Strong Work Ethic at BYD, Maker of Electric Cars

I was a bit surprised when my article last week on BYD’s (BYDDY.PK) new e6 electric car and the related post with videos of Wang Chuanfu received far more attention than coverage of Berkshire Hathaway’s (BRK.A) Q1 2009 results. However, perhaps I should not be surprised given the intense interest in the auto industry in this economic environment. With Chrysler in bankruptcy protection and General Motors (GM) likely to suffer a similar fate, consumers and investors are eager to learn about companies that have been able to navigate the economy without the drama of government aid and bankruptcy proceedings.

I have been reading more on BYD’s history and the path taken by Wang Chuanfu over the past several years. Perhaps the most revealing story I have found was published in the Financial Times in November. The FT article goes into considerable detail regarding BYD’s strategy and background, but what I found most interesting had to do with the work ethic involved in building this company from the ground up over a very short time frame. Here are a few excerpts from the story:

Smarter and Harder Working Engineers

Although many might disagree, Wang Chuanfu considers the Chinese business climate and work ethic to be a major competitive advantage over western competitors:

Mr Wang says Chinese companies are smarter and work harder than their western competitors. He says China’s main advantages are the size of its market and the quality of its people; 5m graduates leave Chinese universities every year, “more than the population of some European countries”, he says. And they will work for much lower salaries than their western or Japanese competitors.

BYD employs 10,000 engineers, half of them working on cars, and Mr Wang says he will have 30,000 automotive engineers within a decade. His US and Japanese competitors cannot afford to hire so many, he says. “The cost is too high.”

BYD recruits most managers straight out of university, trains them on the job and lodges new graduates in a high-rise dormitory-style building adjacent to the factory.

Can Better Battery Technology Outweigh “Fit and Finish” Issues?

BYD has not adopted the typical supply chain that is used by most auto makers. Instead, nearly all components of BYD vehicles, except for the tires, and produced by the company. This kind of integrated supply chain may or may not be the best strategy in the long run since the “fit and finish” of BYD’s vehicles is reportedly not up to par with many other manufacturers. Mr. Wang believes that this will improve over time and defends the overall quality of Chinese manufacturing. He considers the battery technology to be the competitive differentiator for BYD:

BYD will be competing with plug-in models produced by Renault, Nissan, Mercedes-Benz, and General Motors, which plans to make its Volt model in China. Mr Wang says he is ready. “I believe Chinese companies can become leaders in the alternative car business because we make good batteries,” he says. More experienced carmakers are struggling with such issues as the speed of charging and durability of automotive batteries – which need to last far longer than in laptops – in their prototype plug-in cars.

Mr. Wang also points out that other manufacturers have suffered battery recalls but BYD has never had a recall and is confident in the quality of the batteries. Given that battery reliability is a key aspect of the success of electric vehicles like the e6, BYD’s long term success may depend on this point and on keeping this intellectual property proprietary — not always an easy task in China.

… Given cases of exploding lithium-ion batteries in laptops, the potential product liability risk of electric cars faced by carmakers – Chinese or not – is huge. Mr Wang deflects the point firmly. “We’re the only battery maker that has never had a recall,” he says, leaving unspoken the names of Sanyo (SANYY.PK) and Sony (SNE), which have both had expensive recalls. “We’re very confident of the quality of the batteries.”

Work-Life Balance? Not So Much …

Mr. Wang and his employees apparently are not enamored with western concepts such as “work-life balance”. Whether you agree with the need for this balance or not, it appears obvious that there is a competitive advantage when you have a workforce that is willing to make major sacrifices in order to advance the interests of the company. To be sure, this type of work ethic exists in many other countries, but typically in only a small subset of the population.

Wang Chuanfu is all work and no play – and proud of it.

