BYD Auto's Profit Tumble Shorts China's EV Sector for Now

Shenzhen-based carmaker to ship e6 EVs to Los Angeles in 2012

While electric vehicles (EV) continue to be the newest sensation in car development and generally seen as an effective solution to reduce automotive carbon emissions, with the newly launched Chevy Volt having won Motor Trend's 2010 Car of the Year title and North American Car of the Year award at the North American International Auto Show in Detroit, one piece of negative news has arisen in China that may be short-circuiting the prospect of the EV industry over the short term in the world's biggest car market. Other caveats related to EVs include relatively high retail prices currently, shorter cruise ranges compared to gasoline engine cars and still underdeveloped recharging infrastructure. Such shortfalls may prevent EVs from becoming widely popular and major moneymakers for carmakers in the near term.

BYD Auto, the Shenzhen-based carmaker and driver of the EV sector in China, was once a favorite investment target for Warren Buffett, the American investor, due to his optimistic take on the company's growth potential. However, BYD's profit tumbled 99% year-on-year in the third quarter of 2010, shocking the stock market where major investors reduced the target price range of the carmaker repeatedly. Buffett likely also suffered a sizable setback for having held a 10% stake in BYD at the time.

Disappointing Profit
BYD reported a quarterly profit of 11.34 million RMBs for the third quarter of 2010, equivalent to only 1% of that generated in 2009. "BYD profit is very disappointing, far lower than our expectation," said a stock analyst in Hong Kong, attributing the profit tumble to sagging auto market sales and hiking production cost of EVs.

Other setbacks also plagued BYD. The carmaker delayed EV shipments to the U.S. several times, and the Beijing government shuttered seven of its plants for illegal construction. BYD lowered its sales target for 2010 by 25% last August, and generated profit in the first three quarters equaling only 53% of its annul target for 2010.

In December, BYD spokesman Paul Lin admitted that the firm had failed to meet its annual sales target for 2010, having sold only 520,000 to 550,000 EVs, lower than the target of 600,000 vehicles that had been adjusted last August from the original of 800,000 vehicles. Notwithstanding, BYD is upbeat about the long-term prospects, predicting to turn considerable profits as soon as 2015.

EVs to Los Angeles
BYD is to ship its brand new EV-the e6-to the U.S. in 2012, more than one year behind schedule. Meanwhile, it's negotiating with the Los Angeles government to set up its American production center in the city on condition that EVs from BYD are purchased for the municipal fleet. BYD plans to ship the first batch of 50 e6s to major southern Californian cities in the first quarter of 2012, supplying such EVs to the government sector only initially and then promoting them to the private sector.

The e6 retails for around US$40,000 each, a competitive price when compared with others launched by other leading automakers.

While BYD worries about profitability of its EV business, German experts expressed similar concerns, saying that the short-term prospect may not be encouraging due to the high production cost initially. Meanwhile, there may be too many newcomers that are likely to cause excess supply if consumers still hesitate to pay the higher retail prices of EVs. Some budget-conscious buyers argue that the improved energy efficiency of an EV does not justify the price increment over a low-priced gasoline-engine car. In other words, it could take many years to recoup the energy cost savings from an EV with the price difference paid.

Demand to Cool
High cost and consumer hesitation are the two major reasons behind BYD's profit tumble. "In the short term, global demand for EVs may be only 500,000 vehicles, or only 0.8% of the global auto market," said Willi Diez, director of the IFA in Germany, who anticipates that the EV boom will gradually cool in 2012 or 2013, but remains positive toward hybrids.

Germany is among those countries vying for global leadership in the EV niche, having set a goal to launch one million EVs in Germany by the end of 2020, towards which German carmakers are cautious. "Despite mass production, EVs are still very costly and would hinder sales," said Rita Forst, R&D director of Opel.

Subsidizing EVs in China

To accelerate the nation's EV industry development, Beijing plans to promote EVs in 13 major cities by subsidizing each new EV purchase 60,000 RMBs, aiming to boost EV sales beyond 1,000 vehicles each in the 13 designated cities.

Meanwhile, the National Energy Bureau under the National Development and

Reform Commission (NDRC) formed the "National New Energy Car Alliance" last August, recruiting five state-run automakers and their satellite parts suppliers to develop EVs and other transportation vehicles fueled with new energy. The alliance will invest another 100 billion RMBs from 2011 to 2020, aiming to develop China as the largest new energy car producer globally.

In addition, another 10 similar alliances have been formed by private enterprises or trade groups, including the most significant organized by the China Association of Automobile Manufacturers (CAAM) that recruits the top-10 automakers in China.

Another alliance has been formed by the FAW Group, Dongfeng Motor, Chang'an Motors, as well as state-run enterprises as Dong Fang Electric, CRS Corp., China National Offshore Oil, State Grid, China Petroleum & Chemical, and China Southern Power Grid. This group, claiming to be developing national standards, has drawn mixed comments due to the failed EV project under Chang'an Motors, a major member, which has announced the suspension of the production of its HEV due to failing the safety test.

Fortunately, Yulon Motor, the parent of the other member Dongfeng Motor, has passed all the tests for its LUXGEN EV+ , an EV developed with technological cooperation with American ACP (AC Propulsion), and will begin mass production in China this year.