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How BYD became the largest Chinese carmaker?

A look into the moats and future strategy of BYD

May 19, 2023

As of April 2023, BYD has surpassed Tesla in global EV production, clocking in at 1.8 million units vs. Tesla's 1.3 million units. And at the same time one of the biggest investors of all time Warren Buffett has announced that Berkshire Hathaway is selling it's stake in BYD. So what exactly was the moat around BYD in the first place and what should be the keystones of it’s strategy to grow in the coming years.

BYD was founded in 1995 and was first listed in a public market in 2002. Today they have their headquarters in Shenzhen.

Source: Visual Capitalist

What contributed to BYD's moat?

High Verticalization

BYD manufactures its own semiconductors, batteries and even masks during the worst part of the international health crisis. They build their own battery cells and packs, E/E architecture platform and their own electric motors.

Verticalization allows BYD to react quicker to new technology and to their competitors. As they have more control of all parts of the E/E Architecture, they can manage their supply chain with less dependence on suppliers. Eliminating middleman also means that they don't have to pay high vendor margins of Tier1, Tier2 suppliers.

Earlier last year, BYD unveiled their e-Platform 3.0 which will be the base platform their upcoming EVs. It is capable of multiple wheelbases, 2WD and 4WD. The EE architecture is primarily distributed with a high performance central ECU and Vehicle-to-cloud stack integration to enable an app ecosystem. The platform also supports BYD's latest 8-in-1 electric powertrain system with an overall efficiency of 89%, with a motor efficiency of 97.5%, SiC Modules. The battery module is integrated into the body structure to increase the rigidity.

Source: Youtube Video

This level of integration across the hardware stack also helps with the SW features of the vehicle. Tying in Over-the-air update capability into their development and deployment stack to enable fast releases to it's customers.

Domestic Market Strategy

2/3rd of their sales are within China and the remaining are from neighboring countries. The strategy to only focus on one, domestic market meant that they can tailor their product offering, brand and sales strategy in a much more coherent manner.

They have built quite a brand around BYD within China both in terms of it's position in market and the quality of it's products. A new model offering BYD Seal sold 22,637 units less than six hours after reservations opened. This kind of virality in the automotive business is quite rare.

Government subsidies propelling EV sales

Zero emissions and EVs were part of China's most recent 5 year plan. Zero emission vehicles are mandated by the government. Leaving OEMs with 3 options, either to start producing EVs, purchase carbon credits from it's peers or pay fines.

License plate lottery system is how Chinese car buyers can get a number plate for their cars. EV car buyers however can skip the lottery system and directly get a number plate.

Billion dollar range subsidies over the years have also helped prop up the EV market. Although the subsidies have been systematically reduced in the last couple of years, market consolidation is clear with sales figures still matching year-to-year numbers.

Not many foreign players

Chinese market has been a hard one to crack for most global OEMs. Here is a distribution of EV's sold in China.

6 out of the top 10 are BYD EVs and only foreign carmaker in the top 20 is Tesla at positions 5 and 6. This shows the dominance of Chinese EV carmakers in the domestic market and this dominance is no fluke.

China has implemented a quota system where a car manufacturer is required to sell at least 8% of EVs starting 2018. If car companies fail to meet this requirement, they will either have to pay fines or purchase credits from companies that have surpassed this limit. Since there is another subsidization scheme that favors locally manufactured EVs, it is very likely that Chinese manufacturers will be able to sell pricey credits to foreign automakers. Essentially making the foreign automakers fund the subsidization program.

A way out for foreign OEMs is to set up joint ventures with Chinese manufacturers, similar to what GM has done with SAIC, a Chinese OEM. And joint ventures mean sharing technology with Chinese counterparts.

Battery R&D even before EV's came into picture

In the early 2000s, BYD had established itself as a global mobile phone battery manufacturer. This gave them a head start in battery R&D. For example these battery have been used in the Nokia Lumia range of phones.

Source: Google Image Search

BYD's flagship blade battery is a key part to it's competitive advantage. The culmination of over 25 years of research and development in this space. The cathode material of the battery is Lithium Iron Phosphate. The benefits of the blade battery include, simpler battery architecture, lower space consumption, low heat generation, high safety from mechanical damage, longer range and lifetime.

Here is a demo of a nail penetration test of the Blade battery compared that to another EV battery following a more traditional architecture and using traditional cells.

Foreign battery tech not favored by legislation

Samsung SDI and LG Chem batteries have been strategically left out of the subsidy programs to favor BYD and CATL, the Chinese battery manufacturers.

The Chinese government said on April 1 that it would extend state subsidies given to EV manufacturers by two years until the end of 2022, abandoning its initial plan to remove the program after 2020.

Korean battery makers have struggled with their business in China, which has the world's largest EV market, as EVs equipped with their batteries have not been eligible for the subsidies since 2016.

Product cost/margins, Shenzen proximity

BYD's Operating margin have steadily stayed in the 4-8% which is not a bad figure for the automotive industry.

The Group has shown a very consistent track record in terms of cost control, with operating expenses kept at 9% to 12% of total revenue throughout the entire period, as changes in operating profit margin were mostly driven by fluctuations in gross profit.

