Sunday, May 23, 2010

How to Succeed in Tech Without Really Trying

Okay, perhaps that isn't a completely fair characterization of BYD's business, but the Buffet factor looms large over BYD's shareholder returns since he invested.

Bloomberg BusinessWeek released its annual Tech 100 list, and look who's on top: BYD -- listed above such tech giants as Apple, Amazon and Google. And with revenue growth of 50 percent and shareholder return of an astounding 246 percent, it's no wonder that BYD tops the list. Apple, Amazon and Google, while performing well, can only dream of such growth in their much larger revenue bases.

So BusinessWeek's list would then appear to be biased in favor of smaller companies. Still, we shouldn't be surprised to see a company known for the world's first production plug-in hybrid (the F3DM) and an electric car that can go 190 miles on a charge (the E6) find a spot at the top of the list. Given the world's passionate search for alternatives to the internal combustion engine, cars such as these must be flying off the lots, right?

According to BusinessWeek's list, BYD had revenue of $5.8 billion in 2009. According to BYD's 2009 Annual Report, 53 percent of that revenue came from automobiles (the other 47 percent from the manufacture of batteries and mobile phone handsets). So BYD must have sold over $3 billion worth of "new energy vehicles", right?

Not even close.

So far, the F3DM plug-in hybrid has been used extensively by taxi and government fleets in BYD's native Shenzhen, but just last week, BYD revealed that so far, only 13 F3DMs have been bought by individual consumers in China. That's 13. Not 13 million or even 13,000. Just 13.

In all fairness, Chinese consumers are probably waiting around for the government to announce how much its subsidies will be for "new energy vehicles" before they start to buy the F3DM en masse.

What about the E6 electric car? So far, about 40 of these have gone into service as taxis in Shenzhen, but none have been sold to consumers. (Though BYD plans to introduce the E6 in the US later this year.)

So where did BYD's $3.1 billion in revenue from automobile sales come from? Traditional gasoline powered cars. BYD's F3 -- the gasoline powered version of the F3DM -- was the single best selling sedan in China last year.

The company at the top of BusinessWeek's Tech 100 list still makes the bulk of its revenue from selling very old, very polluting technology. Its other two revenue sources, handsets and batteries, are really nothing unique. Dozens of other companies from Nokia to Motorola to Samsung crank out the same thing at much higher volumes.

While BYD's revenue and profit growth are real, how can we justify their 246 percent shareholder return in 2009? Two words: Warren Buffet.

When someone with the stature of Warren Buffet buys a stock, this is a clear signal to the markets that the underlying company is worth a serious look. In the case of BYD, Warren Buffet and his team have evaluated the technology of BYD and see tremendous future value, so while that value has yet to materialize in terms of actual customers buying actual high-tech cars, BYD's stock is a bet on that future.

Unfortunately, given the 246 percent return over the past year, we can probably assume that much of BYD's future possibilities are already baked in to the stock price. If you aren't already on board, it's probably too late.

Tuesday, May 18, 2010

Public-Private Partnership Introduces Electric Taxis in Shenzhen

BYD, a private, Hong Kong listed, automaker based in Shenzhen, announced Monday (17 May) it had put 40 all electric taxis into service in the city of Shenzhen.

The taxi is BYD's E6 model, a cross-over vehicle with a lithium-ion battery that, according to BYD will travel up to 300 km (186 mi) on a single charge. By comparison, Nissan's Leaf all-electric vehicle is expected to travel about 100 miles on a single charge. This is also the model with which BYD plans to make its entrance into the North American market later this year.

BYD expects to have as many as 100 E6 taxis plying the streets of Shenzhen by the end of June.

These taxis are being operated by Pengcheng Electric Taxi Company, a joint venture between BYD and the Shenzhen Bus Group (SBG).

Shenzhen Bus Group is a large operator of bus lines, taxis, and related businesses in the southern Guangdong region. Its largest shareholder (55 percent) is the Shenzhen City SASAC (State-owned Assets Supervision and Administration Commission). In other words, BYD's partner in this joint venture is none other than the city government of Shenzhen.

I recently asked a former BYD employee to describe BYD's relationship with the local government, to which he replied, "feichang, feichang, feichang hao (very, very, very good). Without local government support, it would be hard for BYD to have any success. Wang Chuanfu (BYD's CEO) devotes a lot of time to nurturing this relationship. BYD's relationships with the Xi'an government (where BYD's first auto factory is located) are also feichang, feichang, feichang zhongyao (very, very, very important)."

This blurring of the lines between public and private is not that unusual in China. In fact, no auto company would survive long outside the influence of its respective local government. Though a local state-owned automaker would be expected to have a close relationship with its owner, a privately owned automaker's relationship with the local government is nearly as close.

Because BYD's E6 costs the equivalent of about US$40,000, and because the technology is still fairly new and untested -- and because taxis drivers tend to drive their vehicles far more aggressively than the average driver -- one might guess that this joint venture between BYD and the City of Shenzhen will lose money for the foreseeable future. But this is where the public-private partnership proves to be a win-win.

BYD gets to test its vehicles in real-world conditions and gather a lot of data for improvements. Shenzhen gets publicity for its support of green technology and recognition from Beijing for supporting a company on the forefront of carrying out Beijing's policy for electric vehicles.

And this kind of partnership isn't unique to China. I recently spoke with Mark Perry, VP at Nissan USA, who told me that Nissan is also working with various local governments in the US to provide some of the infrastructure necessary to support electric vehicles in their cities.

Wednesday, May 5, 2010

Shanzhai Electric Cars in China

Last December, my friend Charlie and I visited the factory and headquarters of Great Wall Motors, located in Baoding, Hebei Province, about an hour's train ride south of Beijing.

While the factory visit and interviews I conducted on-site were very interesting and informative, the Great Wall people were understandably concerned about security. I wasn't able to take many pictures except for a few of their crash test course, which, at 250 meters is the longest in China.

After our time at Great Wall, Charlie and I returned to the train station at Baoding for our trip back to Beijing. Since we had about an hour to kill before our departure time, we decided to take a stroll around the train station.

Here we encountered an unexpected sight: a small store selling electric vehicles (电动轿车).

We learned that these small, nondescript cars are assembled in Shandong Province. They run on an array of traditional lead-acid car batteries. The salesman lifted the rear seat of the neon-green car revealing four linked batteries, and he said there are another six under the hood, for a total of 10. (Notice also how the door molding on the green car above doesn't quite meet between the front and rear doors.)

The cars he had for sale on the lot retailed for 16,800 to 29,800 yuan ($2,500 - $4,440), but he said he typically gave discounts. The setup is pretty basic: a car with a radio, the necessary lighting and windshield wipers. No heater or air conditioner.

He told us that these cars did not require a license to be driven on the road in Baoding, but that, without the license plates, it would be illegal to drive them outside the city. I didn't pursue this observation, but it seems to me that, without some kind of "agreement" with the local government, these cars should also be illegal to drive in Baoding. China's MIIT (the Central Govt) produces a quarterly catalogue with the names of every car approved for driving on China's roads. If a car isn't listed there (and these shanzhai electric cars most certainly aren't), they cannot be issued a license.

The friendly salesman offered to take us for a quick spin in one of his cars. Below is a video taken during part of our ride. The car was very quiet, and it took off pretty quickly when he hit the accelerator, but you'll also notice a lot of rattling when we hit bumps in the road.