Cars: BYD Keeps Trying, Dongfeng Drives Consolidation

BYD's latest results show it continues to sputter with no hope of a turnaround in sight, while Dongfeng's talks with Fujian Motor could mark the start of a new round of auto consolidation.

PUBLISHED : Tuesday, 28 August, 2012, 10:24am
UPDATED : Wednesday, 29 August, 2012, 3:05pm


Despite the many problems at car maker BYD (1211.HK, Shenzhen: 002594), I have to admit that I admire this company for its dogged determination to follow its vision of a future powered by electric cars, even if the company may not survive long enough to see that future. The very real problems that BYD faces as it tries to realize its electric dreams were on display in its latest dismal earnings report, even as company officials spoke positively of a new push to put more electric buses on the streets in their home province of Guangdong. Meantime a separate development in the auto space could be a  sign of a much-needed consolidation in China's fragmented car market, with Dongfeng Motor (0489.HK) reportedly in talks to buy a smaller rival in Fujian province.

Let's look at BYD first, as I really do have a certain fascination with this company that made headlines 3 years ago when it sold 10 percent of itself to billionaire investor Warren Buffett. The company's prospects -- and its share price -- soared in the year following Buffet's investment, due in part to people following Buffett's lead but also due to bullishness about the company's leading position in  green energy vehicle development. But investors quickly lost patience with the company as sales of its traditional gas-powered cars tumbled due to its failure to focus on the present, and media are reporting the company's stock now trades close to the level where it was when Buffett first made his purchase.

The reason for investor impatience was on display in the company's latest financial report, which saw BYD's profit plunge 94 percent in the first half of this year, continuing a trend of evaporating profits that began more than a year ago as sales plummeted for the company's previously best-selling model the F3. Revenue for the first half was largely unchanged, which perhaps was a good sign as it probably indicates that sales for electric vehicles at least partially help to offset declining sales of traditional gas-powered cars.

Despite the plunging profits, executives were out promoting BYD's electric vehicle sales, pointing out that governments in the company's home province of Guangdong were planning to buy 50,000 new energy buses by 2015, and that BYD is likely to be one of the biggest beneficiaries of that drive. The only problem is, BYD may not survive long enough to enjoy any success from its new energy initiatives if its profits keep falling and it slips into the loss column, which looks almost inevitable.

From the woes at BYD, let's turn our attention quickly to Dongfeng, which already counts Honda (Tokyo: 7262) and Nissan (Tokyo: 7201) among its joint venture partners and is now pursuing a purchase of smaller domestic rival Fujian Motor.  There's not much detail to the reports besides the fact that discussions are ongoing and other possible suitors include BAIC and Guangzhou Auto (2238.HK).

But if a deal were to occur, it would mark the first major merger between 2 big Chinese automakers since 2009. That would be an important development in a slowing auto market where there are far too many domestic players, most of which are coming under intense pressure from better-run foreign rivals. Look for a possible tie-up in these latest talks perhaps by the end of the year, with more such mergers likely in 2013 as growth remains sluggish and foreign-backed nameplates continue to gobble up market share.

Bottom line: BYD's latest results show it continues to sputter with no hope of a turnaround in sight, while Dongfeng's talks with Fujian Motor could mark the start of a new round of auto consolidation.