Case Study Operations Strategy at BYD of China, Electrifying the World’s Automotive Market
The Chinese company BYD is pursuing electric cars and hopes to become the world’s largest car company. With the financial support of American Warren Buffett, the company, which has only been in existence for a few years mostly making batteries, has caught the attention of not only Mr. Buffett but also many in the auto industry. This case examines the favorable conditions, technology and the operations strategy that are propelling this Chinese company to the forefront of the not so distant future of the auto industry. Many Americans and Europeans have never heard of the Chinese firm called BYD. In fact, it isn’t really clear what the letters representing the company’s name stand for, although some joke that recently it has meant “Bring Your Dollars.” The company’s latest PR message states that BYD stands for “Build Your Dreams.” BYD is a public company which started making batteries in 1995. Although Chinese-made batteries were already available, they were of poor quality. Imports of higher quality batteries were available in China mostly from Japan, but they were quite expensive. To satisfy the need for high quality and low cost batteries, Wang Chuan-Fu started BYD. Wang, who was a graduate of the Beijing Non-Ferrous Institute, found his competitive advantage by studying Japanese batteries and finding creative ways of making similar batteries at a lower cost. Wang had been fascinated with batteries as a graduate student at the Institute and now seeks to take that passion to the global automobile market.
ELECTRIC AND HYBRID CARS
Electric cars (also known as electric vehicles or EVs) rely exclusively on battery power. With an all-electric EV there is no internal combustion engine, muffler, gasoline tank, air and fuel filters, and other parts needed to run a gasoline powered system. The vehicle itself also produces no tailpipe emissions, and by getting its power from an efficient utility company, overall it produces fewer greenhouse gases. This is especially true if the electricity is produced with nuclear power, clean coal or natural gas. EVs are also less expensive to fuel on a per mile basis. Electric cars, however, have a shorter driving range and are difficult to operate with long distance travel (Exhibit 1). There are also some safety concerns associated with using a lithium ion battery, as lithium is a highly reactive material prone to explosion. EXHIBIT 1 Source: www.hybridcars.com.This case was prepared by Charles A. Rarick, Kasia Firlej, and Arifin Angriawan of Purdue University Calumet and was published in the Journal of the International Academy for Case Studies 17, no. 1 (January 2011), pp. 19–28. It was prepared solely to provide materials for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. It has been revised by Roger G. Schroeder, 2016 and is reprinted with permission. Hybrid vehicles run on battery power until the battery reaches exhaustion and then a gas-powered engine Page 411 kicks in to power the vehicle and to recharge the battery. Given the relatively short driving range of EV vehicles, hybrid vehicles have been the logical first step towards all electric cars and the replacement of the internal combustion engine. Hybrid cars became hot selling items when the price of gasoline soared in 2008, and then fell back sharply as the price of gasoline fell. Some have proposed that electric vehicles can save the U.S. auto industry. According to Andy Grove (of Intel fame), “batteries will become a competitive advantage for the automakers of the future.” He supports a position whereby the government takes a more active role in promoting and protecting an “infant industry” in new battery technology. The Obama administration took steps in 2009 to provide significant funding of battery research and the production of environmentally friendly automobiles. New mileage standards were also proposed that will make electric vehicles more attractive to consumers. Since about 2009 many companies have begun to think electric automobiles will have a promising future. In addition to the world’s largest automakers that begun to develop electrical cars, some upstarts were established. Ford, Nissan, Chevrolet, Toyota, Daimler Benz, and Volkswagen all moved into the EV or hybrid market. The success or failure of electric cars and the companies that enter this market is strongly related to the batteries that will power the vehicles. Sales growth of hybrid and all electric vehicles is slow due to the high price tags, low battery mileage on a single charge and the relatively low price of gasoline, particularly in the U.S.
