Profits plunge at Buffett-backed BYD

Financial Times, October 26, 2010

By Patti Waldmeir in Shanghai

BYD, the Chinese electric carmaker backed by Warren Buffett, has announced a 99 per cent drop in third-quarter earnings after its growth strategy plunged the company into fierce competition with Chinese rivals, according to analysts.

Shares in the carmaker fell more than 10 per cent after its earnings statement. News of the profits drop came on top of other setbacks. BYD was recently forced to scale back plans to double sales this year, delay plans to export vehicles to the US, and surrender seven factories after Beijing said they had been built illegally.

After starting life as a maker of rechargeable batteries, BYD built its first branded car in 2005. By last year, the company was China’s fastest-growing carmaker and had taken first place in the Chinese market for compact cars. BYD forecast sales of 800,000 cars this year, up from 400,000 last year, but recently cut that forecast to 600,000 after sales began to slide when government tax incentives for small cars were partially withdrawn.

Shanghai-based analysts said BYD’s growth strategy had backfired, with dealers forced to slash prices to meet the company’s over-ambitious sales target. BYD sales fell 25 per cent in September year on year, as growth in the China market slowed. Sales in the rival joint venture between General Motors and Shanghai Automotive Industry Corporation rose by 41 per cent in the same period.

“They are finding out the hard way just how difficult it is to maintain momentum in the hyper-competitive China market,” said Bill Russo, former head of Chrysler in China and head of Synergistics, a Beijing car consultancy.

Tax incentives on small vehicles and the high-profile Buffett investment are no longer providing the same sustaining force as last year, he added, and BYD must begin to compete on the strength of product offerings, which is proving to be more challenging than they may have anticipated.

They are also learning that moving into a mature market like the US with a new brand and distribution network “is not as straightforward as they originally thought,” he adds.

Mike Dunne of Dunne & Co, an Asian auto consultancy, said the recent setback over illegally built factories is not a major cause for concern. “The main issue is this: the car business accounts for 70 per cent of BYD revenues and there is no evidence that BYD has advantages over other companies when it comes to the business of building and selling cars”.

Mr Buffett, who owns 10 per cent of the company through Mid-American Energy Holdings, affirmed his support for BYD last month when he visited several of its facilities in China, saying it would be a leader in electric cars.

Additional reporting by Shirley Chen in Shanghai

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