China's EV leader BYD is looking for new markets

SHANGHAI — In October 2010, two years after his investment company Berkshire Hathaway bought 225 million shares of Hong Kong-listed automaker BYD Co. at barely more than a dollar a share for a 10 percent stake, Warren Buffett came to China.

In front of the local press, Buffett said BYD was "a young and promising company" and "a leader in innovation and technology".

Not everybody was convinced. Many of its dealers quit BYD in the next few years when sales of its gasoline cars lost steam and China's electrified-vehicle market was still in infancy. But Buffett was patient, which paid nicely for his investment company — as well as for BYD.

Today, BYD's global growth is illustrating just how sharp Buffett is, even as it rattles some nerves around the traditional industry. The BYD phenomenon is well known in China but not in the U.S. nor many other markets in the world.

But that's quickly changing.

Its annual sales more than doubled in 2022 from a year earlier to approach 1.86 million electrified passenger vehicles, making BYD the second largest car brand in China, next only to Volkswagen.

It made the company the world's largest electrified-vehicle maker and the No. 1 EV maker in China, though it still trails Tesla Inc. in global EV sales.

This year, BYD began a market launch into Germany. That a young Chinese brand would have the chutzpah to tangle with Europe's biggest market is raising eyebrows there. A few months earlier, BYD also began selling in Finland, the U.K. and Sweden, with Australia, France and the Netherlands next on its list. To feed its envisioned European EV sales, the company was negotiating earlier in the year to acquire Ford Motor Co.'s soon-to-close assembly plant in Saarlouis, Germany. But in February, a company executive told Bloomberg that BYD is more likely to construct its own European plant, along with its own local batteries.

Product is coming fast. BYD started in Europe with three models: a compact crossover called the Atto 3, a large SUV called the Tang and a large sedan called the Han. The company is now indicating that two more models could arrive this year: a mid-size electric sedan, the Seal, and an affordable small car called the Dolphin.

Two questions arise as this Chinese rocket shoots skyward: Is the U.S. market part of its global plans? And who is making all this happen?

The answer to the second question is 57-year-old CEO Wang Chuanfu, the son of a poor farming family in East China's Anhui Province, who founded BYD in 1995 under the name "Build Your Dreams."

Wang has clearly built his dreams. Forbes magazine recently estimated his net worth at $19.5 billion.

And although BYD has technically already entered the American market with a headquarters in Pasadena, Calif., and a U.S. business producing electric buses, Wang made it clear just last month that BYD is not planning to introduce its cars here.

One challenge he would face in the U.S. market is a steep import duty on vehicles made in China. Another challenge would be the same one all automakers are sorting out lately: In order for a customer to qualify for a federal EV tax credit under the Inflation Reduction Act, the EV must be assembled in North America with locally made batteries and battery components sourced from either North America or from approved trading partners.

That cost of entry will have to be factored into any new EV maker's U.S. entry decision.

But Wang remains a person of interest for the auto industry, for both his global view of auto sales and his speed of business.

BYD became the first company to produce electrified vehicles in China in 2008 when it launched a plug-in hybrid. Its first EV model, the e6 compact multi-purpose vehicle, arrived just two years later.

Over the next decade, it still had to rely largely on gasoline cars for sales, but BYD consistently expanded its lineup of electrified vehicles by creating plug-in hybrid and EV variants of its gasoline models.

In 2021, its electrified vehicles not only outsold its gasoline cars for the first time but became the main driver of its sales growth. And last year, the company phased out production of gasoline cars to focus on producing EV and plug-in hybrid models.

BYD sold 911,140 full electric vehicles last year, an increase of 184 percent, and 946,239 plug-in hybrids, a jump of 247 percent. For the first quarter of 2023, its sales of electrified vehicles were up 93 percent.

Five years ago, Warren Buffett told CNBC that he would like to take credit for the idea of investing in BYD, but it was his longtime partner and vice chairman, Charlie Munger, who pushed him to do so. Munger himself told analysts his bet for BYD was based on a single person: Wang Chuanfu.

According to Munger and BYD's filings on the Hong Kong stock exchange, Wang was raised by his siblings, who paid for him to go to college and get an education in metallurgy. He established BYD in Shenzhen, China, to develop rechargeable batteries after briefly running a battery development unit for a state-owned metallurgy research institute in Beijing. Within three years, BYD had become one of the world's largest rechargeable battery suppliers.

In 2003, the battery company started to make mobile phone components. And just two years later, the company launched sales of its first vehicle, a compact gasoline sedan called the F3. Two years after that, the F3 would become the top-selling model produced by a domestic Chinese carmaker.

Munger, who is also chairman of the California newspaper company, Daily Journal Corp., said at his 2009 annual meeting that he was amazed by Wang's ability to build BYD from ground zero into a major global supplier of rechargeable batteries and mobile phone components in rapid succession.

"And then, finally, not satisfied with having worked a couple of miracles, Wang Chuanfu decided he would go into the automobile business. As nearly as I can tell, it was zero experience in automobiles. And from a standing start at zero and with very little capital, he rapidly was able to create the best-selling single model in China," he told his audience.

"This is not some unproven, highly speculative activity," he added. "What it is, is a damn miracle."

What has enabled BYD to quickly bulk up in the sectors it stepped into?

Wang has told the Chinese press on multiple occasions that the secret weapon is "vertical integration." The company designs, develops and produces not only its end products, but its components and production equipment. That allows BYD to assure a stable component supply at low costs, he noted.

Wang has said that the approach helped it establish itself in rechargeable batteries, requiring his employees to invent BYD's tools and production processes.

He repeated the self-sufficient strategy when he began mass-producing mobile phone handsets, and again when he began manufacturing vehicles. By not relying on third parties, Wang told the Shenzhen magazine Manager in 2010, the cost benefits are significant.

"Even in the traditional auto industry," he told the magazine, "we can get a level of gross margins that people in the industry can't imagine. A car like the F3 is half the price of an international equivalent, and we still have a 25 percent gross margin."

Although today a visitor to BYD will see automatic machines and equipment purchased from international suppliers, the essence of Wang's vertical integration strategy remains in place. The company produces its own EV batteries, as well as its electric motors, electronic controllers, plug-in hybrid systems, vehicle connectivity systems and automotive-grade semiconductors.

Wang estimates BYD will sell at least 3 million vehicles in 2023, a 60 percent jump from last year. But its hands are too full with China and other parts of the world to take on the U.S. market yet. Despite its rapid growth, BYD is still a small player in exports. Last year, it sold only 560,000 vehicles outside China.

That outlook is changing. In addition to taking on Europe, the company is stepping up efforts to export electric sedans and crossovers to Southeast Asia, Latin America and the Middle East. Last month, it started construction in Thailand of what will be its first overseas plant. The new factory will have an annual capacity of 150,000 vehicles when completed next year.

At a March 29 news briefing in Hong Kong after his company released its 2022 earnings report, Wang said that BYD's main target markets in the near term will be countries where no strong local brands exist.

Meanwhile, Buffet has been selling off his holdings in the company for a big return. In the first half of 2022, BYD's sales results sent its stock price soaring, and by the end of January, Berkshire Hathaway sold 73.2 million of its shares in the company, according to information disclosed by the Stock Exchange of Hong Kong. The stock has been trading at more than 37 times what Berkshire Hathaway originally paid for it.

Buffett has made barrels of money on his BYD stock. But the investment guru probably won't have a chance to test drive the Chinese company's vehicles on U.S. roads any time soon.