As we enter the month of August, BYD's positive developments continue. In July, their sales of new energy vehicles maintained first place and they even made their debut on the Global 500 list. Now, their subsidiary company BYD Electronic has just announced that they have obtained a license for electronic cigarette manufacturing. This news has surprised some netizens who are wondering why a car company is involved in this industry. So, who exactly is BYD Electronic?
Looking back at BYD's past achievements, they have been successful in every field they have entered, and have constantly ventured into new areas. Now, why has BYD Electronics entered the electronic cigarette manufacturing industry? Is this a new blue ocean for them to explore? Currently, the global electronic cigarette industry has ended its period of unregulated growth and has entered a phase of stronger regulation. In this context, can BYD Electronics, which has only entered this field for less than two years, achieve a "curve overtaking" and succeed in this new venture?
What is the story behind BYD Electronics?
On August 4th, the official WeChat account of BYD Electronic announced that a subsidiary, BYD Precision Manufacture Co., Ltd., has been awarded the "Production License for Tobacco Monopoly (Electronic Cigarette Processing Company)" by the National Tobacco Monopoly Bureau.
According to BYD Electronics, they have completed patent layouts for their full range of electronic atomization products and have invested in automated production lines. They have integrated their in-house capabilities, such as new material development, precision moulds, product design and development, and intelligent manufacturing, to provide comprehensive solutions.
Upon hearing the news, some netizens were surprised and questioned, "Isn't BYD a car manufacturer?" In reality, the well-known BYD automotive brand is not the company's original business - BYD actually started in the mobile phone lithium battery industry, with electronics being their primary focus.
This dates back to 1995 when BYD founder Wang Chuanfu received a 2.5 million yuan investment to establish BYD Industrial Co. Ltd. in Shenzhen, focusing on research and development of mobile phone batteries. The company entered the automotive industry in 2003 with the acquisition of Xi'an Qinghua Automobile Co. Ltd. and launched its first vehicle, the F3, in 2005, making a name for itself in the industry. In 2008, BYD officially entered its "Dynasty Era" with the successful launch of new energy models such as the Qin, Song, and Tang, achieving immense success in the market.
Source: BYD Automotive Weibo (a Chinese social media platform)
In April of this year, Chinese automaker BYD announced that it would stop producing petroleum-fueled vehicles and instead focus solely on electric and hybrid models. This bold move was prompted by the company's unparalleled sales figures in the new energy vehicle market, where it has maintained a top position for several years. Additionally, BYD has emerged as a major player in the global electric vehicle battery market, alongside Nidec and LG Energy, as one of the three largest battery manufacturers by installed capacity.
BYD Electronic, which is venturing into the electronic cigarette OEM industry, is a subsidiary of BYD that spun off its core business of manufacturing electronic components for mobile phones. According to Wind, BYD Electronic was founded in 1995 and went public on the main board of the Hong Kong Stock Exchange in 2007 with the stock code 0285.HK. Its main business is selling mobile phone parts and modules, as well as assembly services, with sales of mobile phone parts and modules accounting for 99.91% of its revenue in 2021. The company is a supplier to companies such as Xiaomi Group and Continental Group, according to its official website.
Source: BYD Electronics Official Website
BYD Electronics described itself in its annual report as a "globally leading platform-based high-end manufacturing company," providing end-to-end services such as new material development, product design and research and development, as well as manufacturing components and complete systems, supply chain management, logistics, and after-sales to renowned global clients. Its products span across four major fields, including intelligent smartphones and laptops, new intelligent products, automotive intelligent systems, and medical and healthcare.
Disrupter" in the electronic cigarette manufacturing industry.
Looking back at BYD's past achievements, it can be said that they have been successful in every aspect and have consistently diversified their business. When the COVID-19 pandemic broke out in 2020, they immediately announced that they would produce masks and within just 24 days, became the world's largest mask manufacturer with a maximum daily output of 100 million masks. In the first half of 2020 alone, BYD's mask sales revenue reached 8.57 billion yuan.
Today, why has BYD Electronic entered the e-cigarette OEM industry? Is this a new lucrative market to explore?
Let's first take a look at the performance of BYD. In 2021, the company's revenue increased but its net profit declined. Its revenue reached 89.6 billion yuan, a year-on-year growth of 22%, while its non-GAAP net profit was 1.7 billion yuan, a reduction of 66.67% compared to the previous year.
In its 2021 annual report, BYD Electronics stated that fluctuating customer demand due to the ongoing pandemic and a shortage of industry chips led to lower overall capacity utilization and a negative impact on profitability. Additionally, as the pandemic prevention and control measures became more normalized, the demand for medical protective products decreased year-on-year, resulting in significant decreases in both revenue and profits.
