With net profit down 31.6% in 2018, is BYD losing steam?

It’s all about changes in governmental policy.

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With net profit down 31.6% in 2018, is BYD losing steam?

Shenzhen-based electric vehicle (EV) manufacturer BYD’s annual revenue increased 22.8% from RMB 105.9 billion in 2017 to RMB 130.1 billion (USD 19.3 billion) in 2018, according to the company’s annual report released on Wednesday.

Yet the Buffett-backed automaker is seemingly losing steam—the company has recorded two-digit declines in its net profits for two consecutive years. BYD’s net profit peaked at RMB 5.05 billion in 2016 and the company booked only RMB 2.78 billion last year, followed by another 31.6% drop.

The company attributed the steep fall of its net profits last year to the reduction of government subsidies for new energy vehicles (NEVs) and the sharp increase of its research and development expenses.

Industry observers seem to agree. “BYD’s net profit peaked because of the high level of governmental subsidies. Its net profits were too good to be normal. And now its net profit is gradually coming down along with the reduction of governmental NEV subsidies. The trend is heading towards normality,” Beijing-based independent auto industry analyst Zhong Shi told KrASIA. “Automakers are not supposed to make too big a margin.”

BYD has its competitive edge in cheap hybrid electric cars, so newcomers in China’s EV market—such as Tesla, NIO and Xiaopeng—do not pose an immediate threat to the industry leader in the short term, according to Zhong.

But the company’s annual net profits will continue to dip before stabilizing—at least for the coming two years. China has recently announced its plan to phase out all NEV subsidies by the end of 2020 and BYD is widely seen as one of the biggest beneficiaries of those generous handouts from the Chinese government.

“Once all the subsidies are phased out, by the end of 2020, everyone will be back to the same starting line again,” Zhong said, adding that the drag on BYD’s net profits will then come to an end.

 

Write to Luna Lin at [email protected]