BYD Will Come Out As A Winner In The EV Price War

seekingalpha04-06

The car market is challenging and competitive, requiring continuous improvement and realignment.BYD has an advantage in the market due to its proprietary battery tech, its integrated production ...

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href=https://seekingalpha.com/article/4682486-byd-will-come-out-as-winner-in-ev-price-war-byddf-byddy-stock><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The car market is challenging and competitive, requiring continuous improvement and realignment.BYD has an advantage in the market due to its proprietary battery tech, its integrated production ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682486-byd-will-come-out-as-winner-in-ev-price-war-byddf-byddy-stock\">Source 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offers great opportunities as well as great risks.We believe that given its price and scale advantages, BYD is well positioned to be the main winner of an ongoing price war.   Robert Way/iStock Editorial via Getty ImagesHere is what Tesla (TSLA) CEO Elon Musk argued recently: \"Frankly, I think if there are not trade barriers established, they will pretty much demolish most other car companies in the world,\" he said during a Tesla earnings call in January. \"They are extremely good.\" While he was talking about Chinese EV manufacturers in general, no doubt BYD (OTCPK:BYDDF) is the most formidable of these, and after looking at the competitive threat to Nvidia (NVDA) in our previous article we'll delve into BYD's dominant position and try to see what could stop them. The market In principle, the car market is fairly lousy, it's capital intensive, cyclical, regional, margins tend to be low, and competition cutthroat. Maintaining one's position depends on meticulous continuous improvement, the type that Toyota introduced and perfected after WWII and that Western companies adopted in the 1980s. Then there are periods of realignment when competitive relations become fluid and the market is in flux. We have seen that with the arrival of the Japanese car makers, followed by the Koreans (even if that was less of a paradigm change), and now we're in the early innings of a third one. The change towards EVs, which are much easier to assemble, has lowered barriers to entry. The result is that a whole host of new and even a host of boutique players have entered the market. In China alone, there are some 200 EV OEMs, and no doubt there will be a huge shakeout, but countries that were not on the map even a couple of years ago like Vietnam (with VinFast) and Turkey are coming up with successful EV OEMs. Competitive advantage  All NEV (New Energy Vehicles, that is, hybrid and EV) production, no legacy burden Integrated strategy Started as a battery maker, leveraged advantage The company’s blade lithium iron phosphate battery packs Automation Lower labor, and environmental standards Bigger, more competitive home market China cornering supply chains  No legacy ICE business BYD isn't burdened by any legacy ICE (Internal Combustion Engine) business that many of its rivals have to deal with, especially in the US and Europe. It doesn't have to cannibalize such a business and it can fully concentrate on building hybrids and EVs from scratch: There are considerable costs in going from ICE to “all-electric” - to retrain staff and converting plants to producing electric vehicles, which, arguable, cannot produce electric vehicles efficiently than a plant specifically designed to assemble electric vehicles and employs fewer staff. How this works in practice was nicely illustrated by: A leading automotive executive attending one of my classes commented, “Our only job is to deliver our quarterly sales numbers [of traditional cars]. Someone else is dealing with innovation and mobility in the headquarters somewhere.” Patiently building capabilities The remarkable fact is that China began its EV drive later than the US and with similar incentives for consumers and producers, but it's been wildly more successful. While US success was mostly down to Tesla's (TSLA) high-profile strategy which made its cars almost like a fashion statement, the likes of BYD and Geely, the top two Chinese OEMs were quietly building their capabilities. Geely did so in motorcycles, BYD focused on electric buses, both acquired relevant experience and capabilities from the respective problems these markets serve up and which can be applied in the EV market Since buses are much heavier than cars and operate for up to 18 hours a day, they have much greater battery power and storage requirements, which focused BYD on developing better batteries, which led to success with electric buses: It first sold electric buses as fleet vehicles in 2013, before supplying them to the Los Angeles Metro system in 2015. BYD electric buses are now also prevalent in South American markets. Now they've transferred that core battery capability into EVs and hybrids. Batteries Given that batteries consume some 40% of the cost of an EV and determine many of its relevant metrics, it's a main and quite likely the main area of competitive advantage. BYD started as a battery producer and decades of development and the use