11.06.2010

Leveraging China & India for Global Competitiveness: Theme 2

November 6, 2010

by Glenn Hodges and Bill Russo

In our initial posting, we introduced four clear China-India themes which provide insight into the nature of the challenges and opportunities for creating value in and through these markets. Each of these themes stands on its own to provide insight for companies looking to maximize value from China and India. The real value of these themes, however, is that collectively they demarcate a range of options for maximizing value within China and India as well as globally.

THEME 2: Differentiated and complementary supply profiles create “islands of opportunity” for leveraging unique capabilities of the resources available in each country.

China and India have highly differentiated and complementary supply profiles. These differences are the result of historical regulatory forces, which created “islands of opportunity” in otherwise restricted markets. In China, the government created special economic zones (SEZ), the primary purpose of which was to attract assembly operations. The SEZs, along with China’s auto industrial policy, drove dramatic increases in both assembly and component manufacturing resulting in large scale, efficient operations. In contrast, India’s manufacturing scale was intentionally limited to reflect the goals of internal self-sufficiency laid down by the Gandhi and Nehru governments. Another key government policy factor has been the different approaches to developing road, rail and electrical infrastructures. China has invested significantly more than India and now has an infrastructure, which strongly supports logistics and transportation of manufactured goods. As a result, China has world-class manufacturing and India lacks both the scale and infrastructure to strongly support efficient distribution of manufactured goods.

In India, manufacturing was heavily regulated by the so-called “license raj”, which determined what companies could produce and in what quantities. In contrast, services were largely ignored by the regulators and left unregulated. This provided Indian entrepreneurs, as well as foreign MNCs, with an opportunity to capitalize on India’s strong educational system and English language ability to provide call centers, IT and engineering services as well as other back-office services for MNCs outside India. As a result, India has become the global epicenter for the outsourcing of these services.

Ironically, government policies in India have positioned it to become a major vehicle exporter, while China’s policies have placed it in a weaker position to do so despite its many advantages in manufacturing. In China, obtaining a duty free export license is more complex, and China’s automotive policies often require a local partner to be involved. Some MNCs such as Honda have gone as far as creating a separate facility for export operations. This has limited the participation of MNCs in exporting complete vehicles from China. In contrast, the Indian government has clearly stated its desire for India to become the global hub for the development, manufacture and export of A & B segment vehicles. Hyundai is an example of an OEM that has strongly augmented its local Indian market sales of A & B segment products with vehicles assembled in India for export. Hyundai was the driving force behind India’s 441,000 vehicle exports in 2009 with 285,000 vehicles exported[1]. China meanwhile had 370,000 exports in 2009[2].

Government policies in both China and India can be expected to reduce the value chain differentials over time. China is investing large sums in engineering education as well as major engineering efforts (e.g. development of EV technologies and infrastructure). This is an area where Indian companies’ know-how and experience could benefit China’s development. At the same time, India is investing more into its physical infrastructure, which will increase its capacity to support large-scale manufacturing. Chinese companies with experience and know-how gained from China’s massive infrastructure development effort could greatly contribute to India’s efforts in this area.

In our next posting, we will address THEME 3: Leading global players seek to leverage horizontal capabilities resident in China or India to achieve competitive advantage.



[1] Society of Indian Automobile Manufacturers

[2] Chinese Association of Automobile Manufacturers






11.03.2010

If the government is selling GM stock, who's buying?

Marketplace Public Radio, November 2, 2010


A sign at General Motors' world headquarters The federal government is offloading a big chunk of its ownership in General Motors to help pay off the massive bailouts. Scott Tong has more.


TEXT OF STORY

JEREMY HOBSON: The federal government is offloading a big chunk of its ownership in General Motors. In the next day or so, GM is expected to file final papers for an Initial Public Offering. But if the government is selling shares, who's buying?

From Washington, Marketplace's Scott Tong says a lot of buyers are overseas.


SCOTT TONG: Investment bankers are said to be shopping the IPOto investors in places like Kuwait, Qatar, and Singapore. And there's talk of investment from China. State-owned Shanghai Automotive is a longtime GM partner there.

