BYD Company Limited (HKG: 1211) is engaged in two core businesses: the IT parts business, which consists of rechargeable

battery and handset component production, and the automotive manufacturing business. Since its founding in 1995, BYD has grown to become the second largest producer of rechargeable batteries by volume in the world after Sanyo at 285 million units.[1] Part of the company's success in the rechargeable battery business has been its unique business model. Instead of using fully automated production lines like its competitors in Japan and Korea to manufacture batteries, BYD has implemented a manufacturing line that breaks down the production process into simple jobs performed by workers, thereby replacing a conventionally capital intensive business model into a labor intensive one, which is cost effective for the company due to the availability of cheap labor in mainland China. [2] The company's sales of rechargeable batteries and handset components increased 10.7% to 18.1 billion RMB (US$ 2.65 billion) in 2008. [3] BYD's expertise in both rechargeable battery technology and automotive production have allowed the company have to become the world's first manufacturer of a massproduced plug-in hybrid, the BYD F3DM, establishing the company's place as a global leader in innovative fuel-efficient automotive technology. The company's automobile business was also able to achieve an output of 170,000 vehicles in 2008.[3] BYD has gained global recognition from a substantial investment made by Warren Buffet's Berkshire Hathaway (BRK) subsidiary MidAmerican Energy Holdings Co. of $1.8 billion in 2008. The investment gave Berkshire Hathaway a 10.98% shareholding of BYD.[4] Contents

1 Company Overview
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1.1 Business Segments

1.1.1 Automobiles (55%)[7] 1.1.2 Handset Components and Assembly Services (33%)[7] 1.1.3 Rechargeable Batteries and Related Products (12%)[7] and

1.2 Financial Performance Business Metrics

1.2.1 Growth from 2005-2009

2 Trends and Forces

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2.1 Changing Battery Demand

2.1.1 Financial Crisis Causes Decreased Global Battery and

Handset Demand

2.1.2 Growing Demand for Lithium Ion Batteries from Electric Vehicles Manufacturers

2.2 Growing Chinese Automotive Market 2.3 Foreign Investment 2.4 Oil Price 2.5 Government Support

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2.5.1 Direct investment in Energy Research

Government Alternative

2.5.2 Government Subsidies for Alternative Energy Vehicles

3 Competitors
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3.1 Rechargeable Battery Business 3.2 Handset Components Business 3.3 Automobile Business

4 References

Company Overview
BYD was founded by Wang Chuan-Fu, a former Chemist and government researcher, in Shenzhen, China in 1995. Wang's business model for BYD was to make use of qualified engineers and the large inexpensive Chinese labor pool to make quality components at low cost. This business model initially employed a labor intensive strategy that was and continually is supplemented by the deployment of self-designed and self-produced equipment in the production line. In 2003, BYD expanded operations to include automobile production, which has become the company's fastest growing segment, averaging 140% growth in sales from 2005 to 2008.[3] [5] Wang announced that BYD aims to be the number 1 automaker in China by 2015 and number 1 in the world by 2025, reflecting Wang's great ambition for the company.[1] BYD's operations span across nine production bases in China with the largest sites located in Guangdong, Beijing, Shanxi and Shanghai. The company employs over 130,000 people with branches and offices established in the Americas, Europe, Japan, South Korea, India, Taiwan, Hong Kong and other regions. [6] All production work is performed in BYD's Chinese locations. The company's branches located outside of China are primarily responsible for sales and marketing of its products.[2] The company has three segments business segments: battery and

related products, mobile handset components, and automobiles and related products.[3] BYD has reported a 78 percent sales increase for the first five months of 2010 after May sales rose 38 percent to 45,020 units. The company plans to double sales to 800,000 units this year. The car maker is expected to launch four models including the G3 sedan in the second half of 2010.

