BYD’s rise from battery manufacturer to global electric car leader

The Chinese company, which generated revenues of $61.7 billion in 2023, launched its first model as a sedan

01/17/2024

Chinese company BYD’s assembly line in Hefei: the company had produced 6 million vehicles by last year — Foto: Costfoto/NurPhoto via Getty Images

Chinese company BYD’s assembly line in Hefei: the company had produced 6 million vehicles by last year — Foto: Costfoto/NurPhoto via Getty Images

A visit to BYD’s headquarters in Shenzhen, China, often begins unconventionally. Just beyond the entrance to a vast showroom, encased by glass walls, are two machines, each holding a battery. These machines ignite the batteries, demonstrating their durability. The employee explains that the battery that withstands the flames is used in BYD vehicles, which, in 2023, became the world’s largest electric car manufacturer. The other battery, quickly consumed by fire, is said to be typical of other brands.

This dramatic demonstration is part of BYD’s narrative, a company with a history stretching back almost 28 years and revenues of $61.7 billion in the previous year. Founded in 1995, BYD initially produced batteries for cell phones, a venture initiated by Wang Chuanfu, a chemist with a specialization in battery technology. At 29, Mr. Chuanfu capitalized on the burgeoning cell phone trend, establishing a battery factory in Shenzhen’s Kuichong industrial subdistrict, an epicenter of innovation.

Like a museum, the showroom chronicles the journey of BYD and its reserved founder through photographs and informative displays. BYD’s breakthrough came in 2000 when it began supplying lithium batteries to Motorola, later expanding to serve Nokia, Ericsson, and Samsung.

In 2002, BYD, standing for “Build Your Dreams,” went public on the Hong Kong Stock Exchange. The following year, Mr. Chuanfu, now chairman, realized his ambition to venture into vehicle production, with a sedan as the company’s inaugural model.

In 2008, a significant development occurred as American billionaire Warren Buffett invested $232 million to acquire shares in BYD, priced at $1 each at the time. Fourteen years later, when Mr. Buffett’s holding company Berkshire Hathaway started selling these shares, their value had surged to $35 each.

BYD entered the bus segment in 2009, producing its first electric bus in the subsequent year. In 2012, the company established a bus manufacturing facility in Campinas, in the Brazilian state of São Paulo. In 2016, it ventured into monorail production in China, a technology soon to become familiar to residents of São Paulo. By the close of 2024, BYD aims to deliver the first vehicles for use on the 17-Ouro line in São Paulo.

Alongside its automotive pursuits, BYD maintains a battery production presence, with a Manaus facility supplying the bus line in Campinas. The company also produces solar panels, emphasizing that it extends beyond the scope of a vehicle manufacturer.

The year 2023 marked BYD’s establishment in Bahia. The former Ford factory in Camaçari will transition to producing electric cars and plug-in hybrids, including a hybrid pickup truck fueled by ethanol. Plans to expand and modernize the Brazilian factory are set to start in February. BYD’s director, Marcelo Schneider, announced an expansion of the initial labor force recruitment from 5,000 to 10,000 workers. The first stage of investment is projected to amount to R$3 billion.

In Shenzhen, BYD employees take pride in their contribution to the fight against COVID-19. Throughout the pandemic, the production of protective masks against the coronavirus not only saved lives but also secured the salaries of BYD employees in China, where the majority of the company’s 750,000-strong workforce resides.

When the global population was compelled into social isolation, BYD swiftly mobilized its engineering team to develop masks, a scarce commodity at the time. Remarkably, the project was completed in just three days. BYD emerged as a major mask producer, with ongoing sales, including in Brazil.

With 90,000 engineers on board, BYD anticipates reaching 100,000 by year-end, a testament to its commitment to innovation. Rows of patents acquired by BYD adorn a vast wall in the showroom at its Shenzhen headquarters, attesting to the company’s dedication to research and development, with 11,000 daily patent applications.

BYD’s achievements are colossal in every dimension. In vehicle manufacturing, it took 13 years to produce its first million units. A mere year and a half later, that number surged to three million, followed by an additional million within nine months. By 2023, the company had surpassed the milestone of six million vehicles produced.

The showroom’s car display area showcases compact models featuring whimsical animal-inspired names like the Dolphin. Notably, the Dolphin Mini, set to launch in Brazil in February, is called the Seagle in China.

Outside, it’s time to witness a car that offers a unique driving experience. Introduced to the Chinese market in September, the Yangwang U8 model, a sizable SUV, can rotate a full 360 degrees on its own axis.

However, BYD’s management is most eager to gauge the reaction of Brazilian visitors to the Dolphin Mini. Jolin Zhang, the director of the American sales division, joins in to generate excitement, stating, “This car is compact but exceptionally roomy inside. It’s ideally suited for Brazil.”

