Big Yard-Sale Discounts: BYD Triggers Price War

Why does Warren Buffett have a headache? For quite a while, China’s BYD had been nothing but a miracle. Now, the Buffett-backed wunderkind turns outcast. To move their cars, BYD slashes prices down to the bone.

The battery-maker turned EV-manufacturer was lauded for their e6 plugin that claimed a miraculous 250 miles on a single charge. The e6 never really saw the light of day. Instead, much to the amazement of the industry, BYD’s conventionally powered F3 topped China’s sales charts. A one hit wonder doesn’t make a large car factory. With 519,805 units sold in 2010, BYD ended 2010 in the #7 position as far as Chinese car companies go.

In 2010, BYD’s luck started to turn. While the Chinese car market powered ahead and rose 32.37 percent in 2010, BYD was lagging more and more behind and had to down-revise their sales targets.

In the tougher climate of January 2011, BYD’s sales cratered. Their sales were 15 percent below January 2010, Reuters reports. That while the overall market grew 13.81 percent. BYD’s sole domain, passenger vehicles, even grew 16.17 percent.

BYD had to do something, and do they did. Chinacartimes reports that BYD slashed prices across the board by up to 20 percent. All of their cars received a very closed cropped haircut. Even their bestselling F3 “will see its price cut by 3000rmb to 10,000rmb,” says CCT. That’s $456 to $1,521, and it’s a huge discount on a car that usually goes for between 60,000 and 90,000 RMB ( $9,100 to $13,600), depending on trim and extras. BYDs sold mostly on price, and a company that moves just half a million units a year operates with razor thin margins. After discounts, they must sell at least some of their cars at a loss.

China Daily expects a price war among domestic lower-priced car manufacturers. They reckon that home-grown low-end manufacturers will be at each other’s throats. However, “the sales outlook on the mainland may not be as bad for foreign carmakers such as General Motors Co and Volkswagen AG as they will be for the likes of BYD and Geely,” the government-owned paper notes.

These developments don’t seem to be unwelcome in government circles. Foreign carmakers such as GM and VW are involved in joint ventures with government-owned SOEs (state owned enterprises), whereas the homegrowns are mostly privately owned. Nobody really knows how many car manufacturers are there in China (the guesses range from 60 to 120), but there definitely are too many. Beijing wants to prune the jungle down to 8 to 10 carmakers, and has tried its hand in command consolidation for more than a year. So far, with little effect. Now, the supposedly communist government lets market forces do the dirty work.