IT’S ALL ABOUT THE BATTERY
Lithium ion is the current choice for batteries to power electric cars. Lithium ion batteries are lighter and more powerful than traditional batteries. Lithium, a metal compound, can be found in large quantities in South America, especially in Bolivia, Chile, and Argentina. Chile is currently the world’s largest producer of lithium; however, Bolivia has the largest known deposits of lithium in the Salar de Uyuni region. It is estimated that the lithium supply in Bolivia is somewhere around 5.4 billion tons. Significant deposits of lithium can also be found in China. The Chinese government has declared the lithium battery industry to be a “strategic industry” and will likely support its development. While lithium batteries are currently the most popular option for automobiles, they are still heavy and expensive. For example, the Chevy Volt, a hybrid car, has a battery that is six feet long and weighs around 400 pounds. The cost of an electric car battery is in the range of $10,000–$20,000 each. Lithium batteries can store up to three times the power of nickel-metal hydride batteries. They are clearly superior to conventional batteries. Further advances in lithium battery production may be able to produce smaller, lighter, and faster charging batteries. At least one reported research study shows this promising development. BYD’s advantage in this technology is the production of ferrous lithium ion batteries, which are safer and cost about half of those of the competition, according to BYD’s general manager of its Export Trade Division, Henry Z. Li. The United States is still behind Asia in battery production and research. Sanyo, NEC, BYD and LG created core competencies in batteries and achieved economies of scale that will require the Americans some time to catch up with. U.S. firms in the industry are relatively small upstarts such as EnrDel. Even the Chevy Volt is powered by a Korean company, Compact Power, with a plant in Michigan. Serious movement into electric vehicles will require investment money, long term commitment and strategic alliances. Nissan has partnered with NEC to allocate $1B towards battery development. Toyota-controlled Panasonic EV Energy recently bought Sanyo for its battery making ability. Recently, promising U.S. companies have arisen to research and develop batteries needed to fuel electric cars. EnrDel already operates two factories in Indiana and one in Korea. In 2016 Tesla opened a gigifactory battery plant in Utah that can eventually supply 500,000 batteries per year. The Big Three: General Motors, Chrysler and Ford, have been considering alternative vehicles since the 70s, however among the Big Three there is still a lack of momentum about this technology and its useful application in the U.S. automotive market, particularity for all electric vehicles. EXHIBIT 2 Key players in the electric auto battery industry, 2009. A123 (USA) M.I.T. spin-off with $250M in venture capital AESC (Japan) Joint venture between Nissan and NEC BYD (China) Largest battery producer in China ENERDEL (USA) Once part of Delphi. Invested $200M in Indiana plant Johnson Controls/SAFT (USA/France) Joint venture with plant in France LG (Korea) Leading producer of lithium ion batteries for cell phones Panasonic (Japan) Owns Sanyo Electric, the largest producer of rechargeable batteries. Source: P. Engardio, K. Hall, I. Rowley, D. Welch, and F. Balfour, “The Electric Car Battery War,” BusinessWeek, February 23, 2009, pp. 52–54. Page 412 It seems that BYD is moving much faster and much more aggressively in the direction of introducing electric vehicles. Its all electric e6 model was released at the end of 2009 and is much more competitively priced than the offerings of its Western competitors. Furthermore, BYD has tapped into a cost innovation strategy by reducing manufacturing costs through reverse engineering the expensive Japanese battery models and substituting the expensive raw materials with cheaper substitutes. The e6 is a big seller in Europe with its innovative iron-phosphate battery, zero emissions and the ability to go 300 km on a single charge.
BYD captured international attention when Berkshire Hathaway bought a 10 percent interest in the company. Warren Buffett wanted to buy 25 percent of the company, but BYD refused the offer. A company known for being cost-conscious and frugal, BYD has consistently been profitable. Located in Shenzhen, a manufacturing megacity better known for electronics, the company gained a competitive advantage by finding creative and innovative ways to manufacture batteries of high quality at costs lower than rival Japanese and American brands. The founder of the firm bet on the substitution of low-cost labor for expensive machinery, and attention to detail, and these strategies have proven to be successful. By 2000, BYD had become the biggest producer of cell phone batteries. BYD raised capital through a public stock offering on the Hong Kong Stock Exchange in order to increase the size of its battery business. In 2003 company founder, Wang had the opportunity to purchase a failing state-owned automobile manufacturer. He thought that the company could leverage its battery competence in the auto industry by producing electric cars. While many thought that BYD was making a mistake in moving into automobiles, others thought differently. As Joann Muller of Forbes magazine stated in 2004: “In the vast and looming Chinese automobile market now dominated by foreigners, a small Chinese company called BYD is barely noticeable . . . Amateur hour maybe, yet it would be foolhardy for General Motors, Volkswagen and other foreign makers to ignore Chinese companies like BYD.” (Muller p.76). It appears that she was right. With the capital injection from Berkshire Hathaway and a focus on an increasing share of the auto market, BYD has positioned itself well to compete internationally. BYD seeks to position itself as an innovator and to tap into the growing green business by not only producing electric automobiles, but also making its batteries environmentally friendly. BYD is producing batteries that contain nontoxic fluids and thus do less harm to the environment, if the battery is discarded instead of being recycled. In addition to being environmentally friendly, BYD believes that it has made a major breakthrough in battery technology which will produce a longer lasting charge and allow