The Truth about BYD

(Caixin Online) Auto technician Li Xuelin never dreamed of dismantling his boss' Mercedes Benz S300. But one day, that's exactly what the boss ordered Li and a half-dozen colleagues to do.

It wasn't easy. At first, the technicians just stood beside the shiny black car, daring not to touch it. But eventually their boss and BYD CEO Wang Chuanfu broke the stalemate.

Wang stepped up to the car and, with sweat on his brow, gouged the paint job with a car key. "Now you can start," he said.

Li's team disassembled the car, piece by piece, to reverse engineer the luxury car's electronic control system. It was a painstaking but money-saving project that's now become a trademark for Wang and BYD, a highly successful Chinese manufacturer that's proud to be a master copyist.

Since its launch in 1995, BYD has expanded from OEM battery manufacturing into various unrelated fields including IT products, autos and new energy. Li's experience with reverse engineering Wang's Benz has been repeated at many levels by BYD's army of about 30,000 engineers and technicians.

By reverse engineering products made by others, BYD pushed its way into manufacturing production, eventually expanding upstream and downstream in chosen fields to build a profitable, vertically integrated enterprise. BYD won big wherever its elbows went.

BYD's success as a revolutionary copyist has drawn mixed reactions, but of course business champions seldom pay heed to grumblings from those they defeat. When carmaking, for example, BYD found that reverse engineering can cut the cost of a new vehicle by more than one-third.

Last May, the city of Xi'an started switching its taxi fleet to the BYD F3 car, which at first glance could be confused with a Toyota Corolla. Indeed, the F3 is an inside-outside copy of the Japanese manufacturer's small car but costs only half as much.

BYD isn't shy about its business practices. In the F3's introductory period, the company marketing department touted Corolla similarities as a sales point. At some service centers in the city of Zhengzhou, F3 owners could spend a few hundred yuan to have the exterior badge swapped with a Toyota logo. And last year, after just five years in production, annual F3 sales reached 300,000 units, making it one of China's best-selling cars.

To develop good cars in the shortest time possible, BYD spends tens of millions of yuan every year buying and then dismantling the newest models built by manufacturers around the world.

That's also how Wang set up the company's first battery production line. In those early years, a fully automated Ni-Cd battery production line from Sanyo cost tens of millions of yuan, so Wang decided to make one himself. He reverse-engineered the setup for an identical production line that cost only about 1 million yuan.

Wang decided to move into autos in 2002, and the following
January his company bought a 77 percent stake in Shaanxi's Qinchuan Auto Co. "A car shouldn't cost so much," he told his investors at the time, before revealing that he'd already dissected a large number of motor vehicles as part of his imitation quest.

Copying was in Wang's blood. After a 2003 visit to BYD's Songjiang laboratory in Shanghai, for example, a former Chery Auto expert noted that he saw only two pieces of lab equipment that had been imported; the rest were Chinese-made imitations of foreign equipment.

Rather than waste effort creating new models for the sake of variety, a limited number of resources are spent on developing key products. That's the company's focus. As a brazen market player, BYD picks best-selling products and blatantly copies them, head to toe.

The company also works to rigidly control costs and quality, and learns by doing. "BYD's excellent quality imitation cars are tied to the fact that the company has accumulated experience in strict product control from its earlier practices in batteries and the IT sector," the Chery source said.

"Maybe it's right. They very well may become China's flagship auto manufacturer."

BYD delights and frightens suppliers at the same time. Many have discovered that BYD typically makes one or two serious, large orders of models, materials, or components but never orders again. That's because it just starts making whatever it bought.

This kind of vertical integration is a cost-cutting measure. And it worked well in the battery business. BYD overtook Japan's Sanyo in just a few years to become the world's largest supplier of Ni-Cd batteries, and eventually became the second largest provider of Li-Ion batteries.

BYD rose to a new extreme when it got into automotive manufacturing. The company went against an industry trend that started in the late 1990s, when the world's major auto manufacturers were turning to outsourcing to increase efficiency and lower risk.

