Probing for Secrets Behind BYD's Mystique

(Caixin Online) The market had waited with bated breath for years before the anticipated pride of Chinese carmaker BYD finally appeared on a Ministry of Industry and Information Technology (MIIT) annual list of new autos in early January.

Listing the E6 in MIIT's 2010 catalogue put what's still largely a secret vehicle in line for a final permit process, which should gradually answer persistent and sometimes troubling questions about the car's technology, market goals and proposed commercial model.

BYD claims it has developed the world's leading electric vehicle and battery technology. But the technology has yet to be verified beyond the company's shadowy walls by industry and technical organizations. And so far, scale models of the E6 and BYD's plug-in hybrid F3DM have been seen only at auto shows.

Despite unproven claims, BYD's stock value has risen 10 times since U.S. billionaire Warren Buffet made a high-profile investment in the Shenzhen-based company in 2008. The attention catapulted its image into the stratosphere as a new energy vehicle company.

But to this day, no one outside the company really knows much about BYD's research into electric vehicle technology or whether its promise will ever become a reality.

BYD officials say they don't want to reveal trade secrets. But many in the industry have raised doubts, pointing to the fact that some automakers including Nissan and Daimler, which plan to start mass producing electric vehicles this year, have long offered their products for test drives.

The mystery gets even more profound when one considers that Wang Chuanfu, BYD chairman and CEO, once admitted on Chinese television that even without accounting for research costs, the company would lose 20,000 yuan on each F3DM sold.

Claims, Counterclaims

BYD has said the E6 will be able to travel 300 kilometers on a single charge -- much farther than electric vehicles developed by Nissan and Ford. Skeptics say BYD's numbers have yet to be confirmed by third-party testers, and some in the industry say an E6 could only achieve 300 kilometers by adding an extra battery pack.

BYD says charging an E6 battery generally requires eight hours, and that a high-current, fast charge can take about 15 minutes, outstripping Nissan's electric model.

But BYD's claims have raised technical issues. For example, Feng Fei, head of the State Council Development Research Center Industry Department, said fast-charging may slash in half the lifespan of an auto battery – usually about 1,000 charges –
and greatly increase an electric vehicle's costs.

In a speech at Peking University on January 9, former Dongfeng Motor Corp. president and MIIT Vice Minister Miao Wei criticized some electric car companies and their experts, whom he said try to fool laymen by only releasing information that's to their advantage. For example, Miao said, some leave out the facts that long driving distances are achieved by adding battery packs, and fast-charging reduces battery life.

Sources at the China Automotive Technology and Research Center say no tested, domestic-made electric vehicle has simultaneously met targets for driving range, battery weight, failure rate, maximum speed and battery life.

Electric car developers are racing to close the performance gap with traditional cars with internal combustion engines. But they still lag far behind in areas such as driving distances per fill-up, which a survey by the consultancy McKinsey found is among the foremost issues for consumers in Shanghai when considering electric vehicles.

Barriers to Mass Production

Manufacturing an electric vehicle is not difficult, but it's a challenge to mass produce battery-powered cars at low cost that can guarantee safety. And to date, there's been no indication that BYD can mass produce electric vehicles, given its inability to find a commercial solution to battery consistency issues.

A Shenzhen Development and Reform Commission (SDRC) source close to BYD said the company has not put an electric car into mass production because of its inability to ensure battery supplies. He stressed the problem was not technical, but that the company just needs more time.

The source insisted the E6 would reach "a certain scale" of mass production in 2010. Generally speaking, 10,000 vehicles is a basic industry qualifier for mass production. It's unclear whether the F3DM or E6 will reach that mark.

Speaking to Caixin Online, BYD officials said their battery production methods are automated, and that they have full confidence in their manufacturing system. But they declined to provide direct proof of these and other claims.

Cao Jianhua, vice president of Shenzhen B&K Rechargeable Battery, said BYD probably runs only a single production line that builds two F3DMs per day. He also noted the E6 is still in the prototype stage.

Cao said a battery comprises up roughly half of an electric car's weight and cost, and according to his projections the E6 may require as many as 1,600 batteries. The challenge for BYD, he said, is to guarantee the quality of each car's 1,600 batteries while maintaining low costs.

Experts say ensuring battery consistency and safety requires automation and high-quality materials. So far, however, BYD's success has been built on leveraging China's low-cost labor, using people instead of machines in the production process.

Shen Yang, director of investment banking strategy for Beiqi Foton Motor Co., a Chinese auto manufacturer with early investments in new energy vehicle research, calls BYD a "battery king" with distinct advantages in single-cell batteries. But he said the company lacks a competitive edge in the areas of battery pack management, electronic control technology and vehicle integration technology.

Mao Huanyu, general manager of Shenzhen BAK Battery, said BYD in the past mainly produced single-cell mobile phone batteries but never ventured into the field of notebook computers, which use six- or seven-cell batteries.

An electric car needs hundreds or thousands of cells, so consistency is paramount. "So far, I have not seen a technological bright spot for (BYD) in terms of integrating multiple batteries," Mao said.

Government Business

BYD and other electric car hopefuls also must overcome the infrastructure hurdle. For example, charging stations and other supporting facilities will be needed before the ubiquitous electric market takes off. Questions about the form of this infrastructure, investment sources, and their likelihood remain unanswered.

But local support is in place. A SDRC source said the city of Shenzhen plans within four years to buy 2,000 electric cars from BYD for use as taxis. And the Pengcheng Taxi Co., a subsidiary of Shenzhen Bus Group, plans to jointly establish an electric vehicle servicing company with BYD. BYD's investment would consist of 100 E6s, while the bus group would handle company operations.

To offset the high cost of electric vehicles, the source also said policy subsidies for the E6 are under discussion. The government plans to provide a 50,000 yuan subsidy for each E6 purchased, and is currently choosing between two subsidy programs: a direct subsidy to buyers, or subsidies to the manufacturer. Additionally, the government plans to offer electric vehicle drivers half-price parking and highway toll discounts.

If its electric vehicle business is forced to depend on government subsidies, BYD will need more friends than Shenzhen officials. But local car companies already have connections and stakes  in Beijing, Wuhan, Guangzhou, Chongqing and other major urban centers. Each city government is likely to offer preferential treatment to a hometown favorite, and BYD is a latecomer in China's crowded public transportation sector.

Competition among government departments may be another challenge for BYD. For example, Science and Technology Minister Wan Gang has long supported electric vehicles as a target for state investments. But officials at MIIT, which oversees the automotive industry, advocate energy-saving and emissions-reduction solutions for traditional auto technology given the immaturity of new-energy technology.

Perhaps aware of the complexity of the policy environment, BYD has adopted a maverick, behind-the-walls business style. Its officials also have been keen to lobby the government; in recent years, the company has frequently invited national leaders and industry experts to inspect its facilities.

BYD's development strategy called for evolving from small beginnings as an OEM maker of cell phone batteries to a become a manufacturer of autos, from traditional to new-energy vehicles, including electric cars. Many industry insiders and investors are bullish about this path.

But a slow start for the electric vehicle market and an uncertain future are putting pressure on BYD. And the pressure will only rise as CEO Wang and his team seek a genuine market solution.

Some investors are speaking with their wallets. After BYD received MIIT approval for the E6, the company's stock fell to HK$ 55.80. It had reached a high of HK$ 85 in 2009.

At this point, Mao of Shenzhen BAK, said the company's veiled approach to public relations, product development and technology may be hurting.

"Technology will depreciate over time," he said, but practical applications help technology develop. Persistently holding back a new product to protect a secret technology is simply illogical, Mao said.