TheRaceforaGreenCar

Context
Highoilprices,greenregs,andbetterbatteriesarebehindthemaddashtocreatetheultimateelectric
automobile.1
Theelectriccarislikelytoemergeasoneofthemosttransformationalproductsofthecurrentera,as
importantperhaps,asthepersonalcomputerandtheInternet.Giventheeffectoftheautoindustryon
therestoftheeconomy,masscommercializationoftheelectriccarwillfundamentallytransformnotjust
that industry but others such as petroleum, electricity generation and distribution, steel, nonferrous
materials,andchemicals.Byreducingtheworld'sdependenceoncrudeoil,theelectriccarwillreshape
thestructureofglobaltrade.Importantlytoo,becauseelectriccarshavezeroemissions,theyalsocould
dramaticallyresetthedebateonglobalwarming.2
Thesharpincreaseinglobaloilpricesinthelastdecadecombinedwithanincreaseawarenessofclimate
change and energy security is bringing about a radical change in the way customers think about
commuting.Carsalreadycontributetoaround10%ofthemanmadegreenhousegasesresponsiblefor
climate change. As more of the worlds global population continues to move out of poverty, car
ownershiparoundtheworldisgoingtoquadrupletonearly3billioninthenext40years3.Thereforein
ordertoensureacleanerandgreenerfuture,governmentsandcustomersacrosstheworldarepushing
forcleanerandmorefuelefficientcars.
Howeverthisnotthefirsttimegreenadvocateshavepushedforagreeneralternative,norisitthefirst
time that large automobile companies have publicized plans for a battery based alternative to the
internal combustion engine. In 1997 GM introduced the EV1 in select dealerships across Southern
CaliforniaandArizonabutdiscontinueditsproductiontwoyearslater.
Therearehoweverchangesthatmakethisspurofinterestinelectriccarsglaringlydifferentfromthe
initiativeslaunchedearlier.Themajoronesare:
1. Increased concerns over the availability of cheap oil in the future, governments all over the
worldareactivelyadvancingelectricvehicletechnologiesbywayofsubsidiestocustomersand
directinvestmentswithcarmanufacturers.ForexampleUSresidentscanclaimataxcreditupto
$7500 on the purchase of a PHEV whereas taxi fleets and local governments in the People
RepublicofChinawillgetupto$8,800ofsubsidiesoneachelectriccarthattheypurchase.

Thegreatelectriccarrace:CNNMoney.com,accessedon11/20/2009
http://money.cnn.com/2009/04/14/autos/taylor_electric.fortune/index.htm
2
ElectricCars:AWideOpenRace:AnilK.Gupta&HaiyanWang.BusinessWeek,accessedon11/20/2009
http://www.businessweek.com/globalbiz/content/oct2009/gb20091018_051999.htm
3
Charge:TheEconomisthttp://www.economist.com/opinion/displaystory.cfm?story_id=14363307accessed
11/20/2009

2. Unlike the internet, an allelectric car is the first major new product in which, right from the
start, the contestants include companies from not just the developed but also the developing
economies4.
3. IncreasedinterestbyindividualentrepreneursandventurecapitalistsintheUSandabroadhas
increasedthespeedofinnovationandmadelegacyautomobilemanufacturerssitupandtake
notice.5Allmajorautomanufacturershavenowmadesubstantialinvestmentsintheirelectric
carprograms.
4. Batterytechnologies,amajorimpedimentintheearliercommercializationofelectriccars,have
in the past decades become more efficient and cost effective. Lithium Ion batteries lighter,
denserandrechargeablemoretimeshasimprovedthecostbenefitequationofelectriccars.
Thus even though the global financial crisis affected a number of large automobile manufacturers,
observersandanalystsarecaughtupinfrenzieddiscussionsontheelectricalvehicleofthefuture.The
aim of this paper is to examine compare and evaluate the operating strategy of two electric car
manufacturers,TeslaMotorsandBYDAuto.
Thestructuredofthispaperisasfollows.Afterabriefintroductionofthecompany,thepaperwillfirst
examinethestrategichingeseachcompanyistryingtoleveragethenanalyzekeydifferencesbetween
their operating systems and finally assess if each companies operating strategy creates a sustainable
advantageforitsfuturegrowth.

TeslaMotors
The overarching purpose of Tesla Motors ..is to help expedite the move from a mineandburn
hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not
exclusive,sustainablesolution.
ElonMusk,CoFounderTeslaMotors
Tesla Motors is an entrepreneurial, venture capital backed venture headquartered in San Carlos
California. Its investors include Capricorn Management, Compass Venture Partners, Draper Fisher
Jurvetson, Daimler AG and Abu Dhabis Aabar Investments6. The company, incorporated in 2003 is
currentlytheonlyautomakerbuildingandsellinghighwaycapableElectricvehicles.
The companys launched its first product, a $109,000 sports car, in 2006. The car has a range of 227
milesperbatterycharge7andusesLithiumIonBatteries.InMarchthisyear,thecompanyalsounveiled
asedanthatwouldbepricedatapproximately$50,000andwillbebigenoughtocarry5adults.Tesla

