BYD Company, Ltd. · BYD Company, Ltd. 606-139 3 dry room. Hence, BYD began experimenting with different formulas to avoid the problems of humidity. Six months later, BYD had developed

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________________________________________________________________________________________________________________ Professors Robert S. Huckman and Alan D. MacCormack prepared this case. Senior Researcher Wai-Shun Lo and the staff of the HBS Asia-Pacific Research Center provided support in the development of this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006, 2007, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R O B E R T S . H U C K M A N

A L A N D . M A C C O R M A C K

BYD Company, Ltd.

The sun was shining as Wang Chuan-Fu, chairman and president of BYD Company, Ltd., pulled his Mercedes into a parking spot outside the firm’s headquarters in Shenzhen, a rapidly growing city with a population of approximately 7 million in southern China’s Guangdong province. Founded by Wang in 1995, BYD had rapidly grown to become the world’s second-largest manufacturer of rechargeable batteries by July 2002, when it received a listing on the Hong Kong Stock Exchange. By this time, the Shenzhen plant employed over 17,000 workers with a daily output of over 2 million units. This was all the more remarkable given battery manufacturing had traditionally been a very capital-intensive process, a feature most analysts thought made it a poor fit in a country known for competing on the abundant availability of low-cost labor.

Wang was justifiably proud of the company’s achievements in the seven years since its founding. But today, in late 2002, he was contemplating the next stage in the company’s growth. Wang was considering the acquisition of a small, regional automotive manufacturer, Qinchuan Auto, located in central China, near the city of Xi’an. Buying an auto company seemed like a large leap for a company that had built its reputation by becoming the largest Chinese supplier (and the fourth-largest global supplier) of lithium-ion (Li-ion) batteries to cell phone manufacturers. Many analysts would frown on such a move. But Wang thought there were a number of reasons it could make sense.

The assets of the state-owned Qinchuan Auto were being sold cheaply, and the government had stopped issuing production permits for new automotive companies. Given the expected growth in Chinese demand for automobiles—from 1 million sedans in 2002 to potentially six times that many by 2010—this appeared to be one of the few remaining opportunities to get into a booming industry. Wang was also intrigued by the potential of applying Li-ion battery technology to develop an electric vehicle. While such vehicles had made a short appearance in the U.S. in the early 1990s, they quickly were discontinued due to low sales and high costs. But those early electric vehicles used older battery technology and were assembled in a high-labor-cost country. The real potential, Wang believed, came from using newer technology, assembling it cheaply, and selling it to a population whose tendency for short trips was better suited to its features. Finally, Wang was excited about applying the firm’s deep capabilities in process engineering—used so successfully to design new methods of battery production that gave BYD a significant cost advantage over global competitors—to automotive manufacturing.

606-139 BYD Company, Ltd.

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At heart, Wang remained very much an entrepreneur. No problem seemed too large to overcome, no market too difficult to conquer. While this logic ran counter to management wisdom in the West, China represented a very different context. He reflected, “U.S. models don’t work here, so we have to run our business very differently from what I’ve read in most management books.”

BYD Company, Ltd.

Early History

Having completed his masters degree in 1990 at the Beijing Non-Ferrous Institute (which conducted research on metals), Wang had originally stayed on at the institute to conduct research on his passion: “to make better batteries for electronic products.” By 1994, however, the lack of money for research at the government-funded center convinced him he needed to take a different approach. In February 1995, he moved to Shenzhen, just across the border from Hong Kong (at that time, under British control), and opened BYD. The name had no special meaning, though Wang would later joke that it stood for “brings you dollars.”

Wang’s original aims were modest. His work at the institute had given him a good knowledge of battery technology, so, along with three colleagues from the institute, he began working on a process for making nickel-based rechargeable batteries (nickel-cadmium [NiCd] and nickel-metal hydride [NiMH]), a mature technology used in toys and consumer electronics. At the time, large Japanese firms—including Sanyo, Sony, and Matsushita—dominated the worldwide market. Wang was not aiming at these giants but was instead focused on the myriad of small local companies that supplied nickel batteries to Chinese toy manufacturers exporting to Europe. As he recalled, “Our competitors were all local. Their quality was inconsistent. Our aim was to improve quality while keeping the price low so we could compete in the high end of the market. So we started to invest in process improvement.” The investments paid off; by 1997, BYD had over 1,000 employees and had started winning business from foreign companies.

This early success led Wang to investigate the potential of newer technologies, particularly those for Li-ion batteries. Li-ion batteries held many advantages over nickel-based batteries due to the greater charge they could hold, their more rapid charging times, and the fact that they did not suffer from capacity loss over time. At the time, Wang had around 20 employees in research and development (R&D), two-thirds of whom were focused on process design and the remainder on battery chemistry. He set them to work on developing specifications and a production process for a Li-ion battery. Their biggest problem was that they could not see inside the factory of the market leader, Sanyo. Wang emphasized, “We didn’t know the chemical formula or the process for making a Li-ion battery. We had to go back to first principles and understand how we could build such a battery.”

