Although it was expected that China would become the next major competitor in the world auto market after Japan and South Korea, that day seems to be coming much earlier than anticipated, particularly with the implementation of clean technology. The State of California, America’s leader in enforcing environmental regulation, has recently selected a low-cost Chinese auto manufacturer to supply green technology for its public transportation system. According to The Financial Times, China’s BYD is going to build electric buses for California’s public projects by the end of 2011. Moreover, BYD’s hybrid electric cars will be running on the roads of the Golden State even sooner. On December 17, 2010, the Housing Authority of the City of Los Angeles announced that it would deploy a fleet of BYD’s F3DM (Dual Mode) cars at its office in downtown Los Angeles. These hybrid vehicles will be able to run on electricity for 40 to 60 miles after one charge, but may also switch to plug-in-hybrid electric mode for traveling more than 60 miles within a day.
BYD, whose initials stand for Build Your Dreams, is another example of China’s growing manufacturing capabilities. Founded in 1995 as a cellphone components producer, the company had its first success in China’s exploding domestic demand for cellphones in the late 1990s. By the early 2000s, BYD had already established itself as the world’s largest producer of handset batteries, supplying major cellphone vendors such as Motorola, Nokia, and later Apple’s iPhone. In 2003 the company entered car manufacturing one year after acquiring a bankrupted Chinese state-owned carmaker. It was said that in making this decision, Chuanfu Wang, BYD’s founder and CEO, had confronted fierce opposition from shareholders, some of whom even threatened to commit suicide. Yet Wang’s strategic vision soon justified his iron-fisted resolve. The fast expanding urban middle class of China in the late 2000s ignited the low-cost car market. While acclaiming the potential value of its capability in batteries for building electric cars, BYD heavily exploited the traditional compact car market by producing cheap cars priced for less than US$10,000. By the seventh year after its establishment, the carmaker had already built one million cars for Chinese consumers. This year, BYD’s annual sales are expected to increase from 400,000 in 2009 to somewhere between 600,000 and 800,000, making it China’s fastest-growing carmaker. In 2009, BYD launched its first all-electric vehicle, and one year later, it transferred its electric car technology into a new line of instantly marketable electric buses. By penetrating the US market with the low-cost green technology, Chuanfu Wang’s stated ambition for BYD to become the world’s largest car company by 2025 must be taken seriously.
The battery-turned-electric car company is among several innovative Chinese carmakers that have emerged within the last decade. Today, many of these companies, such as BYD, Chery, and Geely have already become international players. Starting as low-cost competitors in the domestic market, these indigenous companies, however, were not expected to lead the Chinese auto industry. China’s industrial policy from the 1990s was encouraging its giant state-owned carmakers to form joint ventures with leading multinationals, hoping to leverage their access to foreign technology. Yet most of the joint ventures became almost subsidiaries of the multinationals, relying on foreign partners to supply new models and brands so as to generate quick revenues and profits. While China’s mainstream media often criticized the new non-state-owned companies for producing inexpensive but low-quality cars and for infringing copyrights in their car designs, companies like BYD, Chery and Geely have been actually engaged in indigenous innovation. Chery, for example, is the first Chinese carmaker to implement Toyota’s lean production system. Rather than being captured by foreign technology partners, Geely is expected to leapfrog its technological capabilities through its acquisition of Sweden’s Volvo from Ford. After receiving a capital injection of US$231 million from Warren Buffet’s Berkshire Hathaway in 2008, BYD is pushing electric cars and new energy development in China with a rare vertically integrated model.
Why have these non-state-owned companies succeeded where giant national champions have failed? A report written by Feng Lu and Kaidong Feng of Peking University in the mid-2000s concluded that indigenous innovation is these carmakers’ source of growth. If these companies had only been interested in making quick money, as has been the case with many Chinese joint ventures, they would not have had the incentive to invest heavily in an R&D workforce. In setting their sights on generating higher-quality and lower-cost products, these new indigenous companies have built powerful learning organizations that have enabled them constantly to climb the technological ladder. In fact, as Lu and Feng observed, these new competitors have been able to assemble teams of high-quality engineers from state-owned enterprises that have eschewed an indigenous innovation strategy. Today, the divide between two types of companies, resulting from two different investment strategies, is increasingly obvious.