BYD Profit Picture Changes, but Diversification Succeeds Beyond China and Auto

BYD sold more than 110,000 New Energy Vehicles (NEVs) in 2017 (about 15% of total sales), generating US$5.7 billion in NEV revenues, a significant portion of total revenue and profits and an increase of nearly 13%. “Significantly reduced” Chinese subsidies impacted recent auto results as China pivots instead to a system of credits. The new subsidy program is expected to provide more support to vehicles with greater range until closure in 2020. The company is rebounding with 75,800 NEV vehicle sales this year through June, an increase of 121% year over year.

A similar story applies to the all-electric buses, which may receive local subsidies for about a third of the purchase price until 2020. However, foreign markets are growing rapidly, with U.S. public transit e-bus sales growing last year by 83% (led by California, Georgia, Indiana, and Washington), leading to the tripling of the company’s manufacturing facility in California as it seeks a 30% share of the North American market. Other notable U.S. e-bus sales include Facebook, UCLA, and Stanford University.

The company also has an impressive presence in battery manufacturing as the world’s top producer of phone batteries after Panasonic and CATL. Notably, the battery plant in Qinghai, China where 83% of the country’s lithium is located, is to be completed by 2019 and has an equivalent size of 140 soccer fields. Claiming to be the world’s largest production factory followed by Tesla’s Gigafactory in California, BYD has further plans to build a battery plant in Europe to compliment the Bus Assembly plants in Hungary, France, and its partnership production with ADL in the United Kingdom.

Beyond automotive, BYD has had notable recent success with heavy-duty sales, including 500 electric dump trucks to Shenzhen companies and 200 electric trucks headed to Brazil, BYD’s biggest international e-truck order, along with the largest Americas order in Santiago, Chile. BYD will need to continue to enhance the energy density and endurance of its batteries to better address heavy-duty market needs.

The firm sold 14,000 e-buses worldwide in 2017, increasing its market share in geographies such as Korea, Egypt, and South Africa, and leading orders in Norway and Sweden as well as Spain and New Zealand. A partnership with Tata, including a JV with Goldstone Infratech has netted hundreds of orders from nine Indian cities including Mumbai. Production of buses will reach 5,000 per year in India alone. BYD has won 66% of all e-bus orders in Canada since 2016, and all competitive bids for e-buses, including a recent order from Canada’s largest transit operator. Other diverse market orders have arrived from London and Sydney. Additionally, the company’s early monorail business has expanded from China to Egypt and the Philippines, with a US$689 million order in Brazil for an “over the sea” monorail planned for 2021.

The firm’s local commercial footprint includes many of Shenzhen’s 16,000 e-buses, with work underway on taxis and trucks for this large and smart city. This has been supported by the city’s Air Pollution Action Plan, mandating that all new trucks be NEV, with no diesel trucks permitted. Even ride-sharing fleets must utilize NEVs.

The battery industry is another notable business, with an expected market of nearly US$100 billion by 2025. BYD’s Chinese factory will increase its manufacturing capacity 4X, with an annual capacity of 28 Gigawatt hours (GWh) by 2019 and 60 GWh in 2020, which is nearly double Tesla’s aim to reach 35 GWh at its California-based Gigafactory.

BYD has partnered with Momentum Dynamics on the first public wireless fast charging system in North America for Washington state and rated about 200 kW. It is extending its reach with WAVE’s in-route charger in Long Beach, California, and St. Petersburg, Florida, for its buses. Additionally, the company, along with Penske Truck Leasing, joined Berlin-based CharIN, which is driving standardization of EV charging infrastructure, with the two companies participating in a task force for high-powered commercial vehicle charging.

Some of BYD’s key competition in buses comes from U.S.-based Proterra, which has also won numerous municipal bids. Additionally, Tesla is planning manufacturing in China to reduce automotive costs, and potentially trucks. There is also local concern that the rash of new competition will lead to overcapacity, although BYD is experiencing battery shortages as it builds up multiple production options.Still, BYD managed to race ahead of its Chinese battery-making competition Contemporary Amperex Technology (CATL), with US$628 million in sales last year. It is expected that its battery business will become independent in the foreseeable future.

BYD has also ventured into autonomous technologies with a recent partnership in 1Q this year. At the 2018 Spring Festival Gala, BYD and Baidu, China’s version of Google, showcased electric cars powered by Baidu’s Apollo AI technology. Competition is likely to include Chinese company NIO, known for its Formula E cars, in partnership with Chinese telematic giants G7 and GLP for autonomous heavy-duty trucks.

The global aspiration to connect autonomous and electric is already transforming markets and regulations, from little to no regulation in countries like New Zealand to the ground-breaking “Intelligent Connected Vehicle Road Test Management Standards (Trials)” released in Shanghai this past May, the first regulation passed in the world’s largest automotive market. By 2020, one in every two new cars sold in China is expected to include both ADAS technologies and be AI powered. Longer term, the Ministry of Industry and Information Technology (MIIT) plans to reduce traffic accidents by 30%, lower energy usage by 10%, and reduce transport emissions by more than 20% by 2025.

BYD will need to diversify both vertically and geographically to strategically address the significant drop in profits as incentives are decreased and eliminated. That does not negate the importance of its home market, where only two years ago, China produced 43% of global EVs. With just seven years remaining on ambitious Chinese aspirations, BYD, along with other OEMs, could still generate a new path away from a “carbon footprint” and form a new age of transportation fit for the future of smart cities in China and influence other countries.