BYD Company Limited: A Case Review By: Atty. Christine P. Carpio-Aldeguer, DBA Graduate School of Management, Pamantasan ng Lungsod ng Maynila
March 31, 2010
Introduction
BYD Company Limited (HKG: 1211) is engaged in two core businesses: the IT parts business, which consists of rechargeable battery and handset component production, and the automotive manufacturing business. BYD had revenues of 26.8 billion RMB (US$ 3.92 billion) in 2008. Since its founding in 1995, BYD has grown to become the second largest producer of rechargeable batteries by volume in the world after Sanyo at 285 million units in 2008.1 The company's success in the rechargeable battery business has been its unique business model. Instead of using fully automated production lines like its competitors in Japan and Korea to manufacture batteries, BYD has implemented a manufacturing line that breaks down the production process into simple jobs performed by workers, thereby replacing a conventionally capital intensive business model into a labor intensive one, which is cost effective for the company due to the availability of cheap labor in mainland China. The company's sales of rechargeable batteries and handset components increased 10.7% to 18.1 billion RMB (US$ 2.65 billion) in 2008. 2
BYD was founded by Wang Chuan-Fu, a former Chemist and government researcher, in Shenzhen, China in the year 1995. Wang's business model for BYD was to make use of qualified engineers and the large inexpensive Chinese labor pool to make quality components at low cost. This business model initially employed a labor intensive strategy that was and continually is supplemented by the deployment of self-designed and self-produced equipment in the production line. In 2003, BYD expanded operations to include automobile production, which has become the company's fastest growing
1 -- CLSA Analyst Report for BYD 17 Sept 2009 Selected Financial Data. 2 -- BYD Annual Report 2008 Selected Financial Data. 2 segment, averaging 140% growth in sales from 2005 to 2008. In August 2007, Wang announced that BYD aims to be the number 1 automaker in China by 2015 and number 1 in the world by 2025, reflecting Wang's great ambition for the company.
BYD's operations span across nine production bases in China with the largest sites located in Guangdong, Beijing, Shanxi and Shanghai. The company employs over 130,000 people with branches and offices established in the Americas, Europe, Japan, South Korea, India, Taiwan, Hong Kong and other regions. All production work is performed in BYD's Chinese locations. The company's branches located outside of China are primarily responsible for sales and marketing of its products. The company has three business segments: battery and related products, mobile handset components, and automobiles and related products.
BYD has gained global recognition from a substantial investment made by Warren Buffet's Berkshire Hathaway (BRK) subsidiary MidAmerican Energy Holdings Co. of $1.8 billion in 2008. The investment gave Berkshire Hathaway a 10.98% shareholding of BYD and contributed to a boost in BYD's stock price from HK$8 per share in September 2008 to a max of HK$88.40 in October 2009.
A case article entitled ―Warren Buffet Takes Charge‖3 has been released by Fortune Magazine last April 13, 2009. This article discusses in detail why Warran Buffet invested 10% stake at BYD for a quarter of a billion dollars. This article shall be the proponent’s subject of review.
