China’s BYD engages in risky strategy to boost EV bus sales

Will the requirement that 30% of municipal government purchases of new energy vehicles in the most recent Chinese government’s policy result in a mismanagement of resources? It will if automakers adopt BYD’s http://www.byd.com strategy. The Chinese electric vehicle manufacturer is building plants all over China to gain customers.

While the strategy may grow BYD’s sales both locally and globally, it could result in a massive waste of what is apparently dwindling capital. And as BYD’s missteps here in California prove, it may also sap a lot of BYD’s human capital as it works to resolve problems.

I started thinking about this as I read a story in Automotive News China regarding BYD’s plan to assemble buses in the central China city of Wuhan in order to convince the Wuhan government to buy BYD’s K9 electric bus for its local fleets. http://www.autonewschina.com/en/index.asp

BYD electric bus at Lancaster, CA plant launch

This strategy is wrong on several levels. BYD will spend 3 billion yuan, or $480 million at current exchange rates, to build the plant, according to Chinese media. It will initially produce 1,000 K9 buses and, in a second phase whose cost was not revealed, it will assemble other BYD electric vehicles.

Selling to the Wuhan government is a challenge. The city is home to Dongfeng, one of China’s largest state-owned automakers (the former Third Auto Works). Dongfeng http://www.dfmc.com.cn is China’s largest producer of medium- and heavy-duty trucks. It just announced a partnership with Volvo to produce commercial vehicles. http://tinyurl.com/mr58azo And it partners with Nissan http://www.dongfeng-nissan.com.cn and PSA http://www.dpca.com.cn/ to produce passenger vehicles.

And, of course, Dongfeng has an obligatory Dongfeng EV Co. subsidiary. http://www.dfev.com.cn/dfev/publish/ According to its website, Dongfeng EV Co. produces hybrid electric buses as well as a range of small low-speed EVs and a tiny passenger EV. But I’ll bet it will start turning out plug-in hybrid electric vehicles, or battery electric vehicles, in the future as the central government pressures local governments to boost purchase of EVs. Why not produce those vehicles right in Wuhan so the money stays at home?

BYD may argue that the latest new energy vehicle policy from the central government requires at least 30% of such purchases be from automakers outside of the area and having a plant in Wuhan makes it the most likely company to grab those sales. Is that worth a $480 million bet?

If Wuhan were the only city where BYD has employed this strategy, it might be worth it But Wuhan will be the sixth city in China where BYD plans a bus plant. According to the press report, BYD also has agreements with Changsha, Nanjing, Tianjin, Dalian, and Hangzhou to assemble electric buses.

BYD is based in the south China city of Shenzhen, where it also produces electric buses, naturally. Will these additional plants merely assemble buses from kits sent from the Shenzhen plant? Probably. Then why not just drive the buses there from Shenzhen? No jobs or investment in the local where BYD hopes to sell buses, of course.
Internationally, BYD is also quickly expanding its manufacturing footprint. This is not a bad strategy. But does BYD have the human and financial capital to support this kind of expansion?

I am most familiar with BYD’s plans to produce electric buses in the city of Lancaster, near Los Angeles, where I live. That plant, the launch of which I attended in May of 2013, has encountered a series of potholes on the road to selling it buses here in California. Most recently, the southern California city of Long Beach announced it would cancel its contract to buy 10 BYD electric buses because BYD violated a California Labor Commission law in producing the buses. http://tinyurl.com/kkgjplp

BYD will be allowed to re-bid for the contract when the violation is corrected. BYD America senior vice president Stella Li said in a statement: “We are confident we will prevail in any competitive re-bid in the future for the same reason we prevailed last year: Our superior technology.”

This was not the first problem for the Lancaster plant, however. In July of 2013, cracks appeared above the rear door in a BYD bus undergoing federally-mandated tests. http://tinyurl.com/ltpdbd2 The cracks were a result of faulty welding at the plant in China where the bus was produced, said BYD. “There were no major design flaws discovered. However, there were some minor findings that we wanted to evaluate and review,” said Michael Austin, vice president of BYD America.

In November of 2013, BYD was hit with a $99,245 fine from the California Labor Commission for allowing workers to take one 20 minute break rather than two 10-minute breaks. BYD was also charged with under-paying some Chinese employees. The under payment charge was later dropped; the labor fine was reduced to $37,803. http://tinyurl.com/l97tzr3

None of these problems derailed BYD’s Lancaster plant plans. But they delayed the launch are costing BYD time and money to fix. Will they be repeated in other countries? BYD is also expanding its manufacturing footprint in other parts of the world. In 2012 it announced it would build electric buses in Bulgaria. It has also talked of plans to build a plant in Brazil and in Europe.

It might seem as if BYD has endless funding to build all these plants. That is not the case. The Hong Kong-listed company is raising money through stock sales. In late May it raised 3.4 billion yuan in its largest stock sale since the company’s 2002 initial public offering, according to Bloomberg.

Says Bloomberg: “The funds give Shenzhen-based BYD room to step up investments and bolster production of electric vehicles as governments worldwide step up efforts to fight pollution. Selling shares will also help alleviate the strain on a balance sheet saddled with surging debt.

The company has reason to raise funds via shares over bonds or loans. BYD’s net debt, or interest-bearing borrowings minus cash and equivalents, climbed 34 percent to a record 20.3 billion yuan ($3.3 billion) at the end of last year.”

BYD is betting that its electric vehicles will be its future. http://www.reuters.com/article/2014/05/23/china-byd-sales-idUSL3N0O915T20140523 Meanwhile, sales of its gasoline-powered vehicles have plunged, along with its profits. In the first quarter of 2014, BYD’s profits were down 89 percent. BYD also engages in other “green” industries, including solar panels, LED lighting, and batteries.

To be sure, profits did surge last year after BYD reduced its auto dealership network and reduced losses at its solar business with the help of government incentive money. That is not a sustainable growth plan, however. BYD’s belief that electric vehicles are the future may pay off. But building plants all over China and the world is a dangerous way to back up that belief.