most importantly gave the company the creditability necessary for it to impinge into foreign markets. California, which offers a US$5,000 rebate to electric car buyers and boasts half the nation’s charging stations, was the first choice. A research and development center and sales office opened in downtown Los Angeles in 2010 to frenzied fanfare from local media and political leaders.

That same year, Lancaster, California Mayor R. Rex Parris and other officials visited BYD's headquarters in Shenzhen in China’s southeastern manufacturing dynamo of Guangdong province. Upon returning home, Parris scurried to create a solar-energy home, powered by BYD-made solar panels. "This cemented the concept in my mind that BYD must be part of Lancaster's future," Parris said from the Golden State, in the heart of the US’ largest and greenest car market.

A factory went up in Lancaster and soon the company was seeing promising results. BYD won a $12.1-million contract with California's Long Beach Transit (LBT) Authority to produce 10 zero-emission, all-electric buses in April 2013 and the Los Angeles County Metropolitan Transportation Authority (LA Metro) announced in July a contract with BYD for the manufacture and delivery of up to 25 all-electric buses.

BYD’s biggest US NEV order to date, the LBT bid, almost aborted, however. This was because BYD had applied as a business owned by minorities or other disadvantaged groups -- a requirement for federal funding -- but the initial disallowance of this status was eventually resolved in BYD’s favor. In 2015, BYD won the largest order for NEVs in US history, at the outset for 10 buses to LBT with potentially 50 more for its partner networks -- and new examples of Chinese innovation started taking shape under the California sun.

Progress In The US 'Much Slower' Than Supposed

The US bastion has, however, proven much harder to storm than expected. BYD complained its products were a tough sell overseas because of a lack of brand recognition. Progress in the US has been “much slower” than anticipated, BYD senior vice president Stella Li told Forbes. She forecast in 2013 delivery of 200 to 300 buses to US customers by the end of 2014, but the actual number hovered at around 50. “The US market is a very conservative one. The process of purchasing electric buses is quite slow due to budgeting and regulations,” said Li. “It’s also a new industry so it takes a lot of time to win trust,” she added.

These two causes, along with tight safety regulations and brand-awareness issues, have hindered BYD in the US to this day. Also, the company has still not brought any of their passenger car models to the US market, which could help to diversify their product line.

Why Hasn't BYD Offered The Domestic NEV Sedan Hits The Qin and Tang to US Buyers?

Elon Musk, chief executive and product architect of Tesla Inc. [NASDAQ:TSLA] could provide the answer. “Have you seen their car?” Musk asked a reporter, while trying to stifle a snigger during a 2011 television interview. “I don’ think they have a great product,” the billionaire entrepreneur said as he collected his thoughts. Their “technology is not very strong,” he concluded, as media reported in 2014.

Shrugging off the claims of inferior quality or design, Stella Li explained the absence of sedans by the slow process of branding. “Our focus remains on all-electric buses and taxis and our main targets for the latter are big US cities. We also have plans to enter the passenger car market, but we want to use buses and taxis to build our brand in the US first.” Once battery production becomes cheaper, consumer cars will follow, she hinted.

Tesla as ‘Industry Poster Child’

BYD and Tesla, who have both recently staged incursions into each other’s home markets, have thus far not complained of each other’s competition. Tesla has shown little interest in electric buses, while BYD’s passenger cars have targeted a different, lower-end market group. BYD announced the debut of several NEVS priced under USD15,000 (CNY100,000) -- pricing not at all comparable with Tesla’s Model S for CNY734,000, the first model orders the carmaker is taking in China.

Li waxes more conciliatory on Tesla’s encroachment into China. “So, from BYD’s perspective, we’re happy to see Tesla, or any other electric car brands, entering China as well as other markets around the world. Once Tesla warms up the market, BYD should follow to pick up some real fruits, and don’t forget that we were originally a battery manufacturer, so at some point we might supply batteries to Tesla,” she said.

In Li’s words, Tesla will be the “poster child of the industry, a superstar.”

Asked if her company would consider powering Teslas with BYD batteries, she replied that this would depend on whether they are effective enough at that time. The question is open to debate because, while the NEV manufacturer has been busy abroad, the competition back home in Asia has heated up.

BYD Loses Out to Its Asian Competition

BYD was hailed as the global top seller until Toyota Motor Corp. [NYSE:TM] outed sales figures in January that cast shade on this claim, suggesting that in comparison to BYD’s 61,700 sold units in that month, Toyota offloaded 104,500 new energy vehicles, including hybrids, plug-in hybrids, pure electrics and fuel-cell vehicles, which effectively would make the Japanese company the global bestseller.

Next came battery sales. In the first quarter, BYD’s batteries yielded top-slot to those of Contemporary Amperex Technology Ltd., which claimed 26 percent of the market in the first quarter, in contrast to BYD’s 17 percent.

Finally, BYD was dislodged as top domestic seller. Beijing Electric Vehicle Co. under Beijing Automotive Industry Holding Co. overtook BYD in domestic NEV sedan sales in the first quarter as BYD sales skidded to 8,719 units sold, down nearly 50 percent. 

Consequently, BYD took a 24 percent dive in net profit to CNY1.7 billion attributable to shareholders of its listed arm in the first half, per the company’s half-year financial report. The profit drop resulted from reductions in government subsidies on new-energy vehicles and fierce market competition, the company said, as Shanghai Daily reported.

As if these setbacks were not enough, BYD also failed new standards for state subsidies because of too-low battery density, and this pushed up their prices this year. Finally, this year also witnessed the suicide of a Nanjing BYD dealer, who claimed he and his staff defrauded authorities to gain green-vehicle subsidies, though local authorities later refuted this assertion.

BYD's Rocky Road Ahead

Given all these recent obstacles, whether BYD has bitten off too much is a cogent question to pose, considering the firm’s ongoing ambitious overseas factory expansion plans, even as barbarians are massing on the home front. Add to the mix that BYD’s technology is cooling off as competition grows between NEV manufacturers at home, and that the limited electric bus market is only slowly warming up in the US, and it becomes clear that BYD stands at a crossroads. How then can the company power up and forge ahead with new growth?

BYD’s answer thus far is to stick to what they do best abroad: electric buses and commercial trucks for the US, (the company unleashed and all-electric garbage truck in the US last year). Its horizons have also further expanded. BYD has opened an electric bus factory in Hungary, with another one in France to follow, and the firm plans for Europe to become its largest market outside China within five years, said Isbrand Ho, managing director of BYD’s European auto sales division.

Any conclusion as to BYD’s future growth remains premature at this point. Considering its European expansion plans and the lower-than-expected number of electric bus orders in the US, the new massive wing to the Lancaster factory may remain vacant until BYD rolls out a pure energy passenger car that is specifically designed for the US market -- a move Li Yunfei hinted may occur in the next two to three years.

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Keywords: BYD, Tesla