He says his punishing seven-days-a-week schedule is par for the course in China. “Maybe in the Western world, life is number one and work is number two,” he says one bright Saturday morning at the bustling headquarters of BYD, his battery-cum-car company in Shenzhen. “But in China, work is number one and life is number two,” he adds. “Especially in my generation. I don’t know if the next generation will be the same. I enjoy working very much, if you ask me to go sightseeing for a day I probably wouldn’t enjoy it.”

In the rare moments when not at the office, Mr Wang lives in a modest penthouse flat in the “workers’ village” with his wife and daughter.

Mr Wang spurns the trappings enjoyed by many of his western peers, such as corporate jets and expensive clothes.

Whether BYD works out as an investment or not is an open question and there are many factors that will determine business success beyond work ethic and technology. However, one cannot help but be impressed with the thirteen year history of this company and the culture put in place by its founder. Like it or not, this is the type of competition the legacy automakers are up against in today’s economy. In my opinion, the world will have better transportation options in the future as a result of agile, hard working, and innovative companies like BYD.

Comments

[John Petersen:]

There has been a lot of talk about Buffet's purchase of a 10% stake in BYD at a post-money valuation of $2.3 billion. I pulled BYD’s annual report and was able to calculate the following valuation metrics for the Buffet purchase:

Price/Earnings – 12.3
Price/Book – 1.18
Price/Sales – 0.6

Buffet's effective price per share was in the $1.12 range. Since BYD is now trading at about $3.35 (presumably from the Buffet halo effect) the market valuation metrics for investors are nowhere near as attractive as they were for Warren.

May 12 06:07 AM

[Ravi Nagarajan:]

Agreed. I'm more fascinated with BYD from a technology perspective than as an investment at current prices.

On May 12 06:07 AM John Petersen wrote:

> Since
> BYD is now trading at about $3.35 (presumably from the Buffet halo
> effect) the market valuation metrics for investors are nowhere near
> as attractive as they were for Warren.

May 12 06:48 AM

[epeon:]

I have been told that BYD has ripped off the patent rights of dozens of companies in the manufacutring of their batteries and cars. You can get away with this in China, but there will be a lot of lawsuits if they come to the US. Is this true?

May 12 08:25 AM

[David Oliver_:]

Good luck to this guy. China certainly needs to work on alternative energy vehicles and move away from fossil fuels.

However I have heard the story so many times about the Chinese entrepreneur who works 24 x 7 and how wonderful his company is ... most of the time its bulls*%t targeted at people who want to believe it.

China may have 5m graduates a year but many of them are unemployed because they don't have skills useful in the real world. Don't assume that the Chinese definition of engineer is the same as one in the west. My guess is that if you paid an unannounced visit to BYD it wouldn't be quite the hive of activity you were expecting. More likely people sleeping at their desks, something quite common in a lot of Chinese companies.

From what I have read BYD has done a good job of copying and reverse engineering existing technologies. Whether they have the ability to go to the next level and be innovative remains to be seen.

May 12 09:01 AM

[Ravi Nagarajan:]

I have not read about any such patent infringement. Have you seen any information online?


On May 12 08:25 AM epeon wrote:

> I have been told that BYD has ripped off the patent rights of dozens
> of companies in the manufacutring of their batteries and cars. You
> can get away with this in China, but there will be a lot of lawsuits
> if they come to the US. Is this true?

May 12 09:02 AM

[Ravi Nagarajan:]

I'm normally a skeptic as well. However, Munger and Sokol have done extensive due diligence on BYD and I trust their conclusions.

For those who have followed Munger, many say that they have NEVER seen him as enthusiastic about an investment as BYD. For Munger to be this excited about an investment is a very positive sign.

> However I have heard the story so many times about the Chinese entrepreneur
> who works 24 x 7 and how wonderful his company is ... most of the
> time its bulls*%t targeted at people who want to believe it.
>

May 12 09:03 AM

[David Oliver_:]

I have seen many foreign investors with great track records in their own countries lose a lot of money in China because they wanted to believe the hype.