The first steps in this process consisted of studying the patents that existing battery manufacturers had filed and taking apart Li-ion batteries to see how they were made. Given these batteries combined up to 25 different chemicals, understanding the proportions of each that led to the best performing product was a difficult challenge. Wang emphasized, “We had to open our minds, believe that nothing was impossible. The process involved much trial and error.”

For example, early in this process, BYD’s engineers discovered that the chemicals Sanyo used in its batteries were very sensitive to the levels of humidity in the environment. What they did not know was that Sanyo overcame this problem by manufacturing its batteries in a humidity-controlled

BYD Company, Ltd. 606-139

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dry room. Hence, BYD began experimenting with different formulas to avoid the problems of humidity. Six months later, BYD had developed a combination that worked effectively in its facility without the need for significant dry-room capacity. Thereafter, Wang and his colleagues turned their attention to the process by which these batteries could be made. The primary aim of process development was to avoid the need for BYD to invest in expensive equipment, such as robotic arms used for materials handling. Instead, BYD aimed to substitute direct labor for these machines.

In August 2000, BYD moved its production to a 420,000-square-meter industrial park in the Longgang District of Shenzhen. Two plants for the production of nickel-based batteries were completed in January 2001, and the Li-ion plant was online by December 2001. Around the same time, BYD completed the construction of its on-site power-generation capacity, which was built to ensure a reliable supply of electricity for its operations. Finally, the Longgang site included additional room for R&D laboratories and dormitories to house the company’s production workers.

BYD and the Battery Market in 2002

Between 1999 and 2001, BYD’s annual sales grew by a factor of more than three, exceeding RMB 1.3 billion in 2001 (Exhibit 1). Based on the first four months of 2002, BYD expected this number to exceed RMB 1.6 billion in 2002. This growth was driven both by overall growth in the global market for rechargeable batteries (Exhibit 2) and BYD’s growth in share over time. By 2002, BYD was among the top four manufacturers worldwide—and was the largest Chinese manufacturer—in each of the three main battery technologies (Exhibit 3). (Exhibits 4a and 4b detail BYD’s revenue and gross margins by battery category. Exhibit 5 lists BYD’s key customers by product application.)

Despite the dominant position of Japanese firms in the battery industry, Wang saw BYD’s toughest competition emerging from a different source—small, but growing, Chinese firms. He estimated that, since BYD’s founding, more than 200 Chinese companies had entered the market for rechargeable batteries. While these firms were substantially smaller than BYD and invested very little, if any, in R&D, Wang noted that they still created significant competition for BYD. He observed:

In China, the competition is so fierce and merciless, it’s just all about money. And consumers benefit from the process, so that makes our industries like garments, toys, motor bikes, and appliances very competitive. The competition is very bloody. If you go to America, maybe the competition is not that cruel. . . . This is real China, good or not. You don’t hear about this often.

Even though competition remained intense, Wang believed that the expected growth of global and domestic Chinese markets for mobile phones—one of the largest applications for Li-ion batteries—promised to support continued growth for the company in the near term (Exhibit 6).

The company’s rapid growth had allowed it to raise approximately HK$1.6 billion (approximately US$192 million) through an initial public offering on the Hong Kong Stock Exchange in July 2002. Beyond repayment of bank loans, the company intended to use these funds for several initiatives, including expansion of development and production for its current battery products, applications of its products to new end uses (e.g., electric bicycles and vehicles), and research into new power sources (e.g., fuel cells and solar cells) (Exhibit 7).


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Battery Production at BYD

Manufacturing Process

The process flow for battery production at BYD appears in Exhibit 8. For all three types of batteries—Li-ion, NiCd, and NiMH—this process began with the production of the anode (negative electrode) and cathode (positive electrode). Both of these electrodes were manufactured by coating a substrate with a liquid slurry to create paper-thin, coated sheets. These sheets were then cut into strips (also known as plates), the specific dimensions of which depended upon the physical size of the battery being produced.

Once cut, the anode and cathode strips were placed on a conveyor belt leading to the first step in assembly—coiling (Exhibit 9a). In this step, an operator would take one anode strip, one cathode strip, and one separator strip from the conveyor and would place them in a motorized winder that resembled a sewing machine. The three filmlike sheets were then wound together to create a cylindrical shell, which was placed back on the conveyor to be checked by a quality control inspector. After passing inspection, batches of five shells were passed by hand to operators in the next step, which differed for Li-ion and nickel-based batteries.

Li-ion batteries first went to cap pressing and welding. Cap pressing involved shaping a piece of aluminum into a container that would eventually hold the cylindrical shell and the electrolyte fluid (Exhibit 9b). The size and shape of the cap depended on the eventual size and shape of the battery. For cellular phones—which accounted for a large volume of BYD’s production—these batteries tended to be rectangular and slightly smaller than a book of matches.

Following cap pressing and another quality control step, the batteries moved to welding, where the shell was inserted into and welded to the cap. After another quality inspection, the tab on the top of the can was folded down and sealed, leaving only a small insertion slit open for the next step in the process—filling the battery with electrolyte fluid. The batteries then received another quality inspection. For nickel-based batteries, the steps from cap pressing to electrolyte adding were similar but occurred in a different order.