ElectricCars:AWideOpenRace:AnilK.Gupta&HaiyanWang.BusinessWeek,accessedon11/20/2009
TheRacefortheElectricCar:http://www.cbsnews.com/video/watch/?id=4502691naccessed12/05/2009
6
WallStreetJournal:TheMoneyKeepsRainingDownonTeslaMotors.www.blogs.wsj.com/venturecapital
7
UsingastandardEPAcycleof45%highwaydrivingand55%citydriving
5

achievedoverallcorporateprofitabilityinJulythisyearwith$1millioninearningsonarevenueof20
million.8
Even though the company has been in the news for a number of wrong reasons recently, it was also
awarded a $465 MM low cost loan by the US DOE and attracted unanticipated $82.5 million Series F
equityinvestmentsfromlargeinstitutionalinvestors,therebysignalinggrowingpublicconfidenceinthe
capabilitiesofthecompany.

ProductFocus
Teslasbusinessplan9isto
1.
2.
3.
4.

Buildsportscar
Usethatmoneytobuildanaffordablecar
Usethatmoneytobuildanevenmoreaffordablecar
Whiledoingabove,alsoprovidezeroemissionelectricpowergenerationoptions

AsshowninExhibit1,thecompanyhasthereforeenteredintothecarmarketwithapremiumpriced
productthatoffershighperformanceandanultraefficienttechnology.ThisplanallowedTeslato:
1. Optimizetheirelectricvehicletechnologybeforerollingoutalessexpensivemodel.Ablogpost
byElonMuskstatedthat"Newtechnologyinanyfieldtakesafewversionstooptimizebefore
reachingthemassmarketandinthiscaseitiscompetingwith150yearsandtrillionsofdollars
spent on gasoline cars. The company is using early adopters to bear the cost and the risks
associatedwithdevelopingthecompany,itscarsandthecoreelectricpropulsiontechnology.
2. Buildthecompanysbrandvaluebypositioningaproductthathadhighappealandexclusivity
thatresonateswithaffluentmembersofsocietywhowanttobeapartofthegreenmovement.
ThemodelalsoallowedTeslatooperateitsbusinessonamoreflexiblemadetoordermodel,
thereby reducing the upfront fixed investments (for plant, property and equipment) and
workingcapitalneededtorunthecompany.
The company also licenses its proprietary battery systems and electric drive trains to other car
manufacturerssuchasTHINKandintostrategicpartnershipwithDaimler.
Teslasentryintothemarkethasundoubtedlygalvanizedtheindustry,howeverinordertomassmarket
cars it needs significant investments, innovation and a steep learning curve. A few issues that could
makethistransitiondifficultare:
1. The value proposition for a customer buying a sports car is significantly different from a
customer operating in the mass market. In the premium segment a manufacturer is able to
command a higher willingness to pay based on subjective attributes such as, exclusivity,
exhilaration, style statement, acceleration, engine power etc. etc. Mass consumers on the

http://www.teslamotors.com/media/press_room.php?id=1734
TheSecretTeslaMotorsMasterPlan:http://www.teslamotors.com/blog2/?p=8accessed12/05/2009

otherhandaremoreinterestedintheoverallcostofownership.Teslathereforehastoensure
thatitscoststructureandvaluepropositionarecompetitivewhencomparedwiththelowcost
manufacturers.Inaddition,ithastosustainthereturnsonshareholdersinvestedcapital,asit
movesinlessprofitablesegmentsofthemarket.
2. The company currently manufactures the Roadster Energy storage system for approximately
$28,00010;11. Assuming a weak Moores law (an 8% year on year improvement in battery
technology), the battery would cost approximately $20,000, when the Model S is launched in
2011 (approximately 1/3 of the cost of the car). In order to launch a mass market car (Cost:
$40,000,Range160miles&Batterycostsremain27%ofcarcosts),batterycostwouldhaveto
halfinthenext fiveyears. Teslaisnotabatterycompany; Itthereforehastorely onthefact
thatinaLithiumIonbattery,thatstoresthesameenergyatthehalfthecost,wouldbewidely
available (as a commodity).Therefore the company can be subject to significant hold up costs
fromaproprietarybatterymanufacturer.

