OPERATIONS RESEARCH Case Study Operations Strategy at BYD of China, Electrifying RCC ee Maun hon ccs ‘The Chinese company BYD is pursuing electric cars and hopes to become the world's largest car company. With the financial support of American Warren Buffett, the ‘company, which has only been in existence for a few years mostly making batterles, has caught the attention ff not only Mr. Burfet but also many inthe auto industry, This case examines the favorable conditions, techno! ‘ogy and the operations strategy that are propeliing this Chinese company to the forefront of the not so distant future ofthe auto industry. Many Americans and Europeans have never heard of the Chinese firm called BYD. In fact, it isnt really clear what the letters representing the company’s name stand for, although some joke that recently it has meant “Bring Your Dollars” The company's latest PR message states that BYD stands for ~Buld Your Dreams.” BYD is a public company which started making batteries in 1995. Although Chinese-made batterles were already avail able, they were of poor quality Imports of higher quality batteries were available in China mostly fom Japan, but they were quite expensive, To satisfy the need for high ualty and low cost batteries, Wang Chuan-Fu started BY, Wang, who was a graduate of the Bejing Non- Ferrous Institute, found his competitive advantage by EXHIBIT 1 Electric Gasoline studying Japanese batteries and finding creative ways fof making similar batteries at a lower cost. Wang had been fascinated with batteries as a graduate student at the Institute and now seeks to take that passion to the global automobile market ELECTRIC AND HYBRID CARS Electric cars (also known as electric vehicles or EVs) rely ‘exclusively on battery power. With an all-electric EV there is no internal combustion engine, muffer, gasoline tank, ai and fuel fiters, and other parts needed to run 2 ‘gasoline powered system. The vehicle itself also pro- ‘duces no tallaize emissions, and by getting ts power from an efficient utilty company, overall it produces fewer greenhouse gases, This is especially true if the ‘electricity Is produced witn nuclear power, clean coal or natural gas. EVs are also less expensive to fuel on a per mile basis. Electric cars, however, have a shorter diving range and are difficult to operate with long distance travel (Exhibit 1). There are also some safety concerns ‘associated with using a Iithium fon battery, as lithium is 2 highly reactive material prone to explosion. Hybrid vehicies run on battery power until the battery reaches exhaustion and then a gas-powered engine NoTalpipe Emissions “Fh, | HARE cxeesnoae GasevPotaion vay commny aga | Cif ore 10H Mile Range MLL LI | bm! 300+ Mite Range peep |e eeeeest 12east per mile ‘This case was prepared by Charies A. Reick, Kasi Fit) ond Arf Angriowan of Purdue University Calumet and was published in the Journal ofthe Intemational Academy fr Case Studies 17, na. * Usnaty 207%) pp. 79-28 It was propsted solely tri for elas sion, The ators donot inland to ilstate either effete or ineffective henling of 8 managerial sin. jon Khas Been revised by Roget ©. Sehvoecer, 2076 anes reprinted wilh permiss.,Operations strategy at YD of China, Electrying the Worl’ Automotive Market Operation Strategy at BYD of China, Elecrifyng the Word's Automonve Market Kicks in to power the vehicie and to recharge the battery, Given the relatively short driving range of EV vehicles, hybrid vehicles have been the logical fst step towards allelectic cars and the replacement ofthe internal com: bustion engine, Hybrid cars became hot selling items when the price of gasoline soared In 2008, and then fel back sharply asthe price of gasoline fel, Some have proposed that electic vehicles can save ‘the US. auto Industry. According to Andy Grove (of Intel fame), “batteries will become a competitive advantage forthe automakers of the future” He supports a postion whereby the government takes a more active role in promoting and protecting an “infant industry” in new battery technology. The Obama administration took steps in 2008 to provide significant funding of battery research and the production of environmentally fiendly automobiles. New mileage standards were also pro- posed that will make electric vehicles more attractive to Since about 2008 many companies have begun to think electric automobiles will have a promising future. In ‘addition to the word's largest automakers that begun to develop electrical cars, some upstarts were established. Ford, Nissan, Chevrolet, Toyota, Daimler Benz, and Volkswagen all moved into the EV or hybrid market. The success or failure of electric