Try doing a Google search for: foxconn byd

"I have not read about any such patent infringement. Have you seen any information online?"

May 12 10:51 AM

[telemorph99:]

I say good luck to you and those with similar delusions.

I have been dealing with Chinese technology companies for 15 years - including a 2 year stint living in China and running a 150 engineering shop (now close to 2,000 strong). My wife is Chinese from the south, and we frequently visit her friends and the manufacturing plants that they run.

While I am often struck by their low tech manufacturing processes, I am always impressed with their work ethic - particularly that of the owners and managers of these companies. Certainly not all employees share the same level of energy and commitment - support staff may not - however, engineers living in the dorms are dedicated, and hard working. These are not the state run enterprises of 20 years ago.

As western populations age and become more interested in enjoying the fruits of our labours; as the future of manufacturing continues to migrate eastward - even GM's Volt is to be manufactured in China; and as our disgraced Finance sector becomes vulnerable to off-shoring as a result of their excesses, how will we manage to maintain our living standards? We will likely need some of that same work ethic.


On May 12 09:01 AM David Oliver wrote:

> Good luck to this guy. China certainly needs to work on alternative
> energy vehicles and move away from fossil fuels.
>
> However I have heard the story so many times about the Chinese entrepreneur
> who works 24 x 7 and how wonderful his company is ... most of the
> time its bulls*%t targeted at people who want to believe it.
>
> China may have 5m graduates a year but many of them are unemployed
> because they don't have skills useful in the real world. Don't assume
> that the Chinese definition of engineer is the same as one in the
> west. My guess is that if you paid an unannounced visit to BYD it
> wouldn't be quite the hive of activity you were expecting. More likely
> people sleeping at their desks, something quite common in a lot of
> Chinese companies.
>
> From what I have read BYD has done a good job of copying and reverse
> engineering existing technologies. Whether they have the ability
> to go to the next level and be innovative remains to be seen. <br/>
>

May 12 11:20 AM

[User 142738:]

About the Foxconn-BYD issue: there was a lawsuit filed in China in 2006 claiming BYD had hired employees from Hon Hai Precision Technology, Ltd. (a Foxconn affiliate) who had supposedly "[stolen] more than 10,000 documents...". To quote the article:

"In June 2006, Hon Hai took BYD to court in Shenzhen, China, saying BYD stole commercial secrets from Foxconn. The Taiwanese company has complained that the mainland court is dragging its feet in the BYD case." (from an AP article titled "Taiwanese tycoon challenges Buffett's investment")

If you recall, in 2005 Malcolm Bricklin, the same person who had brought Subaru and Yugo brands to the U.S., touted Chery as being a reliable automobile maker that whose "QQ" model was in no way similar to the Chevy Spark/Daewoo Matiz. He planned on opening Chery dealerships in the U.S. by 2008. Long story short, crash tests failed, his investment soured, the plans crumbled and he owes his fellow investors a very large amount of money.

May 12 01:47 PM

[Road Runner:]

The Chinese are scary!

This live-for-your-job work ethic of the current day Chinese is similar to the Japanese after World War II. Their self-sacrificing fervor to rebuild Japan after the war drove them to create the world's second largest economy. It seems like the capitalistic, post "workers paradise" communism (an oxymoron) in China is having the same effect. Eventually this live-for-your-job work ethic will subside in China just like it has in Japan.

May 12 02:10 PM

[Ravi Nagarajan:]

Generally, the decision of work vs. leisure tends to be tilted in favor of work when a society is at a relatively low standard of living and then shift more toward leisure as wealth increases. There isn't anything necessarily "wrong" with that other than the fact that the harder working societies will probably catch up with the incumbent "rich" countries. Still, this says alot in terms of where we expect the bulk of innovation to occur in the coming years.