of these in electric bus business have culminated in its Lithium Iron Phosphate blade battery: BYDForbes: One combination of technology and strategy success at BYD has been the development of what it calls a blade battery, a cobalt-free alternative to other rechargeable lithium-ion batteries that are said to be safer and more stable. BYD not only installs the batteries in its own cars; it sells them to other automakers, reportedly including Tesla. And here is Jianing Yan from Macau University of Science and Technology (ResearchGate PdF, our emphasis): In terms of BYD, one of the few electric-car companies to have self-sufficiency in power batteries. Its battery technology is mainly lithium iron phosphate battery. BYD has the world's top level in the research and development of lithium iron phosphate batteries. As a very mature type of lithium battery, the biggest advantage of lithium iron phosphate battery is more stable and safer. Especially for the nascent market for electric vehicles, safety is even more important to users than advanced technology. In March 2020, BYD officially launched the lithium iron phosphate blade battery, announcing that its battery range reached the same level as the ternary lithium battery. At present, the energy density of the first generation of blade battery products has reached 140Wh/kg and the volume energy density has reached 230Wh/L. It is expected that the energy density can reach more than 180Wh/kg and the volume energy density can reach 300Wh/L in 2025. According to BYD's data in 2020, the reshaping of the battery pack has reduced the cost of the blade battery by 30% compared with the ordinary lithium iron phosphate battery and increased the energy density per unit volume by 50%, equivalent to the original 300,000 electric car, which can BCP Business & Management BEMS 2022 Volume 18 (2022) 445 now be reduced by 36,000 yuan (based on the battery cost accounting for 40% of the vehicle). It used to run 400 kilometers on a full charge, but now it can run 600 kilometers. Many foreign EV producers like Tesla and BMW, rely on BYD for batteries (as well as those of the market leader, another Chinese company, CATL, which supplies batteries to Tesla, VW, and Toyota). Integrated strategy By doing most of the stuff like powertrains in-house, BYD (but also Tesla) can optimize: their electrified powertrains sufficiently to provide models with an efficient powertrain with a sufficiently long driving range, short charging time and usable experience. As different Tier 1 vendors support piecemeal solutions to various components, often to a modified model originally designed for combustion engines, the resulting “compliance EVs” often have poor performance compared to a Tesla. They also cut out the middleman (and their profits) and can use the efficiency gains to lower prices. They also don't have to share the same technology with competitors and can introduce new technology faster:  Verticalization allows BYD to react quicker to new technology and to their competitors. As they have more control of all parts of the E/E Architecture, they can manage their supply chain with less dependence on suppliers. Eliminating middleman also means that they don't have to pay high vendor margins of Tier1, Tier2 suppliers. Earlier last year, BYD unveiled their e-Platform 3.0 which will be the base platform their upcoming EVs. It is capable of multiple wheelbases, 2WD and 4WD. The EE architecture is primarily distributed with a high performance central ECU and Vehicle-to-cloud stack integration to enable an app ecosystem. The platform also supports BYD's latest 8-in-1 electric powertrain system with an overall efficiency of 89%, with a motor efficiency of 97.5%, SiC Modules. The battery module is integrated into the body structure to increase the rigidity.  BYDThe company explains the advantages of vertical integration itself (the example is in its material handling equipment), and also in an earlier interview: [BYD] has mastered the core technologies of the whole industrial chain of new energy vehicles, such as batteries, motors and electronic controls And it's not sitting on its laurels as it will introduce DM-i, a new dual mode (for hybrids, obviously) in May this year, which: BYD is set to launch its fifth-generation DM system, with the DM-i branch enabling the vehicle to consume as little as 2.9 L of fuel per 100 kilometers, and drive close to 2,000 kilometers on a full tank of fuel and full charge, 36kr cited a source at the meeting as saying. The successor to the e-Platform 3.0 (e-Platform 4.0) is also likely to arrive this year, which might very well solidify BYD's leading position: The vast majority of BYD's current BEVs are based on e-Platform 3.0, with the main features being integration, lightweight and efficiency. The eight-in-one electric powertrain, for example, reduces volume and weight dramatically, and costs by nearly 20 percent, according to 36kr. The upcoming e-Platform 4.0 is still aiming to improve the integration of components. With more parts being integrated and fewer wiring harnesses, there will be room for new cost reductions, 36kr's report said, adding that this means there is still room for further reductions in car prices. Ecosystem Despite the