Both Li-ion and nickel-based batteries were then transferred up one floor in the factory for the formation step, where they were manually placed into large machines that activated the batteries by fully charging and discharging them. The batteries were then charged and discharged again to test their capacity and to ensure their compliance with performance standards. On average, the formation and testing steps lasted 10 hours. Following discharge, batteries were sent to a storage area where they were typically held for 30 days. This storage provided time for the chemicals in the battery to stabilize, thereby minimizing short-circuit problems. After a final inspection for voltage requirements, batteries were packaged and shipped to customers.

Comparison to Competitors

In terms of the sequence of steps, the manufacturing process at competing firms in Japan was similar to that at BYD. Nevertheless, the typical Japanese plant differed from BYD in several respects. First, most of the process in Japanese plants was automated. For example, the movement of material and work in process between production steps was performed by robotic arms rather than workers. Though robots were highly reliable—defects during assembly were estimated to be slightly lower than the 1.0% defect rate for the similar steps in BYD’s process—they were expensive. Wang


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estimated that each robotic arm cost approximately RMB 800,0001 and was depreciated over five years. Equipping a line to do final assembly would have required several robotic arms. BYD’s Shenzhen plant had more than 25 lines dedicated to battery production.

Second, Japanese factories contained significantly more dry-room space than BYD’s production facility. At these firms, nearly all assembly steps had to be performed in a dry-room environment. At BYD, only the steps from the final formation of the cylindrical shell to the electrolyte-filling process required a dry room. Further, the BYD dry room was designed such that operators sat around its perimeter and worked on parts by putting their hands through airtight sleeves that extended into the humidity-controlled environment (Exhibit 9c). Though not certain, Wang suspected that the amount of dry-room space in a Japanese factory was 10 times greater than that at BYD.

Ironically, the smaller amount of dry-room space at BYD’s facility may have been the result of BYD not having access to information about the process used by its Japanese competitors. Wang noted, “Early in the design of our lithium-ion process, the Japanese plants were off limits to us, so we had to rely on our imagination to research and develop the battery technology and production process from other sources.”

With little information about the process used by competitors, Wang and his colleagues turned their attention to product design. Wang recalled:

We noticed early on that humidity was harmful to the performance of the battery and, at the time, we did not know that the Japanese relied so heavily on dry rooms to solve this problem. We realized that trying to build a large dry room would be very expensive, however, so we focused on changing the product materials to make them less sensitive to humidity. As a result, we have a much smaller dry room than our competitors. If we had known how much dry-room space they actually had, we might have been content just to model our process after theirs.

Together, the higher levels of automation and dry-room space at Japanese firms translated into greater investment in capital equipment by those firms. According to Wu Jing-sheng, BYD’s chief financial officer, annual capital expenditure at the typical Japanese firm was likely more than five times—and perhaps as much as 10 times—that at BYD. (Exhibit 10 provides an analyst’s comparison of the estimated cost structures for Sanyo’s and BYD’s battery businesses.)

In addition to established Japanese firms, BYD faced increasing competition from nearly 200 Chinese firms that had entered the rechargeable battery market since 1995. Like BYD, these firms relied on labor-intensive production processes. Yet Wang felt that BYD differed from its Chinese competitors along at least one critical dimension—investment in R&D. Whereas other Chinese firms focused solely on production, BYD devoted substantial resources—roughly 2% of revenues—to both product and process R&D. Wang observed, “There are two types of Chinese companies in our industry. The first group focuses on the sales channel and does not care about the technology or the development of new components. Companies in the second group, including BYD, emphasize technology, and their competitive edge comes from the products they develop.”

1 RMB 800,000 represents approximately US$100,000.


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Product and Process Development

Since developing its first lithium-ion battery in 1997, BYD had made several improvements that increased the cycle life2 for its product. As BYD made these improvements to its battery technology, it became more active in protecting its intellectual property. Specifically, the company moved from having no patents as of 1999 to holding scores of patents as of the beginning of 2002.

Despite their significance, product improvements accounted for only one-third of BYD’s annual R&D spending. The remaining two-thirds of this spending focused on improving the company’s manufacturing processes. This emphasis on process R&D stemmed from BYD’s labor-intensive approach to manufacturing. Wang noted, “When you rely on labor as your primary input, you introduce variability into the process. You need to develop methods for managing that variability to maintain quality.”

To reduce variability, the production process at BYD was divided into numerous steps, each requiring only a narrow span of activity. For example, before the charge and discharge step, small pieces of tape covering the contacts on the battery had to be loosened using a bladelike device and then peeled off by hand. Rather than have the same worker perform both of these tasks, one worker would loosen the tape on each battery in a batch and then would send it to the next worker, who would remove the tape from each unit. In all, the Li-ion production process included more than 100 distinct process steps. A significant portion of BYD’s process R&D involved revisiting decisions about the allocation of activity across these steps to reduce the adverse effects of variability on production performance.

