It’s Tesla vs BYD In China
‘BYD who?’ you might ask. While Tesla has been making headlines around the world along with its CEO and poster boy for contemporary entrepreneurship, Elon Musk, the much revered American business tycoon and investor, Warren Buffet, had decided to back the Chinese carmaker, BYD, which also manufactures battery and phone components. In 2008, Buffet’s Berkshire Hathaway bought a near 10% stake in BYD. Now that Tesla is eying the Chinese market, it puts these two business magnets in the same sandbox.
The first batch of Tesla’s were delivered to eight buyers in China late last April, albeit delayed and incurring much displeasure from customers who had already placed their orders. Ever-charming, Musk himself was present during the delivery to personally apologise to the customers. Despite its widespread, superstar reputation, Tesla is still a relatively small car company, capable of churning out only 700 Model S’s a week. Although nowhere near the likes of Toyota, which has an annual capacity of about a million in China alone, it is still a noteworthy accomplishment for a startup automaker. Even BMW’s Leipzig production facility, where the electric i3 is assembled, has a full capacity of 30,000 units annually or less than 600 a week.
Now, what about Buffet’s BYD? The Chinese carmaker is spurred by the success of its conventional petrol-powered F3 model. Although vilified as being a copycat of the Toyota Corolla and Honda City, BYD has managed to sell more than a million units of the budget-friendly sedan. Its all-electric cars, however, have not enjoyed the same success. In China, local governments tend to be protective of its local businesses, which is a boon and a perhaps a greater bane, as BYD enjoyed support from the Shenzhen government, where it is headquartered, but could not penetrate the protectionist policies of other cities. Recently, however, BYD enjoyed a breakthrough as it has been granted access to the two largest cities, Beijing and Shanghai, which will subsidies private green vehicles that are built by Chinese companies outside of the cities.
To move ahead, BYD has raised a further US$550 million through a private stock placement of 121.9 million new shares on Friday, 26 May at a close to 15% discount. Despite misgivings about diluting the value of the shares, the Hong Kong-traded shares which dropped during the following Monday morning session bounced back and closed at HK$41.30, slightly higher than when it opened.
The increased capital will be used to boost the Chinese carmaker’s production capacity in anticipation of increased demand for its electric vehicles. Last year, BYD only managed to sell 1,544 units of its all-electric car, the e6; with ‘new’ markets like Beijing and Shanghai, its plug-in hybrid model, Qin, launched in December 2013, had sold more than 6,000 units in the first weeks of 2014, ‘accounting for over half of the Chinese new-energy vehicle market’ according to a press release issued by the automaker. This year, the company expects revenue from its electric vehicle division to multiply seven-fold from last year to about US$1.60 billion.
Li Yunfei, deputy general manager of BYD’s sales unit, admitted that interest in green cars was stirred by the launch of Tesla in the country last year.
Both Tesla and BYD will face the same problems in expanding in the Chinese market. Firstly, they will both have to hike up production to meet demand, and the key factor to doing so is to be able to produce enough batteries. Tesla’s planned US$5 billion battery factory, which location is still being decided upon, is scheduled to begin production by 2017. Meanwhile, BYD, which is already manufacturing its own batteries, will use the recent influx of funds to double the production capacity of batteries this year and triple it by 2015.
Secondly, the lack of charging infrastructure has been cited as one of the main reasons that EVs have not quite taken off in the country. Tesla is working to build supercharging stations across the nation, which can be resource-consuming; as it is, Tesla’s investors are unhappy that the selling price of Tesla in China, US$117,000, is lower than it could be (read also 50% More Is Fair Price) and the company is expected to suffer losses during the initial stage of their foray into China. BYD’s Qin, however, is a plug-in hybrid, which can still run on petrol and only retails for US$32,000. This gaping price disparity means that the Model S and Qin appeal to vastly different market segments, but if Tesla is able to bring its much talked about, more affordable Model E into the market soon, then it would be able to cater to a wider range of affordability.
The Tesla brand appears to be highly popular in China, with buyer forking out down payments even before the final selling price was determined. Robert Downey Jr himself could not have received a warmer reception than Musk, who is often referred to as the real life “Iron Man”, during the handover of the cars in China. BYD may have gained a reputation for producing knock-off designs, but it is essentially a Chinese company and will continue to enjoy the benefits and support of local policies and, perhaps, appeal to the patriotism of the people; Buffet, after all, is possibly the most successful investor of our time, and he must foresee something that the rest of us cannot.
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