Weak buyer demand and dealer discontent preceded the surprise resignation of automaker BYD Co.'s Xia Zhibing, the company's vice president for auto sales, in early August.
But the woes at privately owned BYD apparently run far deeper than the anemic sales figures suggest, indicating Xia might have decided to jump from a floundering ship.
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| (Xia Zhibing) |
BYD recently listed on the Shenzhen Stock Exchange but its debut share prices fell short of market expectations. Shortly thereafter, it reported dismal half-year sales results.
The company reported selling about 220,000 vehicles in the first six months of 2011, down 23 percent from the same period last year. The report came August 23, less than two weeks after Xia announced through a microblog that before leaving he had "misled the company sales team" due to "eagerness for quick success and instant benefits."
While under pressure to boost sales, Xia said he'd been too harsh with the company's retail dealers. He failed to elaborate, however, declining media interviews.
Eight years ago, BYD was a maker of lithium-ion batteries that made a major leap into the auto industry. Not only did the company attract an investment from U.S. billionaire financier Warren Buffet, but for a time BYD's sales results backed up these aspirations.
According to company statements, BYD booked 48.4 billion yuan in revenue last year, a 21-fold increase from 2002, when the Shenzhen-based company listed on the Hong Kong Stock Exchange.
But Tang Jun, an analyst at GF Securities, said BYD is currently working through the growing pains any rapidly developing company may face.
Dealer Exodus
The pain was apparently too great for Xia. He officially left the company for "personal reasons," according to a BYD statement, but after some 308 unhappy dealers, or nearly 23 percent of its nationwide total, stopped selling the company's vehicles.
Last year's exodus from the dealer network was described in June in the prospectus for the Shenzhen exchange filing. The prospectus said dealers withdrew either because they failed to meet company-assigned sales targets or had lacked confidence in BYD's growth outlook.
But an industry source told Caixin that, in fact, the dealers quit because they were upset with BYD's management.
"In general, manufacturers give dealers sales targets," the source explained. "Once a target is met, manufacturers return some profits to dealers.
"But BYD often ignores this unspoken rule."
In late 2010, BYD founder and Chairman Wang Chuanfu admitted in an interview with Caixin that the company had made mistakes with its dealer network. "We're making adjustments," he added.
The market itself has been adjusting as well. Since January, auto sales have cooled because the central government lifted tax incentives for car buyers and several major cities introduced car-purchase restrictions to fight traffic jams.
Despite the tougher climate, China's automakers still booked 3.4 percent year-on-year sales growth in the first half of 2011 to 9.3 million units, according to the China Association of Automobile Manufacturers.
Some analysts say BYD fell behind other carmakers because Chinese consumers started shunning its models.
"Chinese consumers now pay more attention to quality and the brand names of cars," said an industry source. "That is what homegrown carmakers like BYD are really weak at."
BYD has an image problem, the source said, as consumers now lump its cars together with other indigenous brands that have a reputation for a lot of small problems. And its image is unlikely to change in the short term.
Dying Batteries?
BYD launched its first electric car in 2008, but according to the prospectus total plug-in sales have yet to exceed 1,000 units. That includes the estimated 500 electric buses and taxis that the company built for the World University Games held in Shenzhen in August.
Plug-in cars had been the big attraction for Buffet in September 2008, when the investor bought 10 percent of BYD's shares for US$ 230 million. Investors were generally positive about the company's strategy which called for pouring money earned from sales of conventional cars into electric car research and development.
Wang last year acknowledged that it's hard to make money selling electric vehicles. But he optimistically predicted profits from conventional vehicles would support the development of electric vehicles, as well as help the company master complete-vehicle manufacturing technology to build a foundation for a whole line of electric vehicles.
Most analysts interviewed by Caixin said BYD will not abandon its ongoing research and development into electric vehicles. But Chen Huanyu, an analyst with Guotai Junan Securities (Hong Kong) Ltd., admitted that the market for new-energy vehicles has yet to mature.
Chen does not expect BYD to achieve significant growth in the plug-in sector until 2013. Other analysts agreed that several years would have to pass before the electric vehicle industry is fully charged in China.
Moreover, BYD's alternative car story apparently has lost some of its appeal among investors. Many may have good reason now to doubt Buffet and other BYD backers, since profits from traditional car manufacturing are now shrinking.
According to the latest financial report, BYD's net profit fell 89 percent year-on-year in the first half to 275 million yuan. Earnings also fell 33 percent between 2010 and the previous year.
Auto sales made up 46 percent of BYD's revenue between January and June, down 25 percent from a year earlier, to 10.3 billion yuan. BYD's mobile phone component manufacturing and rechargeable battery operations, respectively, accounted for 43 percent and 11 percent of total revenues. Both non-car divisions posted year-on-year growth.
BYD raised 1.15 billion yuan through its IPO in late June. To ensure a successful listing on the Shenzhen bourse, Wang had voluntarily lowered the debut price to 18 yuan per share, compared with a recommended price of 22 yuan set by lead underwriter UBS Securities, according to a source from the Chinese unit of UBS AG.
BYD adopted this conservative strategy mainly because its growth momentum is slowing. The company is in urgent need of new financing to sustain growth and could not afford a failure with its mainland listing, said a securities analyst.
Switching Gears
The company is trying to get back on track by altering its vertically integrated business model, a mid-level executive told Caixin.
Analysts previously praised BYD for forming an integrated industrial chain, saying the system effectively kept costs in check. Like other Chinese auto brands, BYD takes a low-cost approach to carmaking. Yet its profits are higher than domestic counterparts, apparently because it uses an integrated industrial chain model.
Industrial Securities analyst Li Gangling said the business model may actually drag BYD's operations now that the consumer climate is weak and automakers have excess capacity. The model means the company must bear more operational risks and raise management challenges.
"Previously, BYD supplied 100 percent of its own components," the company executive said. "Now it's changed to 80 percent. The other 20 percent were introduced with competing outside vendors."
And that 80 percent self-supply rate is not BYD's baseline, the executive added.
"If vendors have components of high quality, (we'll) use those," he said. "If internally we're still not okay, it's possible we'll reduce the self-supply rate from 80 percent to 60 percent.
"The idea is we'll continue to eliminate backward production processes."
This sort of adjustment may also change recent investment arrangements. According to the prospectus, the company plans to invest in auto and component production bases in Changsha and Xi'an, as well as testing grounds and an auto parts production base in Shaoguan.
But the executive told Caixin that the Changhsa and Shaoguan projects may be scrapped.
A Changjiang Securities report said BYD's focus used to be pure expansion, but for the past year it's switched gears and adopted a new philosophy that puts more emphasis on product quality.
1 comment:
Not a bad idea plug in cars.
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