The Covid-19 pandemic has made it difficult for many businesses executives to travel to China, limiting information flows in an economy that’s ridden out much of the global economic storm in the past one and a half years. Bill Russo, the founder and CEO of Automobility, a Shanghai-headquartered strategy and investment advisory firm, has been here on the ground in the world’s largest auto market amid an accelerating global shift toward electric vehicles. I spoke last week to Russo, a 17-year China business veteran and former head of North East Asia at Chrysler, about current industry trends and the rise of Warren Buffett-backed BYD, the country’s No. 1 EV maker. Russo holds degrees from Columbia University and Lehigh University. Edited excerpts follow.
Flannery: What’s a key thing that multinationals and investors outside of China don’t understand so well about the auto industry and the emerging EV market here?
Russo: What the Chinese companies seem to get that the foreign do not is that the future of mobility isn’t an extrapolation of the past. This EV future appeals to a younger demographic. What’s different about China is that its consumers don’t follow the previous generation in terms of preferences. Very few who own cars today had parents or grandparents that had the addiction to the automobile. It’s a younger demographic in general, even for the people that are buying multinationally branded products. This is something that Chinese carmakers get here, and the foreign companies don’t see it. They’re completely blinded by this.
Flannery: How is it that China has come so far, so fast in EVs?
Russo: China has been prioritizing the conversion to electric power in transportation for decades now. It was really championed by Wan Gang, the former minister of science and technology, who earlier in his career was a fuel-cell engineer at Volkswagen-Audi. He worked overseas, came back, and was elevated to lead a Chinese government ministry. In the process, he sparked the initiative to level the playing field through electrification. If you were trying to compete with the multinational brands with the backbone technology of the internal combustion engine that was invented 136 years ago, then you’re always playing catch-up with global automakers.
If you want to have an even chance of competing, you have to tip the scale – or just put your hand on it – in a way that evens out the competition. China decided early that this was by shifting new energy vehicles. If you have that much influence on the way in which industries get funded and consumers are steered toward a preference, then you can conjure up results, which is what has happened. The spark of innovation and investments in these types of propulsion investments was brought about by a heavy hand of government intervention, and it was subsidized for more than 10 years.
You can make the argument that that is also true for Tesla. Tesla isn’t a pure market-driven company. They benefitted from California carbon credits for more than a decade. Over time, they were able to demonstrate that there was a consumer market for these kinds of products. It was initially based in the western part of the U.S., but it started to turn into a market-driven business for them, with the capital markets now buying into the fact that they are the leader and a decade if not more ahead of the nearest competition in their ability to scale these kinds of technologies.
Now fast-forward to China, a market where Tesla had no business for the better part of 15 or so years. When China was on the path to electrification, you had here a lot of capital-burning subsidies toward state-owned companies that weren’t exactly the leaders of the electric vehicle revolution. There were a lot of experiments going on, not all of which were geared toward creating a real market. That was only until Tesla
legitimized globally that there is a market for these types of vehicles. Then you see the likes of companies like NIO and XPeng get funded not by government money but by Internet capital. That’s what really changed the game.
In the background, there was this other company called BYD. BYD was really taking the lead early on, without any Internet money in their veins. (See related post here.) They were a supply chain aggregator of batteries for electronics. BYD was a battery company long before it was a car company – a private company. It likely didn’t jump in because of subsidies, but there was enough subsidy there for them to want to take an early seat at the table of the electrification movement. Why? Because they’re a battery company, and if transportation does electrify, then “Why not us putting the batteries in those vehicles?”
So they came at it not with the intention of being a car company but to be a supply chain aggregator of a critical component needed for powering the device. It requires capital, then they went through the public markets to generate that capital and were less dependent on the government. And they were able to attract a really big fish in Warren Buffett and Charlie Munger, who put money into the company. BYD caught the first wave of capital market enthusiasm for the future of transportation. It was BYD, even before Tesla, that was one of the early beneficiaries of the capital markets being convinced of the electric car’s future even before the consumer market was ever convinced.
Flannery: How does BYD compare against EV suppliers backed by Internet successes?
Russo: It’s a fascinating question because this is a private-owned enterprise. Wang Chuanfu is a product of China but BYD isn’t a state-owned-enterprises kind of business. He’s an entrepreneur. If we compare “China classic” versus “new China,” there’s really a China 1.0, China 2.0 and China 3.0. China “classic” 1.0 is a whole lot of government spending, subsidized businesses, and not very market driven.
With China 2.0, you started to see the first wave of entrepreneurs jumping into industries and creating value in a different way. The more recent wave of China 3.0 entrepreneurs is leveraging the power of digital technology to build user -centric business models. This group includes the likes of Lei Jun from Xiaomi and William Li from NIO.
Wang is from the entrepreneurial class and saw the opportunity on the electric vehicle frontier before others did, but he’s not from the Internet-backed ecosystem. He went the way that most traditional companies would go: he convinced the market that you have an idea before others do, and then you convince enough customers. And those early EV customers didn’t represent the EV buyers we are seeing today: what I would call “the young demographic of the secular shift toward electrification.” I think younger buyers are going to buy them before their parents do. However, BYD initially went after the traditional market, and didn’t do it in a pure-play EV way. They did it by building traditional cars powered by combustion engines, and then adapting those cars – the same investment in traditional cars — into electric-power vehicles.
