Mini Case: Build Your Dreams (BYD) to Sidestep Entry Barriers

The Big Three GM, Ford and Chrysler, dominated the United States car market throughout most of the 20^th century. As the competition in the industry became increasingly global, foreign car makers entered U.S market mainly by importing vehicles from overseas plants. Among the first were German carmakers Volkswagen, Daimler, and BMW as well as Japanese carmakers Honda, Toyota, and Nissan. The foreign entrants intensified competition, threatened the market share of the Big Three, and led to political pressure to impose import restrictions in the 1980s. The new players responded by building U.S. plants in order to avoid import restrictions. More recently, Korean car makers Hyundai and Kia have begun making and selling cars in the United States.

Although globalization and deregulation paved the way for significant new entry into the

U.S. auto market, the worldwide car manufacturing industry has been exposed to few new entrants. In fact, no new major car manufacturers have emerged in the last couple of decades in part because automobiles powered by internal combustion engines are made out of thousands of precisely engineered parts; few industrial products, excluding commercial airplanes, are as complex as cars. These facts create seemingly insurmountable barriers to entry into car manufacturing. Thus, it would seem that an unknown startup from an emerging economy, attempting to enter the car industry during the deepest economic recession since the Great Depression, would surely be a fools errand.

Yet Wang Chuanfu, founder and chairman of the Chinese technology startup Build Your Dreams (BYD) begs to differ. His strategy is to use new technology to sidestrap entry barriers. BYD began its life as a battery company in 1995 and is now leveraging this expertise into electronic vehicles. Unlike complex gasoline engines, electric cars are powered by simple motors and gearboxes that have very few parts. Electric vehicles are therefore

much cheaper and more straightforward to build. BYDs claim to fame is lithium ferrous phosphate battery on which car can run 250 miles on a single three-hour charge. Already one of the fastest growing independent automakers, BYD is selling plug-in hybrids and all- electronic vehicles in China, Africa, and the Middle East, and South America. It plans to sell cars in the U.S. and other Western countries in the near future.

Legendary investor Warren Buffet found BYD enough to put in some $230 million for a 10 percent equity stake. Consumers may flock to BYD cars as well. Not only they green cars, but their sticker price is anticipated to be about half that of the Chevy Volt (whose starting price is $40,000). Other companies entering the acre industry by leveraging new battery technology include Tesla Motors and Fisker Automotive, both in California, as well Think Global in Norway and Lightning Car in United Kingdom. Sparks are sure to fly as the car industry becomes more competitive in the 21^st century.

(Source: Rothaermal, Strategic Management Concept and Cases, 2013 Ed, Mc GrawHill)

a) Which PESTEL factors are the most salient for the electric automotive industry of the 21^st century?

b)Think about the automotive industry in your home country. Is it structured more like an oligopoly or monopolistic competition? Do you think the structure would change for an electric vehicle strategic group within the overall automotive industry?

c)Why is it important for an organization to study and understand its external environment?

d) How do the competitive forces in Porters five forces model affect the profitability of the overall industry? For example, in what way might strong forces increase industry profits, and in what way do strong forces reduce industry profits?

e) What is a strategic group? How can studying such groups be useful in industry analysis?

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