BYD Under Fire On Labor, Tech Fronts In California

BYD hits California speed bumps

After a year of relative calm in which its shares have surged, electric vehicle (EV) aspirant BYD (HKEx: 1211; Shenzhen: 002594) is once embroiled in a couple of mini-scandals involving its labor practices and technology in California. While I doubt that either of these problems will have a long-term impact on the company, they do highlight the many speed bumps that BYD and other Chinese automakers will face as they move into the global marketplace. The risks are particularly high for BYD, which is 10 percent owned by billionaire investor Warren Buffett, since the company is relying heavily on global markets to fuel its EV business.

The bigger of these 2 mini-scandals has made headlines around the US, and saw BYD fined $100,000 for breaking California’s tough labor laws. (English article) Such labor law violations aren’t all that uncommon, especially for a company like BYD that hasn’t done much business in the US. I suspect the main reason this story attracted so much attention was due to BYD’s Warren Buffett connection. The company was fined the amount for violating California’s minimum wage law, and also for failing to provide some pay documentation to the state.

BYD has responded by saying it was the victim of a misinformation campaign by a labor advocacy group, and that it plans to hire more workers as it ramps up its EV bus production at a newly built local plant. (company statement) According to BYD, the controversy stems not from the wages it pays to locally-based California employees but rather from wages paid to some of its China-based technicians who are on site at the new plant to train local workers.

As I’ve already said, this case doesn’t look too significant to me and I doubt there will be any long-term impact on BYD’s US plans. But it does spotlight the potential conflicts the company could face in many of the global markets where it is trying to expand, which run the range from emerging markets in Argentina to developed ones like Britain and Germany.

The second setback involves BYD’s technology as the company works with the city of Long Beach, one of its main electric bus customers in California. (previous post) BYD has just built a plant to manufacture its electric buses in California, and now some local media are reporting that 7 of 9 bus sub-assemblies that were made at the plant failed to get approval by the Long Beach government. (English article) The failure to win approval looks related to a series of quality problems with the new plant as it revs up production.

Again, I would expect that this kind of quality problem is probably the result of launching a new facility rather than a long-term issue related to BYD’s technology. If that’s the case, then presumably BYD will fix the issues as the plant gains more experience and this kind of problem will soon disappear.

Both of these issues come as BYD’s prospects have improved greatly over the past year, igniting a rally that has seen its stock double since January. In its latest quarterly results announced this week, the company forecast its profit could rise as much as 7-fold this year, mostly on improving sales for traditional gas-powered cars. (English article)

But the company has also said it plans to start phasing out its gas-powered cars and eventually leave the business, focusing instead on EVs. Its EV sales are still tiny and mostly confined to a number of pilot programs both in China and abroad. To keep its rebound alive, those pilot programs need to start showing some results soon and contributing to the company’s top and bottom lines. That looks increasingly likely, though these latest California setbacks show there could be some hiccups along the way.

Bottom line: Two mini-scandals for BYD in California looks like minor setbacks, but reflect obstacles the company and other Chinese automakers will face in their global expansions.

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