*Por Marli Olmos — Shenzhen

Source: Valor International

https://valorinternational.globo.com/
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Electricity bill subsidy doubles in 5 years, puts system at risk

Shift to free market and incentives for specific segments, such as distributed generation, pose threats to payment capacity

01/17/2024

Luiz Eduardo Barata — Foto: Leo Pinheiro/Valor

Luiz Eduardo Barata — Foto: Leo Pinheiro/Valor

In Brazil, the total subsidies on electricity bills have doubled over the past five years. From 2018 to 2023, the annual cumulative amount surged from R$18.8 billion to R$37.4 billion, according to data from the “subsidiômetro,” a National Electricity Agency (ANEEL) tracking tool. Such increase in subsidies, primarily levied through the Electricity Development Account (CDE), has been a concern for industry experts.

Recent warnings highlight the potential collapse of the payment system. Key among the sectoral charges, which are designed to subsidize electricity bill discounts, the CDE encompasses various initiatives, including the social tariff (a special discounted rate designed to make essential services more affordable for low-income households), universalization programs (initiatives aimed at ensuring that all citizens have access to basic services, regardless of their location or economic status), and the procurement of diesel or fuel oil for power plants not connected to the national grid. In 2023, the CDE’s budget sanctioned by Aneel was R$34.99 billion. The budget for the current year is yet to be approved, but an estimated figure of R$37.17 billion has been proposed.

The escalating subsidies are challenging the financial stability of the captive market, which primarily consists of traditional distributors, that is, consumers who do not have the option to choose their electricity supplier and are therefore “captive” to a single local utility provider. Luiz Eduardo Barata, president of the National Front for the Defense of Electricity Consumers, warns, “If comprehensive measures are not implemented soon, we could face a severe crisis by 2026 or 2027.”

In 2023, the highest subsidy allocation was for mitigating the operational costs of thermal power plants in isolated systems, amounting to R$10.3 billion. This was followed by expenditures for incentivized sources (R$10 billion), distributed generation (R$7.1 billion), and discounts for low-income households under the Social Tariff program (R$5.2 billion).

Experts are concerned about the imbalance in expenditure distribution within the sector and question the validity of maintaining certain benefits. They attribute many adverse effects to outdated regulations, recent market changes, and technical decisions made by Congress.

The same experts caution that the situation could deteriorate further with the introduction of new subsidies. Proposals for extending economic incentives for sector groups, potentially adding nearly R$30 billion annually to electricity bills, were included in the draft legal framework for offshore wind generation at the year’s end.

Mr. Barata, a former director-general of the Operator of the National Electricity System (ONS) and president of the Electricity Trading Chamber (CCEE), notes the trend of consumers shifting from distributor contracts to electricity traders in the free market, which allows them to choose their supplier. Due to legislative loopholes, this shift exempts consumers from paying certain obligatory charges in the captive market, some of which ensure supply quality.

Mr. Barata notes that in 2024, “almost everyone could choose the free market,” except for residential consumers. He warns that if a crisis arises, the government’s response must extend beyond localized actions, in contrast to the approach taken during the 2001 electricity rationing. That period was marked by strategic adjustments aimed at attracting investments to improve regional interconnections and expand thermal power plant contracts, vital for ensuring the reliability of the power supply. Mr. Barata now anticipates that the current perceived imbalances might necessitate broader restructuring, echoing the reforms of 1992. “The companies were on the brink of bankruptcy, and billions of dollars had to be injected into the sector, which led to the creation of the Eliseu Resende Act.”

In 2023, despite Congress making headway in discussions on modernizing the sector through Bill 414/21, the Minister of Mines and Energy, Alexandre Silveira, has committed to proposing a comprehensive sector reform through a provisional presidential decree. Economist Elena Landau, known for her role in privatizations during the Fernando Henrique Cardoso administration, argues for passing Bill 414 and deferring further improvements. She suggests the government should convene a sector-wide debate, resisting the urge to draft a new legal framework single-handedly “inside the cabinet.” Ms. Landau believes her suggested approach could protect the new law from becoming a “zombie project,” a term she uses for parliamentary amendments that attempt to establish substantial subsidies for financing gas pipelines through electricity bills.

Jerson Kelman, a former director of ANEEL and the National Water Agency (ANA), recently discussed the potential for a “bubble burst” in Brazil’s electricity market in an article on the Energia Brasil portal. He explains that this can happen in a “poorly regulated” sector that induces market players into a “euphoria of immediate gains.” Mr. Kelman points specifically to the advantageous position of DG (Distributed Generation) consumers, who generate part of their electricity, benefiting from reduced distributor consumption and a discount for contributing the excess to the power grid. He estimates that the subsidy for DG is, on average, 14 times higher than that for a family on the Social Tariff. Generally, DG is adopted by middle-class consumers or companies able to invest in solar panel systems.

In a statement to Valor, Mr. Kelman, who previously led Light and Sabesp, reaffirmed his stance. He draws parallels between Brazil’s electricity sector situation and the American mortgage bond market scenario that led to the 2008 financial crisis, where certain groups favored short-term gains at the expense of medium and long-term systemic consequences.

Marcos Madureira, president of the Brazilian Association of Electricity Distributors (ABRADEE), identifies at least two factors contributing to higher tariffs in the regulated market. One is the surplus power bought in long-term contracts, some lasting until 2050, which raises costs and encourages migration to the free market. The other is the increasing adoption of distributed generation under special conditions, without sharing the expenses for maintaining the distribution network.

