Technology Levels Playing Field in Race to Market Electric Car 

by Norihiko Shirouzu
January 12, 2009
The Wall Street Joutrnal
http://online.wsj.com/article/SB123172034731572313.html

SHENZHEN, China -- It would seem like a lousy time to get into the 
car business, especially if you're a little-known company in the 
developing world. No start-up has grown into a major auto maker in 
at least half a century.

Wang Chuanfu, the founder and chairman of BYD Co., a Chinese 
battery and car maker, thinks he's got a shot.
 
Last month, BYD began selling a plug-in electric hybrid car in China, 
at least a year ahead of similar efforts in the U.S. and Japan. 
The car, called the F3DM, plugs into a home outlet and comes with 
a small gasoline engine that can recharge the battery on the go. 
It is the first of an array of electrified cars BYD plans to introduce 
around the world, starting in China and then in the U.S. and Europe 
as early as 2010.

On Monday, Mr. Wang is expected to pitch the F3DM to U.S. 
consumers, during a news conference at Detroit's North American 
International Auto Show, which opens to the public Saturday. 
His venture has already attracted the attention of industry veterans 
and investors, including Warren Buffett.

Mr. Wang's strategy: capitalizing on the electric car's low barriers 
to entry. Few products are as complex to develop and produce as 
gasoline-powered automobiles, which are assembled with thousands 
of precisely engineered parts. But electric cars use only basic 
motors and gearboxes, and have relatively few parts. Aside from 
perfecting the battery itself, they're far easier and cheaper to build 
-- and that makes for a level playing field.

"It's almost hopeless for a latecomer like us to compete with GM 
and other established auto makers with a century of experience in 
gasoline engines," said Mr. Wang in an interview, pacing and 
juggling calls in BYD's headquarters on the outskirts of Shenzhen. 
"With electric vehicles, we're all at the same starting line."

It's still a bumpy road to a full-blown era of battery cars. Punishingly 
high gasoline prices have come down, potentially damping the 
public's willingness to embrace alternative-fuel vehicles. In addition 
to convincing consumers to try untested technology, BYD has to 
fight mistrust in the West of Chinese-produced goods. Safety has 
also come into question, as some of the lithium-ion batteries -- 
widely believed to be the key to making viable electric cars -- have 
shown a tendency to overheat and sometimes catch fire.

Mr. Wang says BYD's batteries use a new technology that makes 
them safer than other lithium-ion models. He also says cheap 
abundant labor helps keeps his costs down, another factor that 
could sway consumers. In China, the F3DM is priced at 150,000 
yuan, or $22,000, and BYD expects it to sell for a similar amount 
in the U.S. The Chevrolet Volt, by contrast, may be priced at 
$40,000 or more when it hits the market in late 2010.

Another potential BYD edge: more than a decade of experience 
specializing in making batteries. Mr. Wang started the company in 
1995, borrowing $300,000 from a cousin, and making batteries for 
cellphones. Today, BYD is the world's second-biggest producer of 
lithium-ion batteries. The company made 21.2 billion yuan 
($3.1 billion) in revenue last year and has a work force of 130,000. 
Last September, MidAmerican Energy Holdings Co., an Iowa-based 
energy producer, invested $230 million in BYD for a 10% stake. 
Mr. Buffett is majority owner of MidAmerican.

BYD caught the investors' attention in part because of its army of 
10,000 technicians and engineers, many fresh out of college and 
technical schools, says David Sokol, chairman of MidAmerican. 
"Mr. Wang has built high-quality but low-cost research and 
development capabilities in China," says Mr. Sokol.

The first of BYD's electric cars, the F3DM, is more of a purely 
electric car than the gasoline-electric hybrids on the road today. 
It can go about 50 to 60 miles exclusively on electricity when fully 
charged.

By contrast, Toyota Motor Corp.'s Prius is essentially a gasoline-fueled 
car with an electric engine that propels the car at low speeds and 
assists the gasoline engine when accelerating. The F3DM is similar 
in design to General Motors Corp.'s Chevy Volt. But it is being 
launched two years earlier than the Volt and one year ahead of 
Toyota's plug-in hybrid, which is due out for late 2009.

 Other nontraditional players jumping into the fold include Think 
Global in Norway, Lightning Car Co. in the U.K. and Tesla Motors 
and Fisker Automotive, both in California. They all are planning to 
soon roll out or are already taking orders, albeit a very small number 
of them, for electric cars powered by lithium-ion batteries. 
The growing field of upstart competitors could pose a threat to 
Detroit, where the Big Three are betting that hybrids and battery 
cars can help fuel their turnaround.

In China, BYD is already one of the fastest-growing independent 
auto makers. Demand for its traditional small cars, the F3 and the 
F0, is growing despite weakening car sales in China, allowing it to 
close in on Chery Automobile Co. and Geely Holding Group, the 
two biggest independent Chinese auto brands. The F3 was one of 
China's best-selling models during the last quarter of 2008. 
"BYD is probably the closest...to becoming the first Chinese auto 
maker to crack the Western auto markets," says Wolfgang 
Bernhart, a senior researcher for the German consulting firm 
Roland Burger.

By late 2009, BYD plans to mark another milestone by launching 
in China the BYD e6, an all-electric car capable of going 180 miles 
on a single full charge of its battery.

