[Anjani Trivedi] Buffett’s China ride is losing power with investors

It’s backed by Warren Buffett’s Berkshire Hathaway, buoyed by China’s green energy policies and has a track record as a pioneer in the world’s largest car market. Surely, BYD has all the ingredients of a winning electric-car maker?

Yet investors aren’t convinced. The company’s Hong Kong-traded stock has fallen more than 30 percent in the past year and even declined after BYD posted a 290 percent jump in January electric-vehicles sales from a year earlier to 28,668 units. That outpaced a 149 percent increase in China’s sales of electric and hybrid cars.

To explain the disconnect, look at BYD’s dependence on government policies, a battery business that’s losing market share, and a failure to respond swiftly enough to changes in consumer demand.

BYD has been a big beneficiary of electric-car subsidies in China, having used its expertise in batteries and first-mover advantage to gain market share. The company received new energy vehicle subsidies equal to 380 percent of its electric-car sales last year, Jefferies analysts estimate. That’s a much higher proportion than other carmakers.

The Shenzhen-based company gets about 8.2 billion yuan ($1.2 billion) from the central government and 4.4 billion yuan from local governments. Cumulatively, that’s about four times the subsidies paid to Geely Automobile Holdings Ltd. and double those of SAIC Motor Corp. Government grants can come in the form of interest-free or below-market rate loans for construction of projects. The company says it books part of the subsidies as revenue.

Official aid even enabled BYD to push into making electric commercial vehicles. For all that, the company hasn’t been able to maintain its lead. As a result, BYD’s profitability and fate are tied to where Beijing’s policies lead, to a much greater degree than other automakers.

Making cars isn’t really BYD’s forte. Much of the company’s value is concentrated in the battery business. On paper, the segment makes up only around 8 percent of sales, compared to more than 50 percent for autos. Inter-segment sales of batteries are larger than those to outside customers, though. On a sum-of-the-parts basis, the electric-vehicle and battery businesses account for more than half of the company’s value. Conventional cars are only about 10 percent, less than handset components.

BYD plans to spin off the battery unit by 2022, Chairman Wang Chuanfu said last year. That will leave a skeletal car business.

Part of the problem of an integrated manufacturing model such as BYD’s is that it makes managing costs difficult. Unlike carmaking peers, it’s unable to squeeze lower costs from suppliers. So as the price of batteries comes down and subsidy cuts loom, BYD’s margins are bound to shrink further. Last year, the company said it would start selling batteries to other carmakers. That’s aimed at keeping pace with the likes of Contemporary Amperex Technology.

BYD has failed to move with the market. In battery installations, it’s fallen behind CATL, a supplier to BMW AG that doubled its market share to 41 percent last year from 20 percent. BYD’s share of the hybrid car market is declining and it’s also lost electric-vehicle share to BMW and Geely.

Most electric cars in China sell for around 150,000 yuan to 200,000 yuan and the market is dominated by low-end, entry level models. BYD is now planning a host of low-priced electric-car models to appeal to rural buyers -- just as broader consumer demand is dipping. Meanwhile, its share of the market for low-end electric cars is falling in China’s biggest cities.

BYD’s woes don’t end there. Its accounts receivable have more than doubled since the start of 2016. The company says that’s because it mostly sells electric vehicles in fleets to taxi and bus firms rather than to individuals. Meanwhile, the uncertainty of timing of subsidy distributions and the loose accounting policy it’s adopted for new-energy vehicle sales has also impacted cash flows.

Speculation late last year that the government plans to rein in electric-car subsidies has weighed on the stock, though some relief came earlier this year with Beijing’s (vague) commitment to bolster auto demand. Competition is also ramping up, with Tesla Inc. set to start making cars in China and the country’s green energy policies forcing other automakers to produce more electric vehicles.

Starting life with all the advantages is no use if you can’t follow through. BYD still needs to show it can do that.


Anjani Trivedi
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. -- Ed.

(Bloomberg)