Zen and the State of BYD Innovation

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1149 hrs.

Amid all the debate about China’s supposed “lead” in green technologies, it is worthwhile reading this article from Matt Forney and Arthur Kroeber from the Wall Street Journal last fall, wherein those two China hands offer telling insights and point a course for BYD.

“But the true competitive advantage of BYD, as with most Chinese firms, is its ability to commoditize technology products, thereby making them cheaply available to a wider range of customers. This is a useful function, and it will be critical in ensuring that new-energy products can rapidly increase market share against traditional carbon-based technologies. But there is little evidence that Chinese companies are ahead in this new-energy innovation race.”

For the moment, I tend to agree. As Christina Larson recently pointed out in Yale360, while China is extending its role as the world’s factory floor into green technology products, the country and its business leaders all too often still confuse imitation with innovation.

“The first essential fact to be aware of is that most news stories about China’s greentech gains are about manufacturing. China is becoming the wind-turbine factory to the world for much the same reasons it has long been the TV and t-shirt factory to the world: lower wages, lower land prices, fewer regulatory and other requirements, etc. This isn’t particularly surprising, and it shouldn’t be seen as a reversal of the status quo. What’s changed most dramatically in the last five years has been growing global demand. With significant government investment, Chinese factories have planned for and stepped up production accordingly.”

To summarize the sentiment, China’s growing role in greentech is about efficient manufacturing, not innovation. BYD is no exception.

Not the Imitator Forever

What we must guard against, however, is the belief that this will ever be the case. Leaving aside whatever process innovations BYD has developed to crank out its batteries, BYD may well not be doing much innovation today, but the Buffet touch and properly applied capital could help it build on its core competency and make a jump into developing genuine innovations.

There are plenty of “ifs” implicit in the preceding sentence, and BYD is unlikely introduce disruptive innovations in the next few months. But just as we should not be surprised that BYD is not an innovator today, we should not be surprised if and when that changes.

A smart businessman does not wait for his competitor to emerge before taking measures to protect his advantage. He assumes the competitor is there, and acts accordingly to build and extend his lead and to lay the groundwork for the constant renewal of that leadership. Forney and Kroeber remind us not to buy the hype coming out of BYD. I suggest it is wiser for BYD’s presumed competitors to foster a little paranoia and start figuring out how to beat them before it becomes a problem.

And Forget the Motorheads

Forney and Kroeber also note that Car and Driver magazine was scathing in their review of early BYD electric vehicle portotypes, with the magazine’s columnist saying “We drive faster in our driveways.”

Yes, that’s a great line. And it brings a smile to my face as I gaze lovingly out my window at my V6-powered suburban assault vehicle.

Levity aside, though, it would also be unwise to accept the verdicts of the automotive press on BYD’s cars. Auto reviewers are notorious testosterone junkies, and any vehicle that does not incite an involuntary glandular response is dismissed out of hand. For three quarters of a century, that worked, because North Americans (and plenty of Europeans and Japanese) were making their personal transportation decisions with the back half of their brains.

But we are entering an era where a growing number of buyers are overruling their glands in favor of an emotional response linked to a fear for the future of the planet. A niche market this may be, but BYD does not need much more than a niche, a low price, and some volume fleet sales to establish the first generation of its cars in the United States.

Those with a sense of automotive history will remember that both Toyota and Nissan were ridiculed (or worse) by the American automotive press throughout the 1960s. Yet ignoring their detractors, they created the American predilection for Japanese imports, beginning with fringe consumers, then slowly and painfully learning how to appeal to U.S. drivers based on changing consumer tastes and priorities.

Matt and Arthur (and probably Car & Driver) look at BYD and think “Yugo.”

Me, I look at BYD and think “Datsun.”