How Chinese EV Giant BYD Is Taking On Tesla

In the world of electric vehicles, Tesla has reigned. But his days as a leader may be numbered. In China, the world's largest electric vehicle market, it has been losing ground to domestic automakers as a ruthless price war has inflamed an already competitive market. If Tesla hadn't had 20-30% price cuts, they probably would have had a drop in sales last year. And there's one automaker in particular that has given Tesla a run for its money: Warren Buffett backed BYD. The Chinese automaker recorded 2.4 million new auto insurance registrations in 2023, making it the top brand in China with an 11% market share.

I don't think anywhere else in automotive history has any company enjoyed such explosive growth in such a short time. BYD has become this powerhouse. If you look at the monthly rankings, they are always at the top. In 2023, BYD produced more than 3 million new energy vehicles, including plug-in hybrids and battery electric vehicles, surpassing Tesla's production of 1.84 million cars. BYD is far ahead of Tesla in China. It's almost ridiculous. At first, Elon Musk despised BYD. His rivals did not take Chinese automakers seriously. It used to be that foreign brands had the majority of the market in China. Now they are Chinese brands.

And when you look at the vehicles that these Chinese manufacturers and Chinese brands are putting on the market, they are very good vehicles. Now, they are a serious threat as they not only dominate the Chinese market, but also have great ambitions to expand globally. In 2023, BYD exports grew by 334% to 242,765 vehicles in 70 countries. About 40% of the electric vehicle market in China is owned by BYD, and they are just starting to export globally to places like Australia, Japan, Europe and, potentially, very soon, the United States. CLSA has some predictions that by 2026 BYD will enter the top five automakers in the world, and this year it may break into the top ten.

BYD, short for Build Your Dreams, was originally founded as a battery company in 1995 by Wang Chuanfu in Shenzhen, China. It began in the 90s as a manufacturer of mobile batteries and for the first ten years low cost was its magic formula. We are going to undermine all the competition. After building a successful business supplying customers such as Motorola and Nokia, he decided to enter the automobile business. It bought Xi'an Tsinchuan Automobile and launched its first internal combustion car in 2005, the F3. In 2008, it launched the F3DM, a plug-in hybrid electric vehicle. I remember arriving and riding in the first BYDs.

They were called F3 and F1, inspired by Formula One racing, which is almost comical because their cars were sort of mediocre commuter cars powered by Mitsubishi engines. In 2010, it presented its first fully electric vehicle, the e6. It was progress, but it was not yet perfection. Taxis would buy the electric vehicle because they had incentives to do so. But very few individuals had an appetite for BYD cars. The company's automobile division did not see much growth during the 2010s. Sales increased, but only gradually. Profits from those sales were mediocre. In fact, in 2018 and 2019, BYD's sales decreased year after year.

Until very recently, it was unknown whether or not it was going to succeed as a car company. However, he managed to change things. In 2019, I saw some of their new products called Tang and Han, designed by German designers, world-class designers. And when you first see it, these are really attractive cars. There is potential here. In 2022, the company stopped production of its ICE vehicles and focused on manufacturing plug-in hybrids and battery electric vehicles. Most of their cars are mass market, which helps with volume, and they also haven't gone completely pure EV right away. BYD is backed by Warren Buffett's Berkshire Hathaway and considered entering the US market in 2008, when Buffett acquired 10% of the company.

Warren Buffett himself said: "I'm betting on the man." I don't understand the technology. I'm not sure about the Chinese market. Will electric vehicles take off or not? But this guy is one in 10 million. He then recognized something special in Wang Chuanfu and with that gave his blessing to an investment of around a quarter of a billion dollars. Much of the reason he invested was because of the battery business, rather than the vehicle business. And that has grown dramatically along with its vehicle sales. BYD shares have risen more than 1,400% since Buffett first invested. Berkshire Hathaway reduced its stake in the company and sold more than 60% of its shares since last summer.

Why would it go down? One is geopolitics, as he mentioned with Taiwan, he said, I don't like TSMC because of its location. Second, Tesla started a price war about a year ago, in late 2022, and that price war has been fierce. To such an extent that most electric vehicle manufacturers in China are losing money today. Only Tesla, BYD and a couple others are able to make profits. At the center of BYD's winning strategy is price. Many of its vehicles undercut the competition. Just a few months ago, in Munich, they launched The Seagull, priced at $11,500. Very competitive in the $35,000 and under segment.

Its expertise in batteries, typically the most expensive part of an electric vehicle, has also helped in this regard. BYD designs, develops and designs its own batteries at scale. So not only do they have the capacity and capacity for their own products, but they also supply batteries globally with plans to build battery plants around the world. It is one of the world's leading companies that manufactures lithium iron phosphate batteries. They cost 30 to 40% less per kilowatt hour to manufacture, and LFP batteries are also extremely durable. They last a long time. As a leader in battery technology, it actually supplies batteries to other automakers such as Tesla, Toyota, and Kia.

In 2020, it launched Blade, a lithium iron phosphate battery that the company touted as a breakthrough in high energy density with high levels of safety. According to many, bYD's Blade battery is the best in its class globally at the moment. Basically what they've done is maximize energy density, and this is attractive to everyone in the industry. BYD is not only in the passenger car market, but also manufactures trucks, buses and other vehicles. In fact, the company builds and sells electric buses in the US at a factory in Lancaster, California. They have had a big business in the fleet of commercial vehicles, including buses, in the United States and Latin America.

But its passenger cars are what represent the majority of its sales. The company offers several models at different prices. The Dynasty series includes the Qin, priced starting at around $14,000, up to vehicles priced up to the Tang, at the higher end, which starts at around $34,000. The vehicle that really put BYD on the map in the new energy segment is the Han. It is a sedan that they launched in July 2020 and this car has just taken off. The Ocean series appeals to younger consumers and features everything from the Seagull, BYD's smallest car, with a starting price of around $10,000, to the Seal, a sedan that starts around $22,000.

