BYDDY - BYD Atto 3 Challenges 'Too Hard' Viewpoint For BEVs

Summary

• After spending a lot of time and effort in building the international electric bus market, BYD is turning to passenger electric cars.
• BYD is going global (except US) for cost-effective passenger fully-electric vehicles (BEVs). The BEV push includes Japan, which has resisted the switch from ICE to BEV.
• There are two views of owning a BEV - one involves complexity, the other ease and big cost savings.
• BYD’s new focus on global affordable personal transport BEVs is happening at a time of massive BEV adoption.
• BYD has two negatives: Berkshire selling down and US distrust of everything Chinese; this may present an opportunity for investment in BYD.

There's a lot to read about BEVs (Battery Electric Vehicles) currently and no doubt the upcoming Tesla (TSLA) March 1 Investor Day event will consume the headlines. One thing that has gone missing in a lot of recent commentary on electric vehicles is how they're being regarded by traditional buyers of cars with an ICE (Internal Combustion Engine) and in particular how BEVs are considered in relation to hybrids (ICE cars with a small lithium battery). My perspective on electrification is biased by my focus on the climate issues and the need to urgently exit the ICE and electrify wheeled transport. I'm also personally engaged because I've recently made the switch from ICE to BEV through purchase of a BYD ( OTCPK:BYDDF ) Atto 3 SUV. This has focused my attention on my earlier investment in BYDDF, which has been a good news story for me. Here I provide some qualitative perspective on BYD and in particular the Atto 3 BEV which BYD is using to spearhead a major push into a number of key global personal transport markets, with the noticeable exception of the US market. There are some short-term headwinds for BYD but I don't see them as insurmountable problems, and I see the current period as interesting for investors to consider timing a BYD investment sometime in the near future.

Seeking Alpha provides good coverage on BYD, so I won't recap a lot of the core information that investors need when thinking about investment in the company. Nick Cox has provided powerful overviews of the BYD business in October and December 2022. These articles give a great insight into the company and explain why it has been overlooked.

Has the time arrived when buying a BEV becomes a "no brainer?"

For me, the answer is a definite "yes" because my weekly budget has just changed as my personal transport costs have become close to zero. The light bulb moment came for me when I researched the arrival of the BYD Atto 3 in Australia toward the end of 2022. Until then the decision to purchase a BEV largely meant Tesla in Australia due to policies of the previous government to keep out electric vehicles ("vanity machines").

BYD now has an international focus for its BEV cars

China is the world's biggest car market (roughly twice that of the US, which is No. 2). Following the US is India (3), Japan (4), Germany (5), and Brazil (6). BYD is a huge player in China. It's in not yet in the US for personal transport (see below), but BYD is aggressively opening up sales of the Atto 3 in India, Japan and Germany along with other key markets such as Australia, Indonesia, Cambodia, Vietnam and several other European markets. A European review gives a sense as to how it's being received in Europe (Germany, Norway, Sweden, Denmark, The Netherlands, Belgium and Luxembourg). The Atto 3 received the Prestigious Flemish Automobile Club 2023 Electric family car of the year. The above key markets are just the start as BYD is selling the Atto 3 in Mexico, Uruguay, Costa Rica and more countries in Europe (eg France) will get the Atto 3.

In the first 10 months since launching the Atto 3 outside of China (to early January 2023), BYD has sold 229,020 Atto 3s. In China the Atto 3 is known as the Yuan Plus. Since a total of 911,140 BEVs were sold by BYD globally in 2023, the Atto 3 is becoming a big success in an overall electric car success story. These numbers are extraordinary given the 2022 headwinds in the car industry, with supply shortages and shipping challenges. It will be interesting to see how the Atto 3 performs in 2023. In December 2022, 29,468 Atto 3 vehicles were sold, with 8,606 being exports (with 1,268 sold in Australia where the Atto 3 became the second-most successful BEV after the Tesla Model 3).

Also in 2023 two other BYD cars will be introduced to international markets, with the small Dolphin SUV-like city vehicle being highly likely to be of interest in many markets.

