Innovation Opportunity from Adjacency – BYD Auto 127.0

BYD goes from rechargeable batteries to electric cars

Source: Wikipedia

BYD Auto is the prime example of successful innovation and entrepreneurship from the application of ‘adjacency’ strategy. BYD expects to become the largest car company in the world within five years – and with electric cars, at that.

It will end up to be the most innovative, as well! Here is how BYD intends to do it.

History and Vision of BYD. CEO, Wang Chuanfu, started the company in 1995 to make and sell rechargeable batteries for computers. Based in China, he used appropriate, labor-intensive technology instead of automation to make the batteries.

By 2002, BYD was among the top four companies in the world supplying to computer and cell phone manufacturers alike.

In 2003, BYD bought a near defunct auto company in China. This auto company used the traditional gasoline-fueled internal combustion engine (ICE) technology. At the start, car design copied the elements of famous foreign brands. Even the car logo looks almost similar to BMW.

Here, the story turns to very innovative and path-creating ‘adjacency’ strategy.

CEO Wang’s vision is to use his knowhow in rechargeable batteries in large-scale drive-train motors for hybrid and eventually fully electric cars. He has succeeded with hybrids – cars with both electric and a back-up ICE engine. This year BYD will introduce a fully electric model, the E6, pictured above.

Buffet’s Validation. As confirmation of the strength of BYD’s accomplishment, Warren Buffet, the world’s most successful investor, bought 10% of BYD Auto’s parent company for US$230 million in September 2008. Since then, the value of his investment has doubled.  Wang Chuanfu likewise has become one of the richest men in China; it would not be a surprise if he will be the richest in the next few years.

Buffet does not normally invest in businesses he does not understand like technology. In BYD’s case, his partner, Charles Munger, convinced him to invest because of the personal qualities of 43-year old Mr. Wang Chuanfu who is described as the best and modern combination of Thomas Edison and Jack Welch.

Adjacency Strategy. I call the strategy of moving from BYD’s core technology of rechargeable batteries to a nearby one – in this case, an application into cars – as adjacency strategy. As it is, knowhow in battery technology is the bottleneck in the development of an electric car, technology in manufacturing other car components is already well diffused.

The story cannot be more compelling as a business case than because of the present zeitgeist for clean energy.  BYD intends to phase out its ICE cars as electric cars phase in into the critical mass.

Component Technologies. There are many component innovations in the area of rechargeable batteries needed to make this generic adjacency strategy work.

Firstly, there are practical difficulties to be resolved in scaling up from a battery that powers a cell phone to one that powers a car including size, weight and shape.

Secondly, BYD’s car battery is fast charging; able to recharge 50% of its capacity in the first ten minutes. This minimizes the major constraint to acceptability at the current state-of-the-art where long-charging time of, say 12 hours, requires either removal and replacement of the battery at standalone charging stations.

Thirdly, it can run 400 km per charge that, for typical city driving, is enough for charging to be done on weekends.

Fourthly, he has developed a green electrolyte for the rechargeable batteries. When Buffet’s representative first visited, Mr. Wang actually drank a cup saying, “It does not taste good but it is ok to drink.”

Finally, in car design, BYD has hired a group of Italian designers to develop a uniquely BYD image.

Commercial Strategy. Reflecting his general business management style, BYD has a sensible domestic electric car market entry strategy starting with fleet sales, say to taxi and large companies in China, to test the robustness of his design and, I think, best options for battery re-charging.

The international market entry, likewise, reflects his careful method. BYD ICE cars are already produced and sold in four other countries including eastern Europe but not the U.S.A. I think he will implement a Mao-like ‘encircle the cities’ around America, which I think will be the toughest market to crack especially with the political connections of the car unions and companies.

BYD’s strategy is helped in that China is now the largest single car market in the world tracking at 12 million per year compared to 9.8 million for the US, at this time of recession.

China’s move towards green energy inaugurated with new laws by the People’s Congress this year, 2009, will also be a big help in encouraging the Chinese people to buy local and green. As it stands, BYD is already the largest car company in China with its ICE cars.

With BYD having a big chance of success not just in China but into the rest of the world, the innovations will result into huge total factor productivity gains for China from a new transport industry category created and developed in the country.

Source: Wikipedia

Building his Dream. Based on a combination of technology innovation already developed, sound business strategy, congruence with the zeitgeist, and location in the fastest growing car market in the world, it seems that BYD Auto is very well on its way to building its dream!

BYD, as brand, actually stands for the initials of the company’s Chinese name. In another sign of Wang Chuanfu’s genius, he backronymed BYD to stand for “Build Your Dream” in English – the more so to help build his own.

Click here for a link to the website of BYD Auto.

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