MarketFocus
Changing consumer preferences (preference towards greener and more fuel efficient alternatives),
increased regulations (CAF, ZEV Mandates and EU CO2 regulation) and concerns over rising gasoline
priceshassteadilychangingthefaceofautomobileindustryindevelopedmarketsacrosstheworld.In
additiongovernments,concernedoverglobalwarmingandnationalsecurity,areincentivizingtheshift
oftransportationtomoreenergyefficientalternatives.
In order to kick start the electrical vehicle market, the United States government has announced $25
billionindirectloansundertheAdvancedTechnologyVehiclesManufacturingLoanProgram.Inaddition
theUSDepartmentofEnergyisalsoofferingapproximately$2.4 billionundertheAmericanRecovery
and Reinvestment Act funds to support research and development of highefficiency batteries and
components needed for electric vehicles. Countries across the developed world have set out similar
packages for the automobile sector in their countries. Tesla plans to leverage this government and
publicsupporttosellitsproductsinthedevelopedmarketsofNorthAmericaandEurope.
Thecompanysexpertiseinelectricpropulsiongivesitadistinctcompetitiveedgeoverincumbentauto
manufacturers(withacorecompetencyininternalcombustionengines)currentlystrugglingwithother
liabilitiessuchaslabor,pensiondebt.Howeverwitheachofthese(ExhibitfromThinkcase)incumbents
announcing investments in electric cars, the US car market should soon heat up with a variety of
differentoptions.
In addition even though an average US consumer might travel approximately 40 miles a day12, he
expects to own a car that can travel long distances if needed.13 Without the infrastructure to replace

10

CalculationReferencedinExhibit2aandExhibit2b
CostcalculatedareinlinewithaThinkEquityLLCstudyThinkAdvancedMaterials:BatteryTechnologythat
estimatesthecurrentpriceofLithiumIonbatteriestobearound$525/kWhandthatbatteriesareapproximately
27%ofavehiclestotalcost.
12
ElectricPowertrains:OpportunitiesandChallengesintheU.S.LightDutyVehiclesFleet:Kromerand
Heywood,SloanAutomotiveLaboratoryMay2007
11

batterypacksinroute,itwouldbeharderforTeslatoincitecustomerstoswitchovertoabatteryfueled
vehiclewithlimitedrange.ThereforeTeslamightfindithardertogaintractionwithconsumersasafirst
car.

HumanResourcesAdvantage
Tesla Motors has successfully integrated Silicon Valleys model of entrepreneurship engineering and
innovation and Detroits automotive engineering expertise. The company is build around passionate,
innovativeandknowledgeablepeoplethatincludesserialentrepreneursandseasonedexecutivesfrom
theBig3manufacturersinDetroit.
ThiscombinationnotonlyallowsTeslatolearnandinnovatefaster,butalsoallowsittomakeradical
betsandrevolutionarychangesintheproductarchitecture;somethingthatmajormanufacturersmight
havebeenslowtoadopt.Infactitiswidelyacceptedthatthecompanyhasplayedaninstrumentalrole
in reviving and speeding up the idea of electric cars. Bob Lutz, the vicechairman of G.M. in fact
acknowledgedthat,AllthegeniuseshereatGeneralMotorskeptsayinglithiumiontechnologyisten
years away, and Toyota agrees with usand, boom, along comes Tesla. So I said, How come some
teenylittleCaliforniastartuprunbyguyswhoknownothingaboutthecarbusinesscandothis,andwe
cant?Thatwasthecrowbarthathelpedbreakupthelogjam.14
Even though Tesla has built a core of really good people, attracting the right people is going to be a
challenge that it will face in the coming years. This is because there with the globalization of the car
industryandanincreasingnumberofpartsgettingmanufacturedandengineeredoutsidetheUS,good
production and engineering expertise is both expensive and scarce in the US. This problem has been
compounded by the number of people who have lost jobs in the current automobile crisis and have
switchedovertootherlessriskysectors.

Brand
The companys no compromise car has created a successful buzz for the Tesla brand. In 2009 the
company was selected by Advertising Age as an Americas Hottest Brand Case Study15. In addition
Tesla has consciously chosen to position itself as a brand that is (or will be) engineered, designed,
developedandassembledintheUS.Apartfromthefavorablecustomerperception(creatingmorejobs
in the US, better quality of US made goods) and reduced coordination costs this decision gives the
company the capability to respond quickly to its customers andreaddress any early issues that might
cropupinitsinitialmodels.
This decision to be an American company reduces its overall costs of operation. The company has
utilizedtheregulatoryenvironmentthatincentivizesjobcreationwithintheUSthroughenterprisezone
credits,constructionincentivesandloanguarantees.

13

ibid
TheRacefortheElectricCar:http://www.cbsnews.com/video/watch/?id=4502691naccessed12/05/2009
15
AdvertisingAgehttp://adage.com/article?article_id=140487accessed11/23/2009
14

TechnologyandInnovation
Tesla is the first car manufacturer to develop, acquire and integrate proprietary electric propulsion
technologies to make a highway ready electric car. According to Darryl Siry Teslas VP of Sales and
Marketing:
"ThethingsthatarethecorecompetencyofTeslalikethedrivetrainarethingsweholdclosely.The
battery pack, our power electronics, the mechanism to turnenergyinto motion, and the motor are
uniquetoTesla.That'swherethepatentsare."16
The company has put itself in a position from where it can leverage its patented technologies, its
understanding of electric propulsion and its ability to successful integrate all of these technologies to
continuouslydefinethemarketandstayaheadofcompetition.
Howeverinordertomaintainitsleadoverothercarmanufacturersandensurethatitremainsrelevant
indefiningthestandardsinthisspace,thecompanyneedstorapidlyscaleup.Thiswouldensurethat
incumbent automakers and battery manufacturers do not have ample time to partner, scale up and
define the electric car market of the future. Tesla choice to be an independent car manufacturer,
howeverhaslimiteditssizeandscale.

