Buffett’s BYD Threatened by Prius in China Hybrid Shift

Buffett’s BYD Threatened by Prius in China Hybrid Shift

Toyota Motor Corp. (7203)’s Prius hybrid is emerging as the likeliest winner from China’s faltering attempt to dictate the future of world motoring.

Policies favoring Warren Buffett-backed BYD Co. (1211) and other electric-vehicle makers were meant to help China vie for global leadership in a technology the government expected to replace clunkers that run on gasoline. Except, as Chairman Mao Zedong put it, “seek truth from facts,” and the fact is: EVs flopped.

Consumer appetite failed to materialize even with financial incentives that halved the price tag of a BYD e6. The 27,800 EVs on Chinese roads are fewer than 6 percent of the government’s 2015 target — and 0.02 percent of the total civilian fleet. For now, China needs to promote other technologies to cut the tailpipe fumes choking its cities, says one minister.

“We’re very anxious” about worsening air pollution, Miao Wei, industry minister and a three-decade veteran of China’s auto industry, said during last week’s annual National People’s Congress in Beijing. “I’ve never believed that you can gain global leadership in one leap.”

Translation: China may need to support more conventional technologies to lower pollution levels. Miao said he’s seeking support from other government branches to raise hybrid subsidies, aiming to unveil the policy plan in the first half.

Even Science Minister Wan Gang, one of the leading advocates of electric cars, is warming to the idea. At last week’s gathering of more than 5,000 lawmakers and officials, he said the switch to EVs will take more time than planned.

Expand Subsidies

“Subsidies should be based on the fuel consumption and emissions of the vehicle,” Li Shufu, chairman of Volvo Cars- owner Zhejiang Geely Holding Group Co., said at the Beijing meetings. “The government should expand subsidies to include more types of vehicles, including all sorts of hybrids.”

More subsidies for the Prius would offer Toyota a better chance to achieve in China the kind of success enjoyed by the 15-year-old gasoline-electric model in the U.S. and Japan. The Toyota City, Japan-based automaker sold 362,845 Prius cars globally last year, making it not only the top-selling hybrid but also No. 3 among all car lines in the world. In China, sales only reached 2,434 units last year, China Association of Automobile Manufacturers data show.

Toyota, recovering from a wave of anti-Japan sentiment in China last year, could use the help, though Tokyo-based spokesman Dion Corbett said the company doesn’t want to comment on government policy.

Market Share

While a 14 percent share of global car sales makes Toyota the top ranked manufacturer, in China it lags behind General Motors Co. (GM), Volkswagen AG, Hyundai Motor Co. and Nissan Motor Co. in fifth place, with about 5 percent of deliveries, according to CAAM estimates.

Unlike EVs, conventional hybrid cars have gasoline engines that helping recharge the battery for longer journeys. They also don’t need to be plugged in to a socket.

A Lack of recharging stations doesn’t help. China’s 1.3 billion people had only 168 charging stations across 25 cities at the end of 2011, according to the Industry Ministry’s website. That’s 10 percent fewer stations than in Hong Kong, home to 7.2 million people.

“Charging stations still need to be built,” said Science Minister Wan, arriving in a BYD e6. “We should continue to promote the electrification of public transportation while at the same time push for new-energy vehicle use by private buyers.”

Deadly Pollution

Traffic snarl-ups, which exacerbate PM2.5 particle levels that cause disease and premature deaths, can also put EV drivers at risk of breaking down.

“With traffic jams during summer or winter, you need to use the air conditioning or heating,” said Yale Zhang, managing director of industry analysis firm Autoforesight Shanghai Co. “If you’re in a jam, you’ll need to shut down everything or run out of electricity.”

That may leave EVs as a niche product in China for the time being, according to Bloomberg New Energy Finance, which estimates 80 percent of China’s EVs now are public buses.

Unperturbed, BYD will introduce the Denza, a new electric car developed with Daimler AG (DAI), later this year. SAIC Motor Corp. (600104), China’s biggest automaker, has been offering the Roewe E50 electric car since November. SAIC, which has joint ventures with GM and Volkswagen, also plans to sell the all-electric Springo with its U.S. partner and two electric cars with its German partner this year.

15-Year Leader

Unlike with hybrids, a category which Toyota has led since the launch of the Prius in late 1997, EVs remain relatively new and inconvenient relative to gasoline cars.

“You won’t see mass production of all-electric vehicles without a major breakthrough in battery charging,” said Chen Binbo, executive vice president at Honda Motor Co. (7267)’s venture with Dongfeng Motor, which introduced the Insight hybrid to China last year. “We need a transitional product.”

Incentives are a critical step to cultivate market acceptance of electrified vehicles in China, said Dayna Hart, a Shanghai-based spokeswoman for GM. Only customers will determine which technology is successful, Ford Motor Co. spokesman Trevor Hale said.

Volkswagen is developing all “relevant drive technologies,” improving fuel economy and reducing emissions across all models, said spokesman Christoph Ludewig. Shenzhen- based BYD, in which one of Buffett’s holding companies bought a 9.9 percent stake in 2008, declined to comment.

Seven Pillars

China was so committed to new-energy vehicles last year, they were one of seven emerging industries of strategic importance identified by the government, which pledged 5 million EVs would be sold by 2020. They were given subsidies that were at least 20 times higher than for hybrids.

Added to central government incentives of as much as 60,000 yuan ($9,650), some cities added sweeteners. In Shanghai, the total rebate can reach more than 175,000 yuan, Bloomberg New Energy Finance calculations show.

That kind of discount on BYD e6’s 329,800 yuan price tag puts the Prius, at 229,800 yuan, at a disadvantage. Similar rebates on Toyota’s flagship hybrid could make the Prius cheaper than getting a Ford Focus, China’s best-selling car last year.

“Consumers think Prius is expensive,” China FAW Group Corp. Chairman Xu Jianyi said in an interview yesterday. “The key to stimulate demand is to bring down the costs for buyers.”

And while Toyota may benefit from a blooming hybrid market, China shouldn’t allow that to be a distraction from the bigger goal of cutting emissions, according to Dong Yang, secretary general of the state-backed China Association of Automobile Manufacturers.

“There have been concerns that funding for gasoline- electric vehicles will benefit Toyota the most without doing any good to local companies,” said Dong. “We should not be so narrow minded.”

Related News and Information: Toyota Prius Escapes Niche to Surge Into Top Three: Cars

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net; Alexandra Ho in Shanghai at aho113@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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