vertical integration, no company can go it alone and BYD certainly hasn't, especially in the early years when it was amassing its capabilities: early innovators recognized the operational challenges that EVs presented and worked collaboratively with local groups to find solutions. BYD gained crucial capabilities by cooperating with the likes of Daimler and Toyota to gain EV production capabilities, with the Foshan Plastics Group on optoelectronics and with Baidu on software. BYD also worked with taxi companies to remove hurdles for EV adoption, like mapping charging stations and testing various charging schedules that matched their requirements, settling on two charging windows, one for the morning and one for the evening shift that was operationally efficient as well as leveling energy costs and demands. BYD's battery capabilities benefit from China's dominance of the rare earth elements crucial for most battery chemistries. Mass market strategy Unlike most of its competitors who start with producing cars for the more profitable high-end of the market with the idea to use these profits to expand production and gradually move down the market, BYD has started with the mass market: Another part of its strategy is to make models that are more affordable than its competitors. Chinese EV makers NIO and XPeng target the luxury market with cars with higher prices to match. The majority of BYD’s lineup sells for between $13,200 and $46,700. That quote although still relevant, is more than a year old. In the meantime, the company has introduced even cheaper cars like the Qin Plus DM-i new variant called the Glory Edition, a plug-in hybrid that gets a decent all-electric range and will retail for just over $11K. It's not the only cheap car, there is another hybrid, the Destroyer 05 at $11K (hybrid). Apart from cheap hybrids, BYD also produces cheap pure EVs like the Seagull, an EV that costs $9.7K in China (the most expensive version is still only $12K).   ElectrekThe Seagull seems to belie its cheap price (our emphasis): Despite the affordable price tag, BYD’s Seagull does not feel like a “cheap” EV, according to reports. The Seagull has earned the nickname “Lamborghini Mini,” local reports claim, as former Lamborghini designer Wolfgang Egger led the EV’s design. Ford’s CEO Jim Farley called the low-cost EV “pretty damn good” during a conference in February, warning rivals will need to catch up. Farley highlighted that BYD can offer the EV at an ultra-low starting price while still earning a profit... Caresoft inspects every part of a vehicle (digitally and physically) to look for inefficiencies for its clients. After studying BYD’s Seagull, Woychowski said, “What they did do is done very well,” adding that it exceeded its quality and reliability expectations. Then there are the new Dolphin Honor, which sells for less than $14K, and the ATTO 3 electric SUV for $16.6K. It's competitive offerings aren't limited to the low end of the market either, the Seal Honor edition of its electric sedan, which is comparable to Tesla's Model 3 has starting prices around $25K while Tesla's 3 starts at $34K in China. They have a rival for Tesla's Model Y also, although that hasn't been as successful but 7 months after introducing the Denza N7 SUV, BYD introduced revamped versions with better technology and a 20% price reduction (while Tesla increased the price of its Model Y in China). The company even sells high-end luxury cars under the brand of Yangwang brand, producing the U8 with prices starting over $150K and the U9 starting at $233K. All these cars sell at price points that are very difficult for competitors to match (or even come close to, if we abstract from tiny two-seaters with little range or speed like the Citroen Ami, which sells for EUR8.5K), and there aren't even many ICE cars that come close. Of course, BYD would not be able to pull this off without the cost advantage of its batteries, integrated production and the economies of scale of its operations. So we can appreciate why BYD argues that: strategy follows technology Its integrated technology enables a mass market strategy, which creates a bit of a virtuous cycle as the mass market appeal of these cars produces economies of scale that further underpin its cost advantage. Large home market   StatistaTo put the size of the Chinese market in perspective, 69% of all new EVs sold in the world were sold in China in December 2023 and Rystad expects this to be 65% for all of FY24 (or 11.5M of 17.5M EVs). 