Driving ambition: BYD’s right to win

Photography courtesy of BYD

As with any investment, your capital is at risk.

Back in 2008, Wang Chuanfu gave a rare interview to the Financial Times. Under the headline ‘The quiet man of cars’, the engineer-turned-entrepreneur made a bold prediction. By 2025, he said, BYD would be global leader in ‘new-energy’ cars – battery-only and plug-in hybrid electric vehicles (EVs). He achieved that three years early and has consistently outpaced Tesla in battery-only models since late 2024.

While domestic Chinese sales account for much of BYD’s success to date, Wang is focused on international expansion. In its last financial year, the firm sold about one-tenth of its vehicles outside its home market. Wang wants it to be half by 2030. Claire Shaw believes he has earned “the right to win” globally, but it’s not essential for outperformance.

“BYD could achieve a share of China’s car market that matches Toyota’s in Japan – about 40 per cent,” the Trust’s investment specialist Claire Shaw explains.

“China has the world’s biggest EV market, making the domestic opportunity huge. So the valuation works on that alone – it’s almost like we’re getting the benefit of its international growth for free. Moreover, it was very, very cheap when we first took a holding in July 2024.”

From consumer electronics to EVs

BYD’s remarkable trajectory stems directly from Wang’s humble origins. One of eight siblings, he grew up in rural Anhui, then one of China’s poorest provinces. At age 15, he was orphaned, and it was only thanks to an elder brother’s generosity and several scholarships that he continued his schooling.

He eventually gained a master’s in metallurgical physics and chemistry and became general manager of a state-backed battery startup. But in 1995, he gave up this relative security to create his own business.

Today, BYD’s initials officially stand for “build your dreams”, but in the early days Wang joked it was “bring your dollars”. The company started out making batteries for mobile phones and other consumer electronics. By the time it floated in 2002, Motorola, Samsung and Nokia were clients.

BYD’s prospectus did not mention car-making ambitions, so investors were shocked when Wang used the IPO’s proceeds to buy failing automaker Tsinchuan. That he didn’t even know how to drive added to their concerns.

But Wang convinced the shareholders this wasn’t some harebrained pivot. Four years earlier, he had instructed engineers to secretly explore scaling the firm’s battery technology to power vehicles, and they had built a working prototype.

By embracing the mantra ‘reverse engineer, improve, make yourself’, they made further progress. And by 2009, BYD manufactured China’s bestselling petrol-based car and a plug-in variant popular with taxi drivers and government fleets. Furthermore, it had gained US titan Berkshire Hathaway as its largest institutional investor.

“Warren Buffett and Charlie Munger gave BYD essential capital and elevated the firm as a forward-thinking business,” says Shaw. “Munger later described it as the best investment he ever made.”

Investing in innovation

In the shorter term, however, the financial and reputational shield that the legendary investors provided was vital. Overexpansion, production problems and increased competition stalled BYD’s annual sales at about 500,000 vehicles for a decade. Throughout, the company increased spending on research and development, even when profits came under strain, a period Wang later described as his “darkest moment”.

The strategy paid off in 2020, when the firm introduced two innovations. The first, a thin blade-shaped battery, extended the range of its EVs and was highly damage-resistant. BYD proudly showed it withstanding a nail-piercing test that made others explode. The second, a package of engineering improvements, radically increased its hybrids’ fuel efficiency.

These upgrades, coupled with government incentives for EV adoption, turbocharged sales, which reached 713,000 vehicles in 2021 and more than double that the next year.

BYD expects to sell more than 5 million vehicles in 2025, including 800,000 outside China. Shaw says its competitive advantage now rests on three pillars: technological leadership, cost controls and efficient decision-making.

Powering up: BYD's total vehicle production

“BYD now has over 120,000 engineers and technicians. That’s more than the rest of the Chinese EV companies combined. And every year, the firm has its pick of graduates.”

Their recent achievements include the ultra-fast charging Super e-Platform. It supplies BYD cars with 400km of range from a five-minute top-up. The first-of-its-kind service launched in March, when the firm announced it would build 4,000 compatible stations across China.

Additionally, it has made advanced driving assistance standard on all models. BYD’s sensor-enabled ‘God’s eye’ facility steers, brakes and parks but requires human supervision. Competitors often charge for such features.

BYD plans to expand its intelligent software team to 8,000 by 2027 and has partnered with other Chinese companies with self-driving expertise, including Baillie Gifford holding Horizon Robotics.

These moves show that Chinese automobile firms are no longer playing catch-up in terms of AI, and, by forming alliances, BYD has the potential to develop more advanced features at speed.

Regarding costs, BYD’s ‘vertical integration’ gives it a significant edge. Beyond batteries, the firm makes its own electric motors, power electronics, displays, software, LED lights and computer chips, among other components.

Furthermore, it owns lithium mining rights in Brazil and the world’s largest vehicle-carrying ship, which lets it drive 9,200 vehicles on and off rather than having to pack them in containers.

“The automotive industry typically operates on thin margins,” says Shaw. “All this helps BYD maintain larger ones and represents the outcome of many years of supply chain investments, costly to replicate.”

An alignment of interests

Turning to decision-making, Shaw says Wang’s highly engaged leadership remains critical. Having a founder in charge, she notes, encourages far-sighted planning and embeds a healthy radicalism. Moreover, co-founder Lu Xiangyang remains involved as vice chairman.

“Together they own about a quarter of the company,” says Shaw, “creating the strong alignment we look for between executives’ personal wealth and a company’s long-term interests.”

The Trust’s BYD holding now exceeds its stake in Tesla. Shaw says it isn’t a matter of switching horses, but instead reflects the different points the firms are at on their journeys.

“Tesla is between two major growth waves,” she says. “Tesla 1.0 was all about automotive and was driven by EV manufacturing, culminating in the Model Y becoming the world’s bestselling car in 2023.

Tesla 2.0 will centre on advances in autonomy, robotics and software, including its Robotaxis initiative. While Tesla’s progress in these is impressive, they remain nascent opportunities. Hence, the Trust has reduced its holding.”

By contrast, the Trust’s stake in BYD reflects excitement about the Shenzhen-based firm’s existing business and its commanding lead in the world’s second-largest economy.

“We’ve consistently invested in Chinese companies with Chinese founders, even when others declared the market uninvestable,” says Shaw. “There are risks, which is why our bar for inclusion is higher than for other stocks, and we evaluate each company individually.

But when you look at companies like BYD, the massive growth potential coupled with a low stock price relative to earnings suggests those risks are more than compensated for by the potential rewards.”

Wang once credited BYD’s success to its spirit of “dare to think, dare to act, dare to persevere”. By daring to invest, Scottish Mortgage is excited to plug into its potential.

Expanding abroad

BYD’s international ambitions involve establishing local supply chains rather than simply importing cars from China.

In Europe, it is constructing a $4.5bn factory in Hungary that will shortly produce 200,000 passenger cars a year. Efforts are also under way in south-east Asia and in Latin America, where its popularity with Uber drivers has made BYD Brazil’s bestselling EV. However, the US and Canada do not figure in its plans for now.

BYD beyond China: overseas EV production facilities

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Scottish Mortgage Investment Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.

The Trust invests in emerging markets, which includes China, where difficulties with market volatility, political and economic instability including the risk of market shutdown, trading, liquidity, settlement, corporate governance, regulation, legislation and taxation could arise, resulting in a negative impact on the value of your investment.

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