Business Segments
Automobiles (55%)[7]
BYDs automobile segment is run through its subsidiary, BYD Auto, which specializes in the manufacturing and selling of a wide range of vehicle lines. It is a product of BYD Co's acquisition of Shaanzi Qinchuan Auto Company Limited and Beijing Jichi Car Module Company in 2003. As of 2009, BYD Auto offers a line of 7 vehicles that target consumers in low, medium and high ends of the market. The company's automobile business is its fastest growing segment, with sales increasing 1275% from RMB628,594 in 2005[5] to RMB8,645,898 in 2008[3]. It has also grown to become the BYD's primary source of revenue increasing from 10% of total sales in 2005 to 55%[5] in the first half of 2009. Almost all vehicle sales came from China, with a small percentage of vehicles shipped to Russia.[7] In addition to its line of traditional internal combustion engine vehicles, BYD has successfully integrated technology from its rechargeable battery division with the introduction of the BYD F3 DM, the world's first mass-produced plug-in hybrid.[8] The division's growth has also been fueled by a US$1.8 billion investment by Warren Buffet's Berkshire Hathaway (BRK) through its subsidiary MidAmerican Energy Holdings Co. giving the company, a 10.98% shareholding of BYD.[4]
Error creating thumbnail BYD Handset Shipments by Region[1]

Handset Components and Assembly Services (33%)[7]

BYD's handset components segment is run through its subsidiary, BYD Electronic, and specializes in the manufacturing and assembly of handset components. The division isvertically integrated such that it handles every aspect of handset production, which allows it to easily service demand. Revenues for this segment are primarily influenced by demand from global handset manufacturers of various brands. BYD produces 25% of of casings and 40% of keypads for Nokia as well as 80% of Motorola's RAZR handsets. Nokia is currently BYD's biggest customer, accounting for 40% of the company's handset sales in 2008. [1] Despite decreased production volume and price reductions imposed by such handset manufacturers, revenues from the division have increased by approximately .2% from RMB5.32 billion in the first half of 2008 to RMB5.33 billion in the first half of 2009.[7]

Rechargeable Batteries and Related Products (12%)[7]

BYDs rechargeable batteries segment specializes in the sale of rechargeable lithium-ion and nickel batteries. The company has managed to maintain its position as one of the leading manufacturers of rechargeable batteries in the world with RMB1.92 billion in sales in the first half of 2009; despite the decline in sales by 41%

compared to the first half of 2009. The decline in revenue was primarily due to the decrease in global demand for handsets which followed the 2008 Financial Crisis, subsequently resulting in a decreased demand for rechargeable batteries to power those handsets. BYD's rechargeable battery segment maintains a cost advantage over its competitors through its employment of a production process that relies more heavily on low cost labor and less on assembly machines compared to other manufacturers. [7]This difference in the manufacturing process allows BYD to set its battery prices at 20-30% lower than those of its Japanese and Korean competitors. BYD's major customers in the segment include Nokia, Samsung, Motorola and LG. [9]

Financial Performance and Business Metrics

Growth from 2005-2009
Error creating thumbnail Automobile,Battery,Handset Component Revenue[10] [3] [7]