Perhaps the most critical aspect of BYD’s process R&D occurred within each process step. At this level, BYD’s process engineers focused on developing simple assist devices, or jigs, for as many steps in the process as possible. These jigs insured consistency in quality for each step of the process. For example, a jig used in the can-assembly step was used to hold the base of the can steady to insure precision in the folding of the flaps on top of the can. Wang viewed these jigs as critical to BYD’s success in manufacturing and offered the following simple formula to explain his position: “Labor plus jigs equals automation.” In support of this view, the company had more than 60 R&D scientists dedicated to designing and improving jigs for the battery process.

Human Resources

According to Wang, the development of reliable production processes required high levels of discipline among the workforce: “In social life, we stress democracy, freedom, and subjectivity. However, these concepts cannot be accordant with the large-scale manufacturing requests of the factory. In a wide range, the factory requests workers to be consistent and obedient.” He continued:

To manufacture state-of-the-art products, Chinese plants will have to take on some discipline training, which is taken on by society in Japan and Germany. Discipline training is basically some simple action training, including standing in line while waiting for meals, walking in line while being on or off duty, and so on. All of this training, although seemingly having no relation to production, builds the making of employees and greatly affects the quality improvement of products. Discipline training is a very important sector in building a company with unique Chinese characteristics.

2 Cycle life is the number of times that the battery can be recharged to meet at least a threshold amount of power.


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The labor-intensive process at BYD positioned human resources as a critical component of the company’s operating system. The average line worker at BYD earned approximately RMB 1,000 per month in salary and received housing, food, and health insurance with an implied value of an additional RMB 500 per month. Housing was provided in on-campus dormitories with an average of four workers per room. Over 95% of the workers on the battery production line were young women, many of whom were from smaller, inland villages throughout China. They would move to Shenzhen to work for several years before returning to their home villages. As a result of this migration pattern, BYD faced turnover of 10% to 20% in its manufacturing workforce.

To address turnover, BYD made an effort to develop production managers from within the company. Though repetition of narrow tasks was viewed as a key component of reducing variability in the manufacturing process, management did encourage job rotation to reduce monotony for workers and to help them build a broader base of skills. Workers making acceptable progress with respect to the mastery of specific tasks and showing evidence of leadership potential could expect to be promoted to the role of production supervisor within two years.

In contrast to that of manufacturing, the turnover rate among the several hundred R&D scientists at BYD was less than 2%. These scientists—most of whom were male and brought their entire families to live with them in Shenzhen—were paid between RMB 3,000 and RMB 6,000 per month in salary and received housing, food, and health insurance worth an average of RMB 500 per month. Because many R&D scientists had children, the benefit of free access to the elementary and middle schools on the BYD campus was an attractive perquisite.3 Housing for R&D scientists and their families was provided through single-family apartments on the Shenzhen campus. In addition, scientists were offered membership in the BYD Club, where they could meet for lunch and use various athletic facilities.

Given that many of its line workers were away from their home provinces, the company aimed to provide opportunities for social interaction. For example, workers were encouraged to participate in social activities that included monthly birthday parties and gatherings after work. In addition, there was a series of companywide clubs for activities including badminton, ping pong, soccer, dancing, English lessons, Xiaoyuan painting, and Qifei literature. Finally, BYD held an annual sports day on the anniversary of the company’s founding. All employees were encouraged to attend and participate in the Olympic-style event, in which teams from various divisions of the company competed against one another in the stadium on the Shenzhen campus. This event included an address by Wang, in which he would update all of the firm’s employees on the company’s progress and provide thoughts about business goals for the coming year.

Despite its efforts in the area of human resources, certain factors remained beyond BYD’s control. Though China was widely regarded as having a surplus of workers, the labor market in Shenzhen was tighter due to the large number of manufacturers located in that region. Beyond simply losing employees to competing firms, Wang was concerned about the intellectual property that those workers might take with them. He observed:

Chinese people are very ambitious. They are poor, they want to get better, and they want to be the boss. If one person is in charge of a project, the next thing you know, he starts his own company. In America, maybe you can use regulations to protect yourself. In China, those protections are not there. There are more than 200 related companies that have started since we first developed our technology several years ago. . . . What worries me most is not that

3 Access to these schools was offered to all BYD employees with children.


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turnover in the factory is 10%–20%; I am more concerned about the fact that the turnover of spoons in our cafeteria is probably 60%!

Steps toward Integration

In response to the maturing market for Li-ion batteries, BYD sought new sources of growth. At the top of its list was the market for wireless handset components, such as liquid-crystal display (LCD) screens, keypads, camera modules, and plastic housings. Handset makers—both original equipment manufacturers (OEMs) and contract manufacturers—represented the single largest source of demand for BYD’s batteries. As the prices for handsets declined, these customers sought cheaper sources of all components, not just batteries. Wang believed that BYD ultimately would be able to manufacture all of the components—with the exception of the main memory board—required for most basic phone models.

