By on August 24, 2010

Think GM has a tough sell for its coming IPO? Chinese battery/automaker BYD is preparing its own $420m stock offering, likely to be floated on the Shenzhen A-Shares exchange, in the midst of a Chinese-market downturn, and an ongoing lawsuit with electronics manufacturing giant Foxconn. And all this comes after a long run of good news for the Hong Kong-listed BYD, which had been running strong on optimism generated by Warren Buffet’s major investment in the firm nearly two years ago. So, is BYD in real trouble of having its overvalued stock burst, or is the company strong enough to weather the storm that’s swirling around it?

On the surface, BYD is still doing quite well. Net profit at the firm was up over 100 percent year-over-year in the first half of 2010, at about $350m. But with sales slowing across the Chinese market, BYD has already cut its 2010 production target from 800k to 600k units, but BYD dealers are complaining [via ABC] that inventory is stacking up on lots. With reports of BYD dealers dropping out of the official sales network hitting the media, BYD is firing back, claiming that churn is normal and that inventories will be worked through. Still, the company warns that the second half should be significantly slower than the first half, and that earnings could take a hit.

Meanwhile, BYD’s vehicles (long favored as some of the cheaper options on the Chinese new car market) are aging fast, requiring a wave of new products and further R&D work. BYD’s best-seller, the F3 is down considerably from previous levels, as foreign nameplates have made far more progress during the recent slowdown than home-grown brands. Replacements for several vehicles including the F3 are coming this year, but high inventory and price pressure will hurt BYD relative to the global majors, who can tolerate declining volumes in the short term in order to preserve long-term market share in a key growth market.

Moreover, BYD’s main claim to fame, battery-electric vehicles (BEVs) are hardly taking China by storm. Details for the first half of this year are not available, although earlier reports certainly haven’t been encouraging. BYD says that it hopes to move 200 EVs per month over the final months of 2010, before launching its zero-emissions cars in the US and Europe. But those markets are starting to fill up with EV offerings, including major OEM models like the Leaf and Volt, as well as Chinese-built competitors like Coda. BYD aims to sell 1,000 EVs per month globally next year, as it moves into the US and Europe, but even those relatively low volumes are far from a sure thing. Especially because BYD has been dogged by quality, performance and image exposés even before it launched major efforts in the US and Europe.

Speaking of which, one of the major attacks on BYD has been in the realm of R&D, as journalists have exposed the what they call the firm’s reliance on labor-intensive assembly and reverse-engineering. It comes as little surprise then that BYD says it plans on using the $420m-ish it hopes to raise in its Shenzhen float on R&D, particularly for EVs. But that money won’t be seen in the models that will arrive in the US next year, and BYD is locked in a legal battle with the world’s largest electronics manufacturing company, Foxconn, which accuses BYD of stealing its secrets. BYD has countersued, claiming Foxconn intimidated and took false reports from its employees, but the legal battle between major competitors for cellular phone battery production could prove lengthy and expensive. Meanwhile, it does little to improve BYD’s image as an automaker that’s ready for global primetime.

And that, in essence, is the question that faces BYD: can it shed its cheap Chinese image, capitalize on its battery know-how, and make headway in the US and Europe? After all, the Chinese market is still growing, and should recover some of its momentum in the next 9 months or so. Unless the shift towards foreign nameplates is a long-term trend, there’s no reason BYD shouldn’t maintain its viability in that market. The big question is whether its EVs are ready for Western markets, or whether they will give Chinese EVs a bad name for a generation. If BYD’s EVs catch on abroad, it could precipitate a major shift in the global auto scene… if not, BYD could become the latest posterboy for Chinese imperfections. The risk-reward stakes couldn’t be higher… but is it a risk you’d be willing to take?

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2 Comments on “BYD Prepares Stock Offering Amid Falling Sales, Foxconn Lawsuit...”

  • avatar

    For all his brilliance, Warren Buffett does make mistakes. Thinks of his airline stock purchases. It’s hard to tell, but I think BYD will also turn out to be a dud for Buffett.

    And I would stay away from all carmaker stocks. The industry has been a money pit for investors, and by the look of it, will continue that way.

  • avatar

    “in the midst of a Chinese-market downturn”
    Wait, what? There’s a downturn in China? Is there an article on downturn in China? Cause I can’t seems to find any on google and google news. And recently China in #2 in economy now. Ugh… come on USA!

    Is it in general? Or just certain markets in China is in the midst of downturn? And is it speculative mumbo jumbo? I know they’re going to get a bubble cause of their artificial low currency.

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