Is Chinese Company Building Automotive Dreams?

Or Are BYD's Auto Show Displays Just Vaporware?

Walk into the main door of Cobo Hall in Detroit this week to take in the North American International Auto Show, walk past the Mercedes-Benz display, and a few yards away, next to the Smart, you'll see it. Three giant red letters over the booth spell out the acronym BYD, which stands for "Build Your Dreams." Most visitors have likely never heard of this offbeat automotive company, but it has been the fastest growing carmaker in China. In fact, the BYD F3 is China's top selling vehicle.

While it may be setting China ablaze, BYD has been something of an enigma here in the U.S. It has attracted investment from Warren Buffet and signed a joint venture agreement with Mercedes-Benz to develop electric vehicles, yet after three years of displaying cars at the Detroit auto show, those cars have yet to materialize on our shores. And BYD is not yet sending shivers down the spine of U.S. auto executives, despite a widespread fear that a Chinese invasion of cheap cars will be greeted with the same enthusiasm Americans have had for Chinese-made TV's, refrigerators and denim jeans.

One BYD executive admits that it is not only going to be an arduous slog for BYD to establish a beachhead in the U.S., but he says the company is in no hurry. "China remains BYD's number-one priority," says Mike Austin, vice president of BYD's U.S. division.

Batteries First, Cars Second

Austin is a former Motorola executive tasked with handling communications and strategy for BYD in the U.S. BYD is first and foremost a supplier of batteries for cellphones and other small appliances, and a major supplier to Motorola. Its focus in the car business here will be selling hybrid and electric vehicles that will rely on its battery expertise, though it does sell internal combustion vehicles in China, like the F3, while it ramps up the battery-powered models.

That BYD is primarily a battery company should hardly hold it back in the auto business. After all, Honda started out life as a motor company. In time, Honda decided it wanted to build the things its motors went into. BYD is following a similar business path.

But that may be where the similarity with Honda ends. Austin says the company will start out with just five dealers by the first quarter of 2012 and then ramp up to 20. These dealers have not yet been identified. And the company is looking to have them sell BYD-branded LED light-bulbs, solar panels and other energy related products first, and then carry the vehicles as part of a BYD portfolio. "Screening dealers who want to buy into our business model takes time," says Austin.

Having a vision to reinvent how cars are sold is admirable, but seldom successful, especially when companies try to bypass traditional dealerships. Surveys perennially show that car dealerships are among the most dreaded places a consumer faces, but Americans are used to them. BYD's plans to sell vehicles in an unorthodox retail setting likely means if and when the vehicles finally arrive, acceptance and sales growth will be slow.

The other obstacle the company faces is that it plans to sell only hybrid and electric vehicles in the U.S. Toyota, Ford, Nissan and others are already well established with products in this "green" space and will only be that much more entrenched by the time BYD arrives. "We know it's going to be very difficult going up against much more familiar and trusted names," says Austin.

One big advantage BYD executives believes it has over its more established rivals is cost. As a battery producer itself, BYD can set its own price for the battery, the most expensive part of any electric car. "We are the only vertically integrated automaker with battery technology, and that will give us a huge advantage in establishing the market," says Austin.

While China is a growing market with a burgeoning middle class to keep automakers busy, Austin says that a successful launch in the U.S. will help its business at home. "We believe we will be more successful in China if consumers there know we have been successful here," he says.

Goal: Global Domination

The company's ambitions are lofty. A year ago, at the 2010 NAIAS, BYD announced its intention to be China's biggest automaker by 2015 and the biggest automaker in the world by 2025 -- this from a company that only formed its car business in 2003.

The car that BYD plans to launch first to consumers is the five passenger E6 electric car. Slightly smaller than a Hyundai Sonata, it has a top speed of 140 km/h (86 mph) and can travel 200 miles on one charge of its batteries, the automaker claims. After the E6 will come the S6DM dual-mode crossover, a hybrid which features both electric and gasoline drivetrains.

The BYD E6 has been sold to government and taxi fleets in China. The sedan would retail in the United States at an MSRP potentially as low as $35,000. The S6DM's dual-mode system gives it a range of 38 miles on battery power alone or 310 miles when using gasoline as a range extender, akin to the Chevy Volt. The vehicle uses the internal combustion engine to power the front wheels while the electric motor moves the rear wheels.

BYD placed 10 units of another model, the F3DM into fleet testing in December at the Housing Authority of the City of Los Angeles. The company plans to complete all crash testing for both models needed to pass U.S. safety tests.

BYD has ambitions, but as any automaker can attest, getting consumers to buy unknown brands is not easy, especially when it comes to automobiles. "It's an interesting technology company, but they haven't shown anyone they understand the U.S. market and the way vehicles are distributed and sold," says auto industry consultant Jim Hall of Group 2953 Analytics.

"What is most interesting about the company so far is who has invested in them -- Warren Buffett and Mercedes-Benz," says Arnold Gray, an engineer and auto industry consultant on alternative drivetrains such as electric and hydrogen. "I don't doubt they will make a splash in the U.S., but I'm doubtful it will be a wave."

Reality Bites

Even at home, BYD is not on an express train to success. Profits and sales took a dive last year even as the rest of the Chinese auto industry was way up. BYD sold 519,806 vehicles last year, falling well short of its target of 600,000. The company blamed the fact that it missed being included in a state catalog of subsidies until October. Nevertheless, investors have been dumping the shares of BYD, sending the stock down 40 percent over the past year. Analysts expect BYD sales in China to grow 15 to 20 percent in 2011 -- respectable numbers, but hardly the rate the company requires to meet its own sales expectations.

"Building and selling cars is a tough, complicated business, and BYD has only been in it for a few years," notes Gray. "If it was easy, everyone would do it, and I suspect BYD will find it tougher still to achieve its goals than it ever imagined, especially outside of China."

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