In February 2003, BYD planned to begin producing LCD screens at a new plant on the Shenzhen campus. This plant would eventually have the capacity to produce screens for up to 150,000 phones (depending on screen size) per day. In addition to this new facility, BYD was expanding its existing capabilities in plastic molding—used to make battery covers—to manufacture handset housings. Analysts estimated BYD’s total investment in component manufacturing to be approximately RMB 400 million. (Estimates of revenues and gross margins for LCD screens and plastic housings—two of the largest-selling components—appear in Exhibit 11.)

By increasing its capabilities in component manufacturing, BYD hoped to strengthen its position to integrate further into the process of phone assembly—currently the domain of large providers of electronics manufacturing services (EMS), such as Solectron, Flextronics, and Foxconn. The addition of assembly services would allow BYD to offer OEMs a “one-stop” solution for the outsourced manufacturing of their products. Wang saw BYD’s planned vertical integration into wireless handsets as anecdotal support for a more general trend with respect to manufacturing. He claimed, “Once the core technology in a given industry is acquired by a low-cost manufacturer, the whole industry will be reshuffled.”

Wang felt that BYD had to approach new vertical opportunities by owning, rather than contracting for, assets. This view was driven primarily by the highly competitive nature of Chinese manufacturing and the lack of a strong legal system to enforce contracts. Both of these factors created difficulties for Chinese firms that relied on properly functioning markets. Wang observed, “Our goal is the vertical integration of the whole supply chain. . . . Even for the design of tooling and molds required to make components, we do 95% of the work internally. This puts more processes under our control and allows us to get benefits in terms of both cost and quality.”

Qinchuan Auto Company

Qinchuan Auto was a state-owned enterprise (SOE) situated in the northern city of Xi’an, home to the famous terracotta warriors, a 6,000-strong army of clay soldiers built by Emperor Qin Shi Huang around 200 B.C. to strike fear into his enemies.4 The company began manufacturing automobiles in 1989 to complement its existing business of making artillery shells. Plant manager Liu Zhenyu, who

4 The first of these warriors, which appear to have been buried with Emperor Qin, was unearthed in 1974 by local farmers digging for a well.


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had worked at Qinchuan Auto since 1999 and had previously worked for the government as a supervisor for the automotive sector, noted:

In 1988, we were asked to study how we could build a car. The vice president of China was in charge of the project; the aim was to make a small car for the Chinese people. In 1989, we built the first one—the 7050. The engine, chassis, and wheels were bought and assembled into a fiberglass body which we had designed ourselves. We sold a few hundred. Then we started to look at models we might bring from overseas to assemble, part of a government program to increase domestic technical capability. We chose the ALTO, a minicar that Suzuki designed for emerging markets. We built the first one in 1993. First we just put the wheels on finished cars, then we started assembling subsystems, then we began making some of the parts and assemblies here or buying from local suppliers. By 1999, we were shipping 7,000 vehicles a year, with about 80% local content.

Qinchuan Auto stopped making the ALTO in 2000, when Suzuki entered a broader partnership with another Chinese automotive company. To keep the plant alive and employing the 700 people who depended upon it for their livelihood, Liu needed a new model. He thus personally led the design effort for a car called the Flyer, which was loosely based upon the ALTO and allowed Qinchuan Auto to use many of the same parts and suppliers (see Exhibit 12 for a picture of a Flyer). The most expensive outlay for the new model was the tooling (e.g., stamping presses for the metal body parts), which came from Japan at a cost of $5 million. Using production lines designed by a government institute, the company quickly ramped up sales of the new model to 20,000 per year. This volume reflected both growth in the overall Chinese market and the Flyer’s low price of roughly RMB 30,000. By 2002, the plant had raised its employment to 900. Despite this growth in the workforce and the fact that the direct labor content of each vehicle was approximately 50 hours, labor still represented less than 1% of the vehicle’s price.

At the same time, competition in the Chinese auto market was heating up. Given expected growth in demand for personal autos, many foreign competitors had made China their biggest non-domestic priority. Several Chinese auto companies had partnered with foreign manufacturers, such as General Motors, Volkswagen, and Toyota. These arrangements provided access to the booming Chinese market for the foreign partners (which needed a local partner to sell vehicles) while ensuring some transfer of skills to the domestic company. Given the growth potential of the market, investment was rapidly increasing. As of 2002, production capacity slightly exceeded 2 million automobiles per year (see Exhibit 13 for the capacity of major firms); based on planned capacity additions as of 2002, this figure was expected to reach 3.5 million by 2010 (Exhibit 14). Given that the demand for personal autos was expected to rise even more dramatically over this period, some estimated that sales of passenger autos could increase from roughly 1 million in 2002 to around 6 million by 2010. Nonetheless, as of 2002, these dramatic prospects for growth had not yet been realized, and automobile prices continued their recent declines of 10% to 20% per year.