3 -- Marc Gunther, ―Warren Buffet Takes Charge,‖ Fortune CNN.com, published on April 13, 2009. 3
Facts of the Case
In the early year of 2008, Charlie Munger, Warren Buffet’s friend and a long time partner of Bershire Hathaway suggested to Buffet that they invest in BYD, an obscure Chinese battery, mobile phone, and electric car company. According to Munger, BYD’s entrepreneur Wang-Chuan Fu is a combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. David Sokol, chairman of a Berkshire-owned utility company known as MidAmerican Energy, went to China to visit BYD. In mid September 2008, an announcement was made where Berkshire Hathaway bought 10% of BYD for $230 million Berkshire Hathaway thinks BYD has a shot at becoming the world's largest automaker, primarily by selling electric cars, as well as a leader in the fast- growing solar power industry. Wang Chuan-Fu started BYD (the letters are the initials of the company's Chinese name) in 1995 in Shenzhen, China. A chemist and government researcher, Wang raised some $300,000 from relatives, rented about 2,000 square meters of space, and set out to manufacture rechargeable batteries to compete with imports from Sony and Sanyo. In the year 2000, BYD had become one of the world's largest manufacturers of cellphone batteries. The company went on to design and manufacture mobile- phone handsets and parts for Motorola, Nokia, Sony Ericsson, and Samsung. Wang entered the automobile business in 2003 by buying a Chinese state-owned car company that was defunct. Wang knew very little about making cars but proved to be a quick study. In October 2003, a BYD sedan called the F3 became the bestselling sedan in China, topping well-known brands like the Volkswagen Jetta and Toyota Corolla. BYD has also begun selling a plug-in electric car with a backup gasoline engine, a move putting it ahead of GM, Nissan, and Toyota. BYD's plug-in, called the F3DM (for "dual mode"), goes farther on a single charge - 62 miles - than other 4
electric vehicles and sells for about $22,000, less than the plug-in Prius and much- hyped Chevy Volt. Today BYD employs 130,000 people in 11 factories, eight in China and one each in India, Hungary, and Romania. BYD’s U.S. operations are small - about 20 people work in a sales and marketing outpost in Elk Grove Village, Ill., near Motorola, and another 20 or so work in San Francisco, not far from Apple. BYD makes about 80% of Motorola's RAZR handsets, as well as batteries for iPods and iPhones and low-cost computers, including the model distributed by Nicholas Negroponte's One Laptop per Child nonprofit based in Cambridge, Massachussettes. Revenues, which have grown by about 45% annually during the past five years, reached $4 billion in 2008. Wang wanted to be in business with Buffett for two reasons: to enhance the brand of BYD and open doors in the U.S.. However, Wang would not let go of more than 10% of BYD's stock. By 2002, BYD had become one of the top four manufacturers worldwide - and the largest Chinese manufacturer - in each of the three rechargeable battery technologies (Li-Ion, NiCad, and NiMH), according to a Harvard Business School case study of the company. Wang stresses that BYD, unlike Sony and Sanyo, has never faced a recall of its batteries. BYD can afford to hire skilled engineers because their salaries are only about $600 to $700 a month; they also get subsidized housing in company-owned apartment complexes and low-cost meals in BYD canteens and basically breathing, eating, thinking, and working at the company 24/7. BYD stands for ―Build Your Dreams.‖ In order to sustain its lead, BYD will never rest and is always open for improvement.‖
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Problem Statement
BYD’s Chairman and entrepreneur Wang-Chuan Fu intends to penetrate the U.S. market in terms of its sale of autmobile, with emphasis of introducing its plug-in hybrid electric vehicle (F3DM Dual mode) and its all-electric vehicle (E6). Hence, Wang agreed for Warren Buffet to invest 10% in its company. This case article review primarily aims to provide solutions on how BYD will penetrate and to create brand awareness to the U.S. market, with emphasis of introducing its plug-in hybrid electric vehicle and all-electric vehicle models.
Specifically, it seeks to answer the following questions:
1) What is the current market situation in the United States in terms of:
1.1 Market share of existing automobile industry 1.2 Sales of private vehicles 1.3 Market share of plug-in hybrid electric vehicles and all-electric vehicles 1.4 Sales of plug-in hybrid electric vehicles and all-electric vehicles
2) What are the different problems that may be encountered by the company BYD in penetrating the U.S. Market?
2.1. sale of its plug-in hybrid electric vehicle (F3DM dual mode) 2.2. sale of its all-electric vehicle (E6)
3) What are the different market development strategies that may be employed by BYD in order to penetrate the U.S. Market?
