CASE SCENARIO:

BYD OF CHINA: ELECTRIFYING THE WORLD'S AUTOMOTIVE MARKET

CASE DESCRIPTION

The primary subject matter of this case concerns the move towards utilizing electricity to power automobiles and the potential of a Chinese company to become the world's largest automaker, as well as the strategic fit of its innovation with the current external environment. Secondary issues examined include issues of trade, public policy, and the environment. The case has a difficulty level appropriate for junior level students. The case is designed to be taught in one class hour and is expected to require three hours of preparation by students.

CASE SYNOPSIS

The Chinese company BYD hopes to soon become the world's largest car company. With the support of American Warren Buffett, the company which has only been in existence for a few years, mostly making batteries, has caught the attention of not only Mr. Buffett, but also many in the auto industry. This case examines the favorable conditions that are propelling the Chinese company to the forefront of the not so distant future of the auto industry.

BYD OF CHINA

Many Americans have never heard of the Chinese firm called BYD. In fact, it isn't really clear what the letters representing the company's name stand for, although some joke that recently it has meant "Bring Your Dollars." The company’s latest PR message states that BYD stands for “Build Your Dreams.” BYD is a privately owned company which started making batteries in 1995. Although Chinese-made batteries were already available, they were of poor quality. Imports of higher quality batteries were available in China mostly from Japan, but they were quite expensive. To satisfy the need for high quality and low cost batteries, Wang Chuan- Fu started BYD. Wang, who was a graduate of the Beijing Non-Ferrous Institute, found his competitive advantage by studying Japanese batteries and finding creative ways of making similar batteries at a lower cost. Wang had been fascinated with batteries as a graduate student at the Institute and now seeks to take that passion to the global automobile market.

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ELECTRIC AND HYBRID CARS

Electric cars (also known as electric vehicles or EVs) rely exclusively on battery power. With an EV there is no internal combustion engine, muffler, gasoline tank, air and fuel filters, and other parts needed to run a gasoline powered system. The vehicle itself also produces no tailpipe emissions, and by getting its power from a more efficient utility company, overall it produces fewer greenhouse gases. This is especially true if the electricity is produced with nuclear power. EVs are also less expensive to fuel on a per mile basis. Electric cars, however, have a shorter driving range and are difficult to operate with long distance travel (Figure 1). There are also some safety concerns associated with using a lithium ion battery, as lithium is a highly reactive material prone to explosion.

Source: www.hybridcars.com

Hybrid vehicles run on battery power until the battery reaches exhaustion and then a gas- powered engine kicks in to power the vehicle and to recharge the battery. Given the relatively short driving range of electric vehicles, hybrid vehicles have been the logical first step towards all electric cars and the replacement of the internal combustion engine. Hybrid cars became hot selling items when the price of gasoline soared in 2008, and then fell back sharply as the price of gasoline fell. Gasoline prices appear to be rising as the world’s economy slowly rebounds from the economic slowdown and the appetite for oil increases worldwide. Some have proposed that electric vehicles can save the struggling U.S. auto industry. According to Andy Grove (of Intel fame), “batteries will become a competitive advantage for the automakers of the future.” He supports a position whereby the government takes a more active role in promoting and protecting an “infant industry” in new battery technology. The Obama administration took steps in 2009 to provide significant funding of battery research and the production of environmentally friendly

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automobiles. New mileage standards were also proposed that will make electric vehicles more attractive to consumers.

Many companies have begun to think electric automobiles will have a promising future. In addition to the world’s largest automakers who have begun to develop electrical cars, some upstarts have been established. One of these companies is Detroit Electric. The company represents an auto brand from the past and has teaming up with Proton of Malaysia to manufacture electric cars under the Detroit Electric name. Detroit Electric is a privately held company that got its brand name from a defunct 1907 company. The company hopes to sell its cars in China, Europe and the United States. Planned prices for the new all electric cars will be

$23,000-25,000 range for the entry models, with a driving capacity of a little over 100 miles on a single charge. More expensive models will be available for $29,000-33,000 with a driving range of a little under 200 miles before needing to be recharged.

