The founder of fast-growing BYD wore shop clothes for an interview to forecast the company's bold future
(Shenzhen) -- Investment bankers who've met auto and battery magnate Wang Chuanfu say he's an adept storyteller. So after Wang agreed to an interview with Caixin, we were anxious to hear his description of a personal encounter with Warren Buffet, and how he managed to win the billionaire investor's support with the BYD story.
Wang relayed the experience recently when we sat down together at BYD's headquarters in Shenzhen, flashing a proud smile but quickly turning serious.
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| (Wang Chuanfu) |
Buffett, he said, expressed deep interest in BYD's new-energy dreams. Wang, however, made it clear that the company would have to rely heavily on government support.
In fact, as Wang tells the story, although BYD grew quickly as a battery-maker and carmaker in the private sector, it's now an increasingly government-dependent operation. Indeed, the new-energy dream that Buffet and BYD's other private investors are chasing relies on government subsidies and contracts: That's the true story of BYD's success.
Wang turned 44 in 2010, and it was the most controversial year for the business since he founded BYD 15 years earlier.
In 2003, many scoffed when Wang decided BYD would leapfrog from consumer battery manufacturing into the auto industry by acquiring Xi'an Qinchuan Auto. He later rattled conservative industry players by signing up Buffet as a major investor. In 2009, his company sold 440,000 vehicles a year.
BYD and Wang, who serves as company president, climbed a new mountain of controversy in 2010 when sales fell short of an 800,000-vehicle goal, and critics of the new-energy strategy noted that no new models were brought to market that year.
The company's dealer network also withered, with a number of dealers withdrawing from the network last year.
BYD reported sales of 519,800 units in 2010, up about 16 percent from 2009 but below many of its competitors in China, some of whom saw sales jump more than 30 percent last year.
Moreover, company costs rose 48 percent through the first three quarters of 2010 compared to the same period the year before.
The biggest source of doubt about the BYD dream surrounds the new-energy vehicles that it's promised and promoted for years, but has yet to produce for the market. BYD has repeatedly postponed an introduction and, even years of talk, total pre-market production remains below 1,000 vehicles.
Despite the controversy over a seeming lack of progress, Wang and other company executives have been busy telling the world BYD's story, talking up the company's value and outlining their strategy to investors.
When Wang met Caixin at BYD's Pingshan headquarters, he was wearing beige workshop clothes and a badge card identifying him as worker No. 1. He also wore a calm expression. As usual, he'd come to work early and planned to stay late.
Here's how the story unfolded, in Wang's own words:
One aspect of doing business is meeting the interests of shareholders. Another is using technology to provide better things for society, the world and the future, while encouraging society to change in a good way; this is BYD's original dream.
What will the future bring to the company and society? I think we should embrace new energy. In fact, the government has given new energy a high strategic position. This is a good opportunity. We have a dream, and the state has given a high degree of support.
From batteries, we moved into electric vehicles, energy-storing power plants and solar energy: These three industries can be connected just right, and the key is battery technology. (Energy-storing power stations and electric cars) involves the technology linking two ends.
Energy-storing power stations are needed to manage power generation methods such as solar and wind, which do not produce steady levels of power.
Among these three industries, the electric car will slowly grow over the next three years. I think the solar energy industry will explode in 2016. We just began working on energy-storing power stations this year, and the industry will grow slowly over the next decade.
New energy's capital demands are too great. Thus, we need to increase the profitability of our IT components and traditional automobiles. But if we wait for the solar industry explosion and then prepare, we'll be too late.
Traditional Autos
We have two automotive sector goals: To be the largest automaker in China by 2015 and the largest in the world by 2025. Fortunately, we are in China, the largest auto market in the world. China today sells 18 million vehicles annually. In the future, this may reach 50 million.
In the traditional auto business, we have some profitability. From our acquisition of Qinchuan and its transformation into BYD Auto, from several thousand vehicles then to 440,000 vehicles in 2009, growth has been very fast. Growth in 2010 was a little slower, mainly because we made some mistakes in our sales network. We're making adjustments now.
We're becoming more competitive in the traditional auto field. The Chinese market is the fastest-growing and most competitive. Foreign companies originally did not make cars that cost less than 100,000 yuan. Now, they are all making them.
Our competitive pressure will increase. The 2010 goal to sell 800,000 vehicles was a bit high. We actually sold 520,000.
With regards to our dealer network, our mistake in 2010 was to expand the network for the goal of 800,000 vehicles. The network seemed a bit excessive. Additionally, the early threshold we set for dealers was too low, and we let some in that shouldn't have been there.
With rising labor costs, we're also increasing our level of automation. This process began three years ago.
With rising labor costs, we're also increasing our level of automation. This process began three years ago.
