China’s Rising Auto Giant Is Printing Cash And Has Europe And Latin America In Its Crosshairs

Officially, BYD stands for “Build Your Dreams,” but at the rate things are going we may want to call it “Bust Your Door” or “Burst Your Dam” instead. (I’m open to suggestions here, by the way.) The rising Chinese auto giant is basically printing cash and has bigger international plans than ever before, and while we aren’t feeling that in the U.S. market yet it’s probably due to be one of the biggest auto industry stories of 2023. I gotta keep an eye on this “Warren Buffett” character, he seems to know a thing or two about where to put his money.

That’s our lead story for the morning roundup as we close out another week in The Autopian’s Blog Mines. Also on tap today: what actually happened with Hyundai’s supplier’s child labor disaster, gas prices may not get too high this summer, and a look at the impact Tesla’s rapid-fire price cuts have had on the rest of the industry.

Happy Friday. Let’s think deeply about cars and then go drive them with great vigor over the weekend!

BYD’s Q1 Was Bananas

We’ve been telling you for a while to keep your eyes on the homegrown Chinese auto industry. EV battery tech is advancing rapidly there, lineups are growing like crazy to encompass everything from luxury vehicles to the dirt-cheap, high-range BYD Seagull, Western and other Asian brands are getting pushed out of their most important market, and even major automakers like Honda are wondering “How the hell did this happen and how did we miss it?”

Indeed, the one leading the charge is BYD, which Buffett’s Berkshire Hathaway put a big bet on that seems to be paying off nicely. If you need further proof, check out the Q1 reports from BYD, whose net income rose a whopping 411% year-over-year, according to Bloomberg:

BYD Co. reported another stellar quarter of earnings on the back of booming electric-vehicle sales that has propelled the company past Volkswagen AG to become China’s top-selling car brand.

Net income in the three months through March surged 411% from a year earlier to 4.13 billion yuan ($597 million), the Shenzhen-based automaker said in a statement Thursday. Operating revenue rose 80% to 120.2 billion yuan, while its gross margin was 17.9%, up about 5.5 percentage points.

BYD’s margins should continue to grow this year, helped by its Denza and U8 models, Citigroup Inc. analysts Jeff Chung and Beatrice Lam said, while Morgan Stanley’s Tim Hsiao and Cindy Huang said the results showed resilience amid industry headwinds. The company’s vertically-integrated business model helped shore up profitability, they said.

Sales of BYD’s passenger electric vehicles almost doubled to 550,000 globally in the quarter. While the company has been intensifying its push overseas, prioritizing Europe, Latin America and markets around Asia, about 440,000 of its sales in the period were in China, amounting to roughly 40% of all EV sales in the world’s biggest auto market.

You have to get up pretty early in the morning to take down Volkswagen. Also, GM had a good Q1 too. Its revenue was up 11% year-over-year. You know, just 400% off what BYD did.

That same story says BYD sold 1.86 million EVs in 2022—more than its previous four years of sales combined—and it’s targeting double that with 3.7 million in sales this year.

Now, I should note that BYD’s weird in that it counts plug-in hybrids and gas range-extender vehicles among its “EV” numbers, whereas media outlets in the West tend to draw a harder line between those two things. Either way, Tesla sold 1.31 million EVs last year, for some context. BYD is poised to become a juggernaut this year and it has the revenue to back it up.

There are a ton of reasons BYD will have a hard time breaking into the U.S. market, including the fact that our Inflation Reduction Act is aimed at kneecapping China’s supply chain. But BYD’s already selling cars in many European countries and it’s doing quite well there. including selling more affordable cars; the Europeans, too, are pissed that new cars are getting so expensive and they’re looking for cheaper but still impressive newcomers.

This playbook is a proven one, though. VW, the Japanese and the Koreans all pulled it off. First you enter the market with cheap cars and build a fanbase. Then you build the bigger, better, nicer cars. Then you do a luxury brand with huge margins. Then you get a Formula 1 team or race in Le Mans or something. It’s been done, and if any Chinese automaker can follow some version of this plan first, it’s probably BYD.

Is Elon Musk Having A Rick Wagoner Moment?

The Tesla price cuts have the auto industry freaked out a little bit. The moves have proven that Tesla, and Tesla alone for now, has the scale to slash EV prices to drive up demand without bankrupting the whole operation. Now, Tesla’s Q1 reported a 24% net income drop thanks to those cuts, which investors didn’t love, but it was hardly some disaster.

Opinions are divided about the effectiveness of this strategy. Few automakers are willing to chase Tesla into some price war. For Tesla, maybe it means scale, or maybe it means being able to push competitors out of business entirely (especially the smaller EV startups that are struggling a bit, like Lucid and Rivian.)

But Bloomberg posits a third situation:

Elon Musk’s bid to dominate global carmaking is taking a new turn, and dividing opinion. Some see him as Henry Ford in the age of the Model T; others, as Steve Jobs ushering in the iPhone era. But what if he’s Rick Wagoner, who steered General Motors Co. into a ditch?

Wagoner! There’s a name I haven’t heard in a minute. The idea here is that Tesla could focus so much on sales numbers and volume that it cuts too far into actual profits; Wagoner did this after the Sept. 11, 2001 terror attacks, pushing through zero-percent financing deals to get understandably freaked-out Americans to deal with things by buying Silverados.

