BYD founder offers details on dealer-friendly plans

The Wall Street Journal - Chinese battery and auto producer BYD Co. suffered a wave of dealer defections to rival brands last year, in part because of a requirement that dealerships take on what some owners and managers described as an excessive stock of cars on their sales lots. No longer, says the company's founder.

As part of the Shenzhen-based company's effort to bounce back from a lousy 2010, BYD Chairman and founder Wang Chuanfu said in a recent interview that the company would part with high-stock requirements and try to do a better job of forecasting demand in the Chinese marketplace so that its dealers would be better-positioned to make money.

One defector was a former BYD store in Beijing managed by Pu Xiaoqiang, which switched to another home-grown Chinese brand last year. Mr. Pu said BYD regularly demanded his store carry stock roughly six times his monthly selling rate, meaning he was forced to keep around 400 cars at the store even though the store typically sold only around 70 cars a month. "The only thing we could do was to try everything to sell those cars, so we ended up giving huge discounts to customers, but that wasn't profitable at all," Mr. Pu said.

Mindful of the pressure BYD was putting on dealers across China, Mr. Wang said he was gutting the policy: "Our objective now is to ask dealers to carry stock that is twice the monthly selling rate."

In that case, Mr. Pu's store would have had to carry only 140 cars a month as inventory – a level that would likely ease pressure on dealers like his to offer inventory-clearing discounts.

Prior to the financial crisis, U.S. car dealers considered it relatively healthy to carry two months' worth of inventory on their sales lots.

BYD is part-owned by Mid American Energy Holdings Co., a unit of Warren Buffett's Berkshire Hathaway Inc.

Last year, BYD set out to nearly double sales in China to 800,000 cars, compared with the 448,000 it sold in 2009. Sales growth began slowing in June, and in September, the company slashed its sales forecast for 2010 by 25%. In the end, BYD fell short of meeting even the more modest goal, tallying sales of only 519,806 vehicles, a disappointing 16% increase from a year earlier when China's overall vehicle market grew more than 30%.

Because of the dealer inventory reduction and other changes to its strategy, BYD is forecasting even less sales growth this year. The company says it sees its sales growing only around 10% to roughly 550,000 vehicles in 2011, more or less on par with the 10% to 15% growth analysts predict for the China car market as a whole.

To get the company back on track, BYD also plans to slow the roll-out of new cars and spend more time on quality and styling, according to Mr. Wang.

The company also aims to slash the number of dealers, which totaled about 1,000 at the end of last year, by 5% to weed out inexperienced stores – a move it hopes will also improve per-store revenue and profit.

All of these changes, Mr. Wang said, are part of an effort to stabilize BYD's auto operations, which in turn will allow it to focus on profitability and "quality of sales" rather than "obsessing over market share."