ScopeofOperations
Growingglobalization,theneedformanufacturingflexibilityandincreasedpressureonprofitabilityhas
made most car manufacturers outsource parts of their manufacturing operations to specialized
suppliersaroundtheworld.Thismodelallowedcarmanufacturerstoincreasesflexibilityofoperations,
reducecostsandimprovesprofitabilitybyfocusingondesignandassemblypartsofthebusinessthat
commandhighermargins.
TeslaMotorshasalsobeenselectiveintheassetsthatitwantstoown.Givenitslimitedresources,and
scale of production the company has follow a modularized approach. Therefore the company has
outsourcedmostofthecarpartsthatitthinksarecommoditiesornotcriticaltotheproductionofan
electric car. Exhibit 3 shows the current manufacturing setup at Tesla, where even the glider was
supplied by Lotus, where as critical component such as a power train (motor, battery pack and high
voltagecables)wasmanufacturedinhouse.Exhibit4showstheplannedsetupforModelS(theplanned
sedanofferingbyTesla)wheretheyintendtoinsourcethegliderasitiscriticalpartoftheirbusiness.
Teslasmodularapproachhasallowedittoscalefasteranddevelopcompetenciesinelectricpropulsion.
However manufacturing a car also requires a complementary set of assets (rest of the car parts and
technology).Astheownerofthesecomplementaryassets(incumbentcarmanufacturers)stillexercise
marketpowerandhavetheincentivetoreengineerorcopyTeslasinnovation,itistoughforTeslato
emerge as aneventualwinner.Thecompanyis thereforerightfullyfocusing on developingvehiclesin
partnershipwithDaimler.

16

http://www.americanwaymag.com/teslamotorsteslaroadsterelectriccarmartineberhard1accessedon
11/24/2009

ProcessTechnology
Asinmostmanufacturingintensiveprocessesindevelopedcountries,carmanufacturershaveincreased
reliedonreducingcostoverheadsbyincreasingtheamountofautomationintheirplants.Robotshave
increasingly replaced human beings in the automanufacturing industry. This has had significant
advantagessuchamoreconsistentproduct,lowerlaborcosts (expensiveindeveloped countries)and
eliminationofproblemsassociatedwiththehumanelement(injuries,sickdays,strikes).
Tesla CEO Elon Musk has always been maintained that Tesla would firmly remain a Californian
enterprise.17ThecompanyrecentlyannouncedthatitexpectstostartModelSproductioninlate2011
inastateoftheartassemblyplantemployingabout1,000workers18.Theplantwouldbe$365million
ofthe$465millionloanthatTeslahasreceivedfromtheUSDepartmentofEnergyandplanstoproduce
20,000ModelSsedansperyear19.Abackoftheenvelopecalculation(Carsmanufacturedperpersonper
year=20)showsthateventhoughTeslasplantmaynotbeasautomatedas(say)Toyotas,itwillstill
relyonasignificantlevelofautomation20.
Automation in general would reduce flexibility and increases upfront capital costs required by using
expensivesinglepurpose,standardmachines.Howevergiventheoverallcostsinvolvedinsettingupa
labor intensive process (either inside or outside the US) and Teslas desire to protect its copyright
technologies,thismightbethebestchoiceforthecompany.

ProductDevelopmentProcess
Theprocessofdevelopingacarisnotacasualendeavor.Acarisfirstconceptualizedbyunderstanding
the strategic goals of the business and requirements of the market. The subsequent physical
development of the car involves cycles of designing, prototyping and testing after which the cars
productionprocessisfinalized(assemblyandplantdesign)21.Theprocessofdesigning,developingacar
isthereforeanextensiveandexpensiveexercise.
EventhoughTeslasisastartup,thecompanysproductdevelopmentprocessadaptedfromthesame
process used by the big boys in Detroit, develop(s) prototype vehicles at great expense and then
proceedtosmashtheminoursafety22.HoweverTeslaalsorecognizedthatitscorecompetencyisnot
in overall automotive manufacturing. The company therefore consciously chose to sourcemany of its

17

http://green.venturebeat.com/2009/10/30/californiaanchorsteslawith288mtax
break/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+Venturebeat+(VentureBeat)
accessed11/23/2009
18
TeslagetsloanfromUSDOEhttp://www.teslamotors.com/media/press_room.php?id=1539accessed
11/23/2009
19
TeslaModelSSedanBreaksCover:NYTimeshttp://wheels.blogs.nytimes.com/2009/03/26/teslamodels
electricsedanbreakscover/accessed11/23/2009
20
BYDincomparisonusesonly4employeespercar.
21
CourseSlides:IndustrialEcologyofAutomobilehttp://msl1.mit.edu/TPP12399/Session01/lecture01c.htm
accessed11/23/2009
22
MarketingintheFastLane:TeslaMotorsandtheElectricCar,StanfordTechnologyVenturesProgram(STVP)
2007003

technologies from entrepreneurial companies23 while developing, manufacturing and testing other
criticalparts(suchasthepowertrain)inhouse.
AsstatedbeforeTeslasproductdevelopmentprocessishowevercriticallydependentonitsemployees
andthecapabilitiestheybringtothetable.Teslaschallengeistocontinuouslybeabletodevelopand
source these technologies by identifying and infusing new talent while keep its research and
developmentcostsatamanageablelevel.

