How China built BYD, its Tesla killer

China's BYD was a battery manufacturer trying to build cars when it showed off its latest model in 2007. American executives at the Guangzhou auto show stared at the car's uneven purple paint job and poor fit of the doors.

“They were the laughing stock of the industry,” said Michael Dunne, a Chinese auto industry analyst.

No one is laughing at BYD now.

The company passed Tesla in global sales of fully electric cars at the end of last year. BYD is building assembly lines in Brazil, Hungary, Thailand and Uzbekistan and is preparing for this in Indonesia and Mexico. It is rapidly expanding exports to Europe. And the company is on the verge of overtaking the Volkswagen Group, which includes Audi, as the market leader in China.

BYD's sales, of which more than 80 percent are in China, have grown by approximately one million cars in the past two years. The last automaker to accomplish that in a single year in the U.S. market was General Motors—and that was in 1946, after GM had suspended passenger car sales for the previous four years due to World War II.

“BYD's growth is unlike anything the industry has seen in many decades,” said Matt Anderson, curator of transportation at the Henry Ford Museum in Dearborn, Michigan.

BYD, based in Shenzhen, the center of China's electronics industry, has shown how Chinese automakers can leverage China's dominance in electrical products. No company has benefited more from China's embrace of battery-electric cars and plug-in gasoline-electric cars. These vehicles together represent 40 percent of the Chinese car market, the largest in the world, and are expected to reach more than half next year. Like most Chinese automakers, BYD does not sell its cars in America because Trump-era tariffs remain in place, but BYD does sell buses in the United States.

BYD is leading China's export push for electric cars and is rapidly building the world's largest car carriers to transport them. The first of the ships, the BYD Explorer No. 1, is on its maiden voyage from Shenzhen with 5,000 electric cars on board and is expected to arrive in the Netherlands on February 21.

With the success of China and BYD, more attention has been paid.

Tesla CEO Elon Musk warned about the strength of China's electric car exports in a corporate earnings call in January. “Frankly, I think if trade barriers aren't put in place, they will pretty much destroy most other businesses in the world,” he said.

The rapid gains of BYD and other Chinese automakers in Europe have prompted a European Union investigation into Chinese government subsidies and could lead to tariffs. BYD's annual reports show that from 2008 to 2022, there was a total of $2.6 billion in government support. And that doesn't include other help, like ensuring taxi companies in BYD's hometown only buy BYD electric cars.

BYD declined to comment on subsidies. In a statement, the company said that the BYD Explorer No. 1, its new ship, “marks an important milestone for BYD as it expands into international markets and contributes to the development of the global new energy vehicle industry.”

China has built enough factories to make more than twice as many cars as are available on the market. This has led to a price war in China, especially between BYD and Tesla, with discounts leading to heavy losses. One of BYD's newest models, the subcompact Seagull, starts at less than $11,000.

A real estate crisis and a falling stock market are now making Chinese consumers more hesitant to buy a car at all. But BYD's low production costs put it in a better position than most rivals to survive a prolonged sales slowdown and an industry shock.

BYD Chairman Wang Chuanfu founded the company in 1995 to make batteries for Motorola and other consumer electronics companies. He had studied at Central South University in Changsha, an elite institution famous for its research in battery chemistry. But he dreamed of making cars.

In 2003, BYD bought a factory in Xi'an that built gasoline cars. But the company had problems in the beginning and gained an early reputation for building clunkers. A visit to the factory in 2006 revealed a large repair area at the end of the assembly line filled with newly built cars that were already in need of more work.

BYD's sales grew while the Chinese market grew enormously. Warren E. Buffett bought a nearly 10 percent stake for $230 million in 2008, giving BYD not only a cash injection but also global cachet. The same year, Mr. Wang pledged to start exporting battery-electric cars to the United States within two years.

But electric cars at the time cost a lot to build and had limited range, and Mr. Wang had to scupper his plans to enter the U.S. market. In a 2011 interview, he questioned his emphasis on battery-electric cars. Automakers should focus on gasoline-electric hybrids, he stated. He added: “There is still huge potential in the Chinese electric car market.”

By 2012, car production in China had caught up with demand. Buyers became more choosy. BYD's car sales and stock prices fell as multinationals offered more stylish models. Industry executives and analysts wondered whether BYD had a future.

But Mr. Wang went on to make two risky bets that paid off.

In 2016, he hired Wolfgang Egger, a leading Audi designer, who in turn hired hundreds of automotive engineers with bold tastes. They have completely redesigned BYD's models.

Mr Wang also discovered how to replace the standard chemicals in rechargeable lithium batteries – nickel, cobalt and manganese – with cheaper iron and phosphate. But early batteries made from cheap chemical compounds quickly ran out of juice and needed to be recharged even after short trips.

In 2020, BYD introduced its Blade batteries, which closed most of the so-called range gap with nickel-cobalt batteries at a fraction of what they cost.

Tesla began making and selling large numbers of cars in China that same year, and enthusiasm for electric cars spread across the country. BYD was done with cheap battery chemistry and Mr. Egger's new designs.

Tesla also started using lithium iron phosphate batteries in cheaper models. BYD still mainly sells cheaper cars with a lower range, while Tesla mainly sells more expensive cars with more range.

Swiss bank UBS found last year that a BYD Seal electric hatchback sedan cost 35 percent less to make than a slightly smaller Volkswagen ID.3 of comparable quality made in Europe. The savings only partially came from the cheaper lithium iron phosphate batteries.

BYD makes three-quarters of the Seal's components. Like Tesla, BYD uses only a few electronic systems in each car. VW, on the other hand, outsources up to two-thirds of its components. BYD has also benefited from lower labor costs in China, although these have risen as factories compete to hire skilled workers.

BYD now has its own walled city in Shenzhen, a southeastern city next to Hong Kong. An airport-style monorail transports employees from 18-story corporate apartments to BYD's office towers and research labs.

Liu Qiangqiang, an engineer at the Shenzhen center, said his car development team's workforce had almost tripled since he joined the company from General Motors 15 months ago.

“The pace is high,” he said.

After abolishing autonomous driving a year ago, BYD sprang into action when consumer electronics companies Huawei and Xiaomi introduced cars with significant autonomous driving capabilities. Mr. Wang announced in January that BYD has 4,000 engineers working on assisted driving, a limited form of autonomous technology that works mainly on highways and major roads, and that he would invest $14 billion in the technology.

BYD has a continuing lead over Tesla: Mr. Wang's decision to develop plug-in hybrid cars in 2011, which account for nearly half of BYD's sales.

Li Jingyu, a salesman at a BYD dealer in Shenzhen, said many families bought a hybrid as their first car so they could drive back to their ancestral villages during the Lunar New Year. Most villages in China now have chargers, Mr Li said, but not enough for the crowds of visiting drivers during the Lunar New Year holiday, which started on Friday evening.

“People are just concerned,” he said, “about the wait time.”

Li You And Joy Dong contributed to reporting and research.