BYDDY - BYD Powers On

2023-07-12 10:59:05 ET

Summary

• BYD has stopped making vehicles powered solely by an ICE (Internal Combustion Engine).
• The company makes hybrids in China, but a focus is on hybrids having a battery of significant size.
• BYD’s export focus is on relatively cheap, but well-engineered fully electric vehicles rather than on cars with an ICE.
• BYD is planning to manufacture in Brazil and SE Asian countries to make their BEVs more affordable.
• BEV is likely to sell more BEVs than Tesla soon. This company is of interest to investors with a view to a fully electrified future.

BYD ( OTCPK:BYDDF ) is attracting increasing attention not just from electric car purchasers, but also from investors. Seeking Alpha has published several interesting articles recently, one of which from Liang Zhao compared Tesla ( TSLA ) with BYD in terms of conventional financial metrics such as sales and profitability, with a global perspective. There is a lot of useful information in that article. It is clear that Tesla and BYD lead the BEV (Battery Electric Vehicle) pack currently. I've followed both companies for some time and I note a key difference between Tesla and BYD is that Tesla has no baggage, being solely a BEV manufacturer, while BYD is making the transition from being a major ICE (Internal Combustion Engine) car maker. Here I dig a bit deeper into the issues facing BYD as an electric car company that still makes cars with an ICE. I conclude that BYD seems better prepared for the transition than other legacy ICE manufacturers. This provides a further reason for investment in BYD.

BYD's power strategy: ICE vs BEV

BYD is one of if not the first ICE car maker to stop selling vehicles with just an ICE. It does produce hybrids in China, but the push overseas is for pure BEV sales. This is new with affordable BEV model expansions happening now in many markets that don't have a history of BEV vehicles.

BYD is scaling up its BEV production for export rapidly

BYD has chosen three vehicles to spearhead its entry into a number of global markets in 2023. This does not include the US, but major markets in Europe, Australia, South America and SE Asia are being targeted aggressively. The Atto 3 (Yuan plus) BEV is a medium sized SUV which was launched in Europe and Australia in 2022. In 2023 in both Europe and Australia sales of BEV Dolphin (smaller version of the Atto 3) and Seal models will commence. The Seal is being spoken of as a competitor to the Tesla Model 3.

Where do hybrids fit?

Toyota has made clear that hybrids are a key feature of its planned sales well into the future. The company is coy about revealing a plan to exit ICE manufacturing. I'm beginning to discern a difference in what Toyota means by a hybrid and how BYD views a hybrid. Toyota's promotional material talks a lot about electrification, which invariably means a hybrid not a BEV.

I've recently explored the Toyota Tundra hybrid, which has a tiny 1.7 kWh battery. This makes clear that this hybrid is not developed as a fuel saving vehicle. Rather the purpose of the battery in the Tundra is to enhance performance with the battery functioning for very brief driving intervals. I've also realised that even Toyota hybrids with larger batteries are unlikely to have the fuel economy touted under real driving conditions because the driver has little control over when the motor takes over from the battery. In reality driving at speed, in the cold, etc. means that the motor starts and the battery no longer is fueling the drive.

This got me to thinking about BYD's approach to its hybrid vehicles. It seems to me that in the case of BYD, the motor is not necessarily the key issue in the hybrid. It seems more that a BYD hybrid is an electric car with the small highly efficient motor acting as a range booster. An example is the BYD Frigate 07 plug-in hybrid with a 36.8 kWh battery and a battery range of 170-205 km in its premium version.

BYD gets in the way of car makers expecting to find markets that will be slow to adopt BEVs

Not long ago BYD made clear its view about the ICE (Internal Combustion Engine) by ceasing production of all cars powered just by an ICE. And in export markets the focus on BEV vehicles with no ICE is clear. Not only is the export focus on fully electric BEV vehicles at an attractive price, but the markets that BYD is targeting include those that companies with an ICE focus (e.g., Toyota) have been confident could not be approached for BEV sales.

BYD exports

Australia

In Australia, BYD released its export version of the Yuan Plus called the Atto 3 late in 2022. This is only available as a fully electric (BEV) version (no hybrid version). Sales are becoming significant with 1,532 reported in June 2023, which is substantially fewer than the much more expensive Tesla Model Y (5,560) and also the Toyota RAV 4 (2,858 all versions), but watch this space as the company gets its act together in Australia. The BYD Atto 3 did outsell the Tesla Model 3 in June (1,458). People following the introduction of BEVs in Australia might be interested to know that in June 2023 the Tesla Model Y (5,560) split the dominance of ICE Toyota HiLux (6,142) and Ford Ranger (5,334).

Two more BYD models are due for release in Australia in 2023, the Dolphin, which can be ordered now and is due for release in ~October, and the Seal, which is a BYD competitor for the Tesla Model 3. Both the Dolphin and Seal will be only available in fully electric versions.

Rumours are that BYD is contemplating release in 2024 of a Utility vehicle which will compete with the Toyota Hilux and Ford Triton. If the rumours are true, it seems likely that this vehicle will come as a hybrid to provide an extended range of perhaps 800-1000km for a workhorse vehicle. This is speculation but I'm beginning to realise that there are hybrids and hybrids. Toyota's hybrids seem largely about improved performance (electric motors have astonishing torque) and that Toyota's hybrids rely on ICE to run the vehicle and the user doesn't get to choose when the motor gets turned on. I suspect that the BYD Utility vehicle might be more a BEV-like vehicle with motor to help out when the (considerable) range of the battery gets exhausted. Watch this space.

Japan

BYD has similar BEV releases planned in Japan with the Atto 3, Seal and Dolphin all to be released in Japan in 2023. This involves a selection of moderately-priced fully electric vehicles being introduced into the country most stuck on the internal combustion engine.

