The 3 EV Business Models of BYD, Xiaomi and Tesla (Tech Strategy)

Posted on March 31, 2024 by Prof Jeff

In the past week, smartphone and other smart device maker Xiaomi launched its first EV, the SU7. This was just 3 years after they made their surprising announcement that they were going into auto.

I’ve been calling Xiaomi the “dark horse” of EV (and AV). They have no experience in cars. But they are a top-tier tech management team. And they can really execute. I always pay attention when Lei Jun and his team focus big on something.

And, sure enough, they just launched their first EV, and sold +50,000 units in 27 minutes.

That catchy factoid is actually a common Xiaomi sales tactic. Xiaomi has an enthusiastic fan base and they do limited releases that sell out in minutes. Which then makes the news. They did this same tactic ten years ago when they first entered the smartphone market against Apple.

The SU7 is a pretty fantastic looking car (see below). Although why they made it Tiffany Blue is a bit strange.

Pricing in China starts at $30,000 in China, which is about 10% less than the starting price for Tesla’s Model 3. And CEO Lei Jun has been very clear that he is going for high performance cars. He cites Tesla and Porsche as the companies that make the highest quality cars. Those are his primary rivals.

At the launch, Lei Jun said “Many people ask me who the Xiaomi SU7 is built for. My answer is, isn’t it time for Tesla Model 3 users to upgrade?”

That’s funny. Xiaomi is really, really good at B2C marketing.

So, here’s the important point.

Xiaomi is a smartphone and consumer electronics giant. They accounted for 13% of both global and Chinese smartphone sales in the last quarter of 2023. And they are going into cars as part of their ecosystem strategy. They already offer smartphones, smart home devices, and lots of other smart lifestyle products.

Basically, Xiaomi EV has a digital-first strategy.

Which is different than BYD, which has a manufacturing-first strategy.

And is different than Tesla, which is increasingly an AI robotics company.

That’s the point of this article. That the business models of EV and AV companies are evolving. And they are basically getting much stronger and better.

Let’s start with BYD.

BYD Is the Global EV Giant – With a “Manufacturing Plus Services” Business Model

In 2023, much of the world heard about BYD for the first time. Business news began announcing things such as:

BYD is now the world’s largest plug-in hybrid electric vehicle manufacturer.
BYD is the second-largest battery electric vehicle manufacturer, after Tesla.
BYD had the best-selling car brand in China, overtaking Volkswagen (which held the title since the opening of the Chinese automotive industry).
BYD has 36% of the new energy vehicle market of China.

BYD claims to be the #1 electric vehicle company. But this includes electric vehicles, plug-in hybrids, and full hybrids. Tesla, by contrast, only does EVs. So, it’s not really apples to apples. They’re definitely #1 or #2.

I recently wrote two articles on how BYD is going international in EVs (very aggressively). I argued this was mostly a story of Chinese manufacturing – in both automobiles and rechargeable batteries.

From those articles:

“Like Tesla, BYD’s move into electric vehicles was characterized by almost total vertical integration. This is common for early movers in completely new product categories. You have to produce everything yourself so you can innovate rapidly. Plus, the industry doesn’t exist yet so there are no companies to buy components from anyways.”

“But while Tesla integrated backwards into manufacturing from engineering and software, BYD integrated forward from the manufacturing of batteries. While Elon would struggle building out manufacturing facilities, BYD has always a manufacturer and metallurgy company at heart.”

“It is claimed that all the components in BYD vehicles except tires and windows are produced in-house. And the group does operate lithium mines, lithium processing, and battery production. It even has an in-house computer chip unit (BYD semiconductor), which may or may not go public at some point.”

So, when looking at BYD, I mostly see a manufacturing plus R&D focused business model. With a long history of both auto and battery innovation and manufacturing.

I call this as EV business model 1. And BYD is my primary example.

EV Business Model 1 is “Manufacturing Plus Services”. That’s Autos Plus Auto Services. Plus Linked Battery Manufacturing.

BYD actually has 4 businesses overall.

EV Auto. Which is going global very quickly.
Rechargeable battery manufacturing. BYD has been the global leader since 1995-2000. Today, this includes:
1. Consumer batteries. Mostly for electronic devices (Samsung, Dell). Increasingly this includes robots.
2. Power batteries. For EVs, which require high capacity and the ability to deliver a lot of power quickly.
3. Energy storage batteries. This is for power grid, household storage, and industrial uses. These have high capacity and can store energy for a long time.
Photovoltaics. This includes designing and manufacturing everything from silicon wafers and solar cells to PV modules and PV system apps. In PV, BYD is covering the whole sector from energy collection to storage to application.
Handset components and assembly services. This business is basically a one-stop-shop for large companies making smartphones, tablets, computers, smart home devices, drones, robots, and so on. BYD provides the materials development, R&D, product design, component manufacturing, supply chain management, logistics, after-sales, etc.