the battery to be recharged numerous times, at the same time keeping the costs significantly lower than those of its competition. The U.S. Department of Energy is studying the claim made by BYD concerning its new battery technology. In 2009 BYD operated eleven factories and employed 130,000, with most production facilities in China, but also operated factories in India, Hungary, and Romania. BYD employees, including engineers and scientists typically live on the company grounds with BYD providing housing and other living expenses. The labor cost is a fraction of the costs found in the United States or Europe. BYD has two offices in the United States, both close to important customers. BYD offices can be found in Elk Grove, Illinois and San Francisco, California, based on the location of its two major U.S. customers, Motorola and Apple. Most of the firm’s revenue comes from cell phones, components, and batteries, but automobile sales have been playing an increasingly significant role (Exhibit 3). EXHIBIT 3 BYD revenue by segment, 2008. Source: A. Grove, “Andy Grove on Battery Power,” Fortune 62, April 27, 2009. Revenue has increased consistently, and with the exception of 2005, BYD has had consistent profitability (Exhibits 4 and 5). BYD has achieved an impressive record in its short life utilizing low labor costs, little outsourcing, and successful innovation. The company is transferring its cutting edge technology innovation to the automotive market and at the same time closely following the global trends in green marketing that focus on a higher level of cost consciousness. BYD was named the second most innovative company in China in 2009 by Fast Company magazine. EXHIBIT 4 BYD revenue. Source: A. Grove, “Andy Grove on Battery Power,” Fortune 62, April 27, 2009. EXHIBIT 5 BYD net profit. Source: A. Grove, “Andy Grove on Battery Power,” Fortune 62, April 27, 2009. In 2009 BYD produced a number of vehicles including the F3DM—DM stands for dual mode, which means Page 413 that the car can run on dual energy sources. The environment-friendly battery can be fully charged in as little as an hour. This model sold in China for around US$22,000. This hybrid car can travel 62 miles on a single charge and is the first mass produced plugin hybrid in the world. The difference between it and the Toyota Prius is that it is less expensive, has a very small engine and relies significantly on battery power, cutting down the costs of utilization and its carbon footprint. Update to 2015. BYD is the largest EV manufacturer worldwide1 For the month of October, 2015 BYD had the largest sales of all-electric EV vehicles in the world with total sales of 6,099 EV units. October capped a yearlong increase in sales for 2015 making BYD the world leader in units sold of 43,069 from January to October 2015. This represents a 22 percent increase compared to the same period last year. BYD had an 11 percent share of the global market as shown in the following chart. Global Sales of EV (all-electric) Vehicles Ranking Manufacturer October 2015 YTD Market Share Position in 2014 1 BYD 6,099 43,069 11 7 2 Nissan 3,115 42,012 11 1 3 Mitsubishi 4,144 36,623 9 2 4 Tesla 3,349 36,312 9 3 5 VW 3,774 27,755 7 11 6 BMW 2,937 25,470 7 9 7 Renault 2,568 20,136 5 8 8 Kendi 5,081 17,201 4 10 9 Ford 1,776 17,117 4 5 10 Zotye 2,609 15,384 4 13 Note: Toyota Prius and Chevy Volt are not listed; they are hybrid cars and not EVs. BYD climbed from seventh to first place in the world due to a carefully planned strategy of new model introductions. The launch of a sedan, the Qin, gave BYD a competitive passenger model first introduced in 2013. They also launched a new hybrid SUV model, the Tang, in June 2015 to meet the company’s 542 performance claims: “5” means reaching 100 km/h in 5 seconds, “4” means four wheel drive and “2” means fuel efficiency of 100 km with less than 2 liters of gasoline. Next, BYD plans to introduce the Song and Yuan models to its lineup. Page 414 BYD Tang SUV© Imagine china via AP Images In all of 2015 BYD delivered 62,000 EV vehicles, almost entirely in China. The company projects it could sell nearly two to three times this number in 2016. Vehicles with combustion engines are being penalized by the Chinese government through taxes, rebates, and registration privileges. Incentives in China for electric cars are being fueled by government efforts to reduce greenhouse gases and hazardous air pollution in Chinese cities. Globally, BYD will deliver nearly 6000 electric buses in 2016, with about 300 zero-emission electric buses scheduled to be built in 2016 from BYD’s North American factory—the Bus & Coach Factory in Lancaster, California. These numbers alone (6000 in one year) make BYD the largest manufacturer of electric buses worldwide and surpassed the entire U.S. 2015 bus market volumes. In 2015 BYD corporate sales totaled US$12 billion and net income was 423 million. Electric vehicles were approximately 25 percent of the sales.
BYD is attempting to leverage its core competencies in battery production and development to meet the future needs of the driving public. It believes that the future of the auto industry will be in electric vehicles. In order for electric cars to replace gasoline powered ones, infrastructural changes will have to be made to quickly charge depleted batteries, much like present day gasoline stations. Another possibility would be a battery replacement station in which a depleted battery is quickly replaced with a fully charged one. Such battery changing stations are currently being developed in Japan, Denmark, U.S., and Israel. While Mr. Buffet may agree with BYD’s vision of the future, the company faces many challenges as it attempts to compete with the world’s largest automakers. Operations and supply chain managers wondered what the high growth and innovative technology business strategy meant for them. They needed to develop an operations and supply chain strategy that was consistent with this business strategy. It would start with a mission and objectives, along with major decisions to keep up with the growth and technology changes. This would require systems and processes that could be scalable for high-volume production. Capacity would have to be managed and located to support business growth. Perhaps short supply chains with local suppliers are needed. The challenges facing operations and supply chain strategy were indeed considerable.