BYD reportedly set to lay off 1000 workers

Uber-investor Warren Buffett may be impressed by the Chinese battery/automotive company BYD, but US trade officials aren't. Diplomatic communications exposed by WikiLeaks include a dossier whose title borrows the battery giant's unofficial tagline for a scathing report titled "BYD seeks to 'Build Your Dreams' – based on Someone Else's Designs."

Whatever its strategic shortcomings, there seems little doubt the company that two years ago celebrated a 10 per cent buy-in by Buffet has fallen on tough times.

Chinese newspaper Economic Observer reported last week it's set to lay off 1000 workers from its automobile sales division. BYD denies having any such intention, but Reuters reported in the last week of August that its share value took a 14 per cent dive with warnings of a bleak second half.

Buffett's 2009 acquisition of a 9.9 per cent stake in what has long been one of the world's largest mobile phone battery makers reverberated through the investment world. Such was the halo effect of a buy-in by the man looked upon as the world's most astute investor that in just a few months its stock value rose tenfold, elevating his US232 million holding to US$2.47 billion.

Two years on, it's a different story. Buffett's investment hasn't gone sour yet – at $467 million in late August, his stake is still worth around twice what he paid for it. But BYD is now seen by many as cause for concern.

BYD recently announced a Q1-2 fall in net profit of 88.6 per cent, the result of a 23.4 per cent drop in car sales. It attributed projected slow sales for the second half of the year to falls in consumer confidence.

Reuters suggests otherwise. A detailed special report in March drew on extensive consultation with industry pundits and insiders along with leaked diplomatic cables to describe a strategy built on theft of design elements from other car makers to speed up its products' market readiness and cut development costs. The latter, combined with substantial government incentives to buy low-carbon cars, allows it to go to market with unbeatable prices.

On top of this, the leaked cables allege the company sold cars on a near-zero margin to snatch extra market share. Reuters also mentioned BYD making bogus safety ratings claims about some models.

It reported that in January, when the Chinese car market was experiencing double digit growth, sales of BYD's F3DM PHEV fell 15 per cent, and half that again in February, by which time they were down about 25 per cent year-on-year. This is despite a government subsidy of 47 per cent of its purchase price.

The agency, which has been on BYD's case since reporting a sales slump early in the year, put out a detailed special report on its condition in March. The agency attributes waning sales in an otherwise healthy domestic market to issues of the company's own making, mainly associated with a strategy that includes brazen corner-cutting at the expense of safety and theft of intellectual property.

The latter bears possible long-term and wide-ranging implications, for it's seen to have cruelled the company's progress into Western markets, particularly the US. If that is the case, it may herald the end of the era of the Chinese knock-off, which has seen the world flooded with cheap, inferior copies of Western products, to the chagrin of just about every big brand in just about every consumer sector.

In the automotive sector, for example, Reuters says BYD most frequently cites Toyota and Honda as sources of 'inspiration' for its cars.

Approached for comment, both Japanese companies declined to go the record. But one anonymous Honda insider revealed that BYD is known to have knocked off elements of Toyota's Corolla and Honda's Fit (aka Jazz) for its F3 model. Chinese makers aren't averse to buying examples of rival products from established overseas makers, deconstructing them and reverse engineering them into their own line-up.

The Reuters report describes in some detail Western companies' reluctance to make a fuss about such behaviour, simply considering it the price of doing business in the world's fastest growing consumer market. But the report, and BYD's subsequent fortunes, raise the question of what happens to Chinese companies looking for brand penetration of their own in Western markets.

Before they can, they will likely have to rework their product development strategies to eliminate the intellectual property incursions on which they've depended in their home market.

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