BYDAuto
"It's our company's longterm target, to be China's No. 1 automaker by 2015 and to be the world's
leadingcarmakerby2025,"24
JasmineHuang,SeniorManager,PR,BYDMotors
BYDwasfoundedin1995andisoneoftheworldslargestmanufacturersofNiCd,NiMHandLithiumIon
Batteries.Thecompanyssuccessislargelyattributedtotheentrepreneurialspiritandbusinessacumen
of its founder Wang Chuanfu. The company began as a manufacturer of NiCd batteries once Wang
noticedthattheJapaneseweremovingontohighervalueNiMHandLiIonBatteriesandtherewasan
opportunityforalowcostproducerinthismarket.
ThecompanywentpublicinJuly2002,withtheintentiontobecometheworldssecondlargestbattery
maker. However BYD did realize that it was slowly being outdone in the battery business by other
Chinesemanufacturerswhoweremakingthemarketmorecompetitive.Thecompanythereforemade
an opportunistic expansion into automobiles, (a rapidly growing market in China) by acquiring the
Shaanxi Qinchuan Auto Company Limited (Qinchuan Auto). The company sold approximately 100,000
carsinitsfirst20monthsofproduction. In2008,thecompanyannouncedtheF0,asubcompact(A0
class)car,andplansforfivenewmodelsin2009,includingasubcompactcar,theF4,anMPVversionof
theM6,ahybridcar,theF6DMandafullyelectriccar,theE6.25

ProductFocus
Eventhoughthelowerpurchasingpowerofdomesticcustomersandnogovernmentsubsidiesmaylimit
thesalesofhybridsandelectricvehiclestoindividualconsumersinChina,BYDproductsareaimedat
themasssegmentofthedevelopedmarketintheUS.Thecompanyhasalreadystartedmassproducing
(andselling)theworldfirstpluginhybrid(F3DM)forapriceof$2200026andplanstointroduceanall
electric vehicle (the e6) at a price point of $40000. Compared to the F3DM, GMs Volt is priced at
$40000.

23

MarketingintheFastLane:TeslaMotorsandtheElectricCar,STVP2007003
http://wheels.blogs.nytimes.com/tag/byd/accessed11/20/09
25
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
26
IsBYDsElectricCarReadyforPrimeTime?:NYTimesaccessedon11/23/2009
http://blogs.wsj.com/chinarealtime/2009/10/27/isbydselectriccarreadyforprimetime/
24

The decision to offer a low cost product in a price sensitive market may have disruptive potential.
HoweveranumberofexpertshavequestionedBYDsabilitytoproduceacaratsuchalowpricepoint.
InadditioninordertosellitscarsintheUSmarketBYDsproductsalsoneedtopassstringentreliability
andsafetystandardswhichmightmakeitdifficultforthecompanytoselltheelectriccaratthesame
pricepoint27

MarketFocusandOpportunity
China is all set to become the largest automobile market in the coming years. The rapid increase in
purchasingpowerhastransformedacountryonceknownforbicyclestoacountrythatcouldaccount
for 30% of the worlds automobiles by 203028. The opportunities for car manufacturers are therefore
huge. However unless Chinas automobile market transitions from internal combustion engines to a
more fuel efficient alternative, they could be generating as much as 20% of global passenger vehicle
emissions.
TheChinesegovernment,muchlikeitsUScounterpartisconcernedoveritsincreaseddependenceon
foreign oil and rising greenhouse gas emissions in the future. The government, central to Chinas
planned economy believes that kick starting the electric vehicles industry will help it fix a majority of
these problems in the long term. In addition China also sees this as an opportunity to give domestic
manufacturers the opportunity to catch up and exceed developed countries 29 in a potentially big
future industry. The Chinese government is therefore running a $2.9 billion incentive program to
promoteelectricvehicleforpublicandservicesector(taxifleets).Theincentiveprogramishowevernot
beenextendedtoprivatebuyersinChina.
ChinaisalsoanattractivemarketforBYDbecauseanumberofitscustomerswouldbefirsttimeowners
of cars. With consumption habits not yet formed in favor of gasoline powered cars and lower
commuting distances, it is easier for an electric vehicle to become a part of the mass automobile
market. However the lower purchasing power of consumers in China means that electric vehicles are
dependentofgovernmentincentives.BYDisthereforecurrentlyfocusedonsellingitsallelectricmodel
e6tolocalgovernmentsandtaxifleets.Additionallythecompanyfacesincreasedcompetitionfroma
dozendomesticcompetitors,manyofthemjointventureswithglobalautomakers.
IncontrastthesalespriceofthecarmakesitanattractivepurchaseinthedevelopedmarketintheUS.
ThecompanyhasthereforeplannedtoentertheUScarmarketbytheendof2010.Howeverbeingthe
first Chinese automobile manufacturer in China, BYD sees the public perceptions (with regards to the
qualityofitsproduct)asthebiggestchallengeinitsfutureintheUnitedStates30.