cars and the companies that enter this market is strongly related to the batteries that will power the vehicles. Sales growth of hybrid and all electric vehicles is slow due to the high price tags, low battery mileage on a single charge and the relatively low price of gasoline, particularly in the US. IT’S ALL ABOUT THE BATTERY Lithium ion is the current choice for batteries to power electric cars. Lithium ion batteries are lighter and more powerful than traditional batteries Lithium, a metal com ound, can be found in large quantities in South ‘America, especially in Bolivia, Chie, and Argentina, Chile Is currently the world's largest producer of Iithium; how. ever, Bollvia has the largest known deposits ofItaium in the Salar de Uyun’ region. itis estimated thatthe lithium supply In Bolivia is somewhere around 5.4 billion tons. Significant deposits oflthium can also be found in China. The Chinese government has declared the lithium bat- tery industry to be a “strategic industry” and will ikely Support its development. ‘While Ithium batteries are currently the most popular ‘option for automobiles, they are stl heavy and exoen- sive, For example, the Chevy Volt, a hybrid car, has a battery that Is six feet long and weighs around 400 pounds. The cost of an electric car battery is in the range of $10,000-$20,000 each. Lithium batteries can store up to three times the power of nickel-metal hydride batteries. They are clearly superior to conventional bat ‘eties, Further advances in lithium battery production may be able to produce smaller, lighter, and faster charging batteries, Atleast one reported research study shows this promising development. BYD's advantage in this technology is the production of ferrous lithium fon batteries, which are safer and cost about naif of those of the competition, according to BYD's general manager of its Export Trade Division, Henry. Li ‘The United States is sill behind Asia in battery pro- ‘duction and research. Sanyo, NEC, BYD and LG created core competencies in balteries and achieved econo- mies of scale thet will require the Americans some time to-calch up with, US. fms in the industry are relatively ‘small upstarts such as EnrDel, Even the Chevy Volt Is powered by @ Korean company, Compact Power, with a Plant in Michigan. Serious movement into electric vehi- les will require investment money, long term commit ment and strategic aliances. Nissan has partnered with NEC to allocate $18 towards battery development. ‘Toyota-controllee Panasonic EV Eneray recenty bought Sanyo for its battery making ability Recently, promising US. companies have arisen to research and develop batteries needed to fuel electric cars. En:Del already operates two factories in Indiana and one in Korea, In 2016 Tesla opened a gigifactory battery plant in Utah that can eventually supply 500,000 batteries per year. The Big Taree: General Motors, ‘Chrysler and Ford, have been considering alternative Vehicles since the 70s, however among the Big Three there is still @ lack of momentum about this technology ‘and its useful application in the US, automotive market, particularity for ll electric vehicies. EXHIBIT 2 Key players inthe electric auto battery industry, 2008 ‘A123 (USA) MIT spin-off with $250M in venture captal AESC (Japan) Joint venture between Nissan and NEC YD (China) Largest battery producer in China ENERDEL (USA) Once part of Delph Invested $200M in Indiana plant Johnson Controls Joint venture witn plant in SAFT (USA) France France) LG (Korea) Leading producer of thium ion batteries for cell phones (Owns Sanyo Electric, the largest producer of rechargeable batteries, Panasonic Japan) Sruce Pogo Kl Roy, D Wo ad. ai “Te Ee Ca Bote Wahine Fen 28,209.99 52OPERATIONS RESEARCH ParSeven Cave Studies It seems that BYD is moving much faster and much more aggressively in the direction of introducing elec: trie vehicles. Its all electric e6 model was released at the end of 2009 and is much more competitively priced than the offerings of its Western competitors Furthermore, BYD has tapped into a cost innovation strategy by reducing manufacturing costs through reverse engineering the expensive Japanese battery models and substituting the expensive raw materials with cheaper substitutes. The e6 is a big seller in Europe with Its innovative iron-phosphate battery, zer0 emissions and the abilly to go 300 km on a sin- gle charge BYD BYD captured international attention when Berkshire Hathaway bought a 10 percent interest in the com- any. Warren Buffett wanted to buy 25 percent of the company, but BYD refused the offer. A company known for being cost-conscious and frugal, BYD has consis- tently