The cost of Building Your Dreams, Part I

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about the cost of building your dreams, part one, and then we'll talk about how India's defense exports took off. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara. Today is Friday, 17th April. Coming to the first story.
Every morning, the markets team sits to discuss the news cycle. One global company is almost a constant in each of these meetings. BYD. If you Google them now, you're bound to come across a variety of wild headlines all happening simultaneously. Their Shenzhen factory caught a blazing fire. They are in the middle of a huge controversy in Brazil for their working conditions. They just built the world's fastest road-legal car, they're ferociously expanding globally, and most importantly, they're at the center of a bloody price war in their home market, China. That's certainly a very colorful set of headlines for arguably the most important automaker today. But what's even more bewildering is that two decades ago, BYD was nowhere close to being a competitive car maker, much less being the center of all news media. If anything, Chinese consumers looked at their cars with skepticism. How did a company that often struggled to survive eventually become the poster child of China's industrial success? We rarely do stories on individual companies, but BYD's story is as much as the story of China's economy as it is that of entrepreneurship. And understanding their history could help us inform how they got here. Now, we'll be covering this story in two parts, owing to how extensive it is. This part starts from three decades ago.
So in the 1990s, when China had just liberalized, mobile phones had become all the rage, which created demand for rechargeable batteries. Many entrepreneurs saw an opportunity to use China's cheap labor to make those batteries by hand. So they set up their own companies in Shenzhen, which was being promoted as the country's premier business hub. A chemist named Wang Chuanfu also jumped at this opportunity, and in 1995, he set up his own firm in Shenzhen. His team would reverse engineer batteries made by leading Japanese firms like Sony and Sanyo, and then reassemble them using the BYD name. The approach of growing business by copying global products first was all too common in China then. By 2003, BYD had become one of the largest rechargeable battery manufacturers in the world. Revenue had grown for nine consecutive years, and the company had just listed on the Hong Kong Stock Exchange. But then, Chuanfu did something that confused almost everyone. He bought a car company without really disclosing in the prospectus that the IPO funds raised would be used for this.
Qin Chuan Automobile was a struggling state-length manufacturer that made a very small car that nobody really wanted. It came with a small factory and a set of production licenses. BYD acquired a 77% stake in it, effectively making its entry into a brutal, capital-intensive industry that it had no expertise in. See, most cars back then ran on oil, where the engine, not the battery, was the focal point of every car. You had no charging points that would make EV adoption possible either. The electrification of cars was still a very far-fetched story, and almost delusionally, BYD believed that battery technology would transform how cars are made, even when almost no one was seriously innovating in EVs.
What's more, China's auto industry was dominated by state-owned enterprises who often formed joint ventures with foreign automakers like Ford, and in the middle of that entered a company with no conventional supply chain relationships and no car-making capability. However, China faced three problems at the time. One, it was almost wholly dependent on imports for its oil needs. Two, its cities were choking on exhaust from cars and factories. And three, while China did have an auto industry, it wasn't as competitive as, say, Japan or the US. EVs seemed to offer a way out on all three fronts, energy security, environmental benefits, and industrial excellence. That perhaps is why in 2001, China prioritized EVs in their state high-tech development plan, under which R&D spend would be directed into certain unproven sectors. But BYD's road would hardly be easy. It had to learn how to make a standard petrol-driven car first, that too entirely from scratch. In 2004, their first full year in the automotive industry, BYD built a new prototype. It was a completely independent design, separate from the inherited Chinchuan model. Expectations seemed to be pretty high for the battery maker's entry into cars. But car dealerships did not seem to like the model. It simply wasn't good enough in design or execution. So Wang Chuanfu himself personally smashed the prototype. The investment in the model had been quite substantial, and now all of it was sunk. But releasing it would have been worse than releasing nothing at all. A year later, BYD launched their first commercial petrol-only vehicle, the F3. Now, the F3 was not a masterwork of original design. Many noticed that it suspiciously resembled the Toyota Corolla, which was one of the most popular cars in the world at the time. And that wasn't by accident. The F3 followed the same reverse-engineering, labor-intensive playbook as BYD's battery business. But it was affordable, reliable enough, and arrived at the exact moment China's middle class was discovering car ownership. In the next year, the F3 sold over 30,000 units, becoming a runaway success. And within 3 years, it became China's top-selling sedan, beating both the Volkswagen Jetta and the Toyota Corolla. Between 2005 and 2008, automobiles would grow from being just 5% of BYD's total revenues to 32%, and then over half by 2009 itself. All the cars BYD would release in that decade would follow a similar pattern. They would resemble popular models of firms like Mercedes-Benz or Toyota, and they were made by employing masses of cheap labor at the assembly line. In fact, because they were perceived to just be copycat products, car maintenance shops would actually offer consumers to swap out the BYD logo with, say, the logo of the original car.