3.1. plug-in hybrid electric vehicle (F3DM dual mode) 3.2. all-electric vehicle (E6)
4) What conclusions and recommendation which may be derived from the case article review? 6
Statement of the Objectives
The proponent intends to achieve the following objectives for this case article review:
1) Create brand awareness to the U.S. market through niche marketing. 2) Within the year 2012, BYD Automobile will increase visibility in selected areas of the United States, particularly the state of California
Areas of Consideration
I. Opportunity and Issue Analysis (Internal Environment)
Background of BYD and Warren Buffet
In 1995, BYD was established. In July 1996, BYD passed ISO9002 authentication. In 1998, BYD EU Branch was set up. In December 1998, BYD passed ISO9001 authentication. In 1999, BYD USA Branch was set up. In 2000, BYD became Motorola’s first Chinese Li-ion battery supplier. He studied Sony and Sanyo patents and took apart batteries to understand how they were made, a "process that involved much trial and error," he says. (Sony and Sanyo later sued BYD, unsuccessfully, for infringing on their patents.)
In 2000, BYD Japan Branch was established. In 2001, BYD Korea Branch was established. In 2002, BYD became Nokia’s first Chinese Li-ion battery supplier; in May 2002, BYD passed QS-9000 authentication. 7
In July 2002, BYD Company Limited (1211-HK) was listed on the Hong Kong Stock Exchange, creating the highest IPO price record among 54 H stocks. In the same year, BYD ranked No.1 among Asia Money ―2002 Best-Managed Companies‖ and was named ―2002 Best Medium-Sized Enterprise IPO Project‖ by Asset Magazine. The successful IPO of BYD was an important landmark in both Asian and global financial markets.
In September 2002, Shenzhen BYD Li-Ion Company Limited won ―Motorola Excellent Supplier Award.‖
On January 22, 2003, BYD acquired Shaanxi Qinchuan Auto Company Limited and established BYD Auto Company Limited and set up its Xi’an production base after building a new plant of 1 million m2 in the Xi’an Hi-tech Development Zone.
In 2003, BYD acquired Beijing Jichi Car Module Company Limited (covering an area of 200,000m2). In the same year, BYD set up its Shanghai BYD Industrial Park (covering an area of 560,000m2) in Shanghai and moved its car sales headquarters to Shenzhen, thereby developing a layout to service the entire country: east – Shanghai, south – Shenzhen, west – Xi’an, and north – Beijing.
On April 16, 2005, BYD Auto announced the formal offline of its first new car, F3, in Xi’an. At the same time, a new production base with a capacity of 200,000 units per year was formally established.
From April 2005 to February 2006, BYD F3 won 68 various awards within 10 months, including ―New Car Award,‖ ―Best Popularity Award,‖ and ―Most Expectable Car‖ in the Shanghai International Auto Show, as well as the most valued ―Best Price-Performance Car Award‖ in the 2005 Chinacars Annual Billboard.
In June 2006, BYD’s pure electric car—the F3e--was successfully developed. Powered by Fe-batteries using ET-POWER technology, F3e realizes zero pollution, zero emission and zero noise, with a range of up to 350km per charge, thus symbolizing BYD’s pure electricity vehicle technology reaching a leading 8
position in the world.
In 2006, Ukraine started to import BYD car products in large quantities. The first batch of 200 F3 cars represented the first time that Chinese cars have ever been imported to the Ukrainian market.
BYD Auto participated in the Beijing International Auto Show in 2006 with the first ever Chinese hard-top convertible sports coupe—the BYD F8; the world’s first ET-Power car—the F3e; and BIVT technology engines that BYD researched and developed independently. This powerful combination from BYD triggered a great storm of excitement at the auto show. On November 27, BYD F8 won the ―Best Chinese New Car Award‖ at this auto show.
In September 2006, BYD Micro electronics passed Nokia MOSFET supplier authentication.
In January 2007, BYD F3 sales quantity exceeded 10,000 units per month, representing for the first time a Chinese car brand that has ever entered the ―10,000 club‖ with a single car model. In addition, the F3 became one of the ―four giants‖ in the medium-class car market (together with Elantra, Excelle, and Family brands).
