China's BYD Tries to Recharge

By Norihiko Shirouzu

BYD /zigman2/quotes/206867707/delayed HK:1211 +3.24% Co., the Warren Buffett -backed darling of China's car industry in 2009, had a lousy 2010. Now its top executives say they have a plan for getting back in gear.

Car sales in China for the Shenzhen-based company rose 16% to 519,806 vehicles. That might be decent in most markets, but it was less than half of the industry average of well more than 30% growth last year, and it fell miles short of BYD's own publicly stated aim to nearly double sales to 800,000 cars. Dealers have been defecting, and a push into the U.S. electric-car market is almost a year behind schedule.

BYD's shares are now trading at less than half their peak price of 85.50 Hong Kong dollars (US$11) in October 2009. MidAmerican Energy Holdings Co., a unit of Mr. Buffett's Berkshire Hathaway /zigman2/quotes/200060694/composite BRK.B -0.97% Inc., paid US$232 million for a 9.89% stake in BYD.

BYD's product quality, especially as perceived by consumers, suffered a big setback last year when Chinese rivals like Geely Automobile Holdings /zigman2/quotes/200716015/delayed HK:175 +1.71% Ltd. and Great Wall Motor /zigman2/quotes/207702000/delayed HK:2333 +4.68% Co. began introducing cars with much-improved quality.

Among other steps, BYD will slow new-product cycles and take more time to buff the quality and styling of new cars, BYD Chairman and founder Wang Chuanfu said in an interview on the sidelines of the Detroit auto show.

BYD also plans to slash the number of dealers, which totaled about 1,000 at the end of last year, by 5% to get rid of inexperienced stores, according to Mr. Wang. The move is also hoped to improve per-store revenue and profit.

Moreover, BYD plans to do a better job forecasting demand and focus more on "quality of sales" rather than "obsessing on market share," the BYD chief said.

All this comes a bit more than a year after BYD spectacularly more than doubled its sales in China to 448,000 vehicles, up from 170,900 in 2008. BYD also has been the standard bearer for China's ambition to tap electric-vehicle technology to close the gap with more-established global car makers.

Yet, BYD stumbled during 2010 in its first major breakdown since it was established as a cellphone battery company in the mid-1990s.

"In the past few years, we made a mistake of focusing on growth too much," said Mr. Wang. For example, BYD was too optimistic about Chinese consumers' appetite for its cars, and "we expanded our distribution channel too quickly and ended up focusing on the quantity rather than the quality of the dealer network," he said. The result: BYD's sales network became bloated with underperforming dealers.

Stella Li , BYD's senior vice president, said in an interview in Shenzhen, China, that the company drove dealers in China hard to attain its unrealistic sales goals, alienating some of them. "Now, we need to slow down a bit and adjust our strategy," she said.

To start with, BYD this year is forecasting a modest 10% increase to about 550,000 vehicles, more or less on par with the 10% to 15% growth seen for the overall China market by most auto makers and forecasting companies.

The company set out to nearly double its China car sales last year. Yet, BYD's sales began slumping midyear even as sales in China's overall auto market surged.

In September, the company slashed its sales forecast for 2010 by 25% to 600,000 vehicles. In the end, BYD fell short of meeting even the revised goal.

According to Mr. Wang and Ms. Li, one main cause was the slide in BYD car quality and appeal, at least as they are perceived by consumers. Said Mr. Wang: "Over the next few years, we are going to slow down our growth pace and focus on the quality and design of our product."

To improve its image, nearly all new products BYD has launched in recent months are higher-end models, compared to the no-frills cars the company had originally became famous for. To produce those higher-end models, BYD last year purchased a leading-edge body panel stamping plant in Japan and is using experts at that factory to train BYD's manufacturing engineers and workers at its plants in China.

Competition from other indigenous China brands like Geely and Great Wall is getting tougher, and "BYD will have to struggle further and suffer slow sales and thinner profit margin if they don't distinguish themselves," says Yale Zhang, an independent analyst in Shanghai.

Another flaw is BYD's sales channel. Even though it had been an auto maker only since 2003, BYD tried to develop four distribution channels, which the two executives said forced BYD to spread its limited product offerings too thinly among them.

All this made it extremely difficult for most dealers to make money, leading some of them to defect to other brands. One defector is a former BYD store in Beijing managed by Pu Xiaoqiang, which switched to Geely.

According to Mr. Pu, in most months, BYD asked Mr. Pu's store to carry stock of about 400 cars, even though the store typically sold only about 70 cars a month.

"The only thing we could do was to try everything to sell those cars, so we ended up giving huge discounts to customers, but that wasn't profitable at all," Mr. Pu said.

Mr. Wang said BYD in early 2010 had a flood of dealer applicants, and the number of its stores was to hit 1,200. When sales began cooling midyear last year, some of those applicants withdrew, while others defected to other brands. In total, Mr. Wang believes about 100 dealers left BYD because of the turmoil.

"We're starting to watch dealer inventory cycle very closely now" so that BYD doesn't have to require dealers to carry large stock, Ms. Li said. "We do not want repeat this kind of mistake in the future."

Write to Norihiko Shirouzu at norihiko.shirouzu@wsj.com

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