Unless you live in China, there’s a good chance you’ve never even heard of the world’s biggest electric-vehicle maker. It’s run by a former battery engineer who stays under the radar. Its cars aren’t for sale in most of the world’s biggest vehicle markets. And the company’s name—BYD—is quite literally a random sequence of meaningless letters, reportedly chosen when the company was formed two-and-a-half decades ago, so that its listing would end up in the front of the phone book. (The company now says it stands for “Build Your Dreams.”)
Before it started making electric cars, BYD was already one of most important players making gasoline-powered vehicles. In the late 2000s, it accounted for about 5% of China’s total car market. And the company has grown a lot since then. Wang Chuanfu, the engineer who founded BYD in Shenzhen in 1995, is now one of the wealthiest people in China, worth some $5 billion.
The automaker’s pivot to electrics was, by many measures, a massive success: BYD has been manufacturing and selling more EVs than any other company in the world for the last few years.
BYD’s success to date has validated China’s planned economy. It shows that government intervention can create brands big enough to generate top-line numbers that match up to the best that the west has to offer. It was certainly enough to appeal to famed investor Warren Buffett, who bought a large stake in the company.
And yet, despite being the first to manufacture one of the first mass-market electric cars, BYD has still struggled to penetrate global markets and reach the scale needed to be the Toyota, Volkswagen, or GM of electric vehicles (EVs). What happens to BYD in the next few years will, inevitably, be a referendum on China’s economic system: is it a house of cards propped up by the state, or is it a realistic alternative to the ruthless capitalism of the west?
Robots welding electric cars at BYD’s Shenzhen factory. | Video by Theodore Kaye for Quartz
An unusual start
The world’s biggest EV manufacturer started off as a battery company, and in some ways, that makes perfect sense. After all, batteries are the most important—and costliest—component of any EV.
The energy-dense lithium-ion battery was revolutionary, enabling the mobile-phone explosion that has characterized the last couple of decades. Wang had a background in battery chemistry, and he was able to lead BYD’s development of unique products, which, most importantly, didn’t infringe on existing lithium-ion patents, largely held by Japanese companies. BYD became the first Chinese battery supplier for Motorola in 2000 and for Nokia in 2002.
BYD worked its way into the ranks of the top-five battery manufacturers worldwide, and in 2002, had a successful IPO on the Hong Kong stock exchange. It probably could have stuck with phone batteries and remained a profitable company for years.
But instead, Wang took the cash he raised through the IPO, and bought Tsinchuan, a state-owned car manufacturer on the verge of bankruptcy. BYD’s shift into autos didn’t start with EVs. It instead moved into the manufacture of gasoline-powered cars.
Workers on the assembly line at BYD’s Shenzhen factory. | Video by Theodore Kaye for Quartz
Analysts weren’t impressed. The company had just spent the second half of the 1990s building up its reputation as a legitimate innovator in the booming lithium-ion battery industry. The auto industry in China was small and hadn’t grown much for decades. At the time, Wang didn’t even know how to drive.
The story goes that he’d been thinking about cars—and battery-powered cars, in particular—the whole time. As early as 1998, he had committed BYD resources, including 20 of the company’s top engineers, to work on scaling up its phone-battery technology in the hope that it could power cars at some point. First, though, he had to learn to make cars.
The Tsinchuan acquisition gave BYD access to car-manufacturing technology, and Wang immediately started working on doing what he’d done with batteries: lowering costs while maintaining quality.
He did that, in part—critics say—by being a copycat, producing cheap knockoffs of more established brands. For example, one of BYD’s first and most successful cars, the F3, looked a lot like a Toyota Corolla, except its blue-and-white logo, which resembled a BMW’s. Chinese car buyers didn’t seem to care much. By 2009, the F3 was the top-selling car in China.
Use the slider above to compare the BYD F3 to a Toyota Corolla. Click here to see more of China’s popular copycat car models.
The electric era
The F3’s success brought BYD to the attention of one of the world’s richest men, the US investor Warren Buffett, who purchased a 10% stake in the company for $230 million in 2008.
That’s also when BYD made its next big splash: Introducing the world’s first mass-produced plug-in hybrid, beating many more-recognized global names like GM and Toyota to the punch. BYD’s F3DM could go about 60 miles (96 km) in electric mode on a full charge, and when the charge ran out, its backup gasoline engine kicked in. (The “DM” in the model name stands for “dual mode”.)