27

AcaseinpointistheTataNanowhichsellsatadifferentpricepointinIndiaandEuropeduetostrictersafety
standardsintheUS.
28
Chinachargesup:TheElectricVehicleOpportunity,Oct.2008:McKinsey&Companyaccessed11/23/2009
29
QuotedChinasTechnologyMinisterWanGang:WallStreetJournalaccessed11/24/2009
http://online.wsj.com/article/SB10001424052748704500604574485373613787310.html
30
BasedonconversationwithMr.PatrickDuan,RegionalManager,BYDAuto,NorthAmerica.

HumanResourcesAdvantage
It is typical for observers and analysts to think that BYD can deploy armies of scientists, workers and
engineerstosolveproblemsorinnovateatafractionofthelaborcostsinthewest.Itisaknownfact
that labor inChina costs lesserthan labor in more developed economies. Anengineeringgraduate or
freshoutofschoolorscientistsgetspaidbetween3,000(US$435)and6,000(US$870)permonth31,
aworkerapproximately1500permonth.
However, BYD labor intensive approach also comes with an employee management problem of
immense magnitude. The company currently employs 130,00032 people and plans to expand and
eventually employ between 300,000 to 400,000 employees and 30,000 engineers. In addition being a
society in flux, most of Chinas young population come and work for BYD for some years before
returninghome.Thismeansthatinagivenyearapproximately1020%ofBYDsworkforceisnew33.
BYDs Human Resource processes and systems have however allowed it to ensure standardized and
disciplinedthinkingwithinitsworkforce.Thecompanyfollowsasystematictrainingregime,whichstarts
witha2weekintroductorytraining,followedbyabusinessunitspecifictrainingandavarietyofannual
courses.Everyemployeeisrequiredtocompleteaminimumnumberofcoursesannually34.Discipline,a
keycomponentoftrainingatBYD,combinedwithsimplermonotonoustasksensuresthatvariabilityin
thetasksbeingperformedisminimized.Inadditionthecompanyhasalsoinvestedinsocialwelfareof
its employees by providing free access to schools, vocational college and companywide sports and
recreationactivities.
WangChuanfuisquotedassaying:
"BYD not only builds products, it is also good at building people, converting university graduates into
engineeringteams.BYDrecruitsseveralthousandsofgraduates,becauseweknowthemanufacturing
ofcarsstartswithmanufacturingoftalent,thenequipment,thencars."(Tian,2009)

ResearchandDevelopment
"SometimesforeignersthinkeveryChinesecompanyisstealingtechnologyanddesign,"
LuoHongbin,aseniorBYDengineer.35
Contrary to popular perceptions of Chinese companies, BYD has invested heavily in R&D facilities in
order to encourage innovation and experimentation. The companys management believes that the

31

BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
32
http://investing.businessweek.com/businessweek/research/stocks/snapshot/snapshot.asp?ric=1211.HK
accessed11/26/2009
33
BYDCompanyLtd:HarvardBusinessSchoolCase9606139,ProfessorsRobertSHuckmanandAlanD
MacCormack
34
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
35
TechnologyLevelsPlayingFieldinRacetoMarketElectricCaronline.wsj.comaccessedon11/23/2009

companyscompetitiveadvantageresidesinthetechnologyitdevelops.36BYDhadbeguninvestinglarge
amounts of money in research as it realized that its low cost advantage was being undercut by
competitionfromotherChinesemanufacturers.Thecompanynowinvestsaround2%ofitsrevenuesin
bothproductandprocessresearch.37
As shown in Exhibit 5 BYD has build huge team of top level scientists and engineers who in 2007
registeredaround260patents,bringingthetotalnumberofpatentsregisteredbythecompanytomore
than 136038. These scientists stay on the BYD campus and are given privileges and benefits that are
much above the general standard in China. Huckman and McCormack note that the turnover rate
amongR&DscientistsatBYDwaslessthan2%.
The company also understands its lack of experience in developing vehicles and is investing in
automobile design and research. It recently opened an Automobile Research Institute and plans to
spend $219.71 million to build Chinas largest vehicle test center.39 In addition the company has also
signed a memorandum of agreementwith Volkswagen and entered into a joint venture with Wonder
Autotechnology.
Protectingits intellectualproperty remainsoneofthebiggestdrawbacks incarryingout researchand
development in China. BYD itself has not been shy of using proprietary technologies and patented
products to develop knock off version of cars and batteries. However it now faces the same risks of
otherlowcostcompetitorscopyingitsproductsandprocesses.