BYD’s initial forays had both ICE (internal combustion engine) versions and EV versions of the same car. But slowly over time – you see Chinese companies like Great Wall and others do it — they eventually figured out their own way. Wang’s way was not going after the new demographic, but by creating enough fleet purchases – taxi fleets – with enough critical mass to legitimize his brand as unique. And remember, he was there long before Tesla showed up. Tesla sparked the retail market for electrification at scale. BYD sparked the initial market for electrification at scale, which was primarily a fleet market. DiDi told me recently that they had 40% at one time in 2019 of the EVs registered in China on the DiDi platform, and that accounted for the majority of EV miles traveled because those cars get a lot more utilization.
So if the largest market for electrification was fleet, then BYD targeted fleet. They also did it with mobility service vehicles, and they did it with electric buses. They did that at significant enough scale to legitimize the fact that they were China’s largest by far – even today – largest EV company.
Now, enter Tesla, in 2019-2020 with the launch of the Model 3 and the launch of the Internet-backed companies. BYD, quietly in the background and not getting a lot of notoriety, has started to sell significant numbers of EVs to retail
consumers. Their market mix is going to be split — it was disproportionately toward fleet and now it’s rising on the retail side. If you look at the more recent introduction of products, the Tang and the Han that are named after Chinese dynasties, they are definitely targeted at retail consumers. They are doing another product that they are doing for DiDi called the D1, which is a for-fleet only vehicle. So they are going to try to separate the fleet lane from the consumer lane, and not sell the same car. It confuses the customer. They’re learning from the experience. What they are also positioning themselves to do is to be supply chain aggregator of batteries that can be sold outside of BYD.
Flannery: How much of their success can we attribute to Wang?
Russo: That’s the difference with government-led China. In government led China, you don’t’ stick your head out too high. You don’t make yourself a target. In entrepreneur led China, it’s okay to be the leader. You don’t color outside of the lines too much; otherwise, you get yourself reigned in, as we’ve seen recently.
But the point is that there’s a vast difference in entrepreneur-led China in the way that companies think and operate. And I’d say it’s even more disruptive here than elsewhere because you do have this very innovative, experimental mindset going on here in this country. There’s no decades-long history of deeply rooted behavior in the consumer market. Consumers are willing to try new things all of the
time. Companies aren’t wedded to a long history and stuck to a business model that’s weighed down by having to carry over the past. That’s what makes China so disruptive in the world. It has more degrees of freedom as it thinks about the future than the rest of the world.
Flannery: We shouldn’t at this point expect BYD to be focused on being a digital company then.
Russo: They been around a long time. They’ve adapted. They have an idea of what they are at the core. They are still a battery supply chain company. They are not attempting to be a digital company. I think the challenge of the future for many
companies right now is that if something new comes along, they ask: “How will I redefine my core business?” A lot of companies are struggling with that. If the (auto) world is pivoting toward (a digital) as-a-service model, what’s my legitimacy to be in that model? How do I get digital DNA infused in my business?
BYD isn’t trying to be that digital company. If DiDi is out there and DiDi wants to buy a lot of cars to service mobility to the population, then BYD will purpose-build a vehicle for them. It can be a good supplier. Wang was a supplier at the beginning. He became a consumer brand, and I think he has more value-capture potential because of it. On the other hand, if you’re just a battery company, like LG, or SK, or Samsung SDI, you have to prove to the capital markets who’s going to buy your stuff and create enough scale for you to compete. If someone comes in late and says “I’m going to sell to everyone,” others are going to say, “Who are you going to sell to? Aren’t you eventually going to get commoditized by someone who eventually claims they can do the same thing?”
Well, BYD, being the supplier of large-scale EV company, has the legitimate claim – just like Tesla, by the way — to say, “I can sell a half a million of these things, or a significant number of these things. Believe me, I can scale battery technology.” That is the reason why Tesla is worth however many billions more than Toyota — because they have the legitimate claim to be able to scale a critical component in the next generation of automobiles. BYD also has the ability to make that claim. Will they be more than just the supply chain aggregator for their own-branded vehicles? That’s a legitimate question. I don’t think they have demonstrated that yet. I don’t think that Tesla has demonstrated that, either. They’ve just been able to sell literally boatloads of EVs around the world.
I think the way Chinese companies work is that they work with ecosystem partners. BYD is very vertically integrated upstream — when it comes to the supply chain. They want to be able to scale and control the supply chain. And that’s a cost — don’t surrender profit to another business that’s making a component for you. But on the services side, they’re not trying to be the demand aggregator. They’re not trying to be the order taker for mobility, other than fleet-oriented sales. Pivoting to digital services or mobility services – that isn’t something that they’re likely to do.
Flannery: How does BYD compare against multinational brands in China?
Russo: In China, you’ve got both a local and multinational consumer market segments. I think they are legitimately different. There is very little cross-shopping in China. Very few customers are saying: “I’m going to going to look at a BYD and Ford.” If you understand that’s the Chinese way of shopping, you can see that BYD wants to occupy the mid-market position among retail consumers. They don’t want to be just another entry-level local brand. The recent products they’ve launched are well-done. They’re getting better and better but not that much more expensive.
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