BYD Blasted For Reverse Engineering, Labor Practices, Expansion

Typically, the only reports on China’s BYD involve booming Chinese sales, unproven future products, and Warren Buffett’s investment in the battery and auto manufacturing conglomerate. But these don’t tell the whole story of how BYD has emerged from relative obscurity to publicly announcing that it intends to challenge Toyota to become the world’s top automaker by 2018. Chinese outlet Caixin [via GreenCarReports] attempts to shed some light on BYD and what it takes to rise to the top of China’s massive manufacturing industry, in a piece titled “How Manufacturing’s Mockingbird Sings.” The piece details BYD’s reliance on reverse engineering, the practice of stripping down competitor automobiles and components and copying them, and its extreme (even by Chinese standards) dependence on cheap labor.

According to the report, BYD has hundreds of staff who focus on global copyright law, to facilitate the kind of copying that would almost certainly be illegal outside of China, as BYD gets ready to start selling vehicles abroad. One of China’s best-selling cars, the BYD F3, is so similar to Toyota’s Corolla that many buyers pay an extra fee to have Toyota badges affixed, making the F3 nearly indistinguishable from the real thing. According to one expert quoted in the story, Toyota is likely preparing a suit against BYD.

But copying is not limited to vehicle designs and styling:

BYD delights and frightens suppliers at the same time. Many have discovered that BYD typically makes one or two serious, large orders of models, materials, or components but never orders again. That’s because it just starts making whatever it bought.

By copying designs, BYD is able to build more of its components in-house at a time when major automakers are increasingly outsourcing component design and production to independent suppliers. It’s able to vertically integrate (relatively) profitably because of its reliance on cheap manual labor. For example, its batteries are built by hand, requiring a columnar (rather than boxed) shape, and resulting in far cheaper build costs despite waste rates of 20-30 percent. Per-capita productivity at BYD’s battery plants is reportedly half that of more automated Chinese competitors, but the firm is still able to keep costs lower. This strategy is carried over to the auto business, where the sheer volume of employees (BYD reportedly ended 2009 with 140k workers) is able to build cars cheaper than more automated factories. And where BYD does automate, it often builds equipment itself to keep costs low.

BYD’s defense of its practices: first, the company claims that its Japanese competitors relied heavily on reverse-engineering in their rise to dominance (an argument that conveniently chooses not to distinguish between studying competitors and blatantly copying them without a license). Moreover, the firm say it has six new models coming out, which it claims don’t resemble anyone else’s designs. We will have to see about that one, as another Caixin story details a few of the challenges BYD is facing as it seeks to make its electric vehicles reality (one of which is that the firm is rumored to be building a total of two of its much-vaunted but poor-selling hybrid vehicles per day and that the E6 is still prototype-only). Meanwhile, BYD has itself become one of the most active patent-filing companies in China. All of these questionable practices are easy to justify when you’re coming up from nothing, but transitioning from tear-up-the-rule-book upstart to a status-quo player is never easy.