ELECTRIC VEHICLES INDUSTRY IN CHINA:THE SUCCESS OF BYD

GROUP 6

LORENZO DE PAOLISANTONIO DE SANTISRICCARDO LUPIGIOVANNI SERPIANNA SITNIKOVAALESSANDRA TOSSUT

FINAL PROJECTINTERNATIONAL BUSINESSPROF. JOHN MATHEWS

OUTLINE

China economic outlook FDI Clusters

Porter’s Diamond of the Electric Vehicle Industry

BYD and the Porter’s Diamond

CHINA ECONOMIC OUTLOOK• Asia is currently undergoing

rapid growth and industrialization, spearheaded by China and India

• Over the last 20 years Chinese economy has enjoyed one of the highest growth rate in the world

• In 2010, China's GDP was valued at $5.87 trillion, surpassed Japan's $5.47 trillion, and became the world's second largest economy after the U.S.

The role of the governement in such a scenario has been crucial:

1. The move to a market economy and membership of the WTO in 2001 had provided enterprises with many opportunities

2. Government started to give incentives to the creation and development of SEZs

FDI TO SPECIAL ECONOMIC ZONES

• FDI and the Chinese government have played important roles in the success of the SEZs by attracting capital

investment, technologies, and management skills;

generating learning and spillovers;

helping to build local manufacturing capacity.

• In August 2000, BYD moved its production to an industrial park in a district of Shenzen.

• There is a positive relation between Output and FDI

CLUSTERS IN CHINA

•COMPETITIVNESS

•CO-OPERATION

•COLLECTIVE LEARNING

ACCORDING TO PORTER, CLUSTERS ENHANCE

In China, industries tend to develop in a spatially concentrated manner characterized by buyer-supplier links and shared technologies, channels, and customers. This reduces transaction costs for producers and consumersClusters have a massive role in China’s industrialization process. As a matter of fact, industrial clusters create 50% manufacture output in east-south of China

A growing percentage of cluster’s production is functionally integrated into global systems of supply to global market

Source:McKinsey

INDUSTRY ANALYISIS PORTER’S NATIONAL DIAMOND FRAMEWORK

It can be used to analyze a firm's ability to function in a national market

It recognizes four pillars of research (factor conditions, demand conditions, related and supporting industries, firm structure, strategy and rivalry) in order to analyse the viability of a nation competing in a particular international market

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …"

PORTER’S DIAMOND ELECTRIC VEHICLE INDUSTRYFACTOR CONDITIONS

•Lithium is one of the key physical resources for e-mobility•China is holding about 17% of global reserves and is seeking to secure access to others sources in Chile and Bolivia

RAW MATERIALS

•Low labour cost•High-skilled engineers are essential for the industry •The number of professionals in this industry is still not sufficient

HUMAN RESOURCES

•Chinese firms form partnerships with foreign firms to improve their technology

TECHNOLOGY

•China is on track to face the lack of basic infrastructures (e.g. charging stations) in coming years •From 2011 to 2015, SGCC, China’s largest power grid state company plans to build a total of 2,351 EV charging facilities and battery-swap stations •According to a new report released by Pike Research, more than 5 million charge points will be installed worldwide by 2015, and nearly half of the equipment will be heading to China

INFRASTRUCTURES

FACTOR CONDITION: LITHIUM

The global battery market is about $50 billion US, of which the lithium market was worth US$7.8 billion in 2010.

Developments in the lithium battery industry have turned a focus towards China as the country continues its quest to maximize exposure to lithium technology . China has become the world's largest lithium production base (the output of batteries from Asia accounts for over 90% of the global output)

Despite a small market share (in 2009 lithium batteries accounted for 1% of all battery applications), the launch of the electric vehicle industry has further spurred sales. While this will not boost sales significantly in the short-term, the electric vehicle industry will be an important source of growth in the future

• Lithium is a soft, silver-white metal that has several industrial applications, including lithium-ion batteries useful for Evs

• Major reserves are in South America, China and Australia

• Lithium is a comparatively rare element, although it is found in many rocks and some brines, but always in very low concentration

Source:USGS

PORTER DIAMONDELECTRIC VEHICLE INDUSTRYDEMAND CONDITIONS

In China the awareness for emerging technology of e-mobility is at 68%( in Europe 50%)

Familiarity with the concept of e-mobility through existing e-bicycles

Increasing demand for environmental-friendly products in megacities

PORTER DIAMONDELECTRIC VEHICLE INDUSTRYRELATED AND SUPPORTING INDUSTRIES

Shenzen is ahead of the game in terms of R&D (it tops China for number of new patents) and new energy industries (growth of 29% in the last year)

EV industry comprises firms involved in drive motors, power cells, intelligent transmission systems, electric commercial vehicle integration and other key technologies

EV RELATED AND SUPPORTING INDUSTRIES

Source:Roland Berger

PORTER DIAMONDELECTRIC VEHICLE INDUSTRYRELATED AND SUPPORTING INDUSTRIES

All parts of the value chain offer growth potential for both existing and new players

The success of individual players will very much depend on how well they understand the market dynamics of their specific section of the value chain. They must formulate a focused business strategy, either defending or expanding their current position

Despite the explosion of domestic

manufacturers, foreign OEM (Original

Equipment Manufacturing) such as

Volkswagen and General Motors(and

their domestic partners) comprise the biggest market share in

the automotive industry.