Here's analyst Bill Russo at Synergistics.

BILL RUSSO: They bring low-cost production capacity. And they bring a fairer understanding and knowledge of what it takes to compete in these emerging markets.

If the Chinese buy a small piece of GM, expect political heat. But Russo's analysis: chill out, GM's already becoming Global Motors.

RUSSO: GM is transitioning from a north American centered company to a more global company with a new center emerging in its largest overall market, which is China.

Its China partnership has turned Buick into a top seller there. And the joint venture's next venture... is India.

In Washington I'm Scott Tong for Marketplace.


11.02.2010

Emerging Trends Driving the 2010 China Auto Industry

November 3, 2010

by Bill Russo and Jeffrey Zhao

2009 was a year of tremendous historical significance to the China auto industry. Triggered by the global financial crisis, the global automotive industry witnessed a year of unprecedented restructuring, as many industry icons struggled for their survival. After peaking in 2007 at 70 million units, the global automotive markets experienced a contraction of nearly 10% over the next 2 years. The mature “triad” markets of North America, Western Europe, and Japan have led this decline.

China is the noteworthy exception. In 2009, China easily surpassed the US in total car sales to become the world’s largest automotive market. China’s vehicle sales of 13.64 million units were more than 2 million units ahead of the second largest market, the United States. The astonishing growth in car demand was a direct result of many factors that continue to fuel China’s economy. This includes aggressive tax cuts as well as significant investment made in the development of the infrastructure to support transportation. The China government views the automotive industry as a “pillar” of its economy since it brings technology, jobs and investment to the economy. As such, several agencies of the China government play an active role in sponsoring initiatives to further stimulate automotive development and growth.

Driven by the onset of the global financial crisis, the Automotive Industry Stimulus Plan published in early 2009 took specific measures designed to spark the growth of consumer demand. Measures including the reduction of sales tax for cars below 1.6L engine displacement, along with subsidies for new minibus or light truck sales for rural residents have accelerated the auto market expansion particularly in China’s lower-tier cities, helping to boost the performance of the manufacturers of these smaller vehicles.

While aggressive tax cuts and subsidies have been behind much of the demand growth in 2009, the question remained regarding how stable and sustainable this growth would be in 2010. While very few expected a repeat of the 41% growth experienced last year, the question regarding sustainability of demand growth was often raised at the beginning of 2010. However, demand has continued to be quite strong through the first nine months of 2010. In fact, auto sales in China have risen nearly 36% from a year earlier to 13.14 million units according to the China Association of Automobile Manufacturers (CAAM). Sales for the full year are easily expected to surpass 17 million units.

However, automotive companies in China are today finding themselves confronted with a different set of challenges from what they were just a few years ago. From the demand side, Chinese consumers are becoming more selective and are making more diverse and personal choices: making their own individual choices, not just for their family. Meanwhile, demand growth is increasingly driven by lower-tier (Tier 3 and below) cities more than large and mega cities. The Chinese government has also released more restrictive regulatory requirements for safety, environmental care and foreign investment. From the supply side, almost every international player has recognized China as their largest source of future profit and has thereby committed significant investment. Additionally, Chinese local brands have never been so aggressive in fighting for market share than today. All these challenges are pushing global as well as local vehicle manufacturers to alter their thinking and adopt new strategies to play the game.

Based on the developments of this year, we can see several emerging trends that are driving the near-term development of the China automotive industry:

  • Sustainable demand growth fueled by urban economic development
  • Shifting preferences for increasingly savvy consumers
  • Hyper-competition across the automotive market segments
  • Adaptive brand innovation to extend product reach and grow share
  • Increasing focus on the automotive aftermarket
  • Accelerated drive to globalization


Sustainable demand growth fueled by urban economic development

As previously noted, year-to-date Chinese auto sales are 36% higher than the same period of 2009, with an annualized yearly sales forecast to be over 17 million vehicles. While this is quite a strong performance, it was apparent that starting in April annualized growth began to decelerate, which indicated a transition from the explosive growth of 2009 to a more stable and sustainable pattern in 2010. Such a change is mainly attributable to adjustments made in the Chinese economy to tighten credit and government investment to tackle inflation. In addition, tax subsidies and sales incentives offered by government during 2009 financial crisis were reduced with a resulting impact on more price sensitive car buyers.


