Auto Industry

Another U-turn

Why BYD is spinning off its EV battery unit

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BYD still wants to ‘build your dream’ (as its acronym promises), just no longer using a vertically integrated business model. Having lost its crown as the world’s biggest electric vehicle (EV) manufacturer by sales during the first quarter of this year, it has decided to overhaul its strategy and spin off its EV battery division into a separate company.

The new unit will no longer only supply batteries for BYD’s own EVs but will also sell to other carmakers. It may even become a supplier to other transportation modes such as urban light rail. Citing a speculation that has been making the rounds in China’s auto industry since last month, the Economic Observer said BYD only reached a decision on the dramatic restructuring after heeding advice from Warren Buffett, a key investor in the company.

BYD’s founder Wang Chuanfu is personally driving the change. “I’m over 50 now,” he told Economic Observer. “So if I retire at 60 that gives me less than 10 years. But if all goes well, BYD’s scale advantage [in the EV battery market] means competitors won’t stand a chance.”

Sohu Auto agrees that while vertical integration was the obvious choice when BYD began making electric cars – having started out as a mobile phone battery maker – more intense competition means a more autonomous battery division now makes more sense.

BYD’s first quarter earnings, which dropped 29% on lower government subsidies for EV buyers, un derlined the need for change.

According to data firm EV Sales, BYD dropped from number one in the global sales rankings for 2016 to number five for the first four months of this year. It ranked behind Tesla, BMW, Nissan and China’s BAIC.

It is also battling for top spot in battery production with Contemporary Amporex Technology Company (CATL). The Fujian-based company last month announced a significant new battery venture with local car giant SAIC and has plans to produce up to 50GWh of battery cells per year by 2020 versus 7.6GWh last year (as compared to BYD’s 8GWh). CATL is benefiting from meeting the growing battery demands of numerous domestic and foreign carmakers including BMW. Wang’s new vision will see BYD attempt to do the same.

The backdrop to the move are rapidly increasing forecasts for global battery supply. Bloomberg, for example, predicts Chinese companies alone will deliver 121GWh by 2020 if currently announced plans come to fruition (1GWh can power 40,000 electric vehicles, implying production capacity for 4.84 million cars). BYD, for instance, has already outlined plans for a new 10GWh plant in Qinghai. Elon Musk also said recently Tesla plans to build four to five gigafactories by the end of the year. It has already said its first gigafactory in Nevada (a joint venture with Panasonic) will have 105GWh cell capacity by 2020 up from original estimates of 35GWh.

Such rapid global expansion has prompted questions on whether massive oversupply looms in a situation mirroring solar panels (investor Francois Perrin of East Capital predicted this in WiC333). What may come next is consolidation as battery prices fall. CATL’s Neill Yang recently told the Financial Times that within “10 years there might only be 10 lithium battery producers left with the top three holding 60% of the market.”

This week, Bloomberg reported that the Chinese government won’t issue new EV manufacturing licences, fearful that too much competition will destroy profitability. SWS Securities estimates that Chinese producers will have total production capacity for five million cars by 2020, implying a 40% utilisation rate based on the country’s two million sales target for that same year.

Yet there may be a demand surge if electric vehicles become cheaper than conventional ones as soon as 2018 as per some broker forecasts. Key will be reductions in battery costs (40% of the overall vehicle cost). Benchmark Minerals says the cost per cell has come down from $542 per KWh in 2012 to about $140 and should fall below $100 in 2020. Much will also depend on battery density improvements that enable cars to travel without being charged (see WiC365).

Wang – who set BYD up in 1995 by dismantling foreign batteries and working out how to reproduce them chemical by chemical – will hope his recent decision will ensure his firm is one of the survivors in what promises to be a brutal period.


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