ScopeofOperations
BYD, unlike most car manufacturers has a strong tendency towards vertical integration. The company
whichpreviouslyintegrateditsbatterybusinessbelievesitleadstocostsavings,andhelpscontrolcosts.
Wang and Kimble40 state that the boundaries of the company have now expanded to take in what
wouldnormallybetherealmofsubcontractors.BYD'sdifferentbusinessunitsproduceatleast80%of
the components for its own vehicles. In the Pingshan plant in Shenzhen, some the components
traditionallyoutsourcedtoothercarmakersareproducedinternallyandthereisevenadedicatedpower
stationtoensureastablesupplyofelectricity.Giventhefactthattheelectriccariscurrentlyasmall
partofBYDscarbusiness,averticallyintegratedapproachallowsBYDtoreducesetupandtransaction
costs,andenhanceitscommunicationandcoordination;measuresmuchneededtooperateinaprice
sensitivemarketsuchasChina.
OneofthereasonsthatmakethatmakesaverticallyintegratedarchitectureworkforBYDistherapidly
growing, and evolving automobile industry in China. In addition the ability to own both of the critical

36

ConversationwithRegionalManagerMarketing,NorthAmerica,PatrickDuan
BYDCompanyLtd:HarvardBusinessSchoolCase9606139,ProfessorsRobertSHuckmanandAlanDMac
Cormack
38
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
39
ChinaDailyhttp://www.chinadaily.com.cn/bizchina/200911/17/content_8983146.htmaccessed11/26/2009
40
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
37

piecesinanEVsvaluechain(electricalpropulsionandautomobilemanufacturing)helpsBYDlearnand
innovate faster. Howeveras the industry matures the architecture of the industry will be increasingly
modular(asinthecaseofLiIonbatteriesandgasolinepoweredautomobiles).InsuchacaseBYDwillbe
stuckwithassetsthatwouldcreateacompetitivedisadvantageforthefirm.

ProcessTechnology
BYD has historically been able to convert capital intensive production processes into labor intensive
processesbysuccessfullymanaginghumanvariabilitybyusingatraditionalsingleskilllabourforce41.
HuckmanandMacCormack42whoobservedBYDbatterybusinessstatedthattwothirdsofthis(R&D)
spendingfocusedonimprovingthecompanysmanufacturingprocess.Thecompanyhasleveragedthis
approach to replace automated processes with labor intensive processes. This approach that Wang
ChuanFu has described as labour plus jigs equals automation43 allows BYDs Pingshan Automobile
manufacturingcomplextoemploy50,000peopletoproduce200,000carsperyear44(Carmanufactured
perpersonperyear=4).
The presentprocesstechnology allows BYD touse its human resource advantageto produce cheaper
goods.Howeverasinthecaseofautomationthemovetogoinforlaborintensiveprocessesistobe
madejudiciously.Inordertoensureconsistentproductsthatmeetworldstandards(whichinsomecase
aremorestringentthanChinesestandards)thecompanyhastoensurethattheproductionprocessis
therightmixofautomationandlabor.

ProductDevelopmentProcess
Being a conglomerate, BYD has been able to invest heavily in an inhouse three tiered Research and
Developmentstructure.AsshowninExhibit5theCentralResearchLabisresponsibleforbasicresearch,
the process of product development takes place at the Automobile Research Development Center (in
Shanghai)andtheShenzenAutoResearchInstituteandatthemanufacturingplantsfortechnicalissues
related to the production line. The two centers employee approximately 8000 employees that are
focusedonproductdevelopment.45
ThereishoweveracriticaltwisttotheproductdevelopmentprocessatBYD.Thecompanyinthepast
hasreliedheavilyonreverseengineeringitsproductsfromsuccessfulmodelofthewest.Eventhough
theyhadbeenabletotakeadvantageofthelaxenforcementofcopyrightregulationsinthepast,the
company now follows a proactive approach to avoid the risks of infringing on Intellectual Property.
WangandKimblestatethatEachnewcardevelopmentprojectinvolvesateamoflawyersspecialized
inIPRwhoprovidedetailsofthestatusofanypatentregistrationforatechnologybeinginvestigated.If

41

Lu,L.,&Leung,K.(2006).ChallengestoKMatHewlettPackardChina.KMReview,9(1),2023.
BYDCompanyLtd:HarvardBusinessSchoolCase9606139,ProfessorsRobertSHuckmanandAlanD
MacCormack
43
BYDCompanyLtd:HarvardBusinessSchoolCase9606139,ProfessorsRobertSHuckmanandAlanD
MacCormack
44
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
45
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
42

atechnology is patented, solutions involvingthemodification ofthat technologyaredevisedto avoid

theriskofanyIPRinfringements.Ifthetechnologyisnotpatented,itwillbecopieddirectly.46
WangChuanfumentionsinaninterview:"Foradevelopmentofnew(car)product,infact60%(ofthe
technology) comes from public literature (withoutpatents), 30% comes from samples, 5% comes from
raw materials, etc., and our own research only rests on around 5%. We widely use nonpatented
technology, and the integration of nonpatentedtechnology becomes our own innovation. We should
respectintellectualpropertyrights,butwecanalsoavoidtheusageofpatentedtechnology."47
This approach allows BYD to introduce new products faster into the marker without taking on the
technical and market risks that a car manufacturer in the US would have to undertake in order to
develop a new car. However by entering the US automobile market, BYD is also opening itself up to
patentinfringementandcopyrightviolationcases.