GM, Ford, Toyota, Daimler Benz, Volkswagen all have moved into the electric or hybrid market. It is likely that most of these companies will offer electric vehicles soon. Troubled auto maker, Chrysler, showcased five electric concept cars at its recent Detroit Auto Show and is working with battery manufacturer A123 Systems and other suppliers to attempt to produce an electric vehicle. With its financial troubles and other obstacles Chrysler, it doesn’t seem likely that the company will be producing electric vehicles anytime soon. The success or failure of electric cars and the companies that enter this market is strongly related to the batteries that will power the vehicles. Troubled General Motors, who used to dominate the automobile market is touting the introduction of its electric-gasoline-ethanol hybrid in late 2010. The catch, however, is the price tag: the Chevy Volt will be offered at the hefty price of $30,000 to $40,000 at the retail level and will only be able to run about 40 miles on a single charge before switching over to the gasoline or ethanol powered engine.

IT’S ALL ABOUT THE BATTERY

Lithium ion is the current choice for batteries to power electric cars. Lithium ion batteries are lighter and more powerful than traditional batteries. Lithium, a metal compound, can be found in large quantities in South America, especially in Bolivia, Chile, and Argentina. Chile is currently the world’s largest producer of lithium, however, Bolivia has the largest known deposits of lithium in the Salar de Uyuni region. It is estimated that the lithium supply in Bolivia is somewhere around 5.4 billion tonnes. Significant deposits of lithium can also be found in China. The Chinese government has declared the lithium battery industry to be a “strategic industry” and will likely support its development.

While lithium batteries are currently the most popular option for automobiles, they are still heavy and expensive. For example, GM’s electric car, the Volt, has a battery that is six feet long and weighs around 400 pounds. The cost of an electric car battery is in the range of

$10,000-$20,000 each. Lithium batteries can store up to three times the power of nickel-metal

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hydride batteries. They are clearly superior to conventional batteries. Further advances in lithium battery production may be able to produce smaller, lighter, and faster charging batteries. At least one reported research study shows this promising development. BYD’s advantage in this technology is the productions of ferrous lithium ion batteries, which are safer and cost about half of those of the competition, according to BYD’s general manager of its Export Trade Division, Henry Z. Li.

With a big shift towards lithium batteries as a power source for vehicles is the possibility of supply problems. Bolivia, the largest potential source of lithium has a socialist president and an indigenous population not keen on development of the region. The possibility of undersupply, and or a cartel similar to OPEC would reduce the viability of electric cars.

The United States is behind Asia in battery production and research. Sanyo, NEC, and LG have created core competencies in batteries and achieved economies of scale that will require the Americans some time to catch up U.S. firms in the industry are relatively small upstarts such as A123 Systems and Ener1 (ENERDEL). Even GM’s proposed electric car, the Volt, is  powered by the Korean company, LG. American automakers have yet to establish firm strategic alliances with American lithium-ion battery producers. Serious movement into electric vehicles will require investment money, long term commitment and strategic alliances. Nissan has partnered with NEC to allocate $1B towards battery development. Toyota-controlled Panasonic EV Energy recently bought Sanyo for its battery making ability. While the U.S. is behind Asia in battery technology, a number of promising companies have arisen to research and develop batteries needed to fuel electric cars. Ener1 already operates two factories in Indiana and one in Korea, and is building another factory in Michigan. The Big Three: General Motors, Chrysler and Ford, have been considering alternative vehicles since the 70’s, however there is still a lack of knowledge about this technology and its useful application in the automotive market. An Indiana based company, Bright Automotive, has been working on a commercially viable plug- in electric vehicle, but does not anticipate rollout of the all electric powered vehicle until late 2012 or early 2013. Another Indiana based company, EnerDel, sees its primary focus as the automotive market, but is also actively working with the aviation, aerospace, and industrial markets. EnerDel works closely with the automotive industry and is excited about the prospects of its lithium ion battery, which is 100% recyclable, but the company representative admits that the batteries are still fairly expensive to produce and the firm continues to work on issues of energy storage and offloading electricity. It seems that BYD is moving much faster and much more aggressively in the direction of introducing an all electric car. Its e6 model is scheduled to be released at the end of 2009 and is much more competitively priced than the offerings of its Western competitors. Furthermore, BYD has tapped into a cost innovation strategy by reducing manufacturing costs through reverse engineering the expensive Japanese battery models and substituting the expensive raw materials with cheaper substitutes.