It is clear that BYD Electronic, whose performance has declined, is searching for new avenues. In addition to its electronic cigarette business, BYD Electronic has embarked on a strategy to expand into new types of intelligent products, including smart homes, gaming hardware, robotics, drones, and automobile smart systems. However, is entering the electronic cigarette OEM industry a path to success?
According to Ai Media Consultancy, the global retail market for non-burning heated tobacco products (HNB) is expected to reach $31.37 billion in 2022, while the e-vapor industry retail market is predicted to reach $42.44 billion, indicating continued market expansion. Meanwhile, China's vaporized tobacco market is estimated to be worth around $1.3 billion and is still in its early stages with potential for growth, as stated in a recent research report by China Everbright Securities.
Looking at the profitability of companies representing the electronic cigarette industry, Smoore is undoubtedly the leader in the global electronic cigarette manufacturing industry. In 2021, Smoore's market share expanded to 22.8% on a global scale, maintaining its position as the world's largest manufacturer of electronic vapor equipment. Over the past five years since going public, Smoore's net profit has increased significantly year after year, even achieving a non-recurring net profit growth rate of 288.62% and 201.41% in 2018 and 2019, respectively. As of August 5th, their market value has reached 108 billion Hong Kong dollars. However, Smoore's non-recurring net profit growth rate has slowed down significantly in the past two years but still maintains rapid growth.
Interesting enough, BYD has entered the electronic cigarette contract manufacturing industry and is expected by the media to compete with and potentially weaken industry leader, Smoore. This move is seen as breaking Smoore's dominance. Despite being a late entrant, BYD has rapidly accelerated their progress in the industry.
BYD Electronic entered the electronic cigarette manufacturing industry at the end of 2020 and completed its patent layout and production in the first half of 2021. The company has established partnerships with Airnow, Maxfel, Lianpei, ICE Blizzard and V·ZEON after acquiring its license. Its latest achievement is getting licensed after the implementation of the national standard for electronic cigarettes.
On the other hand, BYD Electronics' research and development capabilities should not be underestimated. At the end of 2021, BYD Electronics launched its own ceramic atomization technology brand "BEEM" and planned technology brand identity "BEEM CORE", which triggered a strong attack from Smoore, who considers ceramic core technology to be its killer app. At that time, Interface News highly praised the technology release, stating "behind this seemingly inconspicuous technology launch, the electronic cigarette OEM industry is ushering in an industry turning point.
Overtaking on a turn?
It is worth noting that the brand mentioned earlier that is collaborating with BYD Electronic is not well-known in the electronic cigarette industry. Furthermore, the global electronic cigarette industry has ended its phase of unbridled growth and is now subject to strong regulation. In this context, it remains to be seen whether BYD Electronic, which has only been in this field for less than 2 years, can achieve a "come-from-behind victory" - a matter of great interest.
In fact, BYD Electronic's entry into the electronic cigarette processing industry has not been universally praised. In the comments section of the news announcing their acquisition of the necessary permits, many internet users have criticized BYD Electronics for not focusing on their core business. Some have even cited examples of other car companies and argue that as a subsidiary of BYD, BYD Electronics should be concentrating on upstream and downstream industries related to automobiles.
In late June of this year, Citigroup, one of the world's largest investment banks and financial institutions, expressed its views on BYD's electronic cigarette OEM business. Citigroup believes that the market's expectations for BYD's electronic cigarette business are too high, leading to a significant rebound in its stock price. Despite BYD having obtained a license as an electronic cigarette manufacturer, the demand is still weak under regulation, and progress in exports will take time. Citigroup believes that this business will not contribute significantly to BYD's electronic business in the next two years.
In multiple reports on the electronic cigarette industry, many securities firms have pointed out the significant policy risks faced by this industry. At the end of July, Caitong Securities pointed out in a research report that risks to the industry included unexpected regulatory policies, volatility in raw material prices, and disruption of sales channels due to repeated outbreaks of domestic and foreign epidemics. The Zhejiang Commercial Securities lightweight manufacturing team also noted risks such as uncertainty regarding the timing of new tobacco policies being implemented and failure to meet expectations for new product iterations.
Source: Fortune China Website
On August 3rd, 2022, the Fortune Global 500 ranking was officially released, and BYD made it to the list for the first time with a revenue of $32.758 billion. Despite being considered a questionable business, can the electronic cigarette OEM industry add fuel to Wang Chuanfu's fortune in the future?
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