Conclusion
As an entrepreneurial venturethat aimed at evoking interest intheelectric vehicle, Tesla Motors has
alreadysucceeded.Howeveranexpensiveresearchanddevelopmentcombinedwithalackofresources
means that the company will scale up slowly. This will allow incumbents, with years of car
manufacturingexperience(andgovernmentbailoutmoney)todevelopthecapabilitiestheyrequireto
buildanelectriccar.ThereforeTeslacancontinuetogrowasanichepremiumcarproducerbutthebest
waytoexpandthecompanywouldbetoeitherlicenseitselectricpropulsiontechnologytoamajorcar
manufacturerorgrowitselfintoanattractiveacquisitiontarget.
BYD in contrast has the resources, technology and the expertise to scale up into a bigger electric car
manufacturer.Howeveritwouldbeamistakeforittoassumethatitscurrenttechnicalleadershipwill
make it the car manufacturer of the future. The company is yet to establish its credentials as a car
manufacturer. It has to develop capabilities in ensuring performance, safety, comfort, service for its
customers. Even in the Chinese market, the entry of world class car manufacturers will change the
attributesthatcarswill compete on.Howeverthe companyis makingtherightmovesbyinvestingin
developingitscompetenciesasacarmanufactureranddevelopingitsbrandbothintheChinaandthe
US.Thecompanyhastopotentialtodisrupttheautoindustrywithitsrelativelyinexpensiveproducts.

46

BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble
47
Xing,W.(2009).:[TheonlywayforBYDisinnovationandR&D].China
BusinessUpdateRetrievedFebruary14,2009,fromhttp://tianyongqiu.blog.sohu.com/108151725.html(in
Chinese)accessedfromBettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(under
print)HuaWang&ChrisKimble

Appendix
Exhibit1:TeslaGrowthPlan48

Exhibit:2aEstimatedBatteryCostsyearonyear
Method:ItookthecurrentquotedcostofTesla'selectricstoragesystem.Iassumedan8%improvement
inperformanceofthesystem.Thismeansthatasystemthatcosts28000nowcost8%lesserYoYforthe
sameperformance.Thereforeasystemwiththesameperformancewillcostapproximately17000in
2016.Ifwediscountthisamountby5%to2009,thecostoftheESSinpresenttermsis$12,000.Thisis
exactlythesameasTesla'squotedamount.
0
2009

1
2010

2
2011

3
2012

4
2013

5
2014

6
2015

7
2016

$ 12,000 $ 12,600 $ 13,230 $ 13,892 $

14,586 $ 15,315 $ 16,081 $ 16,885

Battery cost for same performance $ 28,938 $ 26,795 $ 24,810 $ 22,972 $

21,270 $ 19,695 $ 18,236 $ 16,885

$ 546.01 $ 505.56 $ 468.11 $ 433.44 $

401.33 $ 371.60 $ 344.08 $ 318.59

Payout to Tesla for ESS*

*based on cost of replacement

Per KWh costs

Assumptions:1.Teslascostofcapital=5%.2.YoYimprovementinbatterytechnology8%

48

CreatingAlternativeAutomotiveProductsinaRapidlyChangingIndustry:presentationbyMikeDonoughe

Exhibit2b:EstimatedBreakupofTeslaMotorsCarCosts

Sales Price
Gross Profit (Assumed)*
Costs
Battery Costs
Car Costs Excluding Battery

% of
% of
Roadster Sales Model S Sales
109,000
57000
54500 50%
17100 30%
54,500
39900
28938 27%
19661 32%
25,562
20239

Mass Mkt % of
Car
Sales
40,000
$ 7,940.60 20%
$ 32,059
$ 14,451 36%
$ 17,608

Exhibit3:TeslasCurrentScopeofOperations(inblue)49

49

PersonalconversationwithMr.RyanPopple,DirectorFinance,TeslaMotors

Exhibit4:TeslasProposedScopeofOperations(inblue)50

Exhibit5:ResearchandDevelopmentOrganizationatBYD51

CentralResearchLab
(Shenzhen)
Telecom&Electronic
ResearchInstitute
(Shenzhen)

AutoResearchInstitute
(Shenzhen,Feb.2008)

AutoResearchInstitute
(Shanghai,Apr.2003)

ShenzhenPlant

Xianplant

BeijingPlant

F6,engineand
components

F3and
components

Mouldsand
components

50

PersonalconversationwithMr.RyanPopple,DirectorFinance,TeslaMotors
BettingonChineseElectricCars?AnalyzingBYD'sCapacityforInnovation.(underprint)HuaWang&Chris
Kimble

51