BYD's Strategic Expansion into Automotive Market

Established in 1995 by Wang Chuan-Fu, who is currently the chairman and president, BYD Company, Ltd. (“BYD”) is the world's second largest producer of rechargeable batteries. Between 1999 and 2001, BYD experienced a threefold increase in annual sales, surpassing RMB 1.3 billion in 2001. Projections suggest that BYD's yearly sales will exceed RMB 1.6 billion in 2002 based on its performance in the initial four months. By 2002, BYD had secured a position among the top four global manufacturers across all three primary battery technologies - earning the distinction of being the largest Chinese manufacturer - with approximately a 9% market share in Li-ion technology, a 31% market share in NiCd technology, and an 8% market share in NiMH technology (as illustrated in Exhibit).

Renowned as the leading Chinese provider of lithium-ion batteries to cell phone makers.

Despite facing competition from major Japanese companies such as Sanyo, Sony, and Matsushita, as well as numerous local Chinese firms, BYD has successfully attracted business from foreign companies by focusing on improving product quality while maintaining competitive prices.

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This strategy has established BYD as a cost leader in the battery industry and has given the company a competitive edge in its manufacturing processes. By investing around 2% of its revenue in research and development for products and processes, BYD has prioritized technology and product innovation. Since developing its first lithium-ion battery in 1997, BYD has continuously enhanced its products, resulting in longer cycle life. Over time, BYD has progressed from having no patents in 1999 to holding multiple patents by early 2002.

The manufacturing process at BYD is similar to that of competing Japanese companies in terms of the sequence of steps.

However, Japanese companies have a higher level of automation and more dry-room space, leading to greater capital equipment investment. This results in annual capital expenditure five to ten times higher than BYD's. BYD faces tough competition from approximately 200 Chinese firms in the rechargeable battery market, posing a challenge to its competitive advantage.

Like BYD, these Chinese firms also relied on labor-intensive production processes. The lack of proper regulations in China allows competitors to easily duplicate BYD's processes. Meanwhile, BYD faced a labor shortage in Shenzhen due to the high number of manufacturers in the area. 95% of the workforce in BYD's battery production are young women from small villages across China. They typically work at BYD for a few years before returning to their home villages, leading to a turnover rate of 10% to 20% in the manufacturing workforce.

2. BYD's key strengths include Battery Technology, R&D department, Human Resource Management, cost-effective labor, and Manufacturing process. These strengths encompass adapting materials to reduce sensitivity to humidity, offering employee benefits like housing and health insurance, providing training for job rotation to prevent monotony, and organizing social activities for staff promotion. The synergy of battery technology, R&D capabilities, effective HR practices, and affordable labor can be leveraged in the automotive sector. However, the manual manufacturing process is not ideal for this industry. With the acquisition of Qinchuan Auto Company providing production permits and land for a new auto factory at a reasonable cost, BYD should consider entering the auto market. By combining these resources with their existing strengths, BYD could achieve success in this new venture.

The Chinese auto industry is expected to experience significant growth, with demand for cars set to rise from 1 million sedans in 2002 to around 6 million by 2010. In order to take advantage of this opportunity, a number of Chinese car manufacturers have forged partnerships with foreign companies like General Motors, Toyota, and Volkswagen. According to Exhibit 13, major firms in China exceeded a production capacity of 2 million units in 2002 and are projected to reach 3.5 million units by 2012, as shown in Exhibit 14. BYD's interest is in line with the attractiveness of the Chinese auto market.

The auto industry is growing and in high demand, but new production permits are not being issued by the Chinese government. This has limited opportunities to enter the sector, with BYD taking advantage by purchasing assets from Qinchuan Auto at a discounted rate. State-owned auto manufacturers without foreign partners make up 25% of sales in China, often lacking R&D departments and relying on imported parts which results in higher costs for similar models compared to the USA.

Existing foreign joint ventures were selling vehicles with margins of 10% to 20%, leaving room for low-priced entrants in the market. Wang's dream was to use Li-ion battery technology in developing competitively priced electric vehicles, allowing China to advance in an industry where it had fallen behind other nations. Wang also saw potential in applying BYD's process engineering capabilities, which had given them a cost advantage over global competitors in battery production, to automotive manufacturing.

4. BYD should not only provide OEMs with a comprehensive outsourcing manufacturing solution but also consider acquiring Qinchuan Auto Company. This is a strategic move due to the significant potential in the Chinese automotive industry and limited opportunities available. With Qinchuan Auto Company's established market presence, particularly with its popular product Flyer, BYD can continue selling the Flyer model alongside new upgraded vehicle offerings. Furthermore, BYD should focus on investing in automation for production processes and enhancing their research and development department.

It is important for BYD to ensure that a majority of the auto parts are produced internally or locally to maintain low costs and high profit margins. The company should also make significant investments in the necessary infrastructure to meet the expected demand in the Chinese automotive market. Additionally, investing in skilled labor by offering competitive salaries and benefits is crucial. If funding is an issue, BYD could potentially form partnerships with foreign manufacturers to allow them to introduce their products in the Chinese automotive sector. This strategy would give BYD the opportunity to carefully assess the Chinese automotive industry and make appropriate strategic decisions.