Gross profit per bicycle has increased from 800 to 10,000, and the advantages of BYD’s vertical integration are magnified by the environment

Go upstream to master the supply chain and sell more expensive cars downstream.

Text by Pan Juntian

Editor丨Cheng Manqi

Both revenue and profit increase, reflecting both boom and bust

Few companies’ financial reports can reflect the contrasting boom and bust at the same time, but BYD can. Its listed entity, BYD Co., Ltd., currently has five major businesses: consumer electronics OEMs such as automobiles, mobile phones, and tablets. BYD’s consumer electronics foundry business was also listed separately on the Hong Kong stock market. BYD Group’s unlisted business also manufactures monorails and buses for urban rail transit.

BYD’s third-quarter financial report released tonight was as bright as expected: operating income was 117.081 billion yuan, a year-on-year increase of 115.39%; net profit was 5.716 billion yuan, a year-on-year increase of 350.26%; BYD’s non-net profit reached 5.335 billion yuan, a year-on-year increase of 930.48% .

Among the listed companies’ businesses, automobile-related businesses such as complete vehicles and power batteries contributed 72.55% of the revenue in the first half of the year, and consumer electronics foundry and mobile phone batteries contributed 27.27% of the revenue. Other businesses, such as photovoltaics, accounted for less than 1 percent of total revenue. The power batteries produced by Fudi Battery and the in-vehicle semiconductors produced by BYD Semiconductors that supply BYD cars are not included in revenue. At present, the proportion of external supply of Fudi batteries is very small. An industry source told “Lady Auto” that the proportion of external supply is about 2%.

Looking at the two major businesses apart, there is a clear contrast between automotive and consumer electronics. Both revenue and profit in the automotive business grew at a high rate. From July to September this year, BYD sold a total of 538,700 electric vehicles, with a cumulative sales volume of 1.18 million in the first three quarters, surpassing Tesla’s 908,600 to become the global electric vehicle sales champion.

Tesla cut prices in China this week in response to more-than-expected competition. The adjusted starting prices of the Tesla Model Y and Model 3 are 288,900 yuan and 265,900 yuan respectively, further widening the price gap between China and the United States. The price of Model 3 and Model Y in the United States is now 1.28 times that of China.

If you count fuel vehicles, neither BYD nor Tesla, which you are chasing after me, are in the top ten. In the first half of this year alone, Toyota, Volkswagen and Hyundai each sold over 3 million cars. But the gap between the old and new camps is rapidly closing.

The consumer electronics foundry business is a drag on BYD. In the first half of last year, the net profit of this business fell by 33.55% year-on-year, ending four consecutive quarters of high growth. From January to September this year, net profit fell by 42.66% year-on-year.

The foundry business has declined because there are no eggs under the nest. Customers of BYD Consumer Electronics include Huawei, Xiaomi, OPPO, vivo, Honor and other Android-based mobile phone and tablet companies. Since 2021, Huawei will fade out of the market, and other Android phones will not be high-end. Android’s share in China’s high-end mobile phone market will drop by 8%, and the dividend will be eaten by Apple. Since the beginning of this year, the global demand for consumer electronic products such as mobile phones, tablets, and computers has been sluggish. Among the major mobile phone companies, only Apple’s revenue increased by 2% in the first half of this year, while Xiaomi, OPPO, vivo and other companies all saw their revenue decline. BYD’s revenue as an upstream company was also hit.

When the industry cycle and stage are different, the performance of the same company can be very different, and a single company is always part of the general trend of the industry.

What is special about BYD is that few companies can be involved in businesses with completely different business models and industrial chain positions at the same time. At the same time, BYD has two completely different large businesses, one is direct-to-consumer automobiles; the other is assembly and manufacturing for downstream major customers. The semiconductor, battery and photovoltaic businesses, which currently do not account for the majority of YD’s revenue, are also in rising industries and may grow even larger in the future. Few companies can open business lines with very different business logics. BYD’s past experience has proved that it is possible to do this.

Gross profit per bike, from 800 to 10,000

In the first three quarters of this year, BYD’s market share of electric vehicles in China has reached 24.7%, corresponding to 1.18 million sales. Under such a huge base, observing BYD’s auto business not only depends on the growth of market share, but also on the profitability of bicycles. If only 100,000 cars are sold a year, it is a competitive strategy to grab the market at a low price, but if it sells 1 million cars a year, losses or too low gross profit are unsustainable.

According to estimates by brokerages such as Huaxi and Soochow, the gross profit of BYD electric vehicles did not turn positive until last year, but it was only about 800 yuan. Last year, the average price of BYD cars was about 150,000 yuan, and the gross profit rate was about 0.5%.