37% of all cars sold in China in 2023 were EVs, up from 30% in 2022 and 15% in 2021. EVs are expected to reach 50% of new car sales in China in 2025. The market is also very competitive: There are a staggering 129 EV brands in China, but just 20 have managed to achieve a domestic market share of one percent or more, according to data compiled by Bloomberg. BYD is the undisputed market leader but other big Chinese companies are entering the market Xiaomi has already done so and Huawei and Baidu will follow. Even China is not immune to a slowdown in sales with the domestic market growth expected to slow down to 18.5% in FY24 (from 37% in FY23) under economic uncertainties and the end of purchasing subsidies. But this picture is still markedly better than that in other major car markets like Germany, Japan or the US. BYD has a large market share in China selling 5 of the top 8 EVs in 2024 so far: CleanTechnicaBYD had a 33.8% market share in 2023, 4.5x bigger than number two (Tesla) with a 7.5% share so it is dwarfing the competition in China Being the market leader by far of the biggest EV market in the world confers considerable economies of scale. It also surpassed Tesla as the biggest producer of EVs in the world last year. Government support EVs are a development target for the Chinese government so multiple supporting policies exist to foster its growth, like (but see also here):  Generous subsidies for consumers purchasing EVs were ended on January 1, 2023 although a 10% purchase tax exemption stayed for another year (and then another two years and half the exemption for the subsequent two years as part of a larger green energy stimulus package). A mandate for zero-emission vehicles, OEMs have to either build EVs, purchase carbon credits, or pay a fine. A quota system where OEMs are required to sell at least 8% of EVs starting 2018. EVs are excluded from license plate lotteries to keep city air quality under control. Beijing only issues 10K permits for the registration of combustion-engine vehicles per month in January 2022, the Chinese government announced plans to build enough charging stations for 20 million electric vehicles by 2025. Electricity rates for charging stations are often subsidized as well (as well as battery charging stations). China spent more than 200B yuan (US$28B) on EV subsidies and tax breaks between 2009 and 2022. There are also numerous regional subsidies and incentives.  Foreign expansion Given so many domestic EV brands, there is a frantic building of production capacity which has led to a huge overcapacity. Chinese EVs move in force, for instance Thailand, where the Chinese are wiping the floor with the incumbent power, the Japanese car manufacturers: In Thailand, EV sales smashed forecasts in 2023, rising ninefold to 8.6pc of total car sales. A study by the Japanese trade body JETRO said that 90.1pc of these were Chinese imports. Just 0.4pc were Japanese... Five Chinese carmakers have either begun building factories in the country or will start within months. “Thailand is a springboard for China’s overseas expansion, leveraging the entire market of Southeast Asia,” said Chinese auto analyst Zhang Xiang. Within a year after launching in Japan, BYD already accounted for a 20% share of Japan's EV imports in January 2024. China overtook Japan as the biggest car exporter in 2023, the expansion is in full flow but it's meeting resistance. For instance, in the US there is a 25% tariff on imported Chinese EVs which is why there are basically no Chinese EVs on American roads. Apart from trade restrictions, local market access is often easier with a local presence, hence BYD is building new factories in Brazil, Thailand, Hungary, and Uzbekistan, and could soon add Indonesia and Mexico to that list. BYD plans to double its overseas sales this year: BYD aims to sell 500,000 vehicles overseas this year, more than double the 240,000 handed over last year. By 2025, BYD sees overseas sales reaching 1 million. BYD plans to triple its market share in Europe next year with a plant in Hungary and with its fleet of transport ships called the Explorer. The first Explorer already landed in Germany in February 2024. Much of the West is fumbling Meanwhile, at the same time, BYD and other Chinese EV suppliers have built up huge excess production capacity that needs a foreign outlet, sales of EVs are slowing down, rather than the expected acceleration in major markets like the US, Germany, Japan, and the UK. The retreat in plans is pretty spectacular in the US: Last year, Tesla discounted its cars several times, eventually slashing prices on its volume-driving Model S by nearly 25%, and Hertz announced plans to offload its Teslas. GM, for its part, announced that it would be abandoning its near-term EV goals, delaying the production of its EV pickup, and unwinding a joint EV venture with Honda. News stories ran regularly during the year telling of EVs sitting unsold on dealers’ lots. HBR, where this quote comes from, blames this on the saturation of first adopters and companies not figuring out what a broader segment of the market wants, which are either hybrids and/or cheaper EVs. And HBR isn't alone:  The top three things Edmunds says EV shoppers want include: ◾ Lower prices: Among those who intend to buy an EV, 47% want one for less than $40,000, and 22% are interested in EVs below $30,000. Reality: Zero new EVs have an average manufacturer’s suggested retail price (MSRP) below $30,000, and there are only four below $40,000. In 2023, the average transaction price of an electric vehicle was $61,702, while all other vehicles stood at $47,450, Edmunds said.  