BYD again seemed to read the winds of the market better than anyone else. Just a year later, the Chinese government started instituting the policies that would make China the world’s electric-vehicle leader. First, the government picked 13 pilot cities, including Shenzhen, to start using cleaner buses for public transport. In 2010, the government began offering subsidies to lower the cost of “new energy vehicle” (NEV) private-passenger cars, a category including battery-powered, plug-in hybrids, and fuel-cell electrics. And in 2011, it began giving tax breaks to NEV buyers and introduced license restrictions on the number of new gasoline-powered cars in certain cities.
All those incentives helped BYD sell 10,000 F3DMs in 2011, and in the first half of that decade, the company rapidly became the world’s biggest EV manufacturer. Including plug-in hybrids, BYD sold more than 110,000 electric vehicles in 2017 alone—about 7,000 more cars than Tesla sold that year. (Excluding plug-in hybrids, the top seller of battery-powered electric vehicles in 2017 was the Chinese company BJEV, which sold about 100 more cars than Tesla.)
Robots assembling electric cars at BYD’s Shenzhen factory. | Video by Theodore Kaye for Quartz
According to the US think-tank the Center for Strategic and International Studies, between 2009 and 2017, the Chinese government spent an estimated 394 billion yuan ($57 billion) to support NEV production and sales, including point-of-purchase subsidies, infrastructure subsidies, research-and-development investment, government procurement, and sales-tax exemption. Overall, in those nine years, government spending on NEVs was equal to over 40% of electric-vehicles industry’s revenues. And BYD must have got its fair share.
Data on which company got how much in government assistance are not publicly available. However, from annual reports, we can be sure that, since 2009, BYD has received at least 6 billion yuan ($860 million) in government grants for research and development alone.
Despite growing NEV sales, BYD has seen consecutive drops in annual net profit since 2016. That’s because the Chinese government has slowly reduced the amount of subsidies it gives to NEVs. That could get worse in the coming years, since China’s central government is preparing to replace subsidies to NEVs with a cap-and-trade program in 2020.
To make up the shortfall, BYD needs to expand globally. As far as Chinese brands go, it has a better reputation internationally than most. That’s because of its years as a top-ranked battery supplier. But cars are not batteries. Especially not in the US, the world’s second-largest car market after China, and its pickiest. “The issue with entering the car market is that it’s the American dream. If you threaten the American dream you are putting yourself up against a real wall,” Matt Jurjevich, a market researcher with BYD America, told Huffington Post in 2017.
Globetrotting on an electric bus
The executive BYD charged with that unenviable task is Stella Li, who has been with the company for more than 20 years. Li has a long and successful history working international markets, having set up BYD’s first foreign office in Europe in 1998.
When she launched the company’s US auto operations in 2011, Li decided that instead of trying to convince US buyers to choose BYD over tried-and-true favorites like Toyota or hot local startups like Tesla (whose Model S was in the pipeline at the time), she’d focus on a far less competitive sector of the vehicle market: electric buses.
In many cases, the owners of bus fleets are governments or private companies that receive incentives from governments to buy clean vehicles—both of which tend to be more open than individuals to buying passenger cars of an unknown brand, as long as it’s reliable.
Because of their size, electric buses require large battery packs—the costliest component of an electric vehicle. The falling cost of lithium-ion batteries—as much as 80% in the last decade—is starting to make electric buses competitive against diesel buses. Within three years, according to Bloomberg New Energy Finance, electric buses will be cheaper than diesel buses in almost every use case.
Nevertheless, back in 2011 when battery prices were higher, it took Li three years to sell BYD’s first electric bus in the US. “The buyers of buses are very conservative people,” Li says. “It’s unlike the IT world I used to sell to, who were keen to try new technologies.”
Early in 2013, BYD won a contract to produce 10 electric buses for Long Beach Transit in Los Angeles, beating the US electric-bus maker Proterra. Local media favored supporting an American firm and scrutinized BYD’s buses intensely, highlighting all the small problems found in durability tests at the time. The media attention also brought to light the claims of a former BYD employee, who said the company paid some of its Lancaster workers $1.50 per hour. BYD was able to prove to authorities it hadn’t violated labor laws, and that it had paid fair wages.
But the negative media coverage had done its damage: Long Beach Transit canceled its order. “[Other] new companies in the US can start from zero,” Li says. “But Chinese companies start from negative.”
