BYD Structurally Resilient Against COVID-19 Disruptions

April sales soar for the company as rivals' production is continuously hindered by lockdown measures.

BYD

BYD is a Buffett-backed and vertically sound automotive firm that manufactures their own batteries and chips. They are so committed to the EV future that, as of late March this year, the company shifted to production of strictly hybrid and fully electric vehicles.

Their current resilience is a consequence of their inherent design that has been years in the making. With the EV sector requiring extra care in the near-term, BYD has flexed its muscles with stable and record-breaking sales. 


April Sales Reflection 

BYD’s sales rose 1% from March despite competitors having sluggish performance. This stark contrast is highly impressive despite negative indicators, like the China Electric Vehicle Index having fallen 10.5% in the past month. This number derives from the fact that, in just Shanghai alone, five major car companies had production grind down 75% in April, according to the China Passenger Cars Association.

With Shanghai being home to firms like SAIC Motor, GM, Nio, Tesla, and others, the shutdown numbers are alarming. Nationwide, the report indicated that China’s passenger car production plunged 41.1% year-on-year and 46.8% compared to March. 

The result of these numbers is that most firms are now facing near-term profitability pressure. Automakers with diversified geographical exposure and/or strong brands are going to handle these pressures better than highly specialized firms, especially startups who run on low levels of profitability as is.

BYD’s higher levels of vertical integration pushed to the top of the rankings for readiness to navigate future crises. Swiss-based International Institute for Management Development moved BYD up to fifth place while Tesla remained at the top for the fourth consecutive year. BYD’s domestic EV rivals XPeng, Li Auto, and Nio ranked 12, 14, and 18, respectively.

The “Tesla of China,” Nio, sold 5,074 vehicles in April, off 49% from March and down 29% from the year prior. Xpeng performed slightly better, selling 9,002 vehicles in April, down only 42% from March but up 75% from last year. Li Auto has fared worse, having only delivered 4,167 Li One hybrid SUVs, down 62% vs. March's 11,034 and 25% below a year earlier.

Li Auto also forecast Q2 revenue, missing market expectations. For Tesla, their only facility on the mainland is in Shanghai. This may give sufficient reason for believing that Tesla may be the hardest hit by the COVID-19 disruptions in China. They do operate globally, however, with their newest plants in Berlin and Austin beginning to pick up production. This explains why they remain number 1 in readiness for crises.

Aside from rank, within China, they only operate in Shanghai, which leaves them vulnerable to local volatility in work as well as selling conditions. Despite this, Elon Musk said recently that he expects China's COVID-19 restrictions to be less disruptive, and that China sales would account for 25% to 30% of its overall sales in the long-term.


China’s Plan for Market Support

As state sponsored subsidies for EVs are set to expire within the year, localities within China, like Shanghai, Jiangsu, and Zhejiang, are considering a reintroduction of cash grants of their own. Going forward, provincial-level governments may distribute billions of yuan to buyers to keep the momentum going on the national transition. Guangdong led the way, offering buyers 10000 yuan in May and June for electric car purchases.

With the automotive vehicle industry being keystone to China’s economy, it's crucial that they not only sustain demand, but they must also get these factories up and running for both local and growing global demand. China is in the best position to capitalize on this demand if they play their cards right and come to the rescue of the battered industry.

Musk’s company enjoys the benefits of portioning some operations in China long-term. He has also recently said that China will produce “strong” EV companies going forward. Policy-making must avoid self-inflicting damage to the country's pivotal industries. 

A risk that the EV industry faces at a national level within China, especially in reaction to short-term turmoil, is overcapacity. As companies race against each other to produce quickly and in competitive volumes, down the line, all of these factories risk overproducing a glut of EVs that can flood the market.

Underutilization of these factories will be a problem if things continue at the current pace. Even last year, Xiao Yaqing, the minister for industry and information technology, had said that electric car makers are mostly small and scattered. All of the overheated competition that has played out may result in long-term inefficiencies. 


Conclusion

BYD and Tesla are exemplary and serve as the current driving force in the emerging market. The aspirational firms Nio, Li Auto, and Xpeng are certainly having their vulnerabilities exposed while global firms like Tesla and VW are employing tactics to diversify outside of China.

If there was ever a worst case scenario to slow down and damage the EV evolution, the current environment wouldn't be too far off. Assuming things marginally improve on macroeconomic levels, firms like Nio might be able to finally scale up sales volumes and approach the range of BYD and Tesla. For now, everyone’s profitability will continue to take a beating. 

A global recession seems to be looming as inflationary pressures are worsening sentiment and hurting the outlook of industries. Emerging industries with firms leveraged heavily on rapid growth from the previous market boom are vulnerable. If Elon Musk is correct, though, strong Chinese EV companies should be able to make it out as the market continues to adapt and evolve.

BYD has proven that they have what it takes to withstand these pressures. The company is primed to go toe to toe with Tesla at least in China as their figures continue to rise. Though they are handling tough times well, investors should think about what BYD's market position will look like when the dust from this current disruption settles.

Disclaimer: This article's content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal ...

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