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Issue 33, April 2011

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

ChinaCompass - The BYD Way of Production, Emerging but Incomplete

In history, innovative ways of manufacturing have underpinned the rise of great carmakers. Such is the story of Ford's assembly lines, and such is the story of the Toyota production system. When China's BYD launched its commercial plug-in hybrid electric cars in December 2009, a year ahead of Toyota and two years ahead of GM, the world witnessed the unfolding of a new production system. Only a year later, BYD demonstrated its innovative capabilities, again, by deploying its electric technologies to a new line of buses in order to penetrate the U.S. market. What gives BYD the capability to generate these innovative products?

At a glance, what distinguishes BYD from today's conventional carmakers seems to be a rare vertically integrated business model. Many researchers highlight the effectiveness of integrating battery production and car manufacturing in applying the company’s advanced battery technologies to the development of electric cars. But BYD's level of vertical integration is well beyond integrating two business segments. Unlike most carmakers that rely on a contract network of component suppliers, BYD produces almost all parts of its cars in-house, from engines, transmission systems, steering systems, and braking systems, to wipers, indicator mirrors, and even CD and DVD players. The only exceptions are tires, windshields, and a few of the most generic components.

What are the innovative capabilities that BYD derives from this unusual integrated structure? Like any newcomer to the car industry, the technology barriers faced by BYD in making a modern vehicle were enormous. Though BYD acquired a bankrupted state-owned carmaker in 2003, the deal provided BVD with the state sanction to enter the business rather than useful industrial expertise. Instead of adopting the easy strategy of licensing technology from multinationals, BYD chose to develop its proprietary technologies through reverse engineering – a strategy shared by many indigenous carmakers. The army of young engineers employed by BYD, nearly 10,000 today, learnt to make cars essentially by imitating designs from Japanese carmakers, aiming to follow the Japanese low-cost, high-quality manufacturing techniques. In its R&D centers, BYD disassembles a targeted car model, and then modifies it, replacing patented components with customized ones, to form a new design. This radical learning methodology has enabled BYD to generate its proprietary technologies rapidly, with an accumulation of more than 2,000 patents in 2007 after only four years of entering the industry.

A reliance on customized components produced in relatively small volumes, as a result of indigenous learning, may cause significant cost problems for conventional carmakers. But by drawing on its capabilities in process innovation developed from manufacturing batteries, BYD has used its in-house production model to transform such disadvantages into advantages. In the battery business, BYD is well known for outcompeting the Japanese manufacturers by reaping a significant cost advantage from its labor-intensive manufacturing process. It is less known that BYD's engineers developed this manufacturing process. By redesigning the workflow and deploying in-house produced machinery, BYD's workers are able to produce batteries by hand with quality comparable to those made by automated machines, but at a much lower cost. Similar innovation strategies have been extended to car manufacturing. Semi-automated processes are developed to replace automated machines, with workers aided by tools produced in-house to ensure consistent quality. In the case of BYD's own plug-in hybrid, all the manufacturing equipment is produced in house. The ability to deploy in-house produced equipment of newer technology and lower costs at a faster pace than its competitors has significantly contributed to BYD's early breakthrough in the production of electric cars.

BYD’s vertically integrated structure provides the context, not the source, of the competitive advantage of the company’s emerging production system. The real source of BYD's advantage is an engineering force that engages in learning and develops unique productive capabilities. Such a system is built upon long-term investments in a learning organization, with BYD situating R&D divisions in every workshop, and spending two-thirds of its R&D budget on process innovation.

Nevertheless, BYD's model of innovation has a serious limitation, i.e. learning is confined to the managerial structure. Process engineers break down work into simple tasks to ensure consistent quality and fast pace, leaving high workloads, long working hours and tedious task assignments on shop floor. The BYD model is yet to be tested by major labor unrest. But its failure to extend learning to the shop-floor casts doubt on whether BYD can eventually outperform the Toyota production system, which long ago included shop-floor workers into the processes of organizational learning.

Chuanfu Wang, Founder and CEO of BYD, has a famous saying: "the manufacturing of cars starts with manufacturing of talents, then tools, and then cars". Indeed, Mr. Wang has done far better than most of his fellow entrepreneurs in China in fostering growth through investing in employees. Yet the BYD way of production will only become a formidable force when Mr. Wang and his techno managers can integrate their some 100,000 workers into a unified learning system.

Top News of Last Month
Mar 03 China to boost defense spending by 12.7 percent
Mar 04 China's top priority in 2011 Is Controlling Inflation
Mar 05 China to expand use of RMB in cross-border trade and investment
Mar 05 China to accelerate economic restructuring in 2011
Mar 06 China sets same growth targets for GDP and resident income to rebalance development
Mar 14 China adopts 5-year blueprint, aiming for fairer, greener growth
Mar 14 China details ambitious space station goals
Mar 14 China replaces US as largest manufacturer
Mar 29 China rockets to second in science publications
Mar 31 G-20 talks in China to focus on capital flows
New Books
The Effects of Transnational Corporations in the Era of Globalisation: The Case of China

By Yan Li

“This study examines the effects of transnational corporations on China in the era of globalisation. First, it provides the background of globalisation, transnational corporations, and the development and changes in the Chinese economy. Second, the study discusses the impacts of TNCs’ FDI on economy in China and the technical improvement, and also analyses the Chinese economic policy and investment environment, discussing the response of TNCs to them. Third, it examines the Research and Development (R&D) of TNCs and its double effects. Fourth, the study explores the effects of TNCs on China’s manufacturing industry and the changes of the manufacturing industry caused by TNCs in China. And finally, the study discusses the effects of TNCs in the field of culture.” – from VDM Verlag Dr. Müller, Mar 2011

By Henry Kissinger

“In this sweeping and insightful history, Henry Kissinger turns for the first time at book-length to a country he has known intimately for decades, and whose modern relations with the West he helped shape. Drawing on historical records as well as his conversations with Chinese leaders over the past forty years, Kissinger examines how China has approached diplomacy, strategy, and negotiation throughout its history, and reflects on the consequences for the global balance of power in the 21st century.” – from The Penguin Press, Mar 2011
Business Leadership in China: How to Blend Best Western Practices with Chinese Wisdom

By Frank T. Gallo

“In this revised edition of Frank Gallo’s best-selling book, the author brings the story of leadership in China right up to date. With new material on Chinese leadership styles and the challenges of going global, the book is ideal for any international manager who wants to better understand how to blend the best practices of Western leadership with traditional Chinese wisdom. The content comes from a combination of English and Chinese literature, interviews with practicing executives in China as well as the author’s own experience as a leader in China.” – from Wiley, Mar 2011
Upcoming Events
Apr 15 - May 05 China Import and Export Fair
Apr 18 - Apr 21 Strategic Shared Services & Outsourcing Summit
Apr 21 - Apr 28 Auto Shanghai 2011
May 10 - May 12 International Conference on Environmental Pollution and Public Health
May 18 - May 19 Reverse Logistics & Returns Management Asia

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