Not all business transactions have caused so much trouble. So far, BYD has sold 300 buses in North America and Li says it has confirmed orders in the pipeline for another 600. That’s a small number compared to the thousands of electric buses in many Chinese cities. But it’s still a meaningful number on the other side of the Pacific. At the end of 2017, the total number of electric buses operating in the US was 333.
Because the US government has a “buy America” provision requiring all agencies to purchase only vehicles manufactured and/or assembled locally, BYD had to build a new factory there. BYD chose Lancaster, California for the site of its plant, starting with 100 employees in 2013. Now, the plant employs 1,000 people.
Working on an electric bus at BYD’s Lancaster factory. | Video by Alex Welsh for Quartz
The company’s plans to sell electric passenger cars in the US keep stalling, and BYD appears less optimistic that will happen now. Li confirmed in an interview this month that BYD currently has no concrete plans to bring its electric cars to the US. This is at least the third time its plans to sell in the US market have had to be delayed. BYD first thought it could sell the F3DM in 2008 and the e6 in 2015.
Current politics are one potential factor. Although the US and China came to agreement of sorts in early December, (according to a Trump tweet, it was to “reduce and remove” tariffs on US cars exported to China), nothing in the deal mentions cutting tariffs for Chinese cars going to the US, making the US a less attractive proposition for Chinese carmakers.
The next pivot
Given the uncertain prospects for international growth and future government subsidies, BYD is now considering yet another pivot, with something of an eye towards its own past. It started out as a battery company, just as smartphones took off. Now it is sensing that there is another, much larger opportunity in becoming a battery supplier not just to its own electric cars but also for others.
The world’s battery-manufacturing capacity today is about 130 gigawatt-hours (enough to power 2 million Tesla Model S cars) of which BYD has 26 GWh—about a fifth of the total. Bloomberg New Energy Finance expects the global demand for batteries to reach 1,500 GWh by 2030. That’s more than a 10-fold increase to current demand. BYD is trying to take advantage of this growing market, both at home and abroad. The company says it has a few potential customers but did not give specific names.
But other battery makers told Quartz they had doubts about the strategy. Auto manufacturers will feel queasy about providing BYD with the privileged information necessary for a battery maker to design a system that is tailor-made for specific car models. What if the information is shared with executives from BYD’s auto business?
BYD says it will spin out its battery business as a separate company. Last week, the company said it plans a public offering for the battery business as early as 2022. Even so, carmakers will likely be wary. That’s why many of BYD’s competitors in the auto industry source their batteries from CATL (Contemporary Amperex Technology Limited), a Chinese company that focuses solely on batteries and which became the world’s largest supplier of electric-car batteries this year.
Controlling the dragon
Ever since the central government classified electric cars a strategic industry, all Chinese auto companies—whether private or state-owned—have received a sugary drip of subsidies. The goal has been to incentivize demand for electric cars, but also to help these companies survive the teething phase of developing expertise in a new technology.
After 10 years of subsidy-driven growth, the central government is signaling that the industry should be able to stand on its own feet. It’s a formula that Beijing has successfully applied to its domestic solar industry, which despite a few failures, has survived what many call the “solarcoaster.”
Some, like Christina Lampe-Onnerud, CEO of Cadenza Innovations and a long-time battery entrepreneur who has worked in China over the last 20 years, worry that it may be too early to cut subsidies altogether. Others aren’t that troubled. Levi Tillemann, author of The Great Race: The Global Quest for the Car of the Future, believes that if the government sees that the subsidy-rollbacks are causing the industry to fail, then it will bring those subsidies back. The one-party system allows for rapid changes in policy when needed.
China’s government has staked a lot on creating an electric-vehicle market and an industry to serve it. If it succeeds, it will gain a lot: cleaner air, less reliance on imported oil, and the transformation of its auto industry from a technology follower to a technology leader. That makes what comes next for BYD crucial.
Now that the subsidy-driven phase is coming to a close, BYD will be the test of China’s version of a market-driven economy, one where the government has a strong hand on the wheel. The government has shown in the past that it’s willing to tolerate trimming an industry when it gets too bloated—the country has nearly 400 EV makers. But it’s unlikely to risk the future survival of its leading car makers, and we can expect it to continue providing a safety net if needed.
From BYD’s perspective, it has repeatedly shown its ability to get ahead of the forces of disruption. For all the challenges that lie ahead, it’s illuminating to note that even though BYD’s global ambitions are every bit as large as Tesla’s, it has remained profitable throughout its transition to making electric cars. Tesla, on the other hand, has only recorded two profitable quarters in its history. It’s enough to make Warren Buffett proud.