BYD Atto 3 is the differentiator BEV

I see the Atto 3 as not just a very competitive BEV which is a truly modern vehicle (computer on wheels). From my perspective it's competition for the hybrid view of the world (eg Toyota RAV 4 hybrid) which involves keeping the ICE (Internal Combustion Engine) but claiming the hybrid to be an "electrified" vehicle. The Atto 3 is cheaper to purchase than a car that might be considered comparable, such as the Toyota RAV4. It has a range that makes driving as anxiety-free as driving a gasoline or diesel car. The cost of "fuel" (electricity in the case of the Atto 3) is dramatically less, and there are so many parts that you don't have to worry about in the Atto3 because they aren't there!

Contrasting views of the BEV experience

I've recently enjoyed reading about the experience of the first person to drive a BYD Atto 3 from Perth to Sydney and back (8,000 km). But the story also gave me pause because reading it from a position as being skeptical about owning a BEV, it would have pressed all of my buttons. It was hard, but then again the trip covered some of the most remote driving in the world. My perspective as an East coaster in Australia couldn't be different. It's worth briefly looking at the two stories, because my take is that one makes it an easy choice to buy an Atto 3, while the other leaves questions. The stories are important because they encapsulate the issues concerning owning a BEV.

The easy story

My story as an Australian east coaster, but one who doesn't live in a big city, is the easy one. From day 1 the Atto 3 has been a delight to own and drive and there have been a number of unexpected bonuses. Of course having had the clutch go on an ICE vehicle recently has re-emphasized a key difference concerning owning a BEV.

We live in the country ~100 km from Sydney and drive to and from Sydney (~300 km round trip) regularly. The Atto 3 has a range of 420-480km and this means there's no need for range anxiety on this trip and no charging is needed. On returning home charging is either free from our 10 kW of solar panels which provide excess power or ~ if charging at night off-peak. After a Sydney trip the Atto 3 requires ~5-6 hour charge with a 7 kWh charger. We keep the vehicle charged and use it regularly for local trips (which almost always involve ~50 km travel).

We've only had the car two months but we did do a 1000 km trip (~500 km each way) at Christmas. The Atto 3 comfortably transported four adults and a young Labrador dog. We made no plans about charging other than noting that we would charge somewhere around half way to exercise the dog and have lunch. The stops (going and coming) involved a charge of ~30 min with 50 kWh charger. The Atto 3 has a 60 kWh battery so a 50 kWh fast charge gives ~80% charge. Note that the Atto 3 LFP (Lithium Iron Phosphate) battery charges all the way to 100% quickly (unlike NMC batteries which slow down after 80% charge). Going north there was no charge and the return charge cost ~. While holidaying at our destination we just used a 240 V socket (1.4 kWh) normal power point charger (which we took with us). The fast chargers had their own chargers that fitted our Type 2 charge port. We could have done a fast charge at our destination but there was no need for it.

This was very painless East Coast motoring. Absolutely no preparation was needed. The car is a delight to drive. The only modification we made to the Atto 3 was to get professional window and roof tinting to block UV and infrared rays. The BYD has a full length sunroof. Note that the Atto 3 has a heat pump as standard (like Tesla) for temperature control - this substantially reduces power used to heat/cool the car (ie no big impact on range when you use the air con).

The challenging story

It's clear that currently going west in Australia and in particular crossing the Nullarbor Plain, which involves the 1675 km Eyre Highway, more planning is needed. This will change as fast chargers get installed in South and Western Australia, but the Nullarbor Plain is a big deal trip.

Sarah White (Facebook Atto Gal) gave a detailed description of her trip of almost 8000km from Perth to Sydney (and back). The contrast with my east coast experience was significant. Those put off might remember that crossing the Nullarbor Plain is still a big deal even in an ICE car.

BYD Atto 3 in the bush: Our new generator providing power when the grid is down

Living in wild country, which is lightning-prone means frequent power outages. We have a small generator that keeps us going when the power is down, but it uses a lot of fuel, is smelly and noisy. I asked the guy who installed our 10 kW panels about using the Atto 3 as our stand-in generator and he was sceptical, saying that we might boil a kettle but not much else and certainly it wouldn't work for a sustained outage.

Recently we had the first significant outage since owning the Atto 3. I was so over the gasoline generator that I thought I'd try the Atto 3 as it came with a plug-in to our charger inlet that ended with a four-point power board. So with the power out, I drove the Atto 3 up to a verandah and set it up to deliver power. It worked for the 15 hours that the power was out.