been proftable, Located in Shenzhen, a manu- facturing megacity better known for electronics, the company gained a competitive advantage by finding creative and innovative ways to manufacture batteries fof high quality at costs lower than rival Japanese and ‘American brands. The founder of the firm bet on the Substitution of low-cost labor for expensive machinery, and attention to detail, and these strategies have proven to be successful. By 2000, BYD had become the biggest producer of cell phone batteries. BYD raised capital through a public stock offering on the Hong Kong Stock Exchange in order to increase the size of its battery business, In 2003 company founder, Wang had the opportunity to purchase a falling state- owned automobile manufacturer. He thought that the company could leverage its battery competence in the ‘auto industry by producing electric cars. While many thought that BYD was making a mistake in moving into automobiles, others thought differently. As Joann Muller of Forbes magazine stated In 2004: “In the vast {and looming Chinese automobile market now dom! ated by foreigners, @ small Chinese company called BYD is barely noticeable ... Amateur hour moybe, yet It would be foolhardy for General Motors, Volkswagen ‘and other foreign makers to ignore Chinese compo- files tke BY” (Muller p.76). t appears that she was right. With the capital injection from Berkshire Hathaway ang a focus on an increasing share of the ‘auto market, BYD has positioned itself well to compete Internationally. BYD seeks to position itself as an innovator and to tap into the growing green business by not only produc- ing electric automobiles, but also making its batteries ‘environmentally friendly. BYD Is producing batteries that contain nontoxic fuids and thus do less harm to the ‘environment, ifthe battery is discarded instead of being recycled. In addition to being environmentally tiendly, BBYD believes that it has made a major breakthrough in battery technology which will produce a longer lasting charge and allow the battery to be recharged numerous times, at the same time keeaing the costs significantly ower than those of its competition. The US. Depart ment of Energy is studying the claim made by BYD con- cerning ts new battery technology. In 2008 BYD operated eleven factories and employed 130,000, with most production facities in China, but also operated factories in Inca, Hungary, and Romania, BYD employees, including engineers and sci ‘entists typically live on the company grounds with BYD providing housing and other living expenses. The labor ‘cost fs a fraction ofthe costs found in the United States fr Europe. BYD hes two offices in the United States, both clase to important customers. BYD offices can be found in El Grove, Ilinols and San Francisco, California, ‘based on the location ofits two major US. customers, Motorola and Apple. Most of the firm’s revenue comes ‘rom cell phones, components, and batteries, but auto- mobile sales have been playing an increasingly signif ‘cant role (Exhibit 3), Reverie has increased consistent, and with the ‘exception of 2005, BYD has had consistent proftabilty (Exhibits 4 and 5). BYD has achieved an impressive record ints short if utilizing low labor costs, litle out: sourcing, and successful innovation. The company is transferring is cutting edge technology innovation to the automotive market and at the same time closely fol owing the global trends in green marketing that focus fon @ higher level of cost consciousness. BYD was named the second most innovative company in China in 2008 by Fast Company magazine. In 2008 BYD produced a number of vehicles includ- Ing the F3DM—DM stands for dual mode, which means EXHIBIT 3 BYD revenue by segment, 2008, Celipones Catton Astomabies $1.7 bition $13 ion Other Batre $300,000 $3 bilion Soe A Gr “Any Cece Bary Foe” te 6, 7,218Operations strategy at YD of China, Electrying the Worl’ Automotive Market Operation Strategy at BYD of China, Elecrifyng the Word's Automonve Market EXHIBIT 4 BYD revenue. ss EXHIBIT 5 YD net profi. a BYD revenue (ilion) ee os oS w ‘that the car can run on dual energy sources. The fenvironment-triencly battery can be fully charged in as little as an hour, This model sold in China for around US$22.000. This hybrid car can travel 82 miles on 2 single charge and Is the first mass produced plugin hybrid in the world. The difference between it and the Toyota Prius Is that itis less expensive, has a very small engine and relies significantly on battery power, cutting down the costs of utlization and its carbon UPDATE TO 2015, BYD IS THE LARGEST EV MANUFACTURER WORLDWIDE? For the month of