BYD has experienced substantial growth with an average increase of 62% in annual revenue from 2005 to 2008[3] and a 33% increase in sales in the just the first half of 2009[7]. Such growth was primarily due to the rapid development of its automobile business, which the company had acquired in 2003. Through a large scale sales strategy that targeted consumers all across China, offering models that catered to high-end as well as low-end portions of the market, the company was able to achieve RMB3,232,178,000 in automobile sales in 2006, a 414% increase over vehicle sales in the previous year.[5] A major contributor to the growth of BYD's automobile business has been the expanding Chinese economy, which has led to increased income and a higher standard of living for Chinese consumers. Per capita income for urban residents of China increased to 8,856 yuan in the first half of the 2009, up 9.8% from the previous year, or 11.2% after adjusting for inflation. [11] BYD's battery and IT parts businesses also managed to sustain growth during the period due to growth in output of low and medium-end handsets in the global handset market with demand primarily coming from the emerging markets of Brazil, India and China. Sales for all segments experienced the greatest growth in the People's Republic of China with annual revenue sales in China growing 431% from RMB4,552,080 in 2005[5] to RMB19,628,313 in 2008.[3] BYD has been pursuing several business opportunities in order to expand its automotive segment. For example, in June 2010 BYD Auto signed an agreement to sell a group of cars to Budget Rent a-Car in Bahrain.[12] BYD Co also has formed a 500 million yuan (US$73 million) auto financing venture with France's CGL. BYD said the venture, which is still subject to government approval, will provide auto loans to both dealers and individuals on the Chinese mainland. Car makers including GM, Ford, Toyota and Nissan have set up auto financing businesses here to boost sales. In April 2009, banks in Shanghai extended 1.2 billion yuan in auto loans, double the rate of a year earlier. [13]

Trends and Forces Changing Battery Demand

Financial Crisis Causes Decreased Global Battery and Handset Demand

The 2008 Financial Crisis caused a deep decline in global demand for handsets, which translated into a decline in battery sales for BYD amounting to a 13% decrease in 2008[3]and a 46.9% decrease in the first half of 2009 over the previous year.[7] Given that handsets are not readily disposable goods, the period of use of a handset is primarily determined by consumer preferences, consumer disposable income, and rate of changing technology. Since consumer income is highly influenced by the state of the economy, handset and battery demand tends to decrease during economic downturns.

Growing Demand for Lithium Ion Batteries from Electric Vehicles Manufacturers
Increased investment in the development of alternative energy vehicles as well as increased government incentives for the purchase of such vehicles has increased the demand for lithium ion rechargeable batteries from electric vehicle manufacturers across the globe. Almost all major automakers in the world have begun to develop electric vehicles, which require rechargeable batteries to store power. However, since adequate automotive rechargeable battery technology has yet to be developed, automakers have to either buy from leading battery producers or engage in joint ventures with battery makers. BYD, on the other hand, produces both rechargeable batteries and automobiles, so is able to control the costs of both segments and integrate the technology of its multiple divisions to produce hybrid electric vehicles at a cost advantage over its competitors.

Growing Chinese Automotive Market

BYD's growth potential is largely dependent on China's market for automobiles since the company's automobile business generated 55% of total revenue in the first half of 2009[7], and revenue from sales in China accounted for 73% of total sales in. 2008[3] It is currently the sixth largest car maker in China with 5.52% market share as of August 2009, a position which only required 6 years for the company to achieve. The company has explicitly set its primary objectives of becoming China's top automaker by 2015 and the world's number 1 automaker by 2025, as stated by Wang Jianjun, the deputy general manager of BYD Auto Sales Co Ltd. China's automotive industry experienced a surge in vehicle sales with an increase in passenger vehicle sales in the January-August period by 37% to 6.23 million units. Total vehicle sales during the period amounted to 8.33 million units, a 29% increase over the previous year. There market for automobiles in China has immense potential due to the fact that 70% of automobile customers in China are first-time buyers, which means that there is need and demand for automobiles in China, and BYD is positioned to service that demand.[14]

Foreign Investment
BYD's growth has in part been fueled by investment from foreign firms, most notable of which is the US$1.8 billion investment made by Warren Buffet's Berkshire Hathaway Inc. through its subsidiary MidAmerican Energy Holdings Co. This investment gave Berkshire Hathaway a 10.98% interest in BYD, and also resulted in

a surge in the stock price of over 700% over the one year period from September 2008 to September 2009. Buffet's investment has generated a profit of over HK$10 billion (US$1.28 billion) for Berkshire Hathaway as well as boosted the CEO of BYD Wang Chuanfu's wealth from US$880 million to US$5.1 billion.[4] Foreign investments such as Buffet's have increased the value of BYD as well as supply the company with working capital to expand its operations, which have resulted in a significantly increased level of capacity to accommodate greater demand, allowing the company to produce over 6 million vehicles in the first half of 2009, an year-on-year increase of 18%. [7] MidAmerican Energy's investment in BYD also benefits BYD through both companies jointly working on research and development. The relationship developed by the investment also creates the potential for BYD to export vehicles to the United States with Buffet's support.[1]