When they launched the Dolphin and Seal models, one of the things they told me was that we have a lot of different colors. It is supposed to appeal more to young families and especially women. BYD has also introduced vehicles under the luxury sub-brands Denza, Yangwang and Fang Cheng Bao. Denza, a joint venture with Mercedes-Benz created in 2010, introduced some electric vehicles for the Chinese market before undergoing a restructuring in 2021. Mercedes has since reduced its stake to 10%, but BYD has continued to develop new vehicles, starting with the D9, a luxury minivan. The N7, a direct competitor to the Tesla model Y, and the N8, a larger SUV.

Yangwang, created in 2023, targets the high-end segment with a supercar, the U9, and a luxury SUV, the U8. Details of its next car, the U7, were recently revealed that it will have four electric motors with a range of around 500 miles. Fang Cheng Bao, also created in 2023, launched its first vehicle, the Bao 5, in November last year. Yangwang is definitely BYD's effort to enter that truly luxurious segment of the market. The cars are either extremely gigantic or belong to the sports car category, which is very different from other BYD cars. Most automakers, at some point in their history, try to create halo vehicles that reflect well on the rest of the brand and create an image for the brand.

And BYD is no different. It's a sign of their growing confidence and they say: look, we can do what Ferrari, Lamborghini or Porsche can do. Just as good, if not better. Being the leading electric car manufacturer in China, BYD has set its sights on bringing its cars to other markets. Starting in 2018 and 2019, markets slowed and margins started to fall, and all the Chinese automakers said, "Uh-oh, if we stand still in our domestic market, we will drown in excess capacity and hypercompetition." And we're already seeing that play out. It is already a major player in Southeast Asia, where it has a 43% market share in electric vehicles and is currently the top-selling electric vehicle manufacturer in Thailand, Brazil, Colombia and Israel.

In Thailand, a year ago they were practically non-existent on the market and just in the last few months they have become the best-selling car brand, and I believe they also have goals to double their sales in the Philippines and Singapore. this year. Last year, the company began selling in Mexico and is looking to enter Japan. They are now launching the Dolphin in Mexico and are growing more and more in other South American markets, where Tesla doesn't really have that much of a presence at the moment. BYD is strengthening its presence in Europe. Last year it sold 13,000 vehicles there and now has its own

giant

cargo ship capable of transporting 7,000 vehicles.

It recently delivered 3,000 vehicles to Germany on its first trip. It's pretty much in line with BYD's overall strategy to make sure it has as many as possible in-house. With the ship, that gives BYD extreme control over costs. It's safe to say that their number one priority right now abroad is Europe, because in Europe there is legislation to go electric, there are people with money to buy electric cars and there is decent charging infrastructure. The company has said it will open its first European plant in Hungary, but the Chinese automaker faces obstacles abroad. In recent months, the EU has announced that it will investigate subsidies for the production of electric vehicles made in China.

The EU Commission says: "Hey, we don't believe in your costs." We think they are probably dumping or overly subsidizing their products, which is why they are so competitive here. In China, new energy vehicles have received substantial support from the government. Rhodium Group estimates that BYD received approximately $4.3 billion in state support between 2015 and 2020. But the biggest question of all is: Will BYD try to sell its cars in the United States? They are definitely preparing for the US market, waiting for the right time. The United States and Europe promise a profitable market. They have to come in, compete and win here to prosper globally.

Tariffs currently make it more expensive, with electric vehicles made in China receiving a 25% tax on top of the 2.5% tariff imposed on imported cars. Many of these companies and the investors in these companies, which in some cases include various levels of government in China, appear to be more tolerant, at least for the moment, of

taking

losses to increase their market share. It recently announced that it will build a factory in Mexico, possibly to gain a foothold in the North American market. Few people know it, but China is already the number one supplier of automobiles to Mexico, and the natural next step will be to build manufacturing plants in Mexico.

They are already looking for sites, they are very advanced in their research and they will send our vehicles across the border into the US, probably from their expectations, after 2025. What is the possibility of the Chinese approaching every once again? to our market? Within the next 5 or 6 years, several automakers will likely begin final assembly in Mexico. Why is that important? Thanks to NAFTA, it basically eliminates that tariff. People will say that Americans won't buy Chinese products. You know, what you ask someone is: do you want to pay $9,000 for an SUV, or do you want to pay $19,000 or $20,000 for an SUV?

Do not answer. And that's what we find with all thepeople we've talked to here. U.S. lawmakers have warned that Chinese automakers could flood the market and be a threat to domestic automakers. People in D.C. They're definitely keeping an eye on this, and you can bet they're talking to Mexican authorities. The risk is real for the United States at a time when the UAW has just negotiated unprecedented salaries and benefits. In Australia, Chinese automakers are not restricted by tariffs and BYD has grown considerably there. After entering the country in 2022, it now has 14% of the electric vehicle market.

Tesla leads with a 53% share, but has been selling there since 2014. Chinese car companies are the most competitive in the world. I think they will have significant success outside of China, depending on what kind of tariffs or trade barriers are put in place. Frankly, I think if trade barriers are not put in place, they will pretty much demolish most other car companies in the world. They are extremely good. But now that China has become an automotive powerhouse, it may be difficult to keep its ambitions in check. Chinese automakers have learned very quickly to produce really attractive vehicles.

They are more affordable and are arguably better vehicles in many ways. The rest of the industry has reason to be scared. China today has the capacity to satisfy half of the world's demand for vehicles. Half. And given its strength, low cost, improved designs and improved quality, one begins to wonder: what's going to stop this

giant

?