BYD’s bicycle gross profit has risen significantly this year. BYD did not specifically disclose the respective gross profit margins of the five major businesses, but since BYD’s foundry business is listed separately in Hong Kong, BYD Semiconductor submitted a prospectus in June this year to view financial data, and the photovoltaic business accounts for too small, we can exclude other Business profit situation, calculate the profit situation of BYD Auto.

According to Huaxi Securities, BYD’s profit per vehicle in the first quarter of this year is about 2,000 yuan. Assuming that the profit margin of BYD’s consumer electronics business and semiconductor business in the third quarter is the same as the semi-annual report, the profit per bicycle in the third quarter is about 10,000 yuan and about 7,000 yuan for the whole year.

According to public data, the average price of BYD’s electric vehicles this year is about 190,000 yuan. In the third quarter, the gross profit margin of bicycles was approximately 5.26%. Compared with Tesla (28%), Weilai (16.7%), Ideal (21.8%), and Xiaopeng (11.6%), the Great Wall (18.38%) and Geely (14.6%), which have a higher proportion of fuel vehicles, have a higher proportion of BYD bicycles. Interest rates are not high. But compared with its past self, BYD has reached its most profitable moment.

The profitability of bicycles has changed from negative to positive and continued to rise, which is related to changes in the supply chain environment.

Beginning in the second half of 2020, due to the market’s pessimistic forecast of the impact of the epidemic on consumption and insufficient upstream production expansion, the global automotive industry chain lacks cores, and the lithium carbonate raw material that the electric vehicle industry chain relies on has also entered a price hike cycle.

In the automotive industry, where one link is linked and the division of labor is meticulous, most car companies only master the design, production and final car assembly of core components such as engines and gearboxes. In the face of upstream shortages and price increases, they can do be limited.

BYD is an outlier. This company established in 1995, the first business is to make mobile phone batteries, this line later developed into consumer electronics foundry, began to do semiconductor business and car batteries in 2002, and began to enter the vehicle manufacturing in 2003.

At the beginning or even before the manufacture of cars, BYD has been involved in some upstream industries related to automobiles. This makes it one of the few highly vertically integrated businesses in the auto industry.

When the supply chain with global division of labor operates efficiently, the operating efficiency of BYD’s internal transactions lags behind its peers. In 2012, BYD closed its moulding, rubber and coatings divisions due to inefficiencies.

When the epidemic and the international political and economic situation impacted the division of labor in the supply chain, and the high downstream growth of electric vehicles exacerbated the shortage of upstream production capacity, the advantages of BYD’s vertical integration were magnified: BYD had stronger control over upstream costs and production capacity.

Last year, the lithium carbonate required for power batteries rose from 100,000 yuan/ton to 500,000 yuan/ton, and has remained high since then, and has now exceeded 550,000 yuan/ton. Various lithium compounds such as lithium carbonate account for nearly 50% of the cost of the power battery, and the power battery accounts for about 40% of the cost of the entire vehicle. Car companies that purchase batteries will not only lose profits due to battery price increases, but also reduce production capacity due to insufficient battery supply. BYD’s materials also need to be outsourced, but it can control battery production itself.

BYD is also stepping up the layout of the upstream lithium salt link. On March 22 this year, BYD won over 5% of the equity and long-term cooperation agreement of Shengxin Lithium Energy, which produces 45,000 tons of lithium hydroxide annually, with a one-time payment of 2.3 billion yuan and a 3-year non-sale of shares. Generally, the period for which such investments are not allowed to be sold is 6 months. BYD’s willingness to lock in for 3 years shows investment sincerity.

Lack of cores and rising chip prices have plagued many car companies. The most serious price increases are not high-end, high-power chips such as autonomous driving and cockpits, but some MCUs (Micro Controller Units) and power semiconductors that control small functions. . According to McKinsey statistics, the semiconductor cost of pure electric vehicles is double that of traditional vehicles, of which power semiconductors account for 55%. Both chips are produced by BYD Semiconductor. According to BYD Semiconductor’s prospectus, it can now meet demand for about 400,000 vehicles a year. BYD Auto is its biggest customer.

BYD is also seeking more profit by selling more expensive cars.

Most of BYD’s previous models cost between 100,000 yuan and 200,000 yuan. The new versions of the Tang and Han series released this year are priced at around 300,000 yuan. The average car price rose to 190,000 yuan from about 150,000 yuan last year.

The market accepted these more expensive cars. According to BYD’s data, the new version of the Han DM series sold 18,000 units in September this year, and the new version of the Tang series also sold 5,574 units.