Competitive pressure was heightened by the fragmentation of production capacity. While there were over 45 manufacturers of sedans, there were only three companies with double-digit shares of the market for passenger autos5—Shanghai Automotive Industry Corporation (SAIC), with more than 40%; First Automobile Works (FAW), with greater than 20%; and Tianjin Automotive Industrial Co., Ltd., with approximately 14% (see Exhibit 15 for the output of major brands in 2000). In addition, during 2002 only three plants built more than 100,000 vehicles6—widely regarded as the minimum efficient scale for an automobile plant in the United States. While state-owned auto 5 The market for passenger autos excludes trucks and buses.

6 Based on 2002 plant-level production figures from www.chinesecars.net, accessed March 15, 2006.


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manufacturers without foreign partners accounted for 25% of autos sold, most analysts thought that the smaller, poorly capitalized SOEs were doomed to failure. The future was brighter for the larger SOEs and private Chinese companies that could raise the capital required to compete, but only two of these firms—Geely and Chery—sold over 40,000 units per year by 2002. Liu noted:

By 2002, the Xi’an province leaders were getting scared. We needed capital to keep the Qinchuan plant alive, but the province couldn’t afford to give us any. Plus, the trend across China was for SOEs to be privatized and allowed to stand on their own feet. That, or they would be allowed to fail if they weren’t competitive. So we needed a partner or a buyer: one with the capital necessary to inject into the plant so we could expand and prosper, and one with technology that we could take advantage of. As the province leadership7 considered potential partners, we became more and more impressed by what BYD had achieved. It didn’t have the technology we wanted, but it had capital from the stock offering and a method for building high-quality products. So we decided to offer Wang land in a high-tech park where he could build a new one-square-kilometer factory on very favorable terms. Only three kilometers away, the price of land is 50 times what we offered BYD.

BYD’s Decision

Buying a state-owned automotive business was not something Wang had considered six months earlier when BYD made its debut on the Hong Kong Stock Exchange. But the idea intrigued him. If there was a way to deploy the capabilities BYD had built in battery manufacturing, this was a huge opportunity. Some analysts expressed the view that most of the existing foreign joint ventures were “skimming” the market, selling vehicles at prices that gave them margins of 10% to 30%, allowing room for low-priced entrants. For example, GM’s Buick sold for more in China than it did in the U.S., but it also cost more to manufacture given that the most important parts were imported. Domestic SOE manufacturers were thought too conservative and poorly run to take full advantage of the booming Chinese market. While some had large market shares, observers doubted their ability to truly innovate (many had no R&D departments) or produce more efficiently. By contrast, private companies such as Geely and Chery were thought to have great promise.

Buying an auto company, however, was not for the faint of heart. The purchase price of roughly RMB 250 million seemed to be a bargain given the land that came along with it. But the existing equipment and lines at Qinchuan were in a poor state of repair and had no capacity for expansion. Wang estimated that building a new facility with a capacity of 100,000 vehicles per year and production lines for two additional vehicle models would require a further investment of between RMB 400 million and RMB 500 million. Furthermore, developing new vehicles would cost approximately RMB 100 million per product and would require adding resources, as Qinchuan did not have its own R&D group. Overall, Wang thought BYD would require 2,000 additional product and process engineers to be competitive as an auto manufacturer. That amount of skilled engineering talent, however, did not exist in Xi’an but was instead located around Shanghai, where the majority of the foreign joint ventures were based.

Wang believed that BYD’s engineers, working on the manufacturing process with similar methods to those employed in battery production, could reduce the cost of the existing Flyer model by about 30%. Given that Qinchuan currently made a small profit each year, Wang felt that BYD had a significant opportunity to raise gross margins or price more aggressively to increase market penetration. A potentially greater opportunity lay in developing new models with designs that could 7 Liu was a member of the province leadership.


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be produced far more efficiently than the Flyer and that targeted a higher price point—approximately RMB 80,000—thereby addressing a larger portion of the market. With this strategy, it was not unrealistic to expect Qinchuan to be capable of making 60,000 vehicles within three years.

Longer term, Wang was intrigued by the possibility of developing an electric vehicle powered by Li-ion batteries. BYD’s heavy investments in battery product and process development over the years had given it insights that other firms—especially automotive firms—did not have. Indeed, they had recently begun patenting new developments related to electric vehicles as they realized the breadth of potential applications. Developing such a vehicle would take at least several years and require hundreds of product and process engineers focused on automobile design. Such an effort was filled with unknowns surrounding development expenses, product performance, and product reception in the market. Indeed, BYD’s engineers thought a battery designed for such a vehicle would represent up to 60% of the car’s total cost and would only be able to provide a driving range of 250 kilometers per charge in the short term. Still, the idea appealed to Wang’s entrepreneurial spirit, and it represented a way for China to leap ahead in an industry and a technology in which it had previously lagged other nations.

Tempering Wang’s enthusiasm was his recognition that most of the financial analysts who covered BYD in Hong Kong would not be happy if BYD went ahead with the Qinchuan acquisition. After all, BYD had not explicitly mentioned the prospect of entering the automotive industry in its IPO documents. Further, there would likely be concern that the investments required in plant, equipment, and new models would drain the cash created from BYD’s strong position in the battery industry, thereby allowing battery rivals to invest themselves “back into the game.” The difficulties in pulling off this transaction appeared immense; making quality automobiles seemed like such a giant leap from assembling tiny batteries for use in cell phones. Or was it?

