When BYD Meets Mercedes-Benz: a Joint-Venture in China
BDNT, a joint-venture between Daimler and BYD, faced unique challenges in launching the company and its electric vehicle and developed unique business model. But operating the business model may not be challenge-free.
Time flies – 8 years passed after Wang Chuanfu, Chairman and CEO of BYD, made the decision to buy Qinchuan Auto and start to build its own automotive brand of BYD. He flew over two continents to Stuttgart, Germany, to meet Dr. Dieter Zetsche, head of the company that invented automobile – Mercedes-Benz. In mid of 2010, BYD, one of the youngest automaker, and Mercedes-Benz decided to start a 50-50 joint-venture, and develop and introduce an electric car in China for China. The company, Shenzhen BYD Daimler New Technology Co., Ltd. (BDNT), was established in July 2010, in BYD’s auto headquarters -Pingshan, Shenzhen.
Defining the Business Model
However, Chairman Wang’s challenges, as mentioned in the case, are not changed here: (1) BDNT has no chance to obtain a automobile production license; (2) Electric Cars are still facing staggering cost in battery and electric-driven components; (3) BYD is famous in making affordable cars – too famous to make anything even a bit more expensive, such as a premium electric car. Meanwhile, Mercedes-Benz is just about to catch-up with its direct competitors, BMW and Audi, in the attractive emerging market. It is very unlikely that the German leaders would agree using three-pointed star for this new car full of uncertainty. So, the solution is developed and aligned with both shareholders:
- BDNT is to design and develop the electric vehicle (EV), as well as a unique brand – DENZA;
- Both parties committed to put in their advantageous effort in DENZA: Daimler to provide engineers to support design and styling, overall vehicle integration and quality control; BYD to provide electric powertrain key components – high-voltage battery, electric motor, and e-motor controller.
- BDNT then license the production of DENZA EV to BYD Auto via Technical License Agreement (TLA);
- BYD Auto then license back the sales distribution of the vehicle via General Distributor Agreement (GDA);
- BDNT is responsible for distributing DENZA EV to local dealership for retail sales.
Figure 1: BDNT Business Model
Business Model in Operation
The strategist from both shareholder companies left happily with a solution around the challenges in production permission and brand image. The company set-up went on seemingly smooth in the first months. But it did not last very long when the company executives realized that many more troubles are awaiting:
- BYD supplied components took approx. 80% of total material cost of the car, a level so high that makes BDNT extremely difficult in negotiating price and requiring cooperation for cost-down actions;
- Because BYD was to the produce the car, lawfully it becomes the responsible party for after-sales and warranty. BYD required to jointly define the responsibility for vehicle defects and/or customer claims with BDNT: Besides the component issues, BDNT should be responsible for concept issues, and BYD should take care of production relevant quality issues.
- Due to the joint-venture nature, 50% of the management are from BYD. Negotiations with BYD, the shareholder and original employer of some of the BDNT management, became sensitive and tricky, leading to a very weak position for BDNT.
Learning by Doing
Inefficiency and ineffective management and operation could be hardly avoided under such circumstances. However, the resources advantage from both shareholders and the synergy impact ensured the successful launch of DENZA EV in 2014.
Video 1: DENZA Product Video
Since 2012, the joint-venture started to hire its own staff instead of solely relying on secondment from shareholders. Meanwhile, staff from both shareholders started to understand each other culturally and professionally. Issues due to misunderstanding and mistrust are becoming less frequent. The progress is inspiring BDNT to win the market and build-up its footprint in the 20 million sized auto market.
Video 2: Appearance of BDNT Staffs
But it is still obvious to all that BDNT could not survive with only one model – more product should be developed and introduced. Could BYD and Mercedes-Benz afford the tremendous support to secure another product’s development? Are they willing to? How could they avoid the conflicts due to the nature of the business model? Driving his own blue DENZA Electric Vehicle into BYD’s Pingshan headquarters and trying to find answers, Chairman Wang Chuanfu is still confident about the future about electric vehicles, but perhaps not about the future of BDNT.
References
- Selective information is from observation of internal employees and shareholder employees;
- Other information is from my observation;
- Videos provided by DENZA.com.
Very interesting analysis. It was an impressive move by Mr. Wang to enter the automotive sector. However, given that they still have in China a small fraction of the total market and margins are shrinking, how difficult will it be for them in the future to stay competitive?
Thank you for the interest! It is truly difficult if BYD chosen to stick to its advantage in labors. But they have been investing tremendously in forward R&D to generate technological advantage besides price advantage. They are selling the most Plug-in Hybrid cars worldwide now! I think Chairman Wang is betting that the new era of cars is coming soon so that he could be a successful pioneer in promoting and introducing new energy vehicles.
It is great to deepen our knowledge about the topic we learned from the case. BYD is such an interesting company about making their leap from manufacturing batteries to automobiles.
It totally makes sense to form JV with Mercedes-Benz and it seems that the alignment of interest is solidly formed. The more interesting things are, the challenges and problems you illustrated which attribute to the nature of 50%-50% joint venture. It is very insightful to know the problems caused by the organizational structure and the task and responsibility of each entity. I wonder whether these issues are solved today or any measures have been taken.