Brazil

Last week a major expansion for BYD's business in Brazil was announced. BYD plans to invest million in several initiatives involving three new plants, one for manufacturing the chassis for electric buses and trucks, a second for hybrid and electric cars (150,000 cars/year) and thirdly a lithium and iron phosphate processing plant for BYD's global Blade batteries. BYD already has a Blade battery manufacturing facility in Brazil. The plan is to boost local production and make vehicles at a more competitive price. The operation of the new plants is expected in mid-2024!

Thailand

Traditional ICE manufacturers such as Toyota have made no secret of their view that the SE Asian market will be a big opportunity for their ICE vehicles as Europe and China adopt BEVs. BYD is taking on this view with three of its BEV vehicles, the Atto 3, the Dolphin and the Seal. The release of the Atto 3 in Thailand is looking as if BEVs are being adopted with vigour and the well-priced BYD vehicles are making waves. For the first half of 2023 the Atto 3 became the leader in BEV sales in Thailand with 11,167 vehicles sold. Competitively priced (starting price ,000) Chinese Hozon Neta V was the second most popular BEV with 5,955 sales in H1 2023, and the Tesla Model Y was third with 3,638 sold in H1 2023. BYD is releasing its smaller affordable Dolphin which in standard range costs ,919 and in extended range costs ,474. BYD is constructing a manufacturing plant in Thailand with a capacity for 150,000 BEVs annually. Things might get uncomfortable for Toyota quite soon in Thailand.

Indonesia

While Thailand is ahead in getting BYD to establish manufacturing, Indonesia may not be far behind, although details of discussions between BYD and the Indonesian Government are hard to come by. The thing is that the Indonesian Government has a big commitment to electrification of transport and this means BEVs not hybrids. Indonesia wants to build a battery industry and seems to be talking with most major BEV manufacturers. The Atto 3 and Dolphin have arrived in Indonesia but details about sales are unclear as yet.

Vietnam

It seems that BYD is about to start selling the Atto 3 in Vietnam.

The above indicates BYD's clarity about where the future of the car industry lies and its courage in exiting ICE manufacture. There is some indication that areas that are more difficult (e.g., bigger work vehicles) might have a (short?) hybrid future, pending improvements in battery capacity.

The key point is that BYD has ceased selling cars with just an ICE. They do sell hybrids in China, but they are not just ICE cars with battery assist.

Legacy car makers in transition, the case of Ford

Ford ( F ) has a clear view through establishing separate internal combustion engine (Ford Blue), electric (Ford Model e) and Commercial (Ford Pro) segments. The developments in the BEV segment, Ford Model e business, are impressive. However, the internal combustion Ford Blue shows no sign of seeing itself as a terminal business. It focuses on low investment/high margins with a huge focus on simplification with a small number of base vehicles and disciplined derivatives of these vehicles (e.g., orderable combination for the Explorer is reduced from 1,900 to 23, and F-150 complexity is reduced by eliminating more than 2,400 parts!). However, there is little indication that Ford sees its internal combustion engine business as having a finite future, with low double-digit margins to be achieved by 2026. It is all about growing revenue and profits, with increased capacity by 160K vehicles over the next 10 months. It does have provision for hybrid vehicles, but that still means an ICE. Part of the plan seems to be keeping the ICE vehicles in markets with minimal EV infrastructure (e.g., towing capacity) at a time when even Ford is aggressively addressing towing capacity of its F-150 Lightning electric vehicle.

I find it hard to see the big Western ICE manufacturers taking things seriously as to how they plan to exit the ICE.

Key differentiator for BEVs: over-the-air updates

A key advantage for a computer-on-wheels (which buying a Tesla or BYD vehicle indicates), is the ability to provide updates without customers needing to attend a showroom. I've owned a BYD Atto 3 for six months (10,000 km) and there have been several updates in that time. My latest BYD over-the-air software update had six elements: i) improved ventilation to prevent fogging of the windscreen; ii) improved user experience/driving comfort; iii) optimised DC charging for longer high power duration; iv) improved DC charging locking communication; v) improved wireless phone charging; vi) improved real-time range estimation based on current use. These are small changes, but significantly improve the driver experience.

Conclusion

Investors interested in wheeled transport find themselves living in interesting times because we are in the middle of a historic change from the internal combustion engine to electrification through batteries which enable convenient long-distance transport. There are now a number of new generation companies which have no history in the internal combustion engine era, with Tesla the best established company. My view is that investors (other than those interested in very short-term investment) must consider investment in traditional car companies in the light of the current transition. I've explored this view in this article using Ford as an example of a leading traditional ICE maker moving towards electrification, but having trouble letting go of the ICE.

Of all of the conventional ICE vehicle manufacturers, BYD may be the only ICE manufacturer to no longer sell standard ICE vehicles (since March 2022). I see this as a big and symbolic move. It is also interesting that key BYD models in its export market development in Europe, Australia, Japan, South America and SE Asia (Thailand, Indonesia, Vietnam) are for BEV-only models. SE Asia is a market that the ICE vehicle manufacturers (notably Toyota) have indicated that they would own with vehicles with an ICE. Clearly this is no longer the case. I think this differentiates BYD as an investment possibility. Of course, many in the US may fear investment in BYD because it is Chinese, but my take on this is that China is driving the electrification of transport and can't be ignored. Perhaps for many this makes BYD uninteresting. Given the developments I've covered in this article, I'm very comfortable with my early investment in BYD.

I am not a financial advisor but I follow closely the huge changes occurring as wheeled transport electrifies and the end of the internal combustion engine looms. I hope that my comments are useful to you and your financial advisor as you contemplate investment in the transport industry.

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