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BYD

Perhaps the most interesting player in the electric car arena is BYD. While most Americans had never heard of the company with its headquarters in Shenzhen, China, the company captured international attention when Berkshire Hathaway bought a 10% interest in the company. Warren Buffett wanted to buy 25% of the company, but BYD refused the offer. A company known for being cost-conscious and frugal, BYD has consistently been profitable. Located in Shenzhen, a manufacturing megacity better known for electronics, the company gained a competitive advantage by finding creative and innovative ways to manufacture batteries of high quality at costs lower than rival Japanese and American brands. The founder of the firm has bet on the substitution of low-cost labor for expensive machinery, and attention to detail, and these strategies have proven to be successful. By 2000, BYD had become the biggest producer of cell phone batteries. BYD raised capital through a public stock offering on the Hong Kong Stock Exchange in order to increase the size of its battery business. In 2003 company founder, Wang had the opportunity to purchase a failing state-owned automobile manufacturer. He thought that the company could leverage its battery competence in the auto industry by producing electric cars. While many thought that BYD was making a mistake in moving into automobiles, others thought differently. As Joann Muller of Forbes magazine stated in 2004: “In the vast and looming Chinese automobile market now dominated by foreigners, a small Chinese company called BYD is barely noticeable … Amateur hour maybe, yet it would be foolhardy for General Motors, Volkswagen and other foreign makers to ignore Chinese companies like BYD.” (Muller

p. 76). It appears that she was right. With the capital injection from Berkshire Hathaway and a focus on an increasing share of the auto market, BYD has positioned itself well to compete internationally.

BYD seeks to position itself as an innovator and to tap into the growing green business by  not  only  producing  electric  automobiles,  but  also  making  its  batteries  environmentally

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friendly. BYD is producing batteries that contain nontoxic fluids and thus do less harm to the environment, if the battery is discarded instead of being recycled. In addition to being environmentally friendly, BYD believes that it has made a major breakthrough in battery technology which will produce a longer lasting charge and allow the battery to be recharged numerous times, at the same time keeping the costs significantly lower than those of its competition. The U.S. Department of Energy is studying the claim made by BYD concerning its new battery technology.

BYD operates eleven factories and employs 130,000, with most production facilities in China, but also operates factories in India, Hungary, and Romania. BYD employees, including engineers and scientists typically live on the company grounds with BYD providing housing and other living expenses. The labor cost is a fraction of the costs found in the United States or Europe. BYD has two offices in the United States, both close to important customers. BYD offices can be found in Elk Grove, Illinois and San Francisco, California, based on the location of its two major U.S. customers, Motorola and Apple. Most of the firm’s revenue comes from cell phones, components, and batteries, but automobile sales have been playing an increasingly significant role (Figure 3).

Source: Fortune April 27, 2009

Revenue has increased consistently, and with the exception of 2005, BYD has had consistent profitability (Figures 4 and 5). BYD has achieved an impressive record in its short life utilizing low labor costs, little outsourcing, and successful innovation. The company is transferring its cutting edge technology innovation to the automotive market and at the same time closely following the global trends in green marketing that focus on a higher level of cost consciousness. BYD was named the second most innovative company in China in 2009 by Fast Company magazine.

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Source:  Fortune April 27, 2009

BYD currently produces a number of vehicles including the F3DM : DM stands for dual mode, which means that the car can run on dual energy sources. The environment-friendly battery can be fully charged in as little as an hour. This model sells in China for around 22,000 USD. This hybrid car can travel 62 miles on a single charge and is the first mass produced plug in hybrid in the world. The difference between it and the Toyota Prius is that it is less expensive, has a very small engine and relies significantly on battery power, cutting down the costs of utilization and its carbon footprint. The F6 CVT has been widely distributed in the European market since 2008. BYD prides itself on equipping this particular model with a gasoline engine that possesses an innovative electronic fuel injection system that features high power to oil ratio, compact structure, low oil consumption and low emissions.

The e6 is the latest addition to the BYD lineup of models. According to optimistic BYD predictions, it is slated for introduction the at the end of 2009 and could be sold in the United States as early as 2011. The e6 is an all electric vehicle that offers zero pollution, low noise, and guarantees that all the chemical substances in its battery can be recycled. It also offers 0 to 60 MPH acceleration in 8 seconds and is roomy enough to seat five adults. The best part of the vehicle utilization is that it can be plugged into a household socket to obtain a charge, and doesn’t have to rely on special “juicing stations” and can drive almost for almost 250 miles on a single charge. The estimated cost of this groundbreaking vehicle would be $30, 000 to 40,000.

Journal of the International Academy for Case Studies, Volume 17, Number 1, 2011