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Wang Chuanfu: BYD sees more challenges in capacity than in sales

BYD’s March sales reached a historic high of 68,129 units, placing it behind Shanghai-Volkswagen and Shanghai-GM as China’s No. 3 carmaker, according to sales data provided by the China’s National Passenger Vehicle Association. Sales of BYD’s three car models, namely the F3, F0 and G3, all exceeded 10,000 units in that month.

If BYD can maintain such solid performance in following months, the company could realize its goal of selling 800,000 units this year. BYD’s 100-percent growth for three consecutive years has not only put great pressure on other independent brands, but also on JV automakers that it continues to best.

On March 15, BYD (01211.HK) held a shareholder meeting in Hong Kong. The following are highlights of the performance report given by Wang Chuanfu, chairman of BYD, and the Q&A session. – Editor

Automobile business: main income resource

Despite the financial crisis, BYD’s sales revenues increased 47.34 percent to ¥39.5 billion ($5.81 billion) in 2009, and profits for shareholders jumped 270 percent year-on-year to ¥37.9 billion. With a growth of 143 percent, the automobile business contributed 53 percent of the company’s total sales revenues. The rate is expected to be over 70 percent after 2010.

BYD’s receivable turnover in days was shortened from 77 to 73, and the inventory turnover in days was cut from 100 to 70. These are effects of pre-payment from the company’s automobile business. BYD now still owes the market 20,000 vehicles. Thanks to the robust auto market last year, our automobile inventory was almost zero.

F3: best-selling car model

BYD’s revenues from the automobile business hit ¥21 billion, up 143 percent from the previous year. Total vehicle sales skyrocketed 170 percent to reach 450,000 units. Among that, the F3 contributed 290,000 units to become the sales champion among all car models, a first for Chinese independent brands.

BYD initiated sales of electric vehicles to private users in 20 dealerships in Shenzhen starting March 29. The company also strengthened R&D of its lithium iron phosphate battery for vehicle use and built several production lines. Of course, we have to wait several years before we make mass sales of these batteries.

More challenges in capacity

China’s automobile industry had an abundant year in 2002, but then slumped in 2003. We believe that 2009 is the first true year of China’s automobile industry, which will continue to grow in the next 3-5 or even 10-20 years. The growth wave in 2002 came from largely urban and coastal areas, home to at most 300 million people, while the jump in 2009 has a population base of 900 million people in rural and mixed use areas. We believe total sales in 2010 will be 15 to 16 million units, up 20 percent from 2009.

BYD aims to sell 800,000 vehicles in 2010. But, in fact, the sales target is a small challenge compared to meeting capacity needs. New plants in Changsha and Xi’an cannot start operations until 2011. So we have to get more out of our current plants in Xi’an and Shenzhen.

Due to the capacity shortage, we had to postpone the launch of the M6 last year. The M6 can realize a gross profit of ¥50,000 per vehicle, and we expect to launch it as soon as possible this year.

The L3 will be launched in June and put into the A2 sales network, which now sells the F0 and the F3R. BYD’s first SUV model, the S6, is scheduled to be launched in August. We will also introduce the i6 and establish the A4 network this year. In the future BYD will have four sales networks, the A1, A2, A3, and A4 which mainly sells the i6 and M6. Currently, BYD has a total of 1,000 dealerships nationwide, dwarfing other independent brands and even many JV brands.

We initiated sales of the F3DM to private owners this March, and have prepared a capacity of 2,000 units for the model but do’t know how many we can sell. Government subsidies for electric vehicles are expected to be ¥50,000-¥60,000 per unit.

The sales of the pure electric e6 will start in April. It is designed for city taxis, government officials and celebrities. The e6 has a fairly large size since Chinese people are averse to small electric vehicles, unlike the attitudes of people in other countries. The e6 will be distributed in the U.S. this September and sold in Europe in the second quarter of 2011.

 

Q&As

Q: What are the obstacles to the solar energy project?

Wang: We have’t seen obstacles in the project so far. We are now moving from laboratory stage to mass production. In this project, many types of equipment are made by BYD and are under adjustments in the mass production stage. We plan to finish all the adjustments by the year’s end, and will produce some solar products in the meantime. Europe will release its subsidy scheme this July, so orders will rush in right before then. We have received some, but our long-term plan is to polish the whole production system. Currently our investment is not big. Mass investment for the next stage will be decided only after we’ve finished making our adjustments.

