BYD Dreams of Electric Cars

For years, industry watchers have been betting on which company would produce the first reliable, plug-in, electric-powered car. Most experts assumed it would be whichever auto manufacturer first developed a battery powerful enough to run its cars. Would it be General Motors and its Chevy Volt? Or maybe Tesla Motors' Model S?

As it turns out, the pundits may have gotten things backwards. If all goes according to plan, battery-maker BYD could be the first company to deliver a mass-produced, electric-powered, plug-in vehicle, ahead of Detroit, Stuttgart, or Tokyo.

If you don't know the company, open the back of your mobile phone. Chances are the battery powering the device was produced by BYD, a 15-year-old company based in Shenzhen, China. Today, BYD is the leading supplier of batteries to Nokia (NOK), Samsung, and Motorola (MOT). Now it wants to be the leading supplier of power plants for a family of sedans, subcompacts, and sports coupes that will bear its name. Already BYD has attracted quite a following. Among those interested in the company: Warren Buffett, who plunked down more than $200 million to buy 10 percent of BYD in 2008.

Why would BYD be interested in the auto industry? Opportunity. The market for cars is on the cusp of an immense transition—from gas guzzlers to fuel-efficient and environmentally friendly vehicles. BYD senses a once-in-a-lifetime chance to shake up the established world order. Company leaders believe that newcomers have as good a shot at capturing the market as the incumbents. And what an opportunity it could be: According to various estimates, the worldwide market for electric vehicles could be as large as 10 million cars per year by 2016. That's more than 12 percent of the global market for automobiles. "It's almost hopeless for a latecomer like us to compete with GM and other established automakers with a century of experience in gasoline engines," says BYD's ambitious founder and chairman, Wang Chuanfu. "With electric vehicles, we're all at the same starting line."

An Especially Difficult Leap

To get to that starting line, Wang had to embrace a completely new business model to complement its existing model, something nearly impossible for most companies. To make the leap from invisible components to branded products, BYD had to develop a new workforce, create a consumer brand, ramp up government relations to engage national safety commissions, and create an entirely new supply chain. Any one of these can bury a company looking to augment its business model. And for good reason: These are extremely difficult challenges to overcome, all the more so in mature industries.

Despite the difficulty, some companies persevere. They do so because they believe new business models are the key to enormous value in the form of access to new markets, customers, investment capital, and profits. Take Disney (DIS): Within the Magic Kingdom are theme parks, television networks, cruise ships, merchandising operations, and film studios, among other interests. Although they have different financial models, success metrics, and fundamentals, they nonetheless provide Disney an unrivaled footprint in entertainment.

Most companies never achieve anything close to this level of diversification. But even big companies with broad portfolios need to remain attuned to the importance of business model innovation. Multiple business models provide a company a buffer against downturns in any one sector and an extra lift when times are good. They provide entry into adjacent markets and thus expand a company's opportunity and preserve its longevity should one of its revenue streams come under threat from increased competition, regulatory changes, or even internal challenges.

This is an edited extract from Inder Sidhu's new book, Doing Both: How Cisco Captures Today's Profit and Drives Tomorrow's Growth (FT Press, June 2010).

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