On May 12 02:10 PM Road Runner wrote:

> The Chinese are scary!
>
> This live-for-your-job work ethic of the current day Chinese is similar
> to the Japanese after World War II. Their self-sacrificing fervor
> to rebuild Japan after the war drove them to create the world's second
> largest economy. It seems like the capitalistic, post "workers paradise"
> communism (an oxymoron) in China is having the same effect. Eventually
> this live-for-your-job work ethic will subside in China just like
> it has in Japan.
>

May 12 03:16 PM

[Ravi Nagarajan:]

The Motley Fool board has a post from someone who was at the Berkshire annual meeting newsconference. Here is what Munger had to say about this:

Q. Berkshire investment BYD (Chinese producer of lithium batteries) was accused of document theft & patent infringement by rival Foxcroft. Isn't there an ethical problem?

A. Munger - the ethical problem was not with BYD. Foxcroft was trying to obstruct an up and coming rival. This CEO is highly ethical - when he wanted to give stock to his managers he gave them some of his stock instead of issuing new company stock. The company had a patent challenge from a Japanese company and won their case in a Japanese court! If you want to bet against this man it will be your ticket to the poor house.

From Motley Fool Board:
boards.fool.com/Messag...



On May 12 10:51 AM David Oliver wrote:

> I have seen many foreign investors with great track records in their
> own countries lose a lot of money in China because they wanted to
> believe the hype.
>
> Try doing a Google search for: foxconn byd
>
> "I have not read about any such patent infringement. Have you seen
> any information online?"

May 12 06:28 PM

[ArtfulDodger:]

Thank you very much for that work and the point, JP!


On May 12 06:07 AM John Petersen wrote:

> There has been a lot of talk about Buffet's purchase of a 10% stake
> in BYD at a post-money valuation of $2.3 billion. I pulled BYD’s
> annual report and was able to calculate the following valuation metrics
> for the Buffet purchase:
>
> Price/Earnings – 12.3
> Price/Book – 1.18
> Price/Sales – 0.6
>
> Buffet's effective price per share was in the $1.12 range. Since
> BYD is now trading at about $3.35 (presumably from the Buffet halo
> effect) the market valuation metrics for investors are nowhere near
> as attractive as they were for Warren.

May 13 12:12 AM

[James Wilson:]

The principles of electric power do not change when you cross borders. Just because someone got a patent does not mean they invented anything. They have a peice of paper. Mostly like a stolen idea from Voltaires notebooks.

May 13 09:04 PM

[Infoarchitect:]

BYD is an army composed of thousands of the best and brightest engineers from all across China. The workers live and eat onsite. When they are not sleeping or eating, they are hard at work leveraging the latest technologies in creating and refining the products of the company. The workers are completely dedicated to the success of the company. BYD is a model enterprise of the Chinese economic engine and will be supported by the government in every way. Applying traditional numeric calculations to attempt to determine a fair value for these shares is useless. Instead, you need only ask yourself who could successfully compete against their model and momentum over the next 10 years. No one.

May 15 02:44 PM

[Ravi Nagarajan:]

Exactly right, and these are the people that the UAW must compete with. Gettelfinger should think about that very carefully.

I don't fault American workers for wanting more of a work/life balance compared to the Chinese. As a society becomes more wealthy, it is natural for the marginal propsensity to work to decrease in favor of leisure. This is obviously impacted by marginal taxes and many other factors. Workers striving to lift their families out of poverty will be much more motivated to work compared to those leading a comfortable middle class lifestyle. This isn't necessarily *bad*, but something to be very aware of in public policy debates related to restructuring Detroit and something that the unions better understand clearly as well.


On May 15 02:44 PM Infoarchitect wrote:

> BYD is an army composed of thousands of the best and brightest engineers
> from all across China. The workers live and eat onsite. When they
> are not sleeping or eating, they are hard at work leveraging the
> latest technologies in creating and refining the products of the
> company. The workers are completely dedicated to the success of
> the company.

May 15 03:01 PM