Despite that, China is still the world largest and fastest growing market. The double-digit growth momentum will be maintained for at least the next three years. A key reason for continued growth is the rapid development of China’s lower-tier cities. While China’s explosive automotive growth has been most evident in the Tier 1 cities, it is important to note that the trends of urbanization and growth of per-capita GDP will continue into the foreseeable future. As these factors are directly linked to the growth in demand for automobiles, one can expect a continuation of growth next year and thereafter. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.

There is no mistaking the trend of permanent migration of rural population to existing urban areas. Looking forward, it is expected that nearly two-thirds of China’s population will be in urban areas by 2020. This represents a whopping rise in urban population of nearly 200 million people in just over 10 years. Essentially, China creates the population-equivalent of a city of between 1.5 – 2 million people each month! It is no wonder why China’s cities are continually under construction.


Shifting preferences for increasingly savvy consumers

As income levels continue to rise, demand may begin to shift towards vehicles and segments offering more appealing content and features, which may create opportunities for manufacturers to improve their product mix. Early-movers in the China market such as Volkswagen and General Motors have enjoyed significant profit margins by occupying mid-size sedan, full-size sedan and MPV segments without a great deal of competition. In such a market environment, strong profits could be made on products such as the VW Santana and the Buick GL8 minivan – older technologies that dominated their segments with good margins. However, today’s China market no longer offers such an easy road to profitability. Virtually every major vehicle manufacturer is now present in the China market. A recent J.D. Power & Associates study has reported that many of the cars sold in 2009 were in low-end segments that are eligible for tax incentives and that many of these cars earn the manufacturers as little as $100 each.

Coming into 2010, Chinese consumers are increasingly seeking more innovative design for their first cars. Emerging buyers, particularly females and those under 30 are aspiring to a more recreational lifestyle and seeking more individualistic choices. For these consumers, coupe and crossover concept vehicles of stylish design are a better fit to their values. To meet the emerging Chinese preference for fashion and sportiness, both multi-national corporations (MNCs) and Chinese vehicle makers are shifting focus of their new launches to more dynamic and stylish products.

As shown in the Beijing International Motor Show in April 2010, many examples of such coupe, CUV and crossover vehicles were shown. These included vehicles such as Audi’s A3 and A5 Sportback, Honda’s Crosstour, Hyundai’s new SUV ix35, Infiniti IX35, BYD's S6, Mitsubishi's RVR, and Chang’An H30 Cross. These new styles have generated a good traffic to the booth and the dealer showroom. The sales figures of such crossover concept vehicles have this year risen to 1.84million so far, an increase of over 29%.

The future outlook is that local brands and international brands will install more capacity in China, placing even more pressure on pricing in the battle to gain market share. Weak brands and older models will become the first casualties as market and competitive forces squeeze them out. The competitive battle can only be won with strong brands and contemporary models that can be delivered profitably to savvy Chinese consumers with choices that demand a competitive price.


Hyper-competition across the automotive market segments

China’s vehicle market has nearly tripled in size from 4.56 million units (in 2003) to 13.64 million units (in 2009). Global Insight has forecasted that the Asian markets represent the largest growth potential in the global auto industry - with a combined 4.7% compound annual growth rate over the next 10 years (compared with 2.9% in NAFTA). Within Asia, 54% of that growth is expected to come from China. With the promise of tremendous growth, many international firms as well as Chinese firms are encouraged to allocate resources to seize the opportunities presented by the Chinese market.

While many Vehicle Manufacturers have enjoyed strong sales growth, what may not be understood or appreciated among those who are observing the growth in sales is that this is a market where quantity of sales should not be confused with quality of sales. The China market is now experiencing what many companies doing business in globally have come to understand for many years: hyper-competition.

