CHINA IPR: CARMAKER BYD SEEKS TO "BUILD YOUR

UNCLAS SECTION 01 OF 07 GUANGZHOU 000612 SENSITIVE SIPDIS STATE FOR EAP/CM, EEB/IPE; EEP/TPP; EEB/CIP STATE FOR INL STATE ALSO PASS USTR FOR CHINA OFFICE; IPR OFFICE; AND OCG STATE PASS White House OSTP Ambassador Richard Russell STATE PASS FTC for Blumenthal] STATE PASS CPSC for International Office O'BRIEN COMMERCE FOR MAC AND MAS Commerce for National Coordinator for IPR Enforcement USPTO FOR INT'L AFFAIRS FBI for LBryant DHS/ICE for IPR Center - THipelius, TRandazzo DHS/CBP for IPR Rights Branch - GMcCray, PPizzeck ITC for LLevine, LSchlitt NSC for JBader, JLoi E.O. 12958: N/A TAGS: ETRD KIPR ECON PGOV CH SUBJECT: CHINA IPR: CARMAKER BYD SEEKS TO "BUILD YOUR DREAMS" BASED ON SOMEONE ELSE'S DESIGNS REF: Guangzhou 314 (U) This document is sensitive but unclassified. Please protect accordingly. Not for release outside U.S. government channels. Not for internet publication. ¶1. (SBU) Summary and comment. Boosted by a major investment from Warren Buffet and poised to apply its world-class battery technology to automobiles, Chinese automaker BYD has been heralded as one of the most promising carmakers of the future. However, even a cursory look at the BYD product line reveals that most of its models draw heavily on the designs of other carmakers. The letters, BYD, come from the phrase "Build Your Dreams." With a focus on price competitiveness, BYD makes it possible for Chinese consumers to realize dreams of car ownership at significantly lower cost than similar foreign brand models. BYD dealers can even help consumers who have their hearts set on ownership of a foreign brand car. Right at the dealership, buyers can arrange to have the BYD brand marks removed from their new BYD cars and replaced with the brand marks of the similar model foreign brand. ¶2. (SBU) Comment continued: While BYD has certainly achieved a measure of success based on a business approach of copying and then modifying car designs just enough to convince Chinese courts that the company has not infringed on patents, it is far less certain that foreign courts will be as sympathetic. Especially as the company eyes overseas markets and gears up to export its models, including electric cars, to the United States, the likelihood of legal challenges related to intellectual property and safety or liability issues would appear to loom larger and larger on the horizon. End summary and comment. The Midas Touch -------------- ¶3. (U) Chinese carmaker BYD's dealerships in China prominently display enlarged pictures of a smiling, elderly foreigner shaking hands with BYD's 43 year-old Chairman Wang Chuanfu. So there is no mistaking the identity of the pictured foreigner, beneath the picture is a caption explaining that the foreigner is none other than billionaire investor Warren Buffet. Buffet's decision to buy a 10 percent share in BYD, GUANGZHOU 00000612 002 OF 007 based on expectations that the company is poised to parlay it's expertise in making cell phone batteries into becoming a world-wide leader in electric cars, sparked massive interest and investment in the company. BYD share prices increased by five-fold making Chairman Wang, with assets estimated in excess of 35 billion RMB (or over US$5.1 billion),the "richest" person in China according to the Hurun business report. ¶4. (U) If there is anything to the investment frenzy and the media hype, Shenzhen-based BYD is poised to become the world's leading manufacturer of electric cars and a major manufacturer of conventional cars (see reftel). Headquartered in Shenzhen, the company's car manufacturing facilities are located in Xian. With sales increasing rapidly in China, the company is beginning to focus on overseas sales. This year the company launched its first major advertising drive in the U.S. The ads feature California Governor Arnold Schwarzenegger test driving a BYD e6 electric model. BYD also hopes to export the hybrid model of its F6 to the United States. Domestically, BYD is set to launch a Chinese version of the low-cost Indian TATA's Nano with a projected retail price of less that RMB 20,000 (just under US$3,000). BYD claims it will be the "cheapest car on earth" and expects it to gain exceptional popularity in rural China. Chairman Wang claims his company will surpass Toyota in terms of turnover and net assets by the year 2025. Darker Side to the BYD Story -------------- ¶5. (SBU) Like many of China's homegrown automobile manufacturers, the BYD conventional car manufacturing model is based on closely copying successful foreign car models - thus eliminating the need for costly spending on design and functional testing. BYD's current line up includes gasoline-engine models that very closely resemble the Toyota Aygo, Toyota Corolla EX, Toyota Camry, the Toyota Previa, and the Mercedes CLK240 convertible. One model incorporates the rear design from the Buick Excelle HRV hatchback, while other models incorporate, separately, a Peugeot 206CC tail design or a Honda