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Buffett-Backed BYD E6 No Match for BMW Where Price Matters: Cars

November 10, 2011

Nov. 7 (Bloomberg) -- For the price of BYD Co.’s electric vehicle, Chinese consumers could buy a BMW and still have enough spare cash for more than one year’s worth of gas.

BYD’s E6, used in Shenzhen as taxis, has been on sale since Oct. 26 to individuals for 249,800 yuan ($39,300) -- after government subsidies. That’s 36 percent more expensive than Bayerische Motoren Werke AG’s 120i and 16 percent higher than Audi’s A3 Sportback.

The price, coupled with a lack of charging stations, illustrates why the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc. may turn off consumers. BYD is counting on electric cars for future growth as it faces slowing demand and mounting competition with gasoline-run automobiles in a country where the average household makes less than 60,000 yuan in disposable income a year.

“It will take 5-to-10 years and further development of the technology and infrastructure before retail consumers will consider” purchasing electric vehicles, said Bill Russo, a senior adviser at Booz & Co. in Beijing. “Saving the planet is not their priority.”

China, the world’s largest polluter, is promoting alternative-energy vehicles to reduce emissions and fuel imports. The government has a five-year plan that calls for 1 million electric-powered automobiles to be on its roads by 2015, according the Ministry of Science and Technology.

The central government is offering anyone who buys an energy-efficient car in Shanghai, Shenzhen and four other Chinese cities, a 60,000 yuan subsidy.

Electric Cars

BYD says customers will get their money’s worth. The five- seater E6 can run for 300 kilometers (186 miles) per charge, comes equipped with keyless ignition, an onboard navigation system and rear-view cameras, according to the company. The car is available at nine dealerships in Shenzhen, where BYD has its headquarters, and its availability will be expanded to other cities, according to the company.

“We are confident that E6’s quality will appeal to consumers,” Senior Vice President Lian Yubo said in an interview in Shenzhen on Oct. 26, declining to give a sales target. “There is limited production capacity and supply of the car so we think the price is appropriate.”

The E6 will cost $672 a year in power bills, compared with $1,571 in fuel costs for an equivalent family sedan that runs on gasoline, according to BYD projections based on annual mileage of 15,000 miles. BYD’s self-developed iron-phosphate battery takes 40 minutes to fully charge at public stations and as long as six hours when plugged in at home.

First Mover

Development of electric cars is a “key strategy for BYD,” the company said in an e-mail. The first major domestic automaker to offer electric vehicles to individual buyers in China, BYD has failed to translate head starts into market share in the past.

In 2008, it introduced the plug-in hybrid car F3DM in China from 149,800 yuan, compared with 59,800 yuan for the gasoline version. The automaker sold 906 of the dual-powered cars as of September, according to the China Association of Automobile Manufacturers.

BYD, formed 16 years ago as a battery maker, began developing electric cars in 2003, when the company expanded into automobile manufacturing. Its investments in the technology include a 1.5 billion yuan production line in Huizhou, Guangdong province, to make rechargeable batteries for cars, according to spokeswoman Veronica Jiang. She declined to give an investment amount for the E6.

MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway, in July 2009 bought 9.9 percent of BYD for HK$1.8 billion, or HK$8 apiece. The stock climbed to as high as HK$85.50 in October that year and has since declined 78 percent in Hong Kong, last closing at HK$18.96.

Profit Plunge

Earnings are falling too. The company said Oct. 28 it expects profit to decline by as much as 65 percent this year after dropping 89 percent during the first half. China’s end to tax breaks for small cars led to 13 straight months of lower sales at BYD before a rebound in September, according to the nation’s auto manufacturers’ association.

The Chinese automaker faces a difficult task in convincing consumers to choose the E6 over entry-level luxury cars from companies such as BMW and Volkswagen AG’s Audi in the world’s largest car market, said George Yin, an analyst with BOCOM International Holdings Co. in Beijing.

“There are way too many choices for Chinese consumers to shop for both foreign and local brands,” he said. “It’s a bad strategy to start as a taxi before expanding to retail sales if BYD really wants to make the E6 a volume product.”

Lexus, Audi

Audi’s A3, equipped with a guiding system that helps drivers parallel park, starts from 216,000 yuan, according to Cheshi.com, a pricing guide tracking more than 3,000 dealers in the country. The BMW 120i hatchback sells from 184,000 yuan, according to the website.

Still, the E6 is cheaper than Toyota Motor Corp.’s Lexus CT 200h hybrid hatchback, which was introduced in China on the day BYD unveiled the E6 and starts at 279,000 yuan. The car features a voice-activated GPS navigation system and radar cruise control.

BYD is counting on the government to help boost the popularity of the E6.

The city government will strive to facilitate the usage of electric vehicles and promote the E6, Li Ganming, a deputy director of the National Development and Reform Commission’s Shenzhen branch, said at last month’s BYD event, without elaborating.

The fleet of E6 taxis, operated by Pengcheng Electric Taxi Co., has clocked 600,000 kilometers since they were introduced in Shenzhen in May 2010, the company said on its website.

Domestic rivals say they’re in no rush to sell their own electric vehicles. Anhui Jianghuai Automobile Group Co., China’s biggest exporter of light trucks, will wait for the government to build more charging stations before starting sales of EVs to the public, Yang Jun, a deputy general manager with the automaker, said last month. The automaker has sold 550 electric vehicles to its employees.

Shenzhen, which spans across 1,953 square kilometers, has 60 charging stations. By comparison, neighboring Hong Kong, whose area is 43 percent smaller, plans to triple its number of charging stations to 1,000 in a year, Edward Yau, the city’s environment secretary, said in September.

“While being first carries the benefits for building an image as a technology leader, I believe we have already seen how quickly that can turn into a burden,” said Booz’s Russo. “The price needs to come down substantially in order to attract retail consumers.”

--Tian Ying. Editors: Chua Kong Ho, Young-Sam Cho

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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