Despite BYD's rapid expansion and apparent prosperity, it still faces challenges in the high-end market, and its globalization journey is facing sustainability challenges.

BYD's development history can be seen as a microcosm of China's new energy vehicle industry. Today, BYD, which is increasingly influential in the global new energy market, also faces pressure from all sides due to its pursuit of overseas expansion and focus on high-end products, presenting a coexistence of opportunities and challenges.

Following BYD's emergence as the global leader in new energy vehicle sales in 2023, the company maintained its position in the first half of 2024 with sales exceeding 1.6 million vehicles. However, this achievement was made under the pressure of more than 500 billion yuan in debt, raising concerns about the sustainability of its rapid growth.

It is undeniable that since BYD made the decision to stop producing fuel-powered vehicles, it has been firmly committed to becoming a leader in the new energy vehicle sector. However, as its ambitions grow, so do the challenges it faces.

Firstly, overseas expansion brings uncertainties related to international trade and political environments, such as increased tariffs imposed by the European Union. Secondly, the growth momentum of its high-end brands like Denza is struggling to sustain. Thirdly, BYD is burdened by high debt levels due to its extensive workforce and substantial R&D investments.

Part.1

Increased Uncertainties in Overseas Expansion: Competition and Risks Coexist

According to BYD's financial report for the first half of 2024, both revenue and net profit increased by 15.76% and 24.44% year-on-year, setting new record highs. Furthermore, with the official completion of its Thai factory, BYD became the first automaker globally to produce its 8 millionth new energy vehicle.

In addition to its impressive overall performance, BYD is also making strides in overseas markets. Financial reports show a surge in overseas sales of BYD's new energy vehicles, with exports of new energy passenger vehicles reaching 203,000 units, an increase of 173.8% year-on-year, accounting for 12.66% of the company's total new energy passenger vehicle sales.

BYD's successful performance in overseas markets in the first half of the year is inevitably linked to the booming development of the new energy vehicle industry in recent years. According to Xinhua News Agency, the International Energy Agency (IEA) released an outlook report stating that global demand for electric vehicles will continue to grow strongly over the next decade, with sales expected to reach 17 million in 2024, accounting for more than one-fifth of global vehicle sales.

Furthermore, according to data from the China Passenger Car Association cited by IT Home, China's new energy vehicle market continued to maintain a 64.5% global market share in the first half of 2024. This demonstrates the rapid development momentum of China's new energy vehicle industry and the promising global market prospects. As an industry leader, BYD has a bright future ahead.

However, it is worth noting that while BYD is making significant progress in overseas markets, it also faces numerous challenges. For example, according to CCTV News, on August 20, the European Commission disclosed a draft decision to impose definitive countervailing duties on pure electric vehicles imported from China, with BYD, Geely, and SAIC Motor among those affected, facing tariffs of 17%, 19.3%, and 36.3%, respectively.

Earlier in mid-June, before the tariff rates were finalized, both SAIC Motor and Geely Group issued statements expressing disappointment. However, these statements could not change the passive situation faced by domestic new energy vehicle makers. This also signals greater uncertainties for Chinese new energy vehicle companies in the European market, with BYD, as a leading brand, bearing the brunt of these challenges.

Image source: Internet (screenshot of Geely Group's statement)

In addition to these challenges, the fiercely competitive overseas market is weakening BYD's early "first-mover" advantage, and it remains uncertain whether the company can sustain its growth performance in the future.

For example, in the European market, the low-key MG Motor, a subsidiary of SAIC Motor, is a major player. Relying on its British heritage, channel advantages, and cost-effectiveness, MG has surpassed BYD in sales. Meanwhile, the Southeast Asian market is a key battleground for Chinese new energy vehicle companies, with competition intensifying as NIO, Changan, and other automakers enter the market, along with local Southeast Asian brands.

Part.2

Denza Lacks Momentum: Challenges in Pursuing High-End Market

BYD's product portfolio includes various series such as Dynasty, Ocean, Denza, Fangchengbao, and Yangwang, covering the entire spectrum from low-end to mid-end to high-end. According to data from the China Association of Automobile Manufacturers, BYD's market share in the domestic new energy vehicle market further increased to 32.6% in the first half of 2024.

As BYD's flagship brand targeting the high-end market, Denza is highly anticipated. From BYD's revenue structure, plug-in hybrid models sold 1.31 million units in the first half of the year, an increase of 48.3% year-on-year, representing the fastest growth. In contrast, pure electric vehicle sales grew more modestly at 1 million units, up just 11.97% year-on-year.