The US car market isn't in the immediate line of fire for Chinese exports as a 25% tariff protects it, but the picture isn't much brighter in Germany, the EU, and Japan, where the Chinese have easier access. In Germany, there is a real sense of panic as their domestic car companies are in a bit of a bind. The EVs they produce are not selling well and fell steeply at the start of the year after subsidies for car buyers were cut, triggering a price war. Production of EVs isn't profitable while their ICE autos are (generally speaking). However, due to green policies, they are obliged to make the transition or face fines that are increasingly steep and they see a wave of cheap Chinese imports on the horizon. This seems like the perfect storm, BYD has competent cheap EVs as well as hybrids for the masses and Western car companies are stumbling, their expensive EVs are not selling and are not profitable. High growth Data by YChartsAlthough Q1 was disappointing for BYD, Tesla could even reclaim its post as the no.1 producer of EVs: CNNEV sales were still up 13% y/y and sales recovered strongly in March (139.9 EVs, up 36.3% y/y, and 302.4K cars, up 46% y/y) so the slow start of the year could just have been the festive season falling early this year. BYD's margins show an upward trajectory although in part this might be a post-pandemic phenomenon as restrictions were much more severe in China compared to almost any other country, at least until the end of 2022. Data by YChartsThe company generates also quite a bit of cash, most of which goes into CapEx: Data by YChartsDespite the heavy CapEx spending, profitability has been rising fast: Data by YChartsAnd the shares aren't all that expensive: Data by YChartsRisk Remarkably, the emergence as a global leader in next-generation transportation solutions isn't met with more investor enthusiasm with valuation multiples not only at moderate absolute levels but, more surprisingly, at historical lows. Does that mean there are dark clouds on the horizon? Fellow SA contributor Theme Catcher Invest argued recently that the shares even now are too expensive as margins are under pressure due to a price war. That might very well materialize and we could see some margin contraction, but BYD is very well positioned to not just survive a price war, but come out the other end victorious, as we argued above in this article. So we think the lows in the valuation metrics are more a reflection of the increasing China discount and the sorry state of Chinese shares in general, rather than any angst about the effects of a price war. Another factor is the slowing adoption of EVs in many markets, but here too we have basically presented a counter-argument above already. At least part of that slowdown is caused by EVs saturating demand from first adopters which are less price-sensitive. But it's effectively BYD that produces much cheaper EVs (and PHEVs) that will broaden the market, or at least that's the theory, which seems to have gained traction in China, by far its largest market (and the largest EV market in the world by far). So we think this risk too can be overstated, even if investor sentiment could remain subdued for quite some time. But during that time BYD is likely to solidify its lead and get a foothold in many overseas market where its arrival is watched with considerable trepidation, and with good reasons, as we argued above. Conclusion We think BYD is emerging as a dominant car manufacturer based on a series of smart moves, a well-thought-out strategy, and a significant competitive advantage:  Given that batteries determine roughly 40% of the cost of EVs as well as other relevant performance parameters, BYD's competitive advantage in battery tech is transferable to EVs so entering that market was a logical step. Keeping production in-house enables tighter integration and BYD has an unusually integrated production strategy which confers it with economies of scale and scope as it can utilize a single platform over different models. Honing its capabilities in a demanding market such as electric buses enabled the company to refine its advantages. Battery tech, integrated production, and economies of scale and scope confer a price advantage, few can produce good quality EVs and hybrids at the price points that BYD can sell and remain profitable and has enabled BYD to produce genuine mass-market products, a necessary step in the electrification of transport. Being the dominant player in the largest EV market in the world further solidifies its scale advantages. Excess capacity domestically forces BYD (and other Chinese EV producers) to export and this comes at a fortunate timing as few of their foreign competitors can produce mass-market EVs and hybrids close to the price points that BYD can produce and many are wedded to their profitable legacy ICE business.  While we are optimistic about BYD's growth and opportunity to become the dominant hybrid/EV producer in the world, this doesn't necessarily mean that the shares are a good investment at this juncture. Investment sentiment is sullied by the poor performance of Chinese stocks, an ongoing price war, and disappointing uptake in EVs in many markets, but we think that these headwinds are temporary. Given its cost and scale advantages, BYD is likely to emerge victorious from the price war and its new cheap cars are likely to broaden the market. So while we admit that the stock price might be subdued for quite some time, we think longer-term it will deliver.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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