Talking Point

Battery-powered Buffett

BYD plans to carjack the hybrid market

Warren Buffett: prefers Coke to brake fluid, but likes Wang Chuan-Fu's BYD

Last December’s Detroit road trip to Washington was a cross-country exercise in humility for US car bosses; following the PR disaster of the previous month, in which the auto executives flew to the US capital by corporate jet.

On the second journey the executives all chose to drive hybrid or fuel-efficient cars, thus demonstrating not only a new found modesty, but also signalling that they understood the industry’s future was one of electric-powered vehicles.

The gesture would have been appreciated in Shenzhen, by a man capable of dramatic flourishes of his own. During a meeting with Warren Buffett’s Berkshire Hathaway last year, Wang Chuan-Fu, founder of China’s leading hybrid car manufacturer BYD, surprised his visitors with a demonstration of his green credentials. He took a glass of his recyclable (and non-toxic) electrolyte battery fluid and drank it. Talk about faith in your product.

The Berkshire guys declined a sip. But they did buy 10% of BYD for $230 million, in support of its bid for a chunk of the battery-powered car market.

With the global auto industry in a state of such upheaval, this is a market that few can choose to ignore. Is BYD likely to win through?

What hybrids are available today?

Hybrid electric vehicles combine an internal combustion engine and one or more electric motors. Japan has been producing them for a decade. The Toyota Prius, a gasoline-fuelled car with an electric engine that propels the car at low speeds, is the top performer with more than 1.2 million units sold globally since launch.

But BYD’s newest product – the F3DM – has surprised many, as the first “plug-in” model that can be fully charged from mains electricity. GM is trying to catch up (with its own plug-in Volt), which it hopes to release next year. The Volt was a key discussion item in the most recent bailout talks.

So how is BYD different?

Berkshire’s investment, as well as the F3DM launch, has given the company a higher profile within the industry.

Indeed, BYD only started manufacturing cars in 2003 (combustion-engine models which are exported to price-sensitive emerging markets). It is also unusual in that it has diversified from making batteries into hybrid cars. Even today, BYD makes batteries for iPods and iPhones.

But as a newcomer, how does BYD compete?

Electric cars use only basic motors and gearboxes, and have relatively few parts. “It’s almost hopeless for a latecomer like us to compete with GM and other established auto makers with a century of experience in gasoline engines,” Wang told the Wall Street Journal earlier this year, “With electric vehicles, we’re all at the same starting line.”

BYD is also working on a new battery technology in iron phosphate-based lithium (rather than the existing cobalt-based product) that it hopes will allow it to steal a march on its rivals.

Battery safety has been a major issue in the industry. Whereas previous models have sometimes exploded on overheating, the iron-phosphate version is supposed to steam – a preferable malfunction for drivers in traffic jams, no doubt.

The iron-phosphate technology also makes batteries more able to withstand small manufacturing errors that can cause conventional batteries to short-circuit. As a result, BYD can manufacture through labour-intensive assembly lines – a Chinese strength – rather than via robotic production.

And this keeps costs down?

It does if your production line is in southern China.

Wang doesn’t need to worry about truculent unions or legacy pension costs. He pays his engineers about $700 a month.

But industry analysts agree that battery costs must come down before hybrid vehicles are sold in greater volume. At current gasoline prices in the US, it takes eight years to recoup the additional cost of a hybrid. With higher fuel prices, the period shortens – which is why sales of hybrids in the US were much stronger last year.

So while hybrids cost twice as much as fuel-engine cars, consumers are likely to remain cautious.

But some consumers are buying?

Not many in China, so far.

The original plan was to start out by selling the F3DM on fleet contracts to corporate customers and government agencies. But take up has been poor. Xinhua reported this week that only 80 units had been sold since last December.

Previous reports had indicated that the Shenzhen government would add the F3DM to the city’s cab purchase orders but Auto Biz Review suggested recently that talks had broken down due to ‘certain reasons’. These might relate to price: at almost $22,000, the F3DM is cheaper than most international models, but still far more costly than non-hybrids.

On the other hand, BYD supporters claim that China’s consumers will welcome the hybrid car in the medium-term. Chinese commutes tend to be shorter – and at low speed because of traffic – so cars with a top speed of 60km/h and a range of almost 200km (between charges) will not be rejected out of hand. And four-fifths of China’s car buyers are first-time purchasers, so are not yet attached to the roar and power of larger, gasoline-powered vehicles.

But with such small sales, isn’t BYD being overhyped?

Possibly. But the hybrid car business ticks many of the right boxes as far as Beijing industrial policy is concerned. The government likes technology that it thinks can provide “leapfrog” advantages. It wants to minimise its reliance on overseas oil imports. It needs to find ways of slowing down environmental degradation. And hybrid vehicles look like a promising global industry of the future. If BYD – and companies like it – can get in on the ground floor of what promises to be a market of some scale, China will benefit as a whole.

So subsidies are on the agenda. In the US, the plan is to make funds available to the producers themselves. But in China the talk is of offering subsidies directly to car purchasers. Some local governments are finalising plans of their own too; in BYD’s heartland in Shenzhen, there is talk of residents receiving financial support of up to 60% of the F3DM price, bringing the purchase to a much more competitive level.

As with many of the subsidy and stimulus proposals under discussion at the moment, the devil is in the detail – assuming that the plans are implemented at all.

So it looks like the future will be battery-powered then?

Yes, but quite how the industry will develop is unclear; with the price of oil, the role of government policy and the pace of technological and environmental change all in play.

Carlos Ghosn, Nissan’s president is convinced that cars fuelled solely by petrol will be obsolete by 2030. So it seems likely that there will be a major move towards greener vehicles.

And Buffett’s bet is that BYD will be manufacturing a very large number of them.


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