But the more prominent advantage comes from the proximity of BYD to Shenzhen. The closer you can set up shop to Shenzhen the lower you can keep your costs of production, simply due to proximity.

But that also means, the closer you are to Shenzhen the higher the competition is to secure your supply chain.

Source: companiesmarketcap.com

In this comparison between BYD Atto 3 and Tesla Model Y, it is very clear how much BYD is able to undercut the product costs and sacrifice some of it's margins to offer a competitive price compared to a Tesla. The full comparison of features from both cars are available here.

Imitating existing cars

It is no secret that Chinese automakers are copying the design aesthetics of already "proven" car models from around the world. BYD is no exception. The moat here is that these companies save a lot of time, effort and money in the realms of design, marketing, branding by borrowing that from an established car model.

Here are 3 examples that eerily look similar to another existing car model.

BYD S8 and Mercedes-Benz CLK

BYD Yuan and Ford EcoSport

BYD S7 and Lexus RX

Diversified product portfolio

BYD offers a diverse range of electric vehicles, including passenger cars, buses, trucks, and commercial vehicles. This broad product portfolio enables BYD to cater to different market segments and customer needs.

Even within cars, they do have certain products that are specifically designed for ride sharing services such as uber. However, that only makes up for about 1% of the total cars sold.

By producing for a wide range of products BYD has ensured better revenue stability and facilitating better technology transfer between market segments. Essentially, solve the problem ones, sell it in many sizes.

Source: BYD

Apart from the automotive business, BYD gets about 25% of it's revenue from mobile rechargeable batteries, mobile handset components(serves a number of notable customers including Huawei, Samsung, Apple, vivo, and Xiaomi) , monorail and semiconductors.

How does BYD's growth story look like in the coming years?

In my view, BYD's growth strategy will be based on these 3 core aspects

  1. Expanding more into markets outside of China

  2. Leveraging their technical expertise in batteries and become a global battery supplier

  3. More joint ventures with foreign brands

Expanding to other countries

However, over the past couple of years, BYD has ramped up its international diversification efforts with overseas markets accounting for 30% of total revenue in 2021.

Source: investorinsights.asia

Expansion of BYD is going to be the key aspect of growth strategy. They have established a name brand globally, stunning everyone of it's sales prowess.

Here Doug DeMuro reviews the BD Han model, even though this model is not available for sale in the US. The video has 745,000 views already.

BYD has 27 car showrooms in India. All of which were established in the last 2 years.

In Dec 2022, BYD has announced that they have plans to set up one or two plants in Europe. Currently they have offered 3 of it's models to the European market, with more coming in 2023.

Selling batteries

Currently BYD is the second largest battery manufacturer in the world, just behind CATL, another Chinese battery company.

Looking at another close competitor, LG Chem grew in the past few years thanks to it's battery sales for Volkswagen Group’s ID4, Ford’s Mustang Mach-E and Tesla’s Model Y. Securing such partnerships will be crucial for BYD's growth. One such partnership that has already begun to bear fruit. BYD has begun to sell it's blade batteries to Tesla Europe for its Model Y production.

BYD clearly has a lead in the LFP battery chemistry. More and more OEMs are preferring this chemistry over Nickel-Cobalt-Aluminum chemistry. They are cheaper on a per kW basis and does not use rare earth metals such as cobalt.

According to SNE Research, BYD sold the equivalent of 7.9 gigawatt-hours (GWh) of batteries in the first half of 2022, surging 206% year-on-year and taking an 11.8% share of the global EV battery market.

Joint Ventures

BYD has been part of a few joint ventures with both domestic and foreign brands. These joint-ventures are key to enabling better technology transfer, and providing a new market opportunities for BYD's partners. Other manufacturers like SAIC have also set up JVs with VW in the recent times for the same reasons.

BYD-Daimler -> Denza

Started in late 2021, Daimler(10%) and BYD(90%) set up Denza. Prior to this JV, in 2010, BYD and Daimler entered into a contract to establish a research and technology joint venture called BYD Daimler New Technology Co., Ltd. (BDNT) with an equal 50:50 partnership.

BYD-UzAuto

UzAuto and BYD set up this JV in late 2022. UzAuto is an automotive manufacturer that is owned by the Uzbekistan Government. This is an interesting trend where nation states are setting up automotive companies.

TOGG; a Turkish brand also owned by the Turkish Government is another example of governments directly starting an automotive company. This is primarily in realization of how important the automotive sector it is to the economy and countries not able to fully provide the economic environment for foreign brands to set up shop. This also gives options for strategic partnerships with other countries like China as both manufacturing and technology partners.

BYD-Bulmineral

BYD and the Bulgarian energy company, Bulmineral set up a joint venture to build electric buses.

The core technology of BYD electric buses is BYD’s self-developed Iron-Phosphate battery technology boasting the highest safety, longest service life and most environmentally-friendly rechargeable chemistry. It also contains no heavy metals or toxic electrolytes.

BYD-Toyota EV

In 2020, BYD and Toyota announced their new joint venture, BYD Toyota Electric Vehicle Technology. In March 2023, Toyota started selling bZ3 (Beyond Zero series) a compact electric sedan starting a price of around 25000$. The EV is based on the e-TNGA architecture developed by Toyota, with batteries and motors supplied by BYD.

Source: Toyota