This started an incentive war that cut into profit margins and did these automakers no favors when they were strapped for cash during the Great Recession. It lasted after that, too; this incentive-heavy strategy basically trashed Nissan’s brand identity in America, making it more known for the “GET CASH BACK ON A NISSAN ROGUE!!!” commercials during football games than any actual reason to want one of those cars besides scoring a good deal.

Anyway, back to Tesla. Bloomberg argues that the scale play, coupled with Tesla’s admittedly aging lineup (I’m glad other people are catching onto this now too!) could harm the company long-term. I honestly don’t think people will see Tesla as the next Nissan anytime soon; most people still think of it as this high-tech, cutting-edge product, still the next big thing. But Musk’s biggest risk is pissing off the investors whom he promised world domination:

The markdowns meant that Tesla’s automotive gross margin—already a longstanding focal point for investors—was the figure Wall Street was anticipating when the company reported first-quarter earnings last week. Tesla had advised that the figure would stay above 20% this year.

Instead of being upfront about falling short, Tesla removed any mention of automotive gross margin from its earnings deck, forcing analysts and investors to do the math. At 19%, the margin was the lowest in 11 quarters.

Says a lot, doesn’t it? Again, I am skeptical of this theory, but I do believe Tesla needs to move faster in getting new and refreshed cars out—and no, I don’t mean the Cybertruck.

How The Hyundai Supplier’s Child Labor Disaster Happened

Hyundai had a whole presentation during the New York Auto Show a few weeks back about all the stuff it does to help children who are cancer patients, which it has done since the 1990s. But a few of the more cynical of us speculated that the presentation was timed to draw fire away from the horrific news that its Alabama suppliers had apparently been employing child labor.

Most of these kids were migrants from Latin American countries, and it’s awakened America to the wider problems with child labor (which has a direct relationship with the humanitarian crisis at the border.)

So how the hell did this happen? Reuters dug into it and the culprit was fake IDs provided by staffing agencies or brokers who specialize in forged documents.

That boom has been driven by adult labor shortages since the onset of the COVID-19 pandemic, and state and federal enforcement agencies say they need more resources to better combat it. The U.S. Department of Labor said in February the number of child labor violations in 2022 had soared by nearly 70% compared with the tally recorded in 2018.

[…] Many of the child laborers found by Reuters worked under fake identities, often provided by staffing agencies or by brokers who specialize in forged documents. The United States has federal laws and systems meant to ensure the eligibility of prospective employees.

But phony credentials are commonly used by undocumented adult immigrants to get around those curbs. And bogus IDs also have enabled third-party labor recruiters to place kids in plants where it is illegal for children to work.

Those recruiters, in turn, can shield large manufacturers, like Hyundai, from the obligation to ensure their workforces comply with labor laws. “Our laws enable the lead corporations to avoid responsibility and use intermediaries to insulate themselves,” said Terri Gerstein, director of the state and local enforcement project at Harvard Law School’s Labor and Worklife Program.

Kudos to Reuters here, seriously. Their investigations have led to kids being rescued from these situations, multiple investigations and companies like Hyundai vowing to change their practices. There’s also an identity theft angle here:

Inspectors approached the boy, named in company paperwork as “Fernando Ramos,” and questioned him about his age and schooling. Answering in Spanish, the boy said he was 18 years old and had attended a Montgomery middle school. But the documents in his personnel file, inspectors determined later, identified “Fernando Ramos” as a 34-year-old man from Tennessee.

[…] Reuters also reached the real Fernando Ramos. He lives in Texas and expressed surprise to learn in a brief exchange, via Facebook, that his identity was being used in auto plants in Alabama. “What the hell,” he messaged.

What the hell, indeed.

Gas Prices May Not Get Too Bad This Summer

Somehow, Monday is May 1. I don’t know where this year is going! But that means summer is almost upon us, and that means road trip, vacation and track day season. According to Axios, this year you may not feel as much of a pinch at the pump—barring any disasters.

The big picture: Over the last 10 years, the average date summer gas prices have peaked nationally has been May 2, Patrick De Haan, head of petroleum analysis at GasBuddy, told Axios.

“While I’m not yet ready to say ‘hey, we’re done with the increases,’ we’re getting close,” De Haan said in an interview last week. “We’re going to peak I believe in the next few weeks and we may not go much higher.”

It’s possible prices could push $3.80 or $3.90 a gallon nationally, De Haan said, and $4 gas could return later this summer if there’s a hurricane or refinery issue.

“We are going to see probably pretty large gas deflation from now through hurricane season,” AAA spokesperson Andrew Gross told Axios of gas prices nationally.

The price for a gallon of regular unleaded was $3.646 on Wednesday, Axios reports. [Editor’s Note: Meanwhile, here in California, I’m getting burned by $5/gallon. Help! -DT]. 

Do you have any road trips planned for this summer? I hope to do an EV road trip somewhere so gas prices won’t be my problem. Finding working public chargers will instead.

Your Turn

What’s the endgame with Tesla’s price cuts? Does this set the company down the path of destruction, or will Musk be hailed as being crazy like a fox a few years from now when he emerges victorious?