The Chinese Tesla that threatens Elon Musk

Performance – editing: George D. Pavlopoulos

After PK Saxena moved from the South Australian city of Adelaide to the small town of Booleroo Center in January, the 36-year-old secondary school teacher was faced with a daily commute of about 75 kilometers to and from his new school in rural Orroroo. So, he decided to switch to an electric car. “Fuel costs really skyrocket when you’re moving out into the countryside,” he says.

Saxena briefly considered Tesla’s cheapest electric car, the Model 3, but ultimately settled on a metallic gray Atto 3 from a new entrant to the local market: China’s BYD. Although little known in Australia, the company is a giant in its home country, where it has been building vehicles for almost two decades and has Warren Buffett as a long-time investor. Saxena expects to take delivery of his BYD soon at a price of about $33,000, two-thirds the cost of the Model 3. do your job,” he says.

Tesla and its “messianic” CEO, Elon Musk, have captured the attention of investors and drivers around the world with their vision of the future of electric mobility. But BYD’s billionaire founder and CEO Wang Chuanfu is struggling to transform his company, already the largest producer of electric vehicles (EVs) in China’s hypercompetitive market, into a major global player in electrified transportation by taking a very different approach . If it succeeds in expanding internationally, it could bring a level of recognition and scale that has eluded countless other Chinese automakers.

Opposite

In many ways, BYD is the opposite of Tesla. Musk started by selling luxury sedans, which often cost six-figure dollars, but Wang focused from the beginning on developing affordable cars for Chinese middle-class drivers. Unlike Tesla, which has yet to launch an electric bus and has struggled with trucks, BYD has a diversified plug-in product line that includes trucks, forklifts and buses. And while Musk is hostile to labor unions, Wang has a unionized workforce at his Lancaster, Calif., plant, which mainly builds buses for the U.S. market.

Then there’s the different approach to government relations in their home countries: Musk has exchanged fire with US President Joe Biden. Wang on August 17 received a visit from Chinese Premier Li Keqiang, who toured BYD’s headquarters and promised to continue supporting the electric car market. BYD could become a “champion” in its class if it succeeds in combining the spirit of science with the spirit of manufacturing craftsmanship, Li said.

However, BYD’s embrace of production verticalization could prove to be its biggest difference‒and perhaps advantage‒against Tesla and legacy automakers just now entering the electric car space. Wang, a chemist from a farming family, was an early proponent of this strategy, with BYD not only building vehicles but also producing its own semiconductors and batteries. It is now the world’s third-largest producer of electric vehicle batteries, with 14% of the global market, behind Chinese rival Contemporary Amperex Technology and South Korea’s LG Energy Solution. BYD’s battery customers include Toyota, and its executive vice president Lian Yu-bo said in June that the company was preparing to start selling batteries to Tesla as well.

As growing demand for electric vehicles creates a shortage of lithium, a critical material for batteries, Wang is now counting on a payoff from forging close ties with producers of the metal. His deputy at BYD, Vice Chairman Lu Xiang-yang, is the head of Youngy, a Chinese lithium processor, which in June announced that a subsidiary had won a large order from BYD. In March BYD agreed to invest up to 3 billion yuan ($442 million) in Chengxin Lithium Group, a supplier with projects in China’s Sichuan province, as well as Argentina and Indonesia.

“BYD is the most vertically integrated company I’ve ever seen ̶ and not just in the auto space,” says Taylor Ogan, managing director of Snow Bull Capital, a green-tech hedge fund that owns stakes in both BYD and at Tesla. “BYD is already doing what Tesla is trying to do, and more.”

Emphasis on price

The idea of ​​producing well-equipped, yet relatively cheap, electric vehicles for the masses is not new. Musk made headlines in 2018 when he said Tesla could release a $25,000 car within three years. The plan didn’t materialize, and Musk repeated the same commitment in 2020. This time, he pegged the arrival of Tesla’s electric car for the average person sometime in 2023. In January 2022, however, Musk told investors that the company was too busy with other activities to focus on an affordable car for the masses at this time. Tesla’s current lowest-priced vehicle costs $46,990 in the US and 280,000 yuan after government subsidies in China (its two biggest markets). By contrast, after subsidies, BYD’s cheapest EV starts at just 96,000 yuan.