The price of BYD’s just-released Denza has reached 400,000 yuan. A high-end off-road model with a price of 1.5 million yuan will also be released in the fourth quarter of this year.

Integrated production to control costs, coupled with high-end upgrades to increase the brand premium, BYD is even more profitable. In the third quarter of this year, BYD’s operating activities generated a cash flow of 47.852 billion yuan, and monetary funds reached 44.932 billion yuan. This will support its further expansion.

While the advantages of vertical integration have been magnified, the profits created by BYD’s individual employees have declined. According to the semi-annual report, BYD’s per capita profit is about 9,400 yuan, which is lower than last year (10,600 yuan) and the previous year (18,900 yuan), and higher than the low of 7,000 yuan in 2020. This is related to the rapid expansion of BYD personnel in the rapid growth.

Over the past 10 years, the number of BYD employees has been stable at around 200,000, and it only increased to 290,000 at the end of last year. But according to the semi-annual report, as of June this year, the total number of BYD has reached 418,700. Whether the increased labor cost can be translated into corresponding revenue and profit growth depends on the evolutionary speed of the organization and management capabilities of this newly giant enterprise.

Where will the money be spent? Battery supply, overseas and R&D

BYD is investing in three things: expanding battery production capacity, selling batteries to other car companies, selling cars overseas and developing new technologies.

Since 2018, BYD has been expanding its battery production capacity, and it has been more aggressive recently. By the end of 2021, BYD has planned a production capacity of about 250 Gwh. The investment in the power battery base that has been announced this year is 56 billion yuan, and about 100 Gwh will be put into production next year. BYD plans to build a production capacity of 600 Gwh by 2025, second only to the 670 Gwh planned by CATL.

According to data from Soochow Securities, BYD’s existing battery production capacity is actually somewhat idle. Taking into account that the newly built production capacity will be lower than the mature state in the climbing stage, BYD’s battery production capacity will also reach 160 Gwh by the end of this year. However, according to the current production situation, the annual output of BYD batteries is about 80 Gwh, and the capacity utilization rate is only 50%.

BYD needs more external customers. BYD Battery’s previous external customers were FAW Hongqi E-QM, Changan Ford Mustang Mach-E, Toyota bZ4X, and the sales of these models were not high. It is reported that BYD’s blade battery has been shipped to Tesla’s super factory in Berlin, Germany in August this year.

This year, BYD has also accelerated the pace of its cars going overseas.

BYD has now entered Japan, Singapore, Europe and other markets. By the end of August, BYD passenger cars had entered 32 countries and regions around the world. Caixin reported in October that BYD will order up to eight transport ships to export cars, each priced at US$84 million (about 603 million yuan), totaling 4.8 billion yuan.

When entering the Japanese market, BYD plans to build 10 stores in the first batch and start selling cars in January next year. BYD also invited dealers in Japan, and has not announced the specific cooperation with dealers.

On October 17, BYD exhibited three models of Tang, Han and Yuan models at the Paris Auto Show. They have been pre-sold in Europe before, and the price is double that in China – the pre-sale price of Yuan Plus is 38,000 euros (about 250,000 yuan), and the pre-sale price of Han and Tang is 72,000 euros (about 500,000 yuan) .

BYD plans to enter the U.S. market next year, Li Zhuhang, a BYD executive in charge of the auto business outside of China, said in an interview.

BYD spends more money on R&D. According to the third quarter financial report, BYD’s research and development expenses were 7.2 billion yuan, a year-on-year increase of 221.68%. BYD has also started recruiting related technicians for autonomous driving chips and cockpit chips this year.

In the first three quarters of this year, BYD’s R&D investment accounted for 4.1% of its revenue, up from 3.6% in the same period last year, with an investment of 10.87 billion yuan. In comparison, Tesla’s R&D in the same period accounted for 4.82% of its revenue, with an investment of $2.265 billion (about 164.21 yuan).

Nowadays, when consumers buy a car, they pay more attention to factors such as product positioning, pricing, and appearance, rather than intelligent capabilities. The current intelligent experience of various car companies is not enough to bring about huge differences. BYD, which has an integrated layout and a lower price, has a competitive advantage.

But as intelligence develops, new technologies that refresh the consumer experience will create the next opportunity in the automotive industry. The companies that can take the lead in coming up with “killer”-level applications and reaping dividends must be those that continue to invest before the critical point.

From fuel vehicles to electric vehicles, BYD’s products, sales and company value have achieved a leap. BYD itself and more Chinese consumers hope it can do more than that.