Wang pulled his briefcase from the passenger seat and headed for the office. There was much analysis to be done. Ultimately, however, he knew that convincing numbers could be produced to support any decision. It was hard to value opportunities such as these and harder to put a figure on the risks that a poor choice posed to the firm’s operations strategy. He wondered how he should think about this type of decision.


12

Exhibit 1 BYD Income Statement, 1999–2002 (RMB 000s)

1999 2000 2001Four Months Ended

April 30, 2002 Sales 415,274 872,586 1,305,302 571,754Cost of Sales 310,350 603,737 875,221 335,623 Gross Profit 104,924 268,849 430,081 236,131 Selling and Distribution Costs 13,180 25,333 42,023 19,157 General and Administrative

Expenses 44,300 102,351 123,126 31,174 Profit from Operations 47,444 141,165 264,932 185,800 Finance, Net -3,679 -1,821 -20,337 -6,547 Other Income, Net 687 -2,026 4,375 -4,623 Profit before Tax 44,452 137,318 248,970 174,630 Income Tax 2,987 6,266 20,829 13,654 Profit after Tax 41,465 131,052 228,681 160,976 Minority Interests 797 6,998 18,197 11,773 Profit Attributable to

Shareholders 40,668 124,054 210,484 149,203

Source: BYD IPO Prospectus.


13

Exhibit 2 Global Market Shipment Value of Rechargeable Batteries (billions of Japanese yen)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Li-ion 1.2 6.3 15.4 39.6 140.5 208.8 250.2 282.4 311.8 277.8 NiCd 201.3 208.2 209.5 204.5 184.6 200.7 182.6 157.6 130.4 103.0 NiMH 12.6 31.2 77.2 98.9 94.8 109.7 111.2 120.8 134.7 91.3 Totala 215.1 245.7 302.1 343.0 419.9 519.2 544.0 560.8 576.9 472.1


aTotal excludes lithium polymer (LIP) batteries, which entered market in 1997 and grew to a market of 16.2 billion yen in 2001. Exhibit 3 Global Battery Market Shares by Technology and Manufacturer, 2002

Li-ion NiCd NiMH Manufacturer Market Share Manufacturer Market Share Manufacturer Market Share Sanyo 28 Sanyo 36 Sanyo 49 Sony 19 BYD 31 Matsushita 17 Matsushita 16 Matsushita 17 BYD 8 BYD 9 Others 16 Others 26 Others 28

Source: Adapted from Chong Ghee Peh and Yvonne Lui, “BYD Company Limited,” Salomon Smith Barney, October 4, 2002.


14

Exhibit 4a BYD Battery Revenue by Category, 1999–2001 (in RMB millions)

Battery Category Series Main Applications 1999 2000 2001

2002 (first 4 months)

Lithium ion (Li-ion)

LP Mobile phones, notebook computersa and camcordersa 48.0 219.5 562.3 296.5

Nickel Cadmium (NiCd)

AA Electrical toys and cordless phones

142.5 214.9 242.1 59.6 SC Power tools and

emergency lights 101.8 239.3 272.3 107.6 AAA Cordless phones 11.5 24.9 18.9 2.5 A, C/D Portable VCD

players, game players and emergency lights 36.9 39.1 38.5 11.9

Nickel Metal Hydride (NiMH)

AA Cordless phones and electrical toys

6.6 13.6 67.7 23.1 AAA Mobile phones and

cordless phones 2.6 4.8 24.5 15.4 SC Power tools 2.3 5.1 1.5 0.8 A, C/D,

PA, PB, PC, PD

Two-way radios, camcorders, portable VCD players, cordless phones, power tools, and mobile phones 1.4 60.5 10.6 1.7

TOTAL 353.6 821.7 1,238.4 519.1


aUnder development.

Exhibit 4b Estimated BYD Gross Margins by Battery Category, 1999–2001

Battery Category 1999 2000 2001 Lithium ion (Li-ion) 35% 47% 46% Nickel Cadmium (NiCd) 24% 27% 25% Nickel Metal Hydride (NiMH) 30% 18% 10%



15

Exhibit 5 Principal Customers by Application

Application Customers Major Brands Mobile Phones Motorola Motorola Kyocera Kyocera Philips Philips Bird Bird Konka Konka TCL Mobile TCL Mobile Zhongxing Telecom ZTE Eastcom Eastcom Beijing Capitel Capitel UTStarcom UTStarcom Cordless Phones VTech VTech, Lucent, AT&T Matsushita Panasonic Unisonic Bellsouth Thomson GE Thomson Sony Sony Uniden Uniden Philips Philips BBK BBK Power Tools Techtronic Ryobi, Craftsman Makita Makita Bosch Skil, Bosch Electrical Toys NICS Nikko