Civic tail design. In many instances, the interiors, as well, match the cars from which they were copied. BYD has made some minor modifications in some of the car designs and, in other cases, as noted above, has combined the design features of a several foreign models into one car GUANGZHOU 00000612 003 OF 007 (BYD's F3 model has a Toyota Corolla front, a Buick HRV hatchback rear, and a Mitsubishi engine). Still, many of the BYD cars bear a remarkable resemblance to the foreign models on which they were patterned, with almost identical size specifications for copied parts. Where BYD models differ - and differ significantly - is in price. BYD models are at least 30% cheaper than the foreign brand model on which they are based, while some models are two or three times less expensive. ¶6. (SBU) Comment: The copied designs are modified just enough that BYD apparently feels confident that they can withstand intellectual property infringement cases in Chinese courts. For a young company, BYD has considerable experience in the area of intellectual property rights violations. In 2008, Taiwan-based Foxconn filed a lawsuit against BYD alleging that the company had stolen thousands of classified technical documents that BYD claims "accidentally" ended up on BYD's development plan. BYD also lured 400 of Foxconn's highly-trained technicians to switch employers. Foxconn claimed damages in excess of 10 billion NTD (US$307 million) and says BYD's actions have inflicted revenue losses of 85%. End comment. The Costs and Risks of Price-Cutting -------------- ¶7. (U) Price competitiveness stands as BYD's primary selling point. Industry analysts say the company sells cars at exceptionally low profit margins. One online marketing source claims that BYD is currently selling their F0 model at a profit of less that RMB 1,000 (US$146) per car. The pressure to keep costs low apparently applies throughout the production process. Another online source reports that the average monthly salary for a BYD employee is RMB 4,000 (US$586) - lower than the average salary of other automobile manufacturers in China. Others note that the BYD models generally have older-style motors. BYD's F3 and F6 come equipped with an older Mitsubishi 4G15S engine manufactured by Dong'an, a company in Shenyang. Mitsubishi no longer uses the 4G15S engine model in its own cars. Some analysts claim that BYD saves money by eliminating spending on safety testing. According to online sources, BYD claims that the F0 received a China Consumer Association (C-NCAP) five- star (highest) rating were rebuffed by the C-NCAP, which told reporters that it had not yet tested the GUANGZHOU 00000612 004 OF 007 BYD F0 at that time. ¶8. (SBU) A rough inspection of the finished BYD car interior and exterior features - even to the unseasoned eye - suggests that there are differences in the quality and workmanship of the BYD cars and the models that they imitate. The BYD models tend to have larger gaps and less-refined fits between different parts of the cars, and some of the interior fittings appeared rougher and less finished. Because most of the BYD models weigh significantly less than their competing models, some analysts suggest that it is likely that BYD utilizes more plastic instead of steel parts or utilizes a lighter grade steel in order to cut costs, increase fuel efficiency, and reduce the cost of repair parts. Comment: While some of these cost-cutting measures may work in the Chinese market, it is unlikely that they will receive a similar welcome in more safety-conscious and litigious countries. Even in China, some purchasers have complained of sub-standard workmanship in their BYD cars, and several news reports cite fatal mechanical failures and air bags that have failed to inflate in BYD cars. End comment. Building Your Dream Q BYD Style -------------- ¶9. (SBU) Like car buyers everywhere, Chinese consumers are very price conscious. This appears to be especially true for the growing number of first-time car buyers. Notwithstanding the marketing onslaught of foreign car brands, many buyers simply want the best deal. For buyers who had their hearts set on buying one of the foreign brand automobiles but find them too pricey, BYD has a "convenient" solution. It's possible to arrange, right at the dealership, to have all of the BYD markings on your look-alike BYD model removed and replaced with the foreign brand markings. At several dealerships in Fujian Province, ConGenOff was told that for only 600 RMB (US$88),all of the BYD marks, symbols, and model plates on a BYD F3 could be replaced with Toyota symbols. It costs slightly more - up to 800 RMB (US$117) - to have the markings replaced on BYD's more expensive models. One enthusiastic sales person proudly directed ConGenOff to a wall display in the sales office that was filled with snapshots of new BYD owners standing in front of their new BYD cars Q a number of which the brand markings had already been changed. Another GUANGZHOU 00000612 005 OF 