Auto stamping offers a good example of BYD's strategy. The company obtained a complete stamping plant when it bought Qinchuan, eliminating the need for expensive outsource production of new car body parts, which can take two years and cost 200 million yuan. As a result, BYD started making new stamps in eight months for 80 million yuan, and now it's building a third stamping plant near Shenzhen.

"Why are our cars so cheap?" retorted a mid-level staffer at BYD. "Money is saved on every part, from engine to dashboard."

This do-it-yourself attitude stretches from manufacturing to distribution to sales. True, BYD's homemade company ads are a little rough around the edges. But it spends only about 20,000 yuan to build a lighted, outdoor ad which, if outsourced to an advertising agency, could cost more than 400,000 yuan.

When U.S. billionaire Warren Buffett invested in BYD in 2008, major transaction player and MidAmerican Energy Holdings CEO David L. Sokol visited BYD's Shenzhen battery workshop. He was surprised to discover employees sitting on rows of workbenches – like 18th century seamstresses – busy producing millions of batteries every year with simple tools and bare hands.

Indeed, from the start, low-cost labor has been integral to Wang's strategy for overtaking Japanese competitors. He uses people instead of machines wherever possible, supplementing humans only when necessary.

BYD is proud of this operational model which it weaves into unique staff recruiting practices. In addition to laborers, the company hires top engineering students, sometimes an entire university class immediately after graduation, as well as capable engineers and retirees with extensive experience.

In a 2003 television interview with official CCTV, Wang said he thought labor costs plus market advantages were keys to success for Chinese enterprises.

At the end of 2009, according to BYD's official statistics, the company had more than 140,000 employees, including more than 30,000 engineers.

After buying of Qinchuan, Wang brought his literally "hands on" manufacturing approach to the automotive sector. Now, even in usually high-tech areas such as painting, most jobs are done with manpower. BYD's F6 assembly line in Shenzhen, for example, employs a sizable staff of 220 people.

And the strategy began with batteries. Unlike box-shaped Li-Ion batteries made by many other companies, BYD's are column-shaped because they are made manually. Box-shaped batteries require automated equipment.

Today, a BYD battery line employs more than 100 people to do the same work handled by 50 people in China's most automated mobile phone battery-maker, Shenzhen's BAK Battery.

A former BYD employee said relying on manpower for mobile phone batteries results in a higher waste rate, usually between 20 and 30 percent. A similar, automated production line in Japan would have an elimination rate closer to 5 percent. But to Wang, the waste rate is completely acceptable because it can save hundreds of millions of yuan.

There's no doubt BYD's market share and sales are increasing. However, there are still debates about the sustainability of the company's magic, low-cost wand.

The debates haven't affected BYD's bank credit rating. A high-ranking official at the Shenzhen branch of China Development Bank said the bank isn't worried about BYD, noting other businesses such as telecom equipment giants ZTE and Huawei had shaky starts.

The bank has confidence in BYD because it gets substantial financial subsidies from the government for environmental protection programs. In addition, the company's Li-Ion battery business is profitable.

Intellectual property right is another sticky issue, since most BYD cars pay homage to other manufacturers' products.

BYD booths at car shows have been frequented by Toyota employees taking photos and collecting data. "It appears they're building a case," said an individual familiar with the international car market.

In the past, other Chinese automakers such as Chery and Great Wall have had to confront IPR charges and lost lawsuits in the United States and Europe, leading to export restrictions.

Wang has often stressed that his company imitates but does not plagiarize, arguing that South Korean and Japanese car manufacturers got their starts the same way.

In hopes of skirting patent issues, BYD has a team with hundreds of people who study global patent intricacies. At the same time, BYD has begun applying for large numbers of patents; it was the biggest applicant after Huawei and ZTC in Shenzhen last year.

BYD Sales Vice President Wang Jianjun says every automaker has to find its own path slowly. He notes that BYD is coming out with six, new models in 2010, all mid-range cars costing more than 100,000 yuan.

"You'll discover that these new makes don't resemble anyone else's models," he said. "We made them ourselves."

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