In 2010 we have seen even more intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to capture growth opportunities in China. As this is happening, the local manufacturers will strive to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers.

For the early stages of the development of the China market, the multi-national brands and Chinese brands were for the most part not competing directly with each other. Foreign brands enjoyed a tremendously high share of the passenger vehicle market, with overall share of more than 70% as recently as last year. Until recently, China's automotive market was largely driven by the more affluent Chinese consumers who tended to shop for foreign branded products. However, first-time consumers entering the market have largely driven the recent sales jump. The Chinese local brand manufacturers have typically focused on these first-time buyers.

This is changing quickly. Attracted by the tremendous growth of these segments, many multi-national brands are expanding their product portfolio into smaller segments. Examples include the Ford Focus Hatchback, Chevrolet Cruze, PSA 207 Hatchback, Hyundai i30, VW Polo Sport, Toyota Yaris, smart Fortwo, and Kia Soul.

Attracted by the desire to raise their brand image, and achieve higher margins, the Chinese carmakers are also expanding their product portfolio – into larger segments. Examples include Chery’s Rely V5, Riich G6, Dongfeng’s S30, BYD’s S8 and M6, Geely’s Dihao and Yinglun and the Brilliance Zunchi.

Since China has become the most attractive area to invest for growth, it seems that Chinese consumers will be enjoying even more choices and even more attractive pricing as a result of hyper-competition. Structurally, vehicle manufacturers must adapt to compete profitably in this hyper-competitive market.


Adaptive brand innovation to extend product reach and grow share

An interesting fact is that a great majority of international firms have effectively defended their market positions against local brands. Compared with five years ago, international brands have lost about 5% share of the rapidly expanding passenger car market. Through July, they are still comfortably leading the Chinese market with a total share of 70%. Year-to-date sales growth for most multi-national corporations (MNCs) is up 20% from last year.

While some of this success is a result of an expanded product portfolio, it appears that MNCs have maintained their sales success without a dramatic increase in new product launches. One of the most innovative approaches we have discovered is what we would call “adaptive brand innovation”. This approach involves delivering market-specific adaptations and modifications, extending the range of segment participation to new price-points and product categories, and creation of new brands and products. Many of these approaches are often taken together with local Chinese partners.

As early as 2005, MNCs began with different levels of modification ranging from exterior facelifts, powertrain upgrades, restyling of vehicles, and wheelbase extensions. These efforts were taken to meet the unique and diversified taste of Chinese consumers, instead of simply localizing the global vehicle “as-is”. Typical examples are the extended wheelbase Audi A4 and A6, BMW 5 and MB E-class in the luxury segment, as well as the upcoming long wheelbase VW Magotan for chauffer driven buyers. Adaptation of smaller engines to new vehicles is also a way to increase interest in the product, such as new generation VW 1.4TSI Polo GTI and Golf 6 that dropped the 1.6L and 1.8T engines used by last generation platform.

Small and compact car segments with engine displacement of 1.6 liters and below are traditionally dominated by low-priced Chinese local brands. However, represented by Hyundai, Toyota and GM, MNCs are increasingly down-pricing their volume models to close the price gap with Chinese brands. Such competitively priced products appeal to Chinese consumers because of their brand equity. These pricing strategies have resulted in a number of best sellers in small and compact segments, such as Hyundai Elantra, Buick Excelle, Chevrolet Spark, and others.

Many MNCs are also creating new brands and products together with their Chinese partners. While initially in response to government regulations on new joint ventures, MNCs are increasingly pursuing this as a means for capturing the volume opportunities in the lower priced segments. This approach can include co-developing a new product under an international brand, or creating a new mid-market brand within the context of a JV, or supporting the Chinese partner’s local brand development. Several international OEMs are already moving forward in those directions, such as Lavida developed by SAIC and VW, a new JV brand created by Honda and GAIC, a new generation small car platform developed by SAIC and GM.

