China's BYD builds sleek concept car factory

HONG KONG (Reuters Breakingviews) - BYD is showcasing its new concept car factory. The Chinese automaker’s semiconductor business will be given a road test in public markets soon. The company also produces batteries, giving it an edge over rivals grappling with chip shortages and supply-chain woes. Such vertical integration only looks feasible with generous government support, however.

The chipmaking division specialises in insulated gate bipolar transistors, or IGBT, which effectively operate as an electric car’s central processing unit. Demand is booming: worldwide sales are forecast to nearly double to $11 billion by 2026, according to research firm Mordor Intelligence.

A problem for Chinese manufacturers is that the market is dominated by a few foreign suppliers such as Germany’s Infineon. Covid-19-linked shortages for imported power chips, and other technology, have added urgency to build a homegrown national champion. BYD Semiconductor, which already has a near-20% IGBT market share at home, is eyeing that position. In June, it raised money at a $1.6 billion valuation from backers including smartphone maker Xiaomi and state-owned car manufacturers BAIC and SAIC.

BYD’s spinoff coincides with crippling shortages that are forcing peers from Ford Motor to Toyota to cut production. A strong rebound in vehicle demand has created bottlenecks at chipmakers like Taiwan Semiconductor Manufacturing. Just last week, Volkswagen said the impact on its December production has cost it massive sales in China, the world’s biggest market.

By contrast, BYD has enough IGBT chips to meet its own demand, according to Daiwa analysts. That suggests that combining various stages of production is paying off. The $100 billion company, backed by Warren Buffett’s Berkshire Hathaway, also stands out because of its battery-making unit. As a result, BYD has largely been unaffected by the industry’s widespread pandemic problem of ordering parts and components. Its Hong Kong shares have more than tripled over the past six months.

Developing in-house semiconductor and battery capabilities requires big and sustained investments. For years, BYD also has benefitted from subsidies and tax breaks to underpin its bottom line. Beijing’s latest push for technological self-sufficiency should translate into similar financial support. State-backed funds, for example, put some $2 billion into local chipmaker SMIC last year. That will make BYD’s model hard to copy.