Oil Price
The price of oil has an immense impact on consumer demand for hybrid electric vehicles. The price of gasoline in China in June 2009 was approximately 5.23 yuan per liter.[15]Given that most drivers in China drive less than 15,000 km per year, the incentive to pay a premium on a hybrid electric car is minimal. [1] If gas prices were to increase, BYD can expect increased consumer demand for its F3DM plug-in hybrid vehicle; however, without any increases in gas price, other incentives such as government subsidies must be provided for consumers in China to want to purchase hybrid electric vehicles.

Government Support
Direct Government investment in Alternative Energy Research
BYD's growth in China is highly facilitated by support from the Chinese government, which plans to support domestic automakers' research into alternative-energy vehicles in a bid to have 60,000 on the roads of 10 Chinese cities by 2012. The Chinese government's direct support of research for alternative energy vehicles officially began in 2001 with the inclusion of the 'alternative energy vehicles strategy' in its 'S63 Program,' which was China's state plan for the development of advanced technology in a wide range of fields.[1]BYD's signing of an agreement of "financial cooperation" with the Export-Import Bank of China also demonstrates the important role the Chinese government plays in the future of BYD in the Chinese market.[8] The government has also given automakers funding for research in the areas of hybrid electric vehicles (HEVs), including plug-in HEVs (PHEWs), pure EVs, and fuel-cell battery vehicles.

Government Subsidies for Alternative Energy Vehicles

In February 2009 the government announced its offering of subsidies up to US$8,800 to bus companies, taxi operators and state agencies for each alternative energy vehicle purchased in 13 major cities to boost sales of hybrid vehicles. [1] The hybrid vehicle industry in China is also heavily dependent on the Chinese government to provide the infrastructure for charging the electric vehicles. Government support in this area would increase the appeal of hybrid electric cars and increase sales because of the convenience of charging stations and the monetary incentives for purchasing hybrids.[16]

Competitors
Error creating thumbnail Global Battery Market Share
[1]

Rechargeable Battery Business

The global rechargeable battery market is dominated by firms in Japan, China and South Korea. BYD's primary competitors in this rechargeable battery market are Sanyo, Sony, Samsung SDI, Marushita, and LG Chemical.[1] [17]The global lithium ion battery market is dominated by six suppliers located mainly in Japan, South Korea, and China, with BYD being the leading Chinese supplier with 11% global market share. BYD maintains a 20-30% cost advantage over its competitors in the battery market; however, Japanese suppliers are able to maintain position in the market mainly due to strict requirement on safety by handset and notebook PC products. [1]
Error creating thumbnail Global Handset Market Share
[1]

Handset Components Business

BYD's main competitors in the global handset components market are Silitech, ShinEstu, DK UIL, Sunarrow, and Polymatech. BYD has approximately 12% market share with revenues primarily coming from Nokia, Samsung, LG,Sony Ericsson, and Motorola. BYD maintains a cost advantage over its competitors in this market through customized equipment designs, chemical material development and manufacturing material flow to best make use of low cost labor while ensuring quality.

Automobile Business
Error creating thumbnail BYD ranks 6th in China for market share in car sales

BYD's main competitor's in the automotive market consist of joint ventures between foreign automakers and mainland Chinese corporations and independent Chinese automakers. Its primary competitors include ShanghaiVolkswagen, FAW Volkswagen, Shanghai GM, Beijing Hyundai, Dongfeng Nissan Motor (NSANY), Chery, GuangqiHonda, FAW Toyota and Chang'an Ford.