BYD Junks Traditional Cars, Issues Shares
BYD is quite frank about its need for cash, which should come as no surprise since its profits have plunged over the last 2 years as sales of its traditional gasoline powered cars plummeted and its EV program failed to gain much traction. In its announcement on the plan to issue more shares, it says the capital raising plan is the result of the “current capital strain” on the company due to fierce competition.
In a separate media report, BYD also disclosed that it plans to abandon its older gasoline-powered car business completely over the next 2 years as it focuses on its EV program. (English article) Traditional cars were once BYD’s biggest money maker, helping the company to rake in big profits at the time when Buffett made his landmark investment in 2008. But BYD has seen its sales of those cars tumble over the last 2 years as it failed to find a replacement for its F3, once China’s best selling car model.
The company is trying to put a positive spin on its decision to abandon gas-powered cars, calling the move part of a “rebirth” to end its downward skid that has seen its profits evaporate over the last 2 years. Perhaps somewhat ironically, this so-called rebirth plan could send the company into a death spiral if BYD’s EVs don’t start to find a bigger audience in the near future.
I personally have been quite mixed on BYD in the past. On the one hand I think the company is risking its future by placing too much emphasis on EVs, even though most of the world’s top automakers have failed to succeed in the space despite years of effort. On the other hand, I do like BYD’s recent decision to focus on big customers who operate fleets of taxis and buses, since such customers have the resources to build necessary infrastructure and their driving patterns are more suited to EV use.
The most immediate problem for BYD is that time is emerging as its biggest enemy. Many of its bus and taxi fleet customers have launched pilot programs in the past year, meaning it will probably be at least another year or two before they place major orders if those programs are successful. In the meantime, the company is burning through lots of cash to support the EV program, even as its traditional car business sputters.
At the end of the day, this decision to abandon gas powered cars and issue new shares will probably buy BYD another year or two to keep developing its EV program. But the company could face a very challenging future if results from the EV pilot programs are mixed or negative, and it’s quite possible that future won’t include the continued support of Warren Buffett.
Bottom line: BYD’s decisions to abandon traditional cars and issue more shares could buy it 2 more years to make its EV program succeed.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.