16

Exhibit 6 Global Wireless Subscribers and Market Penetration, 1999–2003E

1999 2000 2001 2002E 2003E 2004E Number of Subscribers (millions) North America 92.9 118.1 139.6 157.3 170.5 181.0 Japan 48.5 58.0 67.1 73.1 77.1 80.1 China 44.2 85.3 144.8 200.0 236.0 260.0 Other Asia 63.0 89.0 110.3 134.6 161.6 185.7 Western Europe 154.7 243.4 294.4 311.4 323.0 333.5 Central/Latin America 39.4 62.5 84.4 111.4 134.5 157.2 Other 37.3 68.0 95.9 125.1 152.8 179.9 Total 480.0 724.1 936.6 1,113.0 1,255.5 1,377.3 Market Penetration (percent) North America 30.3 38.1 44.7 49.9 53.5 56.3 Japan 38.3 45.7 52.8 57.4 60.4 62.7 China 3.5 6.7 11.3 15.4 18.0 19.7 Other Asia 3.2 4.4 5.4 6.4 7.6 8.6 Western Europe 39.6 62.1 75.0 79.2 82.0 84.5 Central/Latin America 7.6 11.8 15.7 20.4 24.3 27.9 Other 2.7 4.8 6.6 8.5 10.2 11.8 Total 8.0 11.9 15.2 17.8 19.8 21.4



17

Exhibit 7 Description of Planned Uses for Proceeds of BYD’s Initial Public Offering

Initiative Amount

(RMB million) “For expansion of production capacity and research, development and manufacture of new products in connection with Li-ion batteries, in particular, prismatic and cylindrical batteries, and LIP batteries for mobile phones, notebook computers, PDA and other portable electronic devices.” 200 “For development and manufacture of chemical compounds used in producing Li-ion batteries.” 100 “For product research, development and manufacture of rechargeable batteries for electric motor vehicles and electric bicycles.” 90 “For product research, development and manufacture of fuel cells and solar cells.” 90 “For product research, development and manufacture of display products for mobile phones, including setting up the production facilities for STN-LCD panels and modules.” 150 “For repayment of bank loans which was used to finance the Group’s working capital requirements.” 400 “For the pursuit of acquisition opportunities which are related to the Group’s existing rechargeable battery business.” 200 “For general working capital.” 200 Total Planned Proceeds 1,430



18

Exhibit 8 BYD Battery Manufacturing Process



19

Exhibit 9a Coiling Process Step

Exhibit 9b Cap Pressing Process Step


20

Exhibit 9c Dry Room

Source: Casewriter.


21

Exhibit 10 Analyst Comparison of Battery Manufacturing Costs, Sanyo and BYD

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Source: Adapted from Jeannie Chung, “BYD Co. Ltd-H,” Credit Suisse First Boston, Hong Kong, 2004.


22

Exhibit 11 Estimated Revenue and Margins for BYD’s Planned LCD and Plastic Housing Business

FY03E FY04E FY05E FY06E LCD Panels Revenue (RMB millions) 92 498 658 921 Gross margin (%) 8.5 13.0 14.0 15.0 Plastic Housings Revenue (RMB millions) 75 500 650 780 Gross margin (%) 34.0 34.0 34.0 34.0

Source: Jeannie Chung, “BYD Co. Ltd-H,” Credit Suisse First Boston, Hong Kong, 2004.

Exhibit 12 The Qinchuan Flyer, 2001

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24

Exhibit 14 Total Automobile Production in China, 1995 to 2010E (thousands of vehicles)

Year Passenger Cars Trucks and Buses Total Automobiles 1990 80 429 509 1995 450 1,003 1,453 2000 605 1,464 2,069 2005E 853 1,797 2,650 2010E 1,423 2,088 3,511

Source: Adapted from “Petroleum Additives Consumption by Market,” Chinese Markets for Petroleum Additives, November 1, 2001 (accessed from RDS Tablebase, March 15, 2006).

Exhibit 15 Output of Major Chinese Passenger Car Brands, 2000

Brand Company Outputa Santana Shanghai Automotive Industry Corp. (SAIC) 221,524 Jetta FAW Automotive Co., Ltd. 94,147 Xiali Tianjin Automotive Industrial Co., Ltd. 81,951 Auto 53,958 Fukang Shenlong Automobile Co., Ltd. 53,900 Accord Guangzhou Automobile Co., Ltd. 32,228 Buick Shanghai Automotive Industry (Group) Corp. (SAIC) 30,024 Other Brands 36,945 Total 604,677

Source: Adapted from “Petroleum Additives Consumption by Market,” Chinese Markets for Petroleum Additives, November 1, 2001 (accessed from RDS Tablebase, March 15, 2006).

aBrand-level output figures appear only for brands with output in excess of 30,000 passenger cars (excluding trucks) in 2000. Output for smaller brands appears in the “Other Brands” category.

Documents

BYD Company, Ltd. · BYD Company, Ltd. 606-139 3 dry room. Hence, BYD began experimenting with different formulas to avoid the problems of humidity. Six months later, BYD had developed