Analyzing performance contributions by series, BYD's high-end brand Denza is noticeably lagging behind. For example, in August 2024, Denza sold only 9,989 vehicles, a year-on-year decrease of 13.3% and a month-on-month decrease of 3.4%, falling below the 10,000-unit mark. In June and July, Denza sold 12,275 and 10,340 vehicles, respectively.

This marks two consecutive months of declining sales for Denza, in stark contrast to BYD's overall sales growth. In fact, signs of weakness in Denza sales emerged as early as October 2023.

At that time, compared to the Han and Tang models priced above 200,000 yuan, Denza experienced the most significant sales fluctuations, with sales falling 12.6% month-on-month in October due to sluggish new vehicle sales. As BYD's first luxury brand to enter mass production, Denza's weakness has become a concern for the company as it aims for the high-end market. This initial setback is bound to dampen BYD's confidence in pursuing high-end markets.

The industry consensus is that the transition to new energy vehicles and the development of autonomous driving and other intelligent technologies are inevitable trends. However, autonomous driving technology, a key battleground for traditional automakers and new automotive ventures, is precisely where BYD lags behind, hindering its high-end aspirations.

Objectively speaking, BYD has accumulated considerable expertise in batteries and electric control systems, leading the industry. For instance, in mid-May, BYD showcased its fifth-generation DM (Dual Mode, referring to plug-in hybrid) technology, setting three world records: the highest thermal efficiency of mass-produced engines, the lowest fuel consumption per 100 kilometers in low-battery conditions, and the longest comprehensive driving range.

However, it is undeniable that in the hotly contested fields of autonomous and intelligent driving, BYD lags behind both domestic AI technology companies like Baidu, which are venturing into the passenger car market with services like "Luobo Kuaipao," and overseas giants like Tesla, which is strong in intelligent hardware and software technologies. As a manufacturing enterprise transitioning from contract production, BYD is still playing catch-up in this area.

Taking Tesla's Autopilot system as an example, it has accumulated billions of miles of driving data globally, which is crucial for iteratively improving algorithms and technologies. In comparison, BYD's investments and achievements in this field lag significantly behind.

It is worth noting that BYD's massive R&D investments are primarily focused on blade batteries, IGBT chips, and DM hybrid technology. In contrast, when benchmarked against Tesla's intelligent driving technology, BYD's other technological strengths are unlikely to keep pace in the short term. Therefore, it remains uncertain when BYD will be able to address its shortcomings in this area.

Part.3

High Debt Burden: Proceeding with a Heavy Load

In its relentless pursuit of growth, BYD has paid a heavy price for its aggressive expansion. For instance, according to BYD's mid-year report cited by the financial industry, the company's total liabilities reached 531.634 billion yuan as of June 30, 2024, an increase of 15.39% year-on-year, with a debt-to-asset ratio of 77.47%.

BYD's heavy debt burden can be attributed to two main factors: significant R&D investments and rapid employee growth, which has led to substantial human resource costs.

Financial reports show that the company invested 20.177 billion yuan in R&D in the first half of the year, a 41.64% increase from 14.246 billion yuan in the same period last year, equivalent to an average daily investment of over 100 million yuan. According to historical financial reports and public data, BYD's cumulative R&D investment has approached 150 billion yuan.

According to media reports, BYD's workforce has grown from 290,000 in 2021 to over 600,000 in 2023, several times the approximately 120,000 employees at Tesla. Industry insiders expect BYD's sales to challenge 4 million vehicles in 2024, with its workforce exceeding 700,000, potentially making it the world's largest automaker.

While a higher debt-to-asset ratio indicates stronger capabilities in leveraging external funds, it also signifies greater risks associated with debt financing. The debt-to-asset ratio is a crucial indicator of a company's debt level and risk exposure.

The industry generally considers a normal debt-to-asset ratio range of 40%-60%, with 70% considered the "warning line." Taking SAIC Motor as an example, its total liabilities reached 626.711 billion yuan in the first half of this year, an increase of 3.75% year-on-year, with a debt-to-asset ratio of 64.40%. On the other hand, Tesla's debt-to-asset ratio has gradually declined over the past five years, from 76.36% in 2019 to 40.34% in 2023, according to its annual financial reports.

In comparison to other major automakers, while SAIC Motor and Tesla also carry high debt loads, their debt-to-asset ratios remain below the warning line, indicating more manageable risks. In contrast, BYD's reliance on a "people-intensive" strategy has resulted in a relatively higher debt-to-asset ratio and potentially greater financial risks in the future, which the company must address.