But for EV, we are talking just about the first two, which are linked. BYD is vertically integrated from autos to batteries. I actually like the battery business better than EV 1. It’s a classic Warren Buffett-type value investment. Which is why I think he initially invested in BYD in 2008.

EV 1 for just autos is not that attractive. It’s mostly a business model based on getting to global economies of scale in manufacturing and innovation (i.e., R&D).

That’s what BYD is doing right now. They are getting big as fast as possible. They are going international as fast as possible. They are racing for scale.

They are also iterating and improving their products as fast as possible. These products are still evolving, and they are flooding money into R&D in new technologies, upgraded product designs, and improved customer experiences.

I’d be tracking BYD’s shipments globally and market share. And I’d be measuring the tech gap (hardware, software, and batteries) between them and their competitors. Those would be my primary metrics.

But there’s a lot I don’t like about EV 1.

There is no recurring revenue. Customers only buy a car once every couple of years at most.
There are only a few services combined with the product. Mostly just repair, parts and charging services. I suppose you could consider insurance and financing tied services as well.

And here’s what I really don’t like.

There are no demand side competitive advantages.

There is no real customer engagement or interaction after the sale. The company has little contact or communication with the customer post-sale.
There is no share of consumer mind. Brand equity doesn’t have much power when the purchase is once every several years. There is little loyalty to auto brands. There is no habit formation. And the emotional and aspirational aspects are less powerful than in other products. Buying a car is mostly an infrequent, mostly rational purchasing decision. That’s bad.
There is no customer lock-in. No switching costs.

All the strengths in EV 1 are on the supply-side. Just like with traditional auto. And like with refrigerators and most durable goods. So, the strategy is:

You go for global economies of scale in both auto and battery manufacturing
You go for global economies of scale in both for R&D as well.
There is actually a nice linkage with the battery business. That does create an advantage in the supply and variable costs of batteries. I like linked businesses in important components.

Interestingly, EVs appear to lack one of the biggest barriers to entry of traditional car companies. Elon Musk has talked about this. He said one of the reasons there have been almost no new entrants in auto is because traditional car companies have huge fleets of cars around the world that are mostly off warranty. These big existing fleets buy parts for repair, which the car companies sell at premium. The incumbents then use this to discount their new cars. Basically, they are shifting pricing and margins – and keeping new cars cheaper. This can be a real barrier for new entrants who don’t have existing fleets to price shift from.

The big tech paradigm change of EVs has created an opening in the sector. There also aren’t incumbents with big existing fleets in EV yet.

Anyways…

BYD is a good example of EV Business Model 1 which is “Manufacturing Plus Services”. That’s Autos, Plus Auto Services. Plus, Linked Battery Manufacturing.

And I don’t view it as a great business long-term.

It’s good now because of the current EV growth wave. And BYD is an early mover against this secular trend, which is great. So, it’s pretty good in the short-term.

I like EV Business Model 2 much better. And Xiaomi is a good example of this.

EV Business Model 2 is a “Manufacturing Plus a Consumption Ecosystem”. That’s Auto (Plus Auto Services) Plus Digital Services”.

I like products plus services. Services (like repair) can change the economics of selling cars. And most car companies and dealers have been looking to repair, insurance, financing, and other services to increase their profits (beyond the car sales).

But as cars go digital, we are starting to get new digital services. This is really interesting. Products plus services plus software is a great business model. Software and digital services can change the profits, the business model and (importantly) the relationship with the customer.

Three particularly interesting digital services in EVs today are:

Mapping services
Communication services
Information and entertainment services

They are all evolving. And the first impact is on the customer interactions and engagement. Suddenly the car companies have frequent interactions with the customers. It’s no longer every 5 years when they buy a new car. Suddenly there is direct, two-way interaction between the company and the user. Often every day. We can start to track metrics like DAU and MAU. That’s not something we usually talk about for durable goods.

Digital services also enable versioning, bundling and cross-selling. I like all of those and call them “soft advantages” of digital businesses.

Companies can start to create different bundles of services. They can bundle entertainment and mapping services with things like charging and insurance. They can also cross sell. And they can offer different prices for different packages of services (i.e., versioning). All of this can increase profitability and better meet the preferences of different customer groups.

Basically, EVs are starting to look more like digital businesses. As opposed to a manufactured durable goods business.

But the big question for digital services is: Who is going to own the operating system for the car?

Are we looking at a new innovation platform? An extended ecosystem?

This follows from the operating system. And it’s not going to be Microsoft Windows.