In April 2007, BYD F6 won ―Best (China) New Car Award,‖ ―Best Shanghai Vogue Award,‖ and ―Best Car Design Award‖.
On July 30, 2007, BYD F3R was put on the Chinese market.
On June 18, 2007, the 100,000th F3 was produced in Xi’an, marking an aggregated production quantity of 100,000 units of the medium-class model within just 20 months starting in September, 2005. This also marked a sales record (100,000 units) among national independent car brands (within the shortest time on record).
On August 9, 2007, BYD Auto held the ―BYD Auto Shenzhen Modern Production Base Completion & F6 Offline Ceremony‖ in Shenzhen, symbolizing BYD Auto’s strategy to enter the medium-high-class car market being put into practice. During the ceremony, BYD Group President Wang Chuanfu announced two major 9
goals for the group that shocked the automobile industry and the media world: become No.1 in China in 2015 and become No.1 in the world in 2025.
Warren Buffet is known as the investor with 'the Midas Touch'. Buffet is the most successful investor alive -- the only member among the Forbes' list of the world's richest people to have earned his fortune entirely through investing. He is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is consistently ranked among the world's wealthiest people and currently the third wealthiest person in the world as of 2010
Human Resource Advantage and Business Model at BYD
In place of the robotic arms used on Japanese assembly lines, which cost $100,000 or more apiece, BYD actually cut costs by hiring hundreds, then thousands, of people. To control quality, BYD broke every job down into basic tasks and applied strict testing protocols. Deploying the armies of laborers at BYD is an officer corps of managers and engineers who invent and design the products. Today the company employs about 10,000 engineers who have graduated from the company's training programs - some 40% of those who enter either drop out or are dismissed - and another 7,000 new college graduates are being trained. Wang says the engineers come from China's best schools. "In China, people of my generation put work first and life second," says the CEO Wang, whose wife takes responsibility for raising their two children. His engineers investigate a wide array of technologies, from automobile air-conditioning systems that can run on batteries to the design of solar-powered streetlights. Unlike most automakers, BYD manufactures nearly all its cars by itself - not just the engines and body but air conditioning, lamps, seatbelts, airbags, and electronics.
The company itself is frugal. Until recently, executives always flew coach. The last time BYD executives traveled to the Detroit auto show, they rented a suburban house to save the cost of hotel rooms.
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Leadership style
Transformational leaders are those who inspire followers to transcend their own- self-interests and who are capable of having a profound and extraordinary effect on followers. BYD’s entrepreneur Wang-Chuan Fu can be best described as a transformational leader.
To better understand the leadership style of Wang-Chuan Fu, let us describe him applying John Maxwell’s ―21 Irrefutable Laws of Leadership.‖ We shall describe Wang by discussing which of the ―21 Irrefutable Laws of Leadership‖ is applicable
The Law of Solid Ground
In this principle, trust is the foundation of leadership. To build trust, a leader must exemplify competence, connection and character. Character makes trust possible, and trust makes leadership possible. In the Law of Solid Ground, a leader puts what is best for his followers and the organization ahead of his personal agenda.
Shortly after BYD went public, Wang did something extraordinary: He took approximately 15% of his holdings in BYD and distributed the shares to about 20 other executives and engineers at the company. He still owns roughly 28% of the shares, worth about $1 billion.
The Law of Buy-in
People do not at first follow worthy causes. They follow worthy leaders who promote worthwhile causes. In this principle, people buy into the leaders, then the vision.
This principle was utilized by Wang in order for Warren Buffet to buy a 10% stake at BYD. One of the rules of Warren Buffet is not to invest in something which you do not understand. Buffett may not understand batteries or cars, or Mandarin for that matter. Drive, which enticed Buffet to invest in BYD through its leader, is something that needs no translation.