How China’s BYD Overtook Tesla

It likes to describe itself as the biggest car brand you've never heard of. Now, China's BYD has overtaken Tesla as the world'slargest seller of electric vehicles. Even if you've never heard of BYD, there's a chanceyou've been in one of its busses. While its taxis prowl the streets of some of the world'sbiggest cities. But busses and taxis.

Aren’t the reason why BYD has overtaken Tesla. Instead, it's the fruit of long-termstrategic thinking on the part of BYD itselfand the Chinese government. And it’s setting China up to be the dominant global playerin the transportation of the future: electric vehicles, a business that could be worth $8.8 trillion by the end of the decade. Here are the three most important thingsthat have made BYD the king of EVs. The Chinese government.

Has played a huge role in BYD's rise. We've arguably never seen anything likethis in terms of the amount of support that China has extended to automakers, specifically pertaining to EVs. Beijing has given an estimated $30 billionof tax exemptions to the industry since 2010, and may wave a further $97 billion by 2027. China actually takes a carrotand stick approach. They set mandatory EV output targets for automakers,but they also offer cheaper.

Loans and cheaper landand R&D subsidies to all those EV makers. And BYD has been a massive beneficiary of that. It's still sells most of itselectric vehicles in its home market. But of course, Tesla has also benefitedfrom Chinese subsidies, which is where the second reasonfor BYD’s rise comes in. Most of BYD's cars are simply a lotcheaper than Tesla's. In fact, it sells ten popular models, starting from less than Tesla's cheapest offering for the Model 3 sedan.

And BYD sells a lot moreof the cheaper vehicles in its lineup. They have very cheap modelsstarting from $10,000. Their approach has been extremely different in the sense that Elon Musk believed thatyou had to sort of start from the high end with a sexy performance carto get people interested in electric cars and then work your way down the price spectrum. BYD went at it from the other endwhere it was about cheap taxis and busses that needed a heck of a lot of batteriesand really sort of, you know, drove down the prices of the batteriesthat they could put into passenger cars.

While the average price paid for a Tesla is about $45,000, the average BYD sellsfor roughly half that. That, of course, raises the question,how can it sell them so cheaply? The secret to that price tag lies in what is known as vertical integration. Our vertical integration capability give us the flexibility,the faster response to the market trend as well as the better spot for brand developing and customer service.

That's a fancy way of saying that they make a lot of the things that go into their vehicles themselves. Carmakers usually buy most components from suppliers such as Bosch, Continental and Aptiv. Volkswagen, for instance, only makes35% of the parts in its ID.3 electric car. Tesla, meanwhile, makes 68% of the parts that go into its Model 3 made in the US. BYD makes 75% of the partsthat go into the Seal, its flagship model. The most important factor is that BYD.

Is the only automaker that produces all of its batteries in-house. That was hugely importantduring the pandemic when the supply chains were just absolutely in a state of chaos for the industry. The fact that BYD was in controlof its own destiny gave them a huge leg up over the rest of the industry, andespecially as it pertains to batteries. This is a companythat has been in the battery space since the 1990s. BYD actually stands for Build Your Dreams. It started out in 1995as a battery company.

They make rechargeable batteriesfor mobile phones and other electronics products. And then the companygot into the auto business in 2003. Making its own batteries and othercomponents helps it reduce a lot of costs. That's attracted some big name investors. Call it the continued BYDpromotional roadshow. And investor Warren Buffett brought his buddy Bill Gatesalong for the ride here in Beijing. It was fantastic.

I’m amazed at the quality of that vehicle. Warren Buffett was one of the biggest early investors in BYD through his holding company,Berkshire Hathaway. And the battery technologymight also give BYD a technological edge over some rivals. It uses lithium-iron-phosphate,which is not only cheaper than other batteries,it's also packaged a lot more compactly. And chemistry is a core expertiseof founder Wang Chuanfu. He’s sort of the anti-Elon Musk.

Wang is a chemist by trainingand an engineer. And an anecdotethat one of our reporters was told was that when he was toldhe needed to dress up a bit for an investor meeting, he stopped to buyshirts just sort of off the street. And so he's far from one of the flashierexecutives in the auto industry. This has all set BYD up to bethe biggest player in electric vehicles. The question now is whether it can become one of the world'sbiggest carmakers full stop. And that means growing outside of China.

In 2021, BYD started to step up its global expansion. It started to launch more passenger vehicles across the global markets, including Middle East, Southeast Asia and Europe. It's still a very new entrantin global markets. The volume contributionis rising, but still small. Even so,.

BYD inside three yearshas become one of the top-selling EV brands in marketssuch as Thailand, Brazil and Australia. It also remains to be seenwhether this company can quickly grow in some of these newer markets that it's entering where it isn'twell-known, it isn't recognized. The two most prominent challenges in BYD’s global expansion will be first regulatory uncertaintiesand second brand awareness. The European Union is investigatinginto Chinese EV subsidies. Chinese automakers, they are exportingmore of their EVs into Europe.

Because those cars are produced in Chinaso the production costs are pretty low, which allows the automakersto set their prices in Europe cheaper than the European counterparts, which has been very alarmingto the European auto industry. One way around that will be to increasethe amount of local production. Definitely, localization is one of the very important strategy of BYD’s Europe strategy. And so we are considering, we are evaluating different locations in Europe.

And where we can build the cars. And apart from bussesand trucks, BYD isn’t in the US. The trade tensionsbetween Beijing and Washington are keeping BYD back and giving them pauseto entering the US market. For years, automotive expertshave predicted established carmaking giants like GM, Volkswagen or Toyota would catch up with Teslain electric vehicles.

In hindsight, it probably shouldn't be a surprisethat a Chinese rival got there first.

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