It’s also not going to be iOS. Apple just dropped out of EVs.

In China, we can see Baidu making a strong play to become the operating system with DuerOS. Huawei has also been making moves.

My working hypothesis is there is going to be 1 operating system for your phone, car, and home. It could be one system or something that interconnects.

This is what gets me thinking about Xiaomi.

Xiaomi already has a robust consumer electronics ecosystem. They are in the top 5 for smartphones globally. And they have a complete suite of smart home devices and other connected devices. Everything from home purifiers and vacuum cleaners to smartphones and communication apps. These can all be bundled, cross-sold and versioned with the car operating system and increasing digital services. This is why Xiaomi and Apple both saw smart cars as a threat.

Huawei as a good description for this. They called it “1+8+N” (shown below).

Consumers will have 1 main device (the smartphone in the center). This will connect with 8 ancillary devices (home, pc, tv, tablet, glasses, watch, earbuds, and car). This will also connect with infinite IoT devices.

I tend to think this will be the innovation platform that developers will build on. And Huawei’s HarmonyOS operating system was designed to work on all components. It was actually for IoT devices before they repurposed it to work on smartphones.

Think about the competitive advantages we could see in this EV business model.

A powerful share of the consumer mind from the frequent interactions with customers on the phones, homes, and cars.
The increasing engagement and lock-in of developers and companies who build apps and features for the platform.
A limited set of sellers will result from a likely consolidation to 2-3 operating systems (i.e., innovation platforms) and ecosystems. However, this depends on what happens with open source.
Network effects from an innovation platform.
Scale advantages in manufacturing, R&D, and technology.
Network effects in mapping services?

We can see a list of potential competitive advantages on both the demand and supply sides in this business model.

Xiaomi is a good example of EV Business Model 2, which is “Manufacturing Plus a Consumption Ecosystem”. That’s Auto (Plus Auto Services) plus Digital Services.

And it gets even better if you add in AI Services. And that brings me to Tesla.

EV Business Model 3 is “Manufacturing Plus AI Services”

Tesla is deep into fully autonomous driving and other AI services. And if there is one business model that may be more powerful that platforms it is AI services.

Think of the potential competitive strengths of autonomous driving and AI services:

Technology standardization network effects. At various levels of the AI tech stack.
Platform based network effects. Likely from learning platforms.
Lots of developer switching costs.
Scale advantages in data.
Scarce resources in data.
Intellectual property.
Rate of learning as a competitive advantage?

I’m working on a framework for the competitive advantages of autonomous driving and generative AI right now. But it looks pretty powerful.

And what happens when intelligent cars are integrated into intelligent roads and smart cities. This is what Baidu is doing with Apollo Go and DuerOS. It could be an entire integrated ecosystem for transportation.

But that’s just for cars. Isn’t this really about AI robots?

Tesla has launched its Optimus robot. Isn’t Tesla really an AI robot business? And its first products just happened to be cars?

This is a big subject I’m going to try and dig into.

But for now, I think we can say that Tesla is a good example of EV Business Model 3. Which is Manufacturing Plus AI Services”.

***

That’s it for today. I think this is a pretty good way to think about EVs.

EV Business Model 1 is BYD
EV Business Model 2 is Xiaomi
EV Business Model 3 is Tesla

And they’re all converging right now.

A Final Comment on Why I Like BYD’s Battery Business

Warren Buffett invested in BYD back in 2008. And it wasn’t really a car company back then. Which makes sense, as Buffett doesn’t invest in early-stage speculative tech. BYD was mostly a rechargeable battery manufacturer. And I think he invested in the battery business at a good price (versus value). And he basically got the nascent car company for free.

Everyone needs a smartphone. And they all need batteries. Rechargeable lithium batteries are absolutely essential in smartphones and laptops. And increasingly in cars and industries.

I think that is what Buffett saw in 2008. That BYD was the global market leader (over 50%) in rechargeable lithium batteries, and this was a product that virtually every human had to have. And BYD was the low-cost producer in this business.

That sounds like a classic Buffett B2B business.

An indispensable product with a predictable floor on long-term demand.
A product with no low-cost substitutes.
A product with lots of repeat business and recurring revenue.
A business with a clear competitive advantage in this product, in this case based on economies of scale in manufacturing.
A business with proven attractive unit economics.
A business with proven top-tier management.

Even today, the rechargeable battery business is pretty attractive for value investors.

Cheers, Jeff

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From the Concept Library, concepts for this article are:

EV AV Auto

From the Company Library, companies for this article are:

BYD
Xiaomi
Tesla

Photo by P. L. on Unsplash

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

Jeffrey Towson 陶迅

Consultant and keynote speaker on digital and AI strategy, transformation and disruption