Australia is just one of several countries where Wang sees opportunities to replicate his company’s successful mass-marketing strategy. BYD, which is based in the tech hub of Shenzhen, accounts for about 26 percent of new energy vehicle sales in China, well ahead of No. 2 Tesla at 11 percent, according to Citigroup. BYD has started selling the all-wheel-drive Han EV in Brazil, struck deals with partners to open dealerships in Australia and New Zealand, and recently revealed plans to enter several countries, including Germany, Israel and Thailand.

Wang’s bet is that the expansion will give BYD a head start as the world shifts to plug-in cars, a shift China has dominated. Except for Tesla, most major automakers are still in the early stages of launching their electric models. For BYD that means it “has an opportunity to establish itself and build a certain level of scale,” says Ben Selwyn, director of consultancy ACA Research based in northern Sydney. “There are not many brands with competitive products at competitive prices.”

In many ways, Wang’s strategy has already paid off. BYD is the world’s third-most valuable carmaker (after Tesla and Toyota), with a market capitalization of about $127.5 billion. Although it also has an old arm that sells cars with internal combustion engines, BYD said in April it was shutting down to manufacture them. This year it sold 800,000 new energy passenger vehicles through July, more than in 2021.

Advantage

BYD’s self-sufficiency has also helped it avoid some of the supply chain bottlenecks that have hampered other Chinese automakers, says Kelvin Lau, an analyst in Hong Kong for Daiwa Capital Markets. Over the past 12 months, he points out, “only BYD has recorded steady sales growth, while other companies have been more or less affected by the limited chip supply.”

Wang is also eyeing sales in Japan, where Toyota and other big players won’t have large numbers of electric vehicles available for several years and are more exposed to the vagaries of supply chains. This is an opportunity for BYD, which can rely on its own high-performance batteries, says Atsuki Tofukuji, head of BYD Auto Japan. “This is our biggest advantage,” he underlines.

A big question for Wang is how long that advantage can last. Industry heavyweights such as Toyota are unable to compete with BYD’s electric cars for now. But given the economies of scale enjoyed by Japanese automakers, established players will likely catch up quickly when they’re ready to launch their EVs globally in a few years, says Kota Yuzawa, head of Asia auto research at Goldman Sachs. “The first-mover advantage won’t be as big in this industry,” he says.

Seeking to verticalize production by investing in lithium production overseas, where government officials may not be as friendly to BYD as their Chinese counterparts, is also risky. BYD received an unpleasant reminder of this truth in June when Chile’s Supreme Court rejected a government contract BYD had won in January to produce lithium there.

Buffett and consumers

However, the big question for Wang right now is what legendary investor Buffett is up to. The $230 million in BYD stock that Buffett’s Berkshire Hathaway bought in 2008 has grown into a stake worth about $8 billion.

In mid-July, a position in BYD the size of Berkshire’s appeared on the Hong Kong Stock Exchange’s clearing system. Such moves are often seen by traders as precursors to selling, as shares must first enter the system before trades can be settled. Berkshire Hathaway did not respond to a request for comment.

The possibility of Buffett’s exit has brought to the fore another BYD weakness: the company’s thin profit margins. Profits accounted for less than 2% of revenue in 2021, compared to about 10% for Tesla. This is partly due to BYD’s focus on selling mass-market cars. Its newest model, an SUV called the Yuan Plus, sold as the Atto 3 in overseas markets, costs just 137,800 yuan after subsidies. Tesla’s closest competitor, the Model Y, costs 316,900 yuan.

BYD is focused on overseas growth rather than short-term profitability, says Steve Man, senior auto analyst at Bloomberg Intelligence in Hong Kong. “That’s the strategy: try to go in and build even more scale,” he says. “They have their eyes set beyond China.”

Back at the Booleroo Centre, Professor Saxena is keen to finally get behind the wheel of his BYD, while admitting he is taking a risk. “I’m not worried about engineering quality per se, but about how much they know about markets outside of China and what consumers there want,” he notes. “It’s a big gamble.” The same goes for Wang’s plan to get into Tesla’s “lane.”