Driven by the same incentive as above, MNCs are also offering their technical assistance to supply high performance powertrains to support the extension of the local partner’s products into higher priced segments. For instance, the recent co-development agreement between SAIC and GM for a next-generation fuel efficient global engine platform, Beiqi Foton and Daimler truck’s JV agreement which provides Daimler’s diesel engine’s local production and supply to the local partner’s heavy duty trucks.


Increasing focus on the automotive aftermarket

Along the value chain of global automotive industry, profit is gradually shifting from the vehicle manufacturing to aftermarket service. It is generally understood that aftermarket service and parts contributes more than half of the profits to the global automotive industry. In the United States, more than 70% of auto firms’ earnings have come from their service and parts business, in contrast to only 40% in China.

Entering 2010, Chinese vehicle makers and their international partners obviously recognized huge opportunities from the aftermarket opportunity and accelerated their pace of resource commitment. For network development, vehicle makers are shifting the focus from building brand new 4S dealerships to encouraging current dealers to set up 1S or 2S sub-dealers, particularly in suburban areas, as well as accessible places for rural consumers. For example, among 125 dealers of Mercedes Benz nationwide, there are 42 satellite dealers including 37 sales only dealers and 5 service workshops.

Establishment of sub-dealerships not only provides greater access to potential buyers, but also helps to support service delivery to remote car owners. For service delivery, vehicle makers are dedicated to implementing Customer Relationship Management (CRM) systems and brand experience management stantards to each dealer showroom. Customer retention and lifetime value creation become a focus through the dealer management and performance assessment system.

For service innovation, the vehicle makers are also look beyond traditional service and parts, and extend to derivative business, such as leasing & financing, used car sales, rebuilding & decoration, telematics, and other business. Such an expanded product and service portfolio creates incremental value to car owners, and also maximizes the profitability of OEMs. Shanghai GM and Toyota China are among those first movers to launch their used car business and introduced their own telematics brands (On-star and G-book) to China.


Accelerated drive to globalization

The global financial crisis temporarily disrupted growth in the business for exporting vehicles made in China. However, domestic vehicle manufacturers are once again focusing here and the business has picked up rapidly since early 2010, experiencing a 62.5% growth in the first nine months of 2010. Total export is as high as 405,200 units with even split of passenger and commercial vehicles.

Such a strong rebound is largely fueled by a recovery of market demand in places such as Algeria, Vietnam, Syria, Russia, Egypt, Bangladesh, Iran, Chile, and Brazil. Moreover, improved product quality and a focused business strategy of Chinese local brands has contributed to Chinese export growth. One example is Great Wall Motor Company’s success in securing approval for sales in the European Union, which has enabled them to assemble and ship their 4 small cars to all European countries. It also has greatly enhanced the quality image and market acceptance of Chinese vehicles in other markets.

In view of growing entry barrier of most export markets, Chinese local brands are shifting their market entry strategy from complete vehicle shipment to building a KD plant to assemble locally. Great Wall and Chery have aggressively invested in local facilities in the Middle East, South America and Africa - either solely or with local partners. Meanwhile, other Chinese firms have chosen to work with their international partners to jointly develop locally-adapted product platforms for those fast-growing markets. Recent cooperation between SAIC-Wuling and GM to set up a 50:50 JV to expand into India is a starting point of shifting Chinese small car and engine technology to other markets. With such aggressive and innovative efforts, we expect to see China emerge as a platform for globalization in the coming years.

Summary

These trends observable in the China auto industry in 2010 are reshaping the brands, products and global footprint of those who hope to prosper in the global automotive industry. This is pushing multi-national as well as local Chinese vehicle manufacturers to alter their thinking and adopt new strategies to play the game.

We can now clearly see that China is playing a leading role in the development of the 21st century global auto industry.

10.30.2010

Leveraging China & India for Global Competitiveness: Theme 1

October 31, 2010

by Glenn Hodges and Bill Russo

In our last posting, we introduced four clear China-India themes which provide insight into the nature of the challenges and opportunities for creating value in and through these markets. Each of these themes stands on its own to provide insight for companies looking to maximize value from China and India. The real value of these themes, however, is that collectively they demarcate a range of options for maximizing value within China and India as well as globally.