Only three pure domestic players are in the the top ten namely

Chery, Geely, BYD.

The strongest competitor in the Chinese market is VW, which is still the largest passenger car company in China and will enter the e-market soon.

PORTER DIAMONDELECTRIC VEHICLE INDUSTRYFIRM STRATEGY - STRUCTURE AND RIVARLY

Source: Ascendas Marketing Research 2009

CHINESE OEMS INVOLVED IN EV DEVELOPMENT

Chinese domestic automakers are

looking for innovative ways to

produce cheap electric cars to

fulfill the demand of China's

domestic market. Then they will use this technology to

expand internationally. A new generation of Chinese electric cars may help drive down the

production cost of electric

cars globally. 

Source: Autohome 2009

• The industry (OEMs and suppliers) contributed nearly to 5% of GDP growth rate in 2006.

• However cost and quality remains limitations of India’s auto industry expansion:labour costs are rising due to a shortage of skilled-labour and infrastructure are still poor in comparison to China.

• Only two out of 4 players involved in Evs industry already commercialize their products. The others have only plans.

• India automotive industry has experienced tremendous growth in recent years largely due to a burgeoning middle class with a larger disposable income.

• Industry output in India is estimated to reach 4 millions units in 2013 (PriceWaterHouse Coopers 2009)

COMPARISON TO INDIA

Source Autoblog 2008

JAPAN SITUATION…

• Green vehicle sales in Japan for 2010 were an estimated 500,000, more than 10% of all new car demand with Toyota as the dominant player.

• Government support for electricity in vehicles, both hybrids and pure EVs, is also quite vigorous (the consumer subsidy is about $9,000).

• One of the obstacles to widespread adoption of EVs is spending long time charging a coalition comprising Tokyo Electric Power Company (TEPCO), Nissan, Mitsubishi and Fuji Heavy Industries (the manufacturer of Subaru vehicles) and Toyota created a new technology, the CHAdeMo, that provides 80% of chargeable capacity to the Leaf in 30 minutes

US SITUATION…

• In 2010, GM started to produce a series of hybrid vehicle called the Chevy Volt. Volt ais “Range Extended” Electric Vehicle. It is not a pure EV because it retains an onboard (ICE) internal combustion engine. 

• In september 2011 - General Motors announced the intention to develop electric cars in China through a joint venture with a Chinese automaker, and to transfer battery and other electric car technology to the venture.

Japan is still the dominant player in the US green vehicles market…

ELECTRIC VEHICLE INDUSTRYTHE ROLE OF GOVERNEMENT

• The annual production capacity will be extended to 500000 hybrid or all-electric cars and buses by the end of 2011( in 2008, 2100 vehicles.)

• The reduction of CO2 is a declared political goal, thus promoting the use of e-vehicles.

• Government offers about 5000€ for consumers buying a EV

• 13 cities recently chosen by the government for a pilot program to boost the use of new-energy vehicles

• Government invests aggressively in infrastructures (charging stations) in SEZs

• China and US have signed a joint agreement on initiatives promoting e-mobility

• Government uses policies to concentrate the fragmented market to enable suppliers to become system providers.

The growth process of

this industry is strongly

supported by the

governement

THE ROLE OF THE GOVERNMENT IS IMPORTANT BECAUSE IT AFFECTS ALL THE FOUR ELEMENTS OF THE DIAMOND THROUGH A SERIES OF INITIATIVES

BYDHISTORY AND FACTS

It is a high-tech enterprise in China founded in 1995 specializing in IT, automobile and new energy,

with integrated research, development, manufacturing and sales

BYD has developed from 20 employees in 1995 to a corporation with more than 150,000 employees and 10 industrial parks across China in 2009,

including sites in Guangdong, Beijing, Shaanxi, Shanghai, and Changsha, totaling nearly

16,000,000 sq. m. It also has offices in the United States, Europe, Japan, South Korea, India, Taiwan,

Hong Kong and other regionsBYD has earned a large and stable customer

base owing to its reliable product quality. Currently, its IT Business Unit's customers include

international cell phone giants Nokia, Motorola, Samsung, Sony Ericsson, Kyocera, Phillips,

prominent domestic cell phone companies Huawei, ZTE, Lenovo, as well as cordless phone experts