October, 2075 AYD had the largest sales of all-electric EV vehicles In the world with total sales of 6,099 EV units, October capped a yearlong Global Sales of EV (all-electric) Vehicles Pas [BYD net proit (milion) 3 7 oF Increase in sales for 2015 making BYD the world leader In units Sold of 43,089 fram January to October 2015, ‘This represents a 22 percent increase compared to the ‘same period last year. BYD had an 11 percent share of the global market as shown in the following chart YD climbed from seventh to first place in the world ‘due to a carefully planned strategy of new model intro- tions. The launch of a sedan, the Gin, gave BYD a ‘competitive passenger model fist introduced in 2013. They also launched @ new hybrid SUV model, the Tang, in June 2015 t0 meet the company’s 542 perfor mance claims: “5° means reaching 100 kmh in 5 sec- onds, “4” means four wheel drive and "2° means fuel ‘efficiency of 100 km with less than 2 Iters of gasoline. Next, BYD plans to introduce the Song and Yuan models to its lineup. Market Position in Ranking Manufacturer October 2015 YTD Share 2014 1 BYO) 5.098 43.089 1 7 2 Nissan 3115, 42012 1" 1 3 Mitsubishi 4144 36,622 9 2 4 Tesia 3349 36312 8 3 5 vw 3774 21755 7 " 6 eMw 2937 25470 7 9 7 Renault 2568 20,136 5 8 z Kendi 5081 17,201 4 10 2 Ford 1.776 1.17 4 5 10 Zoye 2.809 15384 4 13 | Abstnctes tom www byecom, August 12, 2016OPERATIONS RESEARCH ParSeven Case Studies BYD Tang SUV In all of 2015 BYD delvered 62,000 EV vehicles, ‘almost entirely tn China, The company projects it could sell nearly two to three times this numeer in 2016. Vehi- clos with combustion engines are being penalized by the Chinese government through taxes, rebates, and registra tion privileges. Incentives in China for electric cars are being fueled by government efforts to reduce green house gases and hazardous air pollution in Chinese cites. Globally, 8YD will delver nearly 000 electric buses In 2016, with about 200 zero-emission electric buses 'schecllecito be built n 2016 from BYD's North American factory—the Bus & Coach Factory n Lancaster, California. These numbers alone (6000 in one year) make BYD the largest manufacturer of electric buses worldwide and sur passed the entre US, 2015 bus market volumes. In 2015 BYD corporate sales totaled US$12 billion ‘and net Income was 423 milion. Electric vehicles were approximately 25 percent ofthe sales. CONCLUSION BYD Is attempting to leverage its core competencies in battery production and development to meet the future needs of the driving public, ft believes that the future of the auto industry willbe in electric vehicies. In order for electric cars to replace gasoline powered cones, infrastructural changes will have to be made to quickly charge depleted batteries, much like present ay gasoline stations. Another possibilty would be @ battery replacement station in which a depleted battery 'squicky replaced with a fully charged one. Such battery changing stations are currently being developed in Japan, Denmark, US., and Israel. While Mr. Buffet may ‘agree with BYD's vision of the futuro, the company faces many challenges as it attempts to compete with the world’s largest automakers ‘Operations and supply chain managers wondered ‘what the high growth and Innovative technology bust ness strategy meant for them. They needed to develop ‘an operations and supply chain strategy that was con: sistent with this business strategy. it would start with @ mission and objectives, along with major decisions to keep up with the growth and technology changes. This would require systems and processes that could be scalable for high-volume production. Capacity would have to be managed and located to support business ‘growth, Perhaps short supply chains with iocal suppliers are needed. The challenges facing operations and sup- ply chain strategy were indeed considerable. Discussion Questions 4. Do you think electric cars may become a viable alternative to gasoline-powered vehicies? What is the future of the electic ear? Explain your answers, 2. What are the internal strengths and weaknesses of 8YD along with the external, opportunities and threats (SWOT analysis)? 3. Given a business strategy of being the word leader in manufacturing electric cars with innovative tech- nology, what operations and supply chain strategy {do you think BYD should pursue? Identify what ‘operations and supply chain should do to help BYD compete including a mission, objectives, distinctive competence and key decisions. 4, What recommendations would you make for the business as a whole to overcome its weaknesses {and threats and then capitalize on Its strengths and ‘opportunities?