BYD and Geely Hit Potholes
BYD and Geely have been the darlings of China’s auto industry.
BYD, which its Chairman, Wang Chuanfu, says stands for “Beyond Your Dreams,” has received a great deal of media attention due to the large investment in the company made by billionaire Warren Buffet and its leadership position in electric vehicles. And, Geely broke the equivalent of the sound barrier in China autos when it emerged as the winning bidder for Volvo, the first Chinese car company to make an overseas acquisition of a premium brand.
The news has been so universally positive that, if you’ve been following these two companies, you may have been tempted into thinking that the old adage that “trees don’t grow to the sky” simply doesn’t apply. In that context, news last week that both BYD and Geely have now hit serious potholes on the road to becoming true global companies caught everyone’s attention.
Last week, BYD reported that its third-quarter net income plunged by 99 percent on weak sales. The worse-than-expected quarterly results came as auto sales slowed in China in response to Beijing’s efforts to keep its economy from overheating.
“Investors were disappointed by its sharp drop in earnings when other automakers were posting strong results,” said Francis Lun, general manager from Fulbright Securities. “It suggested that the products are having problems.” BYD’s pullback marked a sharp contrast with breakneck expansion in 2009 and the first quarter of this year. Company data showed that BYD’s auto sales started to taper off in August, which were down 19 percent from the year-earlier period, with September sales down about 25 percent.
In reaction to the news, BYD’s shares fell 10.3 percent in trading in Hong Kong, the biggest single-day drop in about two years. BYD stock has lost more than a quarter of its value this year.
News of BYD’s earnings woes followed the rather bizarre reports last month that China’s Ministry of Land and Resources has seized seven of the company’s factories in Sha’anxi Province. According to the ministry, BYD unlawfully built seven factories on 112 acres of farmland that it agreed to buy from an economic development agency in Xi’an. Apparently, the company built the plants even though 92 percent of the land was still zoned for agriculture. Mistakes like this are highly unusual for such a large and prominent Chinese company, and may suggest bigger problems below the surface.
For its part, Geely’s plans to become a global player took a hit when recent crash tests performed on its CK1 saloon by Latin NCAP, the recently-launched South American version of Europe’s New Car Assessment Program and similar to the one in Australia that rates cars according to their crashworthiness, failed to award the car a single star out of a possible five. Driver protection was labeled as “poor for most body regions.” The car has no airbags, as is standard for the region, and the NCAP discouraged Geely from simply adding them, stating that the structural weakness of the car was such that they wouldn’t do any good anyway.
Working in China can provide anyone with a dose of humility every day. No matter how much you may accomplish in the country, examples abound of companies like BYD and Geely that seemingly come out of nowhere to become very big, very fast, and which make any achievement pale by comparison.
As the recent news reports from both BYD and Geely clearly demonstrate, though, trees really do not grow to the sky.