In summary the Atto 3 kept the fridges cold, our big freezer frozen, LED lights, phone charging, internet connection through Starlink, coffee ground and Italian coffee machine happy and the pump to provide house water from our tank system. In short all key emergency services were happy for 15 hours, using just 6% of the Atto 3 battery. This means 10 days on a full charge. No noise, no fuel smell just peace and quiet.

The next step is to get a (smallish, say 5-10 kWh) battery to hookup with the solar PV and integrate that with the Atto 3 as the backup power and have all of that integrated to run the house when the power goes down. This will keep the solar PV working through the outage (currently when the power goes out so does the solar because there is nowhere for the electrons to go). There are some connectivity issues but we may well end up dispensing with the grid connection. The Atto 3 provides a big battery for free as it comes with transport.

BYD Atto 3 does things that "normal" cars don't do

It sort of goes with being a BEV, but things do change in a way that doesn't happen with ICE vehicles. You can't plug an ICE car into your house and run it in an emergency. You can't consider an ICE car as part of an overall domestic energy management system (the core energy storage component to balance solar PV etc). You don't get over-the-air software updates in an ICE car. Like Tesla, BYD does over-the-air software updates too. And yes my BYD dealer tells me I can get a towbar, but just as happens with an ICE car, you use more fuel when you tow.

Going international

BYD has benefited from a major push within China in developing the BEV industry. For those interested in why, an article last week in MIT Technology Review is compelling reading. In a nutshell it's argued that China realized that it was never going to be able to compete on ICE cars with countries like Germany and Japan, and Japan had also cornered the hybrid market. BEV represented the possible opening for global dominance and BEVs also addressed urgent needs to decarbonize from the point of view of pollution as well as the fact that China doesn't have adequate reserves of oil. Tesla going to China is an interesting part of the China BEV story.

The obvious next step for Chinese BEV car makers as the Chinese BEV market takes off is to look at the rest of the world. BYD is doing that in a big way now and it is a reason for taking it seriously. I'm not into trying to figure out Tesla versus BYD as both companies have compelling stories. My solution is to be invested in both.

I have a rule that articles in Seeking Alpha have a finite length and this article has tried on several occasions to get out of control. However, before closing it seems worthwhile to have a quick look at a couple of major markets (Japan, India) where BYD has big plans that might prove to be challenging. But before that it's relevant for US investors to get some insight into why BYD is not yet in the US personal transport BEV market.

BYD in the US

I think the considerations outlined in the above-mentioned MIT Technology Review explain why at this stage BYD is taking its time in entering the US personal vehicle BEV market and it is yet to sell a personal BEV in the US. It's clear that BYD, which dominates global (ex China) BEV bus sales has had a tough time establishing itself in the US bus BEV market.

BYD entered the US via a Californian manufacturing operation for its electric buses although this market is inconsequential compared with its Chinese BEV bus sales.

Two companies, BYD and Proterra are the primary BEV bus manufacturers in the US and both will benefit from US goals for all buses to be zero emissions by 2030. It seems that BYD might struggle in competition with US-owned Proterra, given current anti-Chinese stance, notwithstanding that BYD manufactures buses in California. Note that buses are poorly represented in the US because the country is poorly served by public transport. Electric buses represent only a small percentage of the 68,264 buses owned by transit agencies in the US. For comparison China's electric bus fleet dwarfs the total US bus fleet, with 138,000 BEV buses sold in China in 2022 ! So the US is not likely to be a significant market for BYD which shares with one other company most of the Chinese electric bus market that accounts for 98% of the global bus BEV market.

The above small interest (to date) in electric buses in the US is just part of why BYD's entry in to the US market has not been without challenges. Battery range and charging facilities have created problems. Notwithstanding that there are clearly big savings in overall electric bus ownership, upfront costs have been an issue for cash strapped US municipal authorities. California is offering state funding to electrify the entire public bus network by 2040, but it still has only 300 electric buses now, although there are a lot on order. BYD started Californian operations in 2011 and its electric buses comprise two-thirds of the Californian fleet. BYD qualifies for the "Buy America Act" through its Californian manufacture, but there are issues with purchase of products from Chinese-owned companies. Put simply being a Chinese company means problems for BYD selling in the US currently.