Making traditional cars not only generates profits to support the new energy side of the business, but by mastering complete-vehicle technology, air conditioning, batteries, etc., we build a technology base for new-energy vehicles.
New-Energy Industrialization
We're currently using cars to support cars. It's still very difficult for new-energy vehicles to make money. Research and development for a new-energy vehicle requires 1 or 2 billion yuan.
There are currently 50 E6s (a BYD car model) operating as electric taxis in Shenzhen. The most-used taxi has logged 70,000 kilometers, equivalent to five years of driving a private car. The battery has not decayed, which shows that our battery quality meets high standards.
But we still have not reached large-scale production. The current price of an E6 is 300,000 yuan. While the car will save on energy costs during its operation, a taxi company can buy a regular Jetta for 90,000 yuan. If we can reach production capacity of 200,000 vehicles, the price of an E6 will be cut in half.
And for the F3DM (another BYD electric) model, there are currently more than 200 orders a month in Shenzhen. But we can provide no more than 100, mainly because battery production capacity can't keep up.
In March this year, we will start using a new battery production line. Capital demand for battery production expansion is great. But we have the subsidiary BYD Electronics, which is listed in Hong Kong as a red chip. If necessary, we can raise money at any time. We can also issue additional BYD H-shares at any time, and we're still fighting to issue A-shares.
Overall, our debt ratio is not high, 50 percent, which is lower than our domestic counterparts. Our bank credit line is 30 or 40 billion yuan, so we're not constricted financially.
Also, the government is promoting electric public transportation. Our all-electric bus has already received orders -- about 1,000 vehicles for the full year, which means revenues of more than 2 billion yuan. We think orders will be similar in 2012. Then at least won't be losing money.
In new-energy vehicles, the struggle within the industry for a technology route has begun to move toward unification. Now, it is pure electric cars and plug-in hybrids. As to an understanding of industrialization, each manufacturer has its own timetable for the introduction of new-energy vehicles. We think industrialization of new-energy vehicles will be fully developed in the next two or three years.
A bottleneck for industrializing new-energy vehicles still lies in the policy environment. Policies surrounding new-energy vehicles need to have a system, for example, for a purchase tax, vehicle and vessel tax and consumption tax. Setting these tax rates at zero would be a big help.
But right now, policies are not coordinated. In places such as Beijing and Shanghai where there are restrictions on new license plates, couldn't new-energy vehicles be exempted? And then there are road tolls and other things.
2011 Goals
Global solar power is now 15 gigawatts. China has only 0.6 GW, which is not very proportionate. China's subsidies in this area are few. Solar power wasn't written into the 11th Five-Year Plan. Wind was, and its development has been more rapid. Solar power should be put into the 12th Five-Year Plan.
In fact, two years ago the bidding price for solar power was more than 2 yuan per kilowatt hour. In 2009, this fell to more than 1 yuan, and now it's 0.72 yuan. That's the market. Following this trend, it would be no problem for solar power to reach 0.5 yuan in the future. Coal-fired power is currently a bit more than 0.3 yuan, and it will rise. We estimate that by 2016 or 2020 the two will cost about the same, and the solar market will explode.
In 2010, BYD's solar business reached 800 to 900 million yuan. (BYD makes solar cells) In 2011, it might substantially increase to 7 or 8 billion, mostly for export. In 2011, we will make solar energy a new business category.
With around 2 billion yuan in sales from electric buses, together there will be 10 billion yuan in revenue.
In 2010, total company revenue was around 46 or 47 billion.
Buffett and Me
Contacts with Buffett first began two years after BYD listed, in 2003 and 2004, when a fund run by Buffet's partner Charles Munger began buying into BYD. After that, they slowly began observing.
BYD is different from other companies. We get involved in many, highly competitive industries with nothing at the time of our entry. Later, we do well. We have our own technology and can get orders from foreign companies, especially recognition from top-level companies such as Motorola, Nokia, Apple and Samsung.
BYD's core competitiveness is still technology. We currently have 200,000 personnel and 150,000 engineers. Our engineering team is our main asset, but it doesn't show up on our financials. We have 1,500 patents a year across all businesses. Our mold technology and battery technology have reached the top international level.
Our stock was relatively cheap at one time. At listing, it was 10 yuan per share. It is now 40 yuan. At the time we gave Buffett the recommendation, it was only 7 or 8 yuan.
Buffett was attracted to our new-technology strategy, our growth history, management team and work style. Buffett sent David Sokol to us. At first, he didn't believe we were making so many products. Every day, he found that what we did was actually quite successful -- engines, chassis, batteries, semiconductors. Later, he went back and gave his recommendation to Buffett.
After the investment was made, I went to America to see Buffett. The office was small, the corridors narrow and there were no computers. In total, there were only 20-some people. Buffett came to see BYD in 2010. This was the first visit.