007 salesperson showed ConGenOff a just-sold car parked in front of the BYD show room on which the brand markings had just been changed. For all appearances, in style, form, shapeQand brand markingsQthe BYD car looked like a Toyota. How Many Fake Toyotas are on the Road? -------------- ¶10. (U) According to online media reports, BYD has over-reported F0 and F3 sales in order to mislead consumers as to the popularity of BYD vehicles. According to information provided by BYD to the China Automobile Association, the company sold over 51,000 F3 cars in the first half of 2007. However, according to the Public Security Bureau's Traffic Administration Authority (the agency responsible for registration and licensing of automobiles in China),only 30,000 F3 models were licensed during the same period. Comment: Since the registration paperwork clearly indicates that the vehicle make is BYD, it is unlikely that re- branded BYD models were registered as some other make. End comment. The BYD Line-up -------------- ¶11. (U) BYD F0 - The BYD model F0 closely resembles the Toyota Aygo, except for slight modifications in the design of the headlights, rear lights, and rear fender. The basic package of the car, excluding sales taxes, retails for RMB 36,900 (US$5,400). Although the Toyota Aygo is not currently available in China, in Britain, it retails for the equivalent of RMB 69,600 (US$10,192). BYD expects to sell over 100,000 of the F0 in 2009 and claims the design has been sufficiently modified to preclude IPR-related challenges if and when the car is exported to Europe. ¶12. (U) BYD F3 and F3-R Q Except for its Honda Civic- like tail design, the BYD F-3 looks almost identical to the Toyota Corolla EX. The BYD's basic package price of RMB 59,800 (US$8,757) compares very favorably with the Corolla's basic package price of RMB 99,800 (US$14,614). The People's Daily online statistics on car sales suggest that the sharp growth in the sales of the BYD F3 has undercut sales of the Toyota Corolla EX in China. Sales of the Toyota Corolla EX model peaked at 80,100 units in 2006 and fell to 52,247 in ¶2008. On the other hand, BYD claims to have sold 42,000 of its F3 models in 2006, but this number GUANGZHOU 00000612 006 OF 007 jumped to 136,782 in 2008. In the first half of 2009, BYD sold almost five times more F3 model cars than Toyota sold of the Corolla EX. The F3R model retains the Corolla-like front but utilizes a Buick Excelle HRV hatchback-like rear design. Whereas the Buick Excelle HRV basic package costs RMB 112,800 (US$16,518),the F3R basic package costs only 59,800 (US$8,757). ¶13. (U) BYD F6 Q Built to appeal to higher-end buyers, the F6 combines a Lexus LS460 (2006 model) front with a Mercedes S300 tail and has sides, doors, and overall dimensions that are almost identical to the Toyota Camry. The car comes with a DVD player/GPS, Bluetooth telephone port, extra-large sunroof, leather seats and rear radar for backing up. Analysts say that F6 sales have doubled in 2009, with BYD hoping to sell 50,000 by the end of the year. The BYD F6 basic package is set at RMB 79,800 (US$11,685). By comparison, the Toyota Camry is priced at RMB 189,800 (US$27,793). ¶14. (U) BYD M6 Q BYD's only multi-purpose vehicle, the M6 was apparently copied, almost in entirety, from the Toyota Previa. The design of the M6 and the Previa is so close, that without seeing the brand markings, it is hard to tell the two models apart. Whereas the basic package price for the imported Previa is 469,800 RMB (US$68,794),the BYD M6 sells for approximately 200,000 RMB (US$29,287). ¶15. (U) BYD S8 Q With a price tag averaging RMB 200,000 (US$29,287),the BYD S8 convertible is one of BYD's most expensive products. From the front, the car bears a remarkable resemblance to a Mercedes CLK240 convertible. From the back, however, the car looks a lot like a Peugeot 206CC. Compared the Mercedes' basic package 598,000 RMB (US$87,568) price tag, the BYD basic package appears to be quite a bargain at 165,800 (US$24,279). Dealerships visited by ConGenOff did not have the car in stock; sales representatives noted that the car had to be ordered from the factory. ¶16. (U) BYD G3 Q Officially launched on October 26 of this year, the G3 front and interior appear to be based on the newer model Corolla design, while the tail resembles the Lexus ES350. Although the newer model Corolla retails for RMB 127,800 (US$18,714),the new G3 sells for only RMB 76,900 (US$11,261). According to online analysts, BYD has a number of new models in development including two SUVs: BYD's S6 is reportedly based on the Toyota RAV4 and the Lexus RX, GUANGZHOU 00000612 007 OF 007 while the BYD T6 is based on the Porsche Cayenne. For the visually oriented, Consulate Guangzhou has posted on its blog, South China SEZ, pictures of the BYD cars along with the foreign brand cars on which the BYD cars are modeled. Please see QBYD Picture Report link on the blog at http://www.intelink.gov/communities/state/sou thchinase z/ GOLDBECK