The Battery Holdup

The concept of an electric vehicle has been around for more than 
a century. But so far it has failed to become mainstream in large 
part because the batteries have been too heavy, bulky and costly. 
Until recently, no commercially available battery could store enough 
energy in a small space, such as under the car's back seat, 
recharge quickly and operate in all weather without overheating or 
failing.

Lithium-ion batteries, like the ones used in laptop computers and 
cellphones, hold the most promise. But the safety issues have 
slowed production. Both GM and Toyota say they are taking more 
time to roll out their electric cars to make sure their batteries are 
safe.

Mr. Wang says BYD's lithium-ion battery uses an iron-phosphate 
technology that is chemically stable and thus "inherently safe." 
He says it doesn't overheat to the point where it can catch fire.
The technology is similar in design to that developed by A123 
Systems, a U.S. start-up battery maker led by a group of scientists 
from the Massachusetts Institute of Technology. GM is using their 
technology to power the Volt. Individuals close to A123 say the 
company plans to take apart BYD's battery cell to see if BYD has 
infringed on any of its technology. Officials at A123 declined to 
comment.

The Chinese company says it has spent more than 10 years 
developing its own iron-phosphate-based lithium-ion technology 
without infringing on others' intellectual property. "Sometimes 
foreigners think every Chinese company is stealing technology and 
design," says Luo Hongbin, a senior BYD engineer. But, he says, 
"we have been researching electric vehicles for so many years."

In early testing, reviewers said the car still has some kinks. 
The gasoline engine in the F3DM, for instance, rattles and can be 
noisy when it kicks in. The steering wheel also tends to get stiff 
when making a turn. Henry Li, a senior BYD executive in charge of 
overseas sales and marketing, says the company is working to 
resolve these issues before the car hits new markets: "We have 
plenty of time to make them perfect."

Mr. Wang, the 42-year-old Chinese entrepreneur, compares the 
simplicity of building electric cars to the simplicity of a digital 
watch. "Anyone can design and produce digital watches, but it's 
virtually impossible for a newcomer to match the precision of a 
Swiss wristwatch," Mr. Wang says.

Indeed, BYD's all-electric e6, has just two motors (45 parts each), 
one powering the front axle and the other the rear, and two gearboxes 
(60 parts each) to go with each of the motors. That means the 
whole system has 210 primary parts, excluding nuts and bolts. 
In comparison, BYD's F6, a gasoline-fueled vehicle, has a total of 
1,400 powertrain parts: a V6 engine composed of 840 parts and 
a transmission with 560 parts.

Learning to Drive

At BYD's plant in Shenzhen, electric motors and batteries are 
produced with little automation, creating a decidedly low-tech 
feeling to the place. Rows of workers, mostly women in their late 
teens and early 20s dressed in blue uniforms, assemble them 
largely by hand.

Mr. Wang's fascination with batteries harks back to his college 
days in the mid-1980s, when he studied metallurgical physics and 
chemistry. After receiving a master's degree, he found a research 
position at the General Research Institute of Nonferrous Metals in 
Beijing. He says it was a cushy job, but he grew bored and decided 
to go out on his own just as China's experiment with capitalism 
was going into full swing.

Mr. Wang set up BYD with two dozen engineers. Within a few years, 
the company was selling batteries to companies like Motorola Inc., 
Nokia Corp. and Samsung Electronics Co. The business doubled 
each year, Mr. Wang says. BYD went public on the Hong Kong 
stock exchange in 2002.

One industry that grabbed Mr. Wang's attention was cars, even 
though he didn't know how to drive at the time. (He has since 
learned and takes his Lexus to work.) In early 2003, Mr. Wang 
decided to acquire a small auto maker named Qinchuan Motors in 
Xian, but investors voiced strong opposition.

On a conference call, Mr. Wang disclosed that in 1998 he had 
instructed 20 of his top engineers to quietly scale up BYD's 
cellphone-battery technology so that it could be used to power cars 
some day. They developed an all-electric car, a clunky vehicle 
called the Flyer that was just a step above a golf cart.

Encouraged, investors blessed plans for BYD to first design a 
traditional gasoline car so the company could learn the basics of 
design and manufacturing. In mid-2005, BYD launched its first car, 
a small sedan called the F3. Foreign industry observers accused 
the F3 of being a copy of the Toyota Corolla. Mr. Wang says he was 
careful not to infringe on another company's intellectual property. 
"By synthesizing good ideas in China from Toyota and others, 
BYD created its own cars quickly," he says. He says he believed 
there was no better way to learn the ropes of the auto industry 
than "benchmarking" the industry's best.

A Toyota spokesman said the Japanese company doesn't intend 
to take BYD to court over the F3. "In general, we're always prepared 
to take legal action if we can determine there is a clear case of 
infringement," says company spokesman Hitoshi Yokoyama in 
Beijing.

Behind the scenes, BYD kept fine-tuning its electric cars. 
In April 2008, when Mr. Wang unveiled an e6 prototype at the 
Beijing auto show, it was an emotional moment for the executive, 
who grew up poor in Anhui Province and lost both of his rice-farmer 
parents to illness by the time he was 15.

Standing amid firecrackers and confetti, Mr. Wang declared the 
e6 marked the arrival of a new era in automobiles: "We have every 
confidence to surpass GM and Toyota and other global auto makers 
in electric-vehicle technology."