BYD Crowned Leader of the New Energy Sector

In recent times, BYD, the Chinese electric vehicle (EV) giant, has captured public attention for two significant reasonsThe first is its impressive financial performance, surpassing Tesla's revenue for the first time in a single quarterThe second is a controversial request sent to suppliers for price reductions amid rising competition in the EV market.

According to BYD's latest financial report, the company recorded a staggering revenue of 201.1 billion CNY (approximately 27.5 billion USD) in the third quarter, whereas Tesla's revenue was approximately 180 billion CNY (about 25.1 billion USD) for the same periodJust three years ago, BYD's revenue was less than 60% of Tesla's—a striking turnaround that underscores the explosive growth in BYD's salesThis achievement is notable not only for its financial implications but also for the historic shift it represents in the automotive industry, suggesting a new era where BYD might be seen as the emerging leader in the new energy sector.

However, coupled with this success is the emergence of a leaked email from BYD, which called for a 10% price cut from suppliers starting January 1, 2025. The email, which circulated online, showed a firmer side of the automotive giant, igniting debates about the ethics behind pressuring suppliers to reduce prices.

From January to November 2024, BYD's cumulative car sales exceeded 3.74 million units, accounting for a third of the total new energy vehicle (NEV) sales in China

Their commanding market position gives them the leverage to push for lower prices from suppliersNevertheless, the ethical implications of this action remain a significant concernIs this kind of price pressure sustainable in the long term? As the field's top manufacturer both in China and globally, does BYD not have a responsibility to bolster the automotive supply chain instead of solely seeking to reduce costs?

The recent demand for price cuts stems from BYD's substantial sales figuresJust in the past two months, the company has been selling over 500,000 vehicles per monthIn contrast, competitors such as Geely and Chery produced sales figures of 250,000 and 280,000 cars respectively, with NEVs comprising significantly smaller proportions of their total salesMeanwhile, Li Auto, another notable player in the field, has managed monthly deliveries of around 50,000 vehiclesThe data shows that BYD not only occupies a significant share of the market but also continues to experience rapid growth, with a year-on-year sales increase of 40% in the first eleven months of this year

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This incredible performance undoubtedly positions BYD as a formidable force in negotiations.

Moreover, the automotive components market is notably reliant on economies of scaleBy producing at large volumes, manufacturers can reduce the per-unit costs of fixed investmentsAs a result, orders of different scales yield notable price discrepanciesSupply agreements involving substantial order quantities allow BYD to exercise significant bargaining power when negotiating with component manufacturers.

Industry insiders report that some suppliers are even willing to operate at lower profitability levels just to sustain business operations with BYD, depending on the volume of orders they receiveThis phenomenon illustrates BYD's substantial influence within the supply chain and highlights the risks faced by smaller suppliers that might struggle to survive without BYD's backing.

Furthermore, BYD continues to strengthen its vertical integration by establishing subsidiaries for vehicle components production

Between 2019 and 2021, various divisions transitioned into independent entities such as Fudi Battery and Fudi Technology, focusing on battery, vehicle lighting, and automotive electronics developmentNotably, about 75% of components in models like the BYD Seal are produced in-house, significantly boosting BYD's competitive edge and mitigating supply chain risksThis vertical strategy offers the advantage of reliability while enhancing control over manufacturing costsWhile there are challenges associated with maintaining such an extensive in-house production capacity, the benefits in terms of product quality and pricing flexibility are inherently significant.

Nonetheless, the request for price reductions comes at a time when the automotive industry is already feeling the pressure from aggressive pricing warsThe result of these battles, while benefiting consumers through lower prices, has begun to strain manufacturers and suppliers alike

The gross profit margins across the sector have begun to diminish significantly, creating risks for long-term sustainabilitySimply put, while BYD's demands are rooted in a clear understanding of market conditions, the ramifications for smaller suppliers could be severe, with some suggesting that a cut of 10% could push companies into the red.

Moreover, evidenced by a recent survey conducted with nearly 3,000 suppliers, an overwhelming 74% indicated that the demands for cost reductions from automakers have intensified compared to previous yearsInstances of 5-10% annual reductions have become commonplace, with some suppliers facing demands as high as 20% in a single fell swoopSuch pressure may prompt a significant re-evaluation of relationships within the supply chain.

BYD is not the only automaker engaging in these negotiationsCompetitors are equally navigating similar terrains

However, the question remains: how can major players like BYD leverage their market power while also uplifting the entire supply chain? Interventions may include a more balanced approach, wherein larger automakers recognize the precarious position of their suppliers and work collaboratively towards shared success instead of maintaining a strictly transactional relationship.

In conclusion, the dynamics of BYD's strong negotiation position over its suppliers reflect a broader challenge within China's automotive sectorAs both the market leader and a key driver of change, BYD holds the potential to redefine supplier relationships, balancing aggressive cost strategies with cooperative initiatives that will promote stability across the entire value chainBy engaging in mutually beneficial practices similar to those observed in companies like Huawei or Apple, BYD could help bridge the gaps that currently exist within the supplier base, ensuring a more sustainable and robust business environment for all stakeholders involved.