Auto Industry

The great soccer scam

Buffett’s BYD and Arsenal football club are fooled by a fraudster

BYD-w

Overcharged: BYD was defrauded

Most fans know the north London football club Arsenal as the Gunners but some supporters prefer the Gooners, a nickname said to derive from a group of hooligans that wreaked havoc in the 1980s.

This second name seemed more appropriate this month after a high profile scam that originated in China, drew in both the club and one of its potential sponsors.

The debacle kicked off in April when Arsenal and BYD Auto signed a sponsorship deal giving the Warren Buffett-invested electric car manufacturer pitchside signage, branding on seats in the team dugouts and access to some of Arsenal’s best former players at promotional events. A month later, officials from the club and BYD attended a launch event at Arsenal’s Emirates Stadium.

But this month BYD announced that the woman who had brokered the deal was a con artist and is now in police custody. The carmaker further revealed that it believed she had duped 30 domestic advertising agencies into believing she worked for BYD over a three-year period and to the tune of Rmb1.1 billion ($160 million) in false fees.

The farce attracted derision from social media commentators in both the UK and China.

Many wondered how the two brands, supposedly at the top of their respective fields, could have been so easily duped and commentators on Sina Weibo claimed that BYD’s management must be a complete mess, given how long it took to discover the fraudulent behaviour.

One observed, “Three years, Rmb1.1 billion, the involvement of dozens of BYD sales offices and even a tie-up with Arsenal. Yet now BYD says it knew nothing about it. Are you [expletive] kidding me?”

The company itself is taking a more sanguine view, or at least it tried to during a conference call with financial analysts last week. Board secretary John Li explained that the alleged fraudster, Li Juan, passed herself off as a BYD general manager to clients and as the general manager of an advertising agency to the company itself.

He also revealed that Li acted in tandem with an as-yet unnamed high-interest lender to defraud regional car service centres into thinking that BYD and its dealership network would assist them in paying for advertisements.

Board secretary Li says BYD is setting up a compensation fund for the victims but says the financial hit will be minor.

What happens next with the Arsenal deal is unclear, however. The football club thought it had signed a Rmb50 million contract whereas BYD had been told it would cost just Rmb1.2 million. BYD insiders told the Chinese media that it was this scam which finally brought Li Juan’s scheme crashing down.

BYD started getting suspicious when information supplied by Li Juan did not match that coming from Arsenal. Additionally, it stumbled across documents from a BYD office in Shanghai that didn’t actually exist.

The Chinese press expects another layer of the scandal to be uncovered, arguing that Li Juan could not have got away with it for so long without help from inside the carmaker.

She told clients she was acting on behalf of a representative of Li Ke, the wife of BYD’s founder Wang Chuanfu. Li Ke, herself, is understandably less than amused. “I’m incredibly angry,” she posted on WeChat. “It’s awful being framed by scammers while working so hard in the US to build up our overseas business.”

The fraud comes at a time when BYD’s share price has almost halved since its peak last October. The company is guiding investors that interim profits will be down between 71% and 83% year-on-year because of cuts to electric vehicle (EV) subsidies from the government. However, it is predicting a strong turnaround in sales during the third quarter.

While BYD wouldn’t be drawn on rumours about government plans to slash subsidies by a further 30%, it argues that any new cuts will be more than offset by sales growth. It said it was confident that the launch of a new range of vehicles would push monthly sales up from 16,000 units in June to 30,000 by September.

In fact, BYD is hopeful that it will benefit from subsidy increases for longer-range EVs (2% on the sales price for cars that can be driven more than 300 kilometres without charging and 14% for those reaching beyond 400km). Both increases came into effect in June.

This more optimistic forecast contrasts with the gloomier picture painted by some of China’s largest auto manufacturers. In particular, Chang’an, Dongfeng and FAW have been slipping down the rankings (in electric and petrol cars) because of sluggish revenue growth and an inability (or unwillingness) to reduce their reliance on foreign joint venture partnerships for their overall profitability.

The longer-term goal of the joint ventures with the foreign firms was to encourage the production of locally-designed cars. But the plan didn’t go so well. As we first noted in WiC165, business was so good that the Chinese car firms didn’t focus on ploughing their own furrow, concentrating instead on harvesting the fruits of their joint ventures.

“It’s like opium. Once you’ve had it, you’ll get addicted forever,” He Guanyuan, a former government minister, lamented in 2012. “So many years have passed and we don’t have a single brand that can be competitive in the auto world. I feel red-faced.”

Industry chatter that the government is pushing for a merger between Chang’an, Dongfeng and FAW has persisted for more than a year, despite repeated denials. But the rumours gained credence after the trio announced two new joint initiatives this month: an agreement to collaborate on logistics and a commitment to a new ride-sharing venture called T3 Mobile Travel Services. Perhaps more tellingly, in June FAW welcomed a new GM, Xi Guohua. His previous job was driving the merger process between the two dominant rolling stock operators CNR and CSR to create CRRC, a new champion in the railways.

The three state-owned auto manufacturers have to compete with foreign brands and more dynamic private sector operators like Geely. Thanks to a series of international deals (buying brands such as Volvo, Lotus, Proton) and the release of a series of new models, Geely jumped from tenth to third place behind Volkswagen and Honda last year in China’s best-selling brand ranks.

The fourth of the state-owned car giants, SAIC, has done better in developing the kind of homegrown brands the government wants to encourage. For example, its Baojun series, developed in association with General Motors, registered 34% sales growth in 2017, while sales of its SAIC-Roewe brand were up 60%.

A new problem for the domestic carmakers is that Beijing has announced that foreign makers of fully electric and hybrid cars can now make vehicles in the country without first forming a joint venture with a domestic counterpart (makers of standard petrol-powered vehicles will get the same rights by 2022).

As we reported in WiC418, China’s EV producers are about to face enhanced competition from companies like Tesla, which will set up a factory in Shanghai without a joint venture partner. Its tariff-free cars will almost certainly squeeze out some of the China’s manufacturers.

Optimists point to the EV sector’s rapid growth in China. During 2017 there was 53% year-on-year sales growth to 777,000 units and growth accelerated again in the first six months of this year, up 123% year-on-year.

There are some less bullish numbers too. According to the Wall Street Journal, there are now a mindblowing 457 EV makers in China, a figure boosted by state-directed funding and too much enthusiasm from cities around the country to produce their own local champion.

The same newspaper profiled one of the contenders: Singulato Motors, which has just received $535 million from Anhui’s Tongling government despite the fact that its founders have no carmaking experience.

When asked why she had signed the deal, investment bureau official Liu Yi defended her decision, saying she had “pored over books to educate herself about the EV sector”.

Even Singulato’s chief executive Shen Haiyin admits that no more than 10% of these electric vehicle start-ups will be around in five years. Presumably he thinks that his own firm will make the cut.

But the chances don’t look great – the Wall Street Journal added that plenty of analysts estimate that the survival rate of these new Chinese EV firms will be closer to 1%.


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