Q: What is your revenue growth plan for the automobile business in 2010?

Wang: Our sales plan is 800,000 units. You can get the answer by multiplying the ASP. Of course, the ASPs would go down if we sell more F0, but the F6 could make up for that. So the number should remain stable. But I wo’t give you specific numbers right now.

Q: Could Toyota’s recall gate affect BYD’s development?

Wang: Toyota has been ahead in design of auto electronics. It may be making some mistakes in design, but I think it can get through this. The recall is just a reassuring measure. Toyota has not found the root of the problem, which lies in design. But it would be a disaster if Toyota changed its overall design. So we should be much more careful and lower the PPM rate as much as we can. For BYD, we will learn from this lesson and try to wipe out risks.

Q: BYD recently announced cooperation with Daimler. Are there any chances for your cooperation with other automakers?

Wang: Cooperation with Daimler on batteries and whole vehicles has far-reaching significance. If you are familiar with the Chinese auto industry, you should know the cooperation is a big encouragement for Chinese independent brands. Our cooperation is “technology for technology,” instead of the past “market for technology.” In the past, the Chinese side of the venture could’t even change a screw, let alone the whole powertrain. Today, foreigners are willing to use our driving system. The current cooperation is more equitable.

A high-end auto brand is willing to work with a Chinese independent brand on a new brand design. This is the first time in the automobile history of both Germany and China. Most Sino-foreign JVs are created because of the 50:50 ratio industry policy. Our cooperation is totally different. We will collaborate on a new brand, which belongs to both BYD and Daimler. It is a Chinese concept for Daimler, and we will help Daimler open its mid-level car market. For BYD, our technology, brand and management can be enhanced, and we can learn from Daimler’s advanced ideas on production, management and R&D in the process.

Q: Why are you dividing your sales network?

Wang: BYD still ca’t compete with other big brands in terms of name recognition. So we must increase our sales channels to sell more cars. If we sell different models in different channels, we can easily expand our dealership team. Certainly, in order to realize this, you must have a strong development ability.

Some might say the F3 could compete with the G3. But, in fact, our competitors are JV brand models like the Excelle and Elantra. We expand our presence through dividing networks, and boost sales through increasing dealerships, in order to realize our two “No. 1” targets.

Q: According to statistics from the Ministry of Public Security, over 300,000 BYD brand cars were registered in 2009. But your company statement said your sales volume was 450,000 units. Is the difference your dealers stock? If BYD truly adds 400 stores this year, will dealers cut model prices when the market declines?

Wang: BYD dealerships have a stock turnover of 30-45 days. As long as our models are profitable enough, it’s easy to cut prices to boost sales. Now we owe the dealers a total of 20,000 cars, among which 7,000-8,000 are F0s and 10,000 are F3s, because of the capacity limit.

China has not published vehicle registration numbers until now. Many people ask why, and I guess it has to do with keeping military numbers secret. The difference between the registration number and the sales figure mainly lies in the activity of the dealerships.

Q: Is BYD retuning into the A-share?

Wang: We have submitted the application and it’s pending approval.

Q: What about BYD’s plan to build assembly plants in the U.S.?

Wang: Currently both U.S. and Japanese automakers are experiencing hard times, while the Korean automakers are doing the best. China has successfully exported appliances, cell phones and high-tech products to the whole world, and we want to realize the dream of exporting automobiles to western countries.

Our strategy is to adjust the domestic business first, and put our focus on western markets in the future. The key to gaining a foothold in new markets is the new energy vehicle. Regarding our planned California plant, we want to influence consumer choice by introducing new vehicles to a foreign market. We also plan to set up a sales center in the U.S., and will consider building more local facilities. But cost will always be our first consideration, since it has implications for our competitiveness.

Q: What about the development of the ferrous battery?

Wang: The ferrous battery will be mainly used in storage electricity stations and electric vehicles. We have built a highly automatic production line of ferrous battery in Huizhou, Guangdong.

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