A Chinese car company carrying great expectations stalls

From: The Economist

IF ANY company captured the optimism (and possibly hype) emanating from China, it was BYD, whose three letters are said to be short for “build your dreams”. The Shenzhen-based company makes mobile-phone batteries, cars and solar panels, thereby combining growth prospects with green virtues. This appealing combination received a credibility boost in 2008 when a subsidiary of Warren Buffett’s Berkshire Hathaway bought a 10% stake.

Mr Buffett seemed to have picked another winner. Within a year the price of BYD’s shares had risen ninefold. The battery business, which had been a huge success, was drifting, but car sales were accelerating at a stunning pace, from none in 2003 to more than 500,000 last year, including the F3, a small sedan with a modest 60,000-yuan ($9,150) price tag and numerous features like electric windows, cup-holders and iPod docks, which quickly became the most popular car in China.


Any enthusiasm over BYD’s conventional cars paled next to the excitement over its plans for electric ones—the reason, it was thought, for Berkshire’s interest. Two years ago Scott Laprise of CLSA, a stockbroker, was so wowed by a test run of the F3DM, a hybrid that could switch from petrol to electric power at the flip of a switch, that he immediately placed an order.

Mr Laprise is still waiting for delivery; and BYD has announced a series of delays to another hybrid, intended for the American market. Meanwhile, in the hypercompetitive Chinese market, the F3 is suddenly an old model. Geely, another Chinese manufacturer, has an equally inexpensive but more modern car that is this year’s flavour. “Chinese buyers are proving to be more loyal to features than brands,” says Mr Laprise. “When something nicer comes along, they buy it.”

Although last year’s total sales were up 18% on the previous year, they were well below the 700,000 to 800,000 cars that the firm had been expected, at one point, to shift. The Chinese market as a whole grew by one-third. And the real bad news may be to come. Mr Laprise reckons BYD’s sales will drop from 525,000 in 2010 to 425,000 this year, a shocking decline for a big Chinese carmaker and a stunning blow for what had been widely considered to be one of the country’s bright lights.

Other problems loom. BYD was fined for obtaining land improperly for a factory in Xi’an. There are suggestions that at least some of its sales are the product of pushing cars on dealers, which then sit unsold in lots. More broadly, government incentives instituted in 2009 because of the financial crisis were scaled back in 2010 and are now mostly gone. Petrol prices are up, as are component costs. Big Chinese cities are bringing in restrictions on car ownership to cut congestion. Luxury cars are looking fairly resilient so far, but sales of cheap cars and lorries are sliding. BYD’s share price is now about one-third of its 2009 peak.
BYD’s chairman, Wang Chuanfu, is lauded as a near-genius, and the company’s workers are said to be uncommonly motivated. After Mr Buffett’s investment in the company it was mobbed by bright students from all over China, seeking jobs. So why has it been hit particularly badly?

In theory, BYD’s battery and car operations added up to an expertise in electrical cars; in reality, the technology of low-powered phone batteries is quite different from that of high-capacity car ones. The firm may be having similar difficulties in achieving synergies between its solar-panel division and a rumoured project to make energy-efficient appliances. Two years ago BYD symbolised China’s glorious prospects. These still exist, but today the firm may reflect how hard they are to realise.