BYD in Japan

Given the challenges that BYD has encountered in the US, I'm intrigued as to why BYD is clearly serious about attacking the Japanese market.

I suspect that BYD realizes that with the Atto 3 it has a vehicle that provides a real challenge to Toyota's argument that customers want hybrids and don't want a BEV (despite Toyota not offering them the choice). I think BYD is on to something and the Japanese market (fourth biggest global car market) could become interesting, especially when the smaller BYD town vehicle (Dolphin) is added to their line-up in mid-2023. BYD is not without ambition with plans for 100 Japanese dealerships by end of 2025. Sales of the Atto 3 commenced in Japan on Jan. 31, with the referenced article claiming sales at 20 locations, although it isn't clear whether these are all dealerships.

Japan is definitely a challenge as the penetration of BEVs in Japan is negligible. The problem is that Toyota has a huge influence on government policy and this means that true BEVs are marginalised and hydrogen and hybrids get talked up. Toyota has argued that 5.5 million Japanese workers rely on the ICE industry and this may be part of the reason that the Government has not been clear about the BEV transition, having hybrids (fully gasoline-powered) denoted as "electrified" vehicles. The recent cancellation of a contract to supply BYD buses for Japan to Hino (a Toyota subsidiary) could be a sign of trouble for BYD in Japan. Likewise Japan is famed for preferring to buy local products.

As I've argued above, the case for BEVs (and big fuel savings) is easy if the reality can be presented. The BYD Atto 3 and Dolphin seem to me to have a good chance of making that case.

BYD in India

India became the third-biggest car market in 2022, so it deserves attention. India also is the country that clearly understands the need to fully electrify its wheeled transport. I've written previously about how India has resisted heavy pressure by Toyota to give special privileges to its hybrids. India has stayed the course in insisting that the change in the car industry has to be full electrification.

BYD comes to India with its BEV vehicles and also assembly in Chennai. Currently the capacity of the Chennai plant is 15,000 vehicles and BYD expects to sell 15,000 units of a combination of the Atto 3, e6 and Seal fully electric vehicles in 2023. The Chennai plant will be expanded as demand increases, with optimistic plans from BYD being that it will command 40% of India's passenger BEV sales by 2030.

Conclusion

Reflecting on the BYD story helps me understand where my approach to investing fits. I like to be early and find companies that are on their way, or show signs of recovering from a setback. Looking at quarterly earnings is crucial to see how a company is tracking, but it's a historical thing and it's useful to get a sense of what is coming, but it's based on continuity. I look for change.

The good bones in the BYD business have been evident for a long time. Warren Buffett saw the opportunity a very long time ago and I've been lucky to invest early when the shares cost a fraction of what they do today. The question for me in thinking about BYD now is not so much what happened last quarter, but more about what is changing to drive this business to new levels. This is where the story telling that I've covered here and the resulting qualitative analysis has a role. I'm convinced that BYD has a long way to go but the question now is what is a price that will make the stock attractive.

Notwithstanding the positive issues that I've addressed here, there are two big negatives currently which are impacting the stock negatively. These are the continued sell-down by Berkshire Hathaway ( BRK.A )( BRK.B ) and the profound negativity by US investors for anything Chinese. I don't think either of these negatives are significant for BYD's long-term business. Berkshire has every reason to take some money off the table; they have made huge gains on the stock. As for US boycotting everything China, the point is that the big global play in the car industry is China and BYD is very successful there. BYD also has opportunity in Europe, South America, SE Asia and Australia (and look out for what will happen in Japan), so they don't need the US to be successful. I suspect they will enter the US eventually, but they have a lot on their plate at the moment.

I'm not a financial advisor, I just present how I approach this stuff as it might interest other investors. Like you and your financial advisor, I read the quarterly reports and the crystal balling about the state of the economy etc, but I also use my qualitative research to provide guidance. I kick myself for not trusting my instincts and making a substantial investment in BYD at around $10. A silly reason for this was that my initial entry price for a small investment was under $5 and I hoped to have a chance to increase my stake at a price below $10. Now I'm thinking that $25 might be a price that is worth thinking about and the negatives that I mention above might just get the BYDDF share price back into that range.

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