Background On The Automotive Sector In China & India

As explained in our prior posting, we chose to focus on the automotive sector. Rapidly moving from a low cost source of supply for parts and components, China has become a global automotive powerhouse with increasing activity along the entire value chain. As a car market, China is now unsurpassed as it eclipsed the US in sales for the first time in 2009. The China Association of Automobile Manufacturers (CAAM) projected in September 2010 that China will achieve 25 million vehicle sales by 2015. In 2009, China’s auto market stood at 13.64 million units, and is expected to surpass 17 million units in 2010. These projections lead to the same conclusion: that China will be far and away the largest vehicle market for the foreseeable future.

India’s automotive story is very compelling in its own right. India’s already substantial vehicle market is rapidly growing, and the country has quickly becoming a major center for the development and manufacture of A and B segment vehicles. According to Global Insight, sales of just over 2 million units in 2009 are projected to increase to over 2.5 million units in 2010 and 4.2 million units by 2015. As will be explained, a combination of economic and non-economic factors account for the difference in vehicle sales between India and China, and the markets have rather significant pricing potentials in certain segments.


THEME 1: Differentiated demand profiles across markets provide limited opportunity for leveraging a common product portfolio in both markets

This was a consistent finding across all the companies examined and at both a vehicle level and at a part and component level. In fact, demand profiles across China and India were radically different with much lower volume price points found in the Indian market. This finding has significant implications for both OEMs and suppliers. Companies hoping to achieve scale across China and India with common parts and components or vehicles will find limited opportunity to do so, though there are exceptions at the top and bottom ends of the market.

Based on income differentials alone, vehicle sales across China and India would be expected to be more comparable than they have been. Analysis of socio-economic data suggests that approximately one half of the difference in the Chinese and Indian personal vehicle markets can be explained by economic factors. Of six socio-economic classes, only the top four exhibit high levels of vehicle purchases[1]. There are slightly greater than three times the number of Chinese households in these socio-economic categories than Indian households. However, personal vehicle sales in China are more than six times those in India. Fuel cost differentials across China and India could also play a small role in vehicle sales and a significant role in vehicle size across the two countries given that the price is 50% higher in dollar terms in India than in China[2]. This leads to the conclusion that while the varied demand profiles are strongly impacted by economic factors, they are more likely the result of more than economic differences alone.

A non-economic factor impacting differentiated vehicle demand profiles is the nature of the Chinese and Indian vehicle infrastructures. Although there are large rural areas within China where roads remain in poor condition, there has been a dramatic improvement in the vehicle infrastructure in Tier 1 and 2 cities. In addition, China now has over 65,000 kilometers of mostly new expressway for drivers to enjoy. In contrast, the vast majority of Indian roads remain in poor condition, including those in major cities. Also, India has only 200 kilometers of expressways to facilitate inter-city travel[3]. The net result is lower four-wheel personal vehicle utility for Indian consumers relative to Chinese consumers.

Taken collectively, both the economic and non-economic factors result in highly differentiated demand profiles for China and India. On average, Chinese purchase more vehicles per capita than Indians and at higher average price-points. The Chinese also purchase larger vehicles on average than Indians. Based on global Insight data, more than 60% of light vehicles purchased in India are in the A & B segments as compared to around 15% in China. In addition, a notably larger proportion of SUVs are sold in India than in China to help navigate the poor road infrastructure. Even within the same vehicle classes, Indians are spending less than Chinese for vehicles.

Over time, there is potential for vehicle demand profiles to become more similar as Indian incomes rise and the road infrastructure improves, and as Chinese government policy creates incentives for Chinese to purchase a larger proportion of A&B segment vehicles.

In our next posting, we will address THEME 2: Differentiated and complementary supply profiles create “islands of opportunity” for leveraging unique capabilities of the resources available in each country.



[1] Canback Dangel data and Booz & Co. analysis

[2] www.nationmaster.com

[3] National Highways Authority of India


Click here to view article at GLGNews

10.26.2010

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