Vtech, Panasonic, and Sony. On January 22, 2003, BYD purchased Xi'an Tsinchuan Auto Co. and officially entered the

auto industry. As a rapidly growing and innovative auto company, BYD's auto

products and services include fuel and electric vehicles as well as auto molding and auto parts

manufacturing

BYD is committed to developing new green energy. It has developed electric vehicles,

energy storage stations, solar power stations and other green energy projects

BYD AND THE PORTER’S DIAMONDFACTOR CONDITIONS

RAW MATERIALS

HUMAN RESOURCES

TECHNOLO

GY

BYD profits from China’s huge lithium reserves

Building People : recruting and training

Job rotation programme increases motivation and process knowledge

Exploit the low labour cost advantage of the country

Culture based on emphasizing both technology and use of labour

To access technology BYD acquired the Qinchuan : knowledge acquirement by an imitation strategy. Then linked it to its knowledge in the battery production to become a first mover in the EVs industry

Cooperation with Daimler aiming at combining Daimler’s EV architecture know-how and BYD’s battery technology

BYD AND THE PORTER’S DIAMONDDEMAND CONDITIONS

Increase of brand reputation both on

Western and Chinese market through cooperation with

Daimler AG to develop new electric cars

BYD AND THE PORTER’S DIAMONDRELATED AND SUPPORTING INDUSTRIES

COMMITMENT IN

PRODUCTION

NETWORK

BACKWARD INTEGRATIO

N:ACQUISITIO

N OF ABOUT 200 SUPPLIERS

Better controlQuality

improvementLabour cost advantages

Faster innovation cycle in car business

industry (3 years compared to 5)

BYD AND THE PORTER’S DIAMONDFIRM STRATEGY, STRUCTURE AND RIVALRY

Focus on innovation due to high

competitive pressure in the industry

Exploit intrinsic

advantages : use of cheap labour

instead of technology

in the production process to reach cost advantage

Development of a strong position in the Chinese

automotive market in order to become an equal-partner

for western brands

Partnership

between VW and BYD to “work in the area

of electric mobility”

BYDSTRATEGY KEY POINTS

LATE MOVER IN THE BATTERY INDUSTRY

LATE MOVER IN THE AUTOMOBILE INDUSTRY

FIRST MOVER IN THE EV SECTOR

ADVANTAGE BASED ON LOW-COST AND R&D

V.I. OF THE MANUFACTURIG PROCESS

1st manufacturer of nickel-cadmium batteries

2nd manufacturer of nickel metal hybrid batteries

3rd manufacturer of lithium ion batteries

Mass production beginning in 2005

100000 units in 2007

First electric car went on sale in 2008 (a year ahead of GM and Toyota)

Set to become the biggest automotive company in China by 2015

Replacing machinery with manpower

Systematic training of HR and focus on innovation

BYDVERTICAL INTEGRATION

“Vertical integration is the enabling force behind BYD's innovation. Vertical integration not only cuts costs, but also improves efficiency and quality, brings continuous innovation, and breaks ground for new strategies in products and businesses.”

BYD AND THE PORTER’S DIAMONDTHE ROLE OF GOVERNMENT

BYD received 354 million yuan, 390 million yuan and

359 million yuan in government subsidies, respectively, in 2008, 2009 and 2010.

THANK YOU!

REFERENCES

Zhihua Zeng, «How Do Special Economic Zones and Industrial Clusters Drive China’s Rapid Development?» , Policy Research Working Paper 5583, March 2011

www.byd.com Shirouzo Norihiko, «Technology Levels Playing Field in Race to Market Electric Car», The

Wall Street Journal, January 12, 2009 Leung A., «BYD plummets, puts spotlight on strategy and Buffett», Reuters, August

2011 Lockstrom,Callarman, Lei, "The Electric Vehicle Industry in China and India: The Role of

Governments for Industry Development", 2010 Kasperk, Garnet "National Competitive Advantage of China in Electric Mobility: The case

of BYD“, 2010 Huckman, Maccormack "BYD Company, Ltd." , Harvard Business School, 2009 Wang, Kimble "Betting on Chinese electric cars?-analysing BYD's capacity for

innovation" , Int. J. Automotive Technology and Management, Vol.10, 2010 "The Competitive Advantage of Nations" M. Porter, 1990 (http://www.nytimes.com/2011/09/21/business/global/gm-plans-to-develop-electric-cars-

with-chinese-automaker.html) http://www.evsroll.com/GM_electric_cars.html http://www.jetro.org/content/997 Groode, Tillemann-Dick, “The Race to build the Electric Car”, The Wall Street Journal,

March 2011