Apart from high R&D investments and debt pressures, the declining profit margins in the automotive industry in recent years have also challenged BYD's sustainability in profitability. According to National Bureau of Statistics data, the profit margins of the automotive industry have declined for eight consecutive years, from 8.7% in 2015 to 5% in 2023, representing a 3.7-percentage-point drop. This trend is largely attributed to the increasing share of new energy vehicle sales.

Therefore, industry experts widely believe that various subsidy policies in the past few years, aimed at promoting the development of the new energy vehicle industry, have masked the inadequacies in the profitability of new energy companies. As new energy brands proliferate and price wars escalate, the new energy vehicle market, while growing continuously, remains largely unprofitable.

Fortunately, BYD's sales of new energy passenger vehicles surpassed those of Tesla as early as 2022, and by the first half of 2024, its sales had reached 194% of Tesla's. In the pure electric vehicle segment, BYD's sales could also reach 90% of Tesla's.

BYD's economies of scale may therefore help it regain ground in profitability. Specifically, financial reports for the first half of the year show that BYD and Tesla had gross margins of 23.9% and 17.7%, respectively.

In fact, Tesla's declining gross margin is largely due to price cuts, while BYD, once primarily focused on "mass-market" products, is also a significant player in the "price war," which may also impact its gross margin.

For instance, during the peak Chinese New Year sales season in February 2024, BYD launched a "electricity is cheaper than oil" campaign, announcing price reductions of 20,000 yuan and 22,000 yuan for the Qin PLUS and Juguang 05 Glory editions, respectively, compared to their Champion editions.

Subsequently, BYD initiated a "four-price-cut" strategy, prompting automakers like SAIC-GM-Wuling, Changan Qiyuan, NIO, and Geely to quickly follow suit and reduce their vehicle prices. In response, Li Yunfei, General Manager of BYD Brand and Public Relations, boldly declared on social media that BYD would "completely launch a decisive battle against fuel-powered vehicles," effectively igniting a full-scale "price war.

As mentioned earlier, although price reductions and promotions are a panacea and can even bring immediate results in boosting sales, their impact on BYD's profitability is self-evident. Especially when BYD's research and development, human resources, and other costs remain high, this becomes a double-edged sword that "kills 1000 enemies but also wounds oneself 800."

It is foreseeable that as car price reductions become an important means of boosting sales, BYD's profitability will also be tested. Even due to insufficient profitability, its debt burden may become increasingly heavy, accompanied by considerable cash flow pressure that cannot be underestimated.

As the leading domestic new energy vehicle brand, BYD's success is undoubtedly an insurmountable classic case. People still vividly recall the offline ceremony for BYD's 5 millionth new energy vehicle held in early August 2023, where Chairman and CEO Wang Chuanfu of BYD choked up while narrating the story of the company's 20-year journey in automobile manufacturing: "The road to automobile manufacturing is difficult, but we have persisted for 20 years. This is the story of BYD's automobile manufacturing and a microcosm of Chinese brand automobile manufacturing."

However, as the saying goes, "A long tail cannot be easily shaken, and a large extremity will surely break." Today, BYD has become a giant, a commercial behemoth. In the tumultuous market, BYD, which bravely fights against the odds, perhaps needs stability more than speed. It is hoped that BYD can embark on a prosperous path towards brand globalization and product premiumization. Its future development path should be both fast and stable, rather than rushing ahead blindly.

References:

"BYD's Net Profit in the First Half of the Year Increased by 24.44% Year-on-Year, Investing Over 100 Million Yuan Daily in Research and Development" Securities Daily

"BYD's 'Four Consecutive Price Drops': Who Bears the Pressure?" Beike Auto

"The United States Adds New Entities to the Entity List, Including Lenovo, BYD, Xiaomi, and Other Chinese Companies Continuously 'Going Global'" Zhanglian

"Global Demand for Electric Vehicles Will Remain Strong Over the Next Decade" Guangming Daily

"BYD Defeats Tesla" Huxiu/Miaotou APP

"SAIC Motor's Total Liabilities Reach 626.711 Billion Yuan, an Increase of 3.75% YoY, with Accounts Receivable of 72.224 Billion Yuan" Finance.ifeng.com

"A Laggard in the BYD Camp: Denza's 'Heaping Up' Materials Fails to Boost Sales" Titmedia

"BYD Sells 373,000 Vehicles in August, While Denza's Sales Decrease Instead of Increase" China Auto Web