BYD cuts prices on its cars

Financial Times, February 18, 2011

BYD, the Chinese electric carmaker backed by Warren Buffett, has slashed prices on its best-selling models in a bid to regain market share after several months of unexpectedly weak sales.

The move, which could intensify rivalry in the already fiercely competitive Chinese market for small cars, comes as China reported January car sales rose 16.2 per cent year on year, despite the withdrawal of government tax incentives on small cars.

BYD shares have fallen by almost a fifth since the beginning of the year after ending last year 40 per cent down. Investors took fright after a run of bad news, including a cut in its sales forecast of more than 50 per cent and delays to its high-profile plans to export electric vehicles to the US. BYD had planned to sell 800,000 vehicles in 2010, but sold only 510,000.

Mr Buffett, who took a 10 per cent share in the company in 2008 through his Mid-American Energy Holdings, affirmed his support for BYD recently when he visited several of its facilities in China, saying it would be a leader in electric cars.

On Friday, the company, which became a Hong Kong stock market darling after Mr Buffett threw his weight behind it, said it would cut the prices of five models by up to 20 per cent.

“BYD is trying to get out of a rut,” says Mike Dunne of Dunne & Co, an Asian auto consultancy. But he does not believe it will necessarily spark a price war. “Competitors will see it as a kind of desperate move by BYD to recapture momentum and will be slow to follow the lead,” he says.

Others may lower prices in the short term, says Klaus Paur, automotive analyst at Synovate, an automotive consultancy in Shanghai. “But there is not much room left to lower prices and still be able to operate profitably,” he says. “That strategy is not sustainable – for BYD or others.”

Foreign carmakers are unlikely to engage in a price war for fear of damaging their reputation for quality. But BYD’s price cut could have a big impact on its volumes, analysts say. “More people will be able to meet the mobility threshold,” says Bill Russo, head of Synergistics, a Beijing automotive consultancy and former head of Chrysler in China.

Mr Paur says consumers in BYD’s target group are particularly price sensitive. But cutting prices will mean cutting costs too, and sacrificing the quality upgrades that increasingly demanding Chinese consumers will be looking for. “The risk is BYD will lose competitiveness over time.”