GaveKalDragonomics Special Report BYD: China’s electric car pioneer September 2009 in cooperation with GaveKal Dragonomics is pleased to present its subscribers with a detailed investigative report on one of China’s most interesting private companies, battery- and car-maker BYD. The firm is one of the world’s biggest manufacturers of cell phone batteries, and recently diversified into automobiles; its low-priced F3 sedan is China’s best-selling model this year. BYD leaped into the world’s headlines in 2008 when a Warren Buffet-controlled company paid US$232 million for a 10% stake. Media attention has focused on BYD’s stated aim of becoming a leader in electric car production. Close scrutiny suggests that Buffett’s real interest in the company has more to do with its potential to supply large-scale batteries for storage of electricity produced by renewable sources like wind farms. BYD thus stands at the intersection of two of the most crucial questions facing investors today: • Can China produce innovative and globally competitive private companies? • Will the global energy industry find a replacement for oil as a transportation fuel? This report was prepared exclusively for GaveKal Dragonomics subscribers by Fathom China, a Beijing-based consultancy specializing in detailed company background research. About Fathom China Fathom China Ltd. is an independent research company that conducts focused due-diligence investigations on firms and executives in China. Our team of researchers include highly trained former journalists, academics and consultants. Solving Chinese business puzzles is our specialty. Fathom China was formed by Matthew Forney, who served in Beijing for six years as bureau chief of Time magazine and for three years as an investigative reporter for The Wall Street Journal. Mr. Forney then supervised corporate investigations for Kroll Associates before establishing Fathom China in 2008. Clients include fund managers, investment banks and firms engaging in mergers and acquisitions. Examples of investigations include the following: REPUTATIONAL PROFILING. We discreetly speak with a target company’s suppliers, competitors, clients, former employees, industry watchdogs and other informed sources to create a profile of a firm and its top executives. CRIMINAL AND LITIGATION CHECKS. Fathom China has access to Chinese databases that may include relevant court cases or criminal indictments. Because such databases are incomplete, Fathom China supplements them with interviews and checks of courthouse records. MEDIA AND DOCUMENT ANALYSIS. A company’s registration documents may indicate questionable investments, hidden shareholders, family members on a board of directors, related-party transactions and other suspicious business practices. In addition, China’s increasingly profit-minded media often deliver crucial information that overseas readers never see. Fathom China assesses these documents in a way that clients can understand. For more information, please visit Fathom China’s website at www.fathomchina.com, write to [email protected], or call +86-1390-118-6189. BYD Company Ltd. (Hong Kong Stock Symbol 1211) September 2009 BYD Sept 2009 © Fathom China. Redistribution prohibited. 1 Table of Contents 1 Introduction ...................................................................................................................................4 2 Executive Summary ......................................................................................................................5 3 BYD Basics ......................................................................................................................................6 3.1 Wang Chuanfu: Uncontested Genius.................................................................................6 3.1.1 Absolute Authority ........................................................................................................6 3.1.2 Humble Beginnings .......................................................................................................7 3.2 BYD’s Advantages...................................................................................................................8 3.2.1 Making Manual Labor Cool Again ..............................................................................8 3.3 Imitation as the Highest Form of Battery..........................................................................9 3.4 By the Numbers...................................................................................................................10 3.4.1 Cars Take Over ............................................................................................................10 3.4.2 Margins – Collapse, and Recovery.............................................................................12 3.4.3 Gov’t Helping Hand 1: Grants and Subsidies .........................................................13 3.4.4 Gov’t Helping Hand 2: Unsecured Bank Lending..................................................13 3.4.5 Manageable Debt .........................................................................................................14 3.4.6 Miscellaneous................................................................................................................15 4 Traditional Cars ...........................................................................................................................16 4.1 Traditional Car Market - Fast Growth, Foreign Domination.......................................16 4.1.1 World’s Fastest-Growing Market ..............................................................................16 4.1.2 Foreign Firms Dominate, Especially High End......................................................17 4.1.3 Chinese Firms Fight for Survival...............................................................................18 4.2 How BYD Entered the Auto Market.................................................................................18 4.2.1 A Bold Acquisition ......................................................................................................19 4.2.2 Unique Resources ........................................................................................................20 4.2.3 Cutting Costs ................................................................................................................20 4.3 Limited Success....................................................................................................................21 4.3.1 BYD’s Cheap Cars Sell Great at the Low End….....................................................21 4.3.2 …But Less Great at the High End............................................................................22 4.3.3 BYD’s Down-Market Showroom................................................................................23 4.3.4 Quality Problems..........................................................................................................23 4.3.5 Trouble Ahead: The Low-End Trap.........................................................................24 5 Electric Cars .................................................................................................................................26 5.1 Electric Auto Definitions ...................................................................................................26 5.2 BYD’s Battery-Powered Models .......................................................................................26 5.3 The Race for the Electric Car ............................................................................................27 5.3.1 Why BYD’s Electric Cars Make Sense .......................................................................27 5.3.2 It’s All About the Battery............................................................................................28 5.4 BYD’s Delayed Electric Cars...............................................................................................29 5.4.1 BYD’s Foreign Competition ........................................................................................29 5.4.2 So, Where Are They?...................................................................................................30 5.4.3 Suspicion of Battery Difficulties................................................................................32 5.5 Experts Question BYD’s Auto Specs.................................................................................33 5.5.1 How Far Can the F3DM Really Drive?....................................................................33 5.5.2 How Far Can the e6 Really Drive?............................................................................34 5.6 Probable Consumer Ambivalence in China.....................................................................34 BYD Sept 2009 © Fathom China. Redistribution prohibited. 2 5.6.1 Private Drivers: Small Payoff for Plug-in Hybrid ...................................................35 5.6.2 Fleet Purchases: Higher Payoff for Plug-in Hybrids ..............................................36 5.6.3 Buyers Unprepared for Electric Cars........................................................................37 6 Government Policies and BYD ..................................................................................................39 6.1 Top Concern Is Imported Oil, Not Carbon Emissions ................................................39 6.2 New-Energy Vehicle Subsidies – Uncertain Benefits to BYD .......................................39