“Distributors are burdened with more expensive electricity, which they cannot reallocate in the market. This results in higher electricity prices for the remaining consumers. It’s what we call a death spiral, as the increased cost is borne by an ever-decreasing group of consumers,” Mr. Madureira cautioned.

In response to inquiries, the Ministry of Mines and Energy stated that the “issue of subsidies is a critical one for the ministry, which is actively working to limit the growth of these costs for consumers.”

*Por Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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North, Northeast, Central-West to lead in income growth

Smaller base, agriculture, investment, and public sector actions explain higher growth in these regions, study shows

01/17/2024

Angelo Ozelame — Foto: Divulgação

Angelo Ozelame — Foto: Divulgação

The total wage bill of Brazilian households is expected to grow more in the North, Northeast, and Central-West regions than in the Southeast and South of the country in the coming years, according to a study by Tendências Consultoria entitled “Classes of Income and Consumption in Brazil: 2023-2033.” The study takes into account the real total wages, excluding inflation.

In the period from 2023 to 2027, the consultancy forecasts that the Brazilian total wages will grow by 3.4% per year. The rates are expected to be 4.6% in the North and 4.1% in the Northeast and Central-West. The same pattern appears in the estimates for the period from 2028 to 2033, when the North (4.1%), the Northeast (4%), and the Central-West (3.9%) are expected to report a greater annual increase in total wages than the South (3%) and the Southeast (3.3%) of the country.

It is not unusual for the country’s total wages to grow at different rates in the five major regions. Experts point to several factors in this scenario of uneven growth of total income from a regional perspective.

The head of the study, Tendências’s economist Lucas Assis, said that the regions with the fastest growth in total wages benefit from a smaller base, which makes growth easier than in areas that are already consolidated, but that each of them also has specific reasons for the movement.

In the Northeast, the outlook is for increased public and private investment. The return of the Growth Acceleration Program (PAC) tends to benefit the region, he said, as does the expansion of production capacity in several sectors, especially oil and gas.

“If in 2022 and 2023 total wages in the Northeast benefited from income transfer programs and increases in the minimum wage, in the coming years the main influences will be public and private investment, which may benefit the local labor market. No further expansion of transfer programs is expected,” he said.

In the North, the boost will come from public administration—with a significant presence in the local GDP—and the concession of highways and ports. The maturation of investments in the iron ore mining industry will also play a role. “With the reduction of logistical hurdles, the region is also expected to attract investment,” he added.

Agriculture, in turn, is behind the income growth expected for the Central-West, said Mr. Assis. “The Central West is the country’s main agricultural frontier and will continue to grow over the next decade. Reducing transportation bottlenecks will further stimulate production in the region,” he said.

In the Central-West, this faster pace of income growth will be sustained by people like Ângelo Ozelame and Daniel Latorraca. They are part of the AgriHub network of entrepreneurs, linked to the Mato Grosso Federation of Agriculture and Livestock (Famato). They show the spread of agribusiness in the economy. Mr. Ozelame is the founder of Escola Agro—a school with courses aimed at agribusiness suppliers—and Lucro Rural—a financial management platform for agribusiness, working in the commercial, financial, and tax areas. The 34-year-old comes from a family of small farmers in Espumoso, Rio Grande do Sul state, has a degree in Agronomy from the Federal University of Pelotas (UFPel), and worked for several years as an analyst at the Mato Grosso Institute of Agricultural Economics (Imea) in Cuiabá, the state capital.

He opened Escola Agro while he was still employed, but a year later, in 2018, he began to dedicate himself fully to the business. In 2020, he opened a second business. His income is now 10 times higher than before he became a businessperson, he said. In 2023, Lucro Rural ended the year with six times more customers than the previous year, as well as R$25 billion in invoices processed in customer service. “More than the financial aspect, I’ve gained a lot of knowledge. The potential of the sector is huge, not only because of the growth prospects for agribusiness but also because of its financial and tax complexity. We help producers make decisions from the front gate, on the economic side,” said Mr. Ozelame.

Economist Daniel Latorraca saw financial services as an opportunity to work with agribusiness. He founded Creditares, a company that presents itself as a financial services hub for rural producers through financial advisors, the so-called “agrobankers.” The platform currently offers loans and will expand its portfolio to include insurance and hedging tools for operations on the futures market. “I have been following the evolution of agriculture and its impact on the economy in recent years, especially in Mato Grosso. So much so that I was encouraged to take the plunge. In my spreadsheets, agribusiness will continue to grow. If it is going to grow, it is going to need more credit,” said Mr. Latorraca.

However, this more significant income growth in the Northeast, North, and Central-West does not mean a reduction in regional inequalities in the country, said Mr. Assis. This is because the total wages of the Southeast and the South will continue to grow. “Regional disparities are likely to persist for at least the next decade. Even though the most vulnerable regions are experiencing greater income growth than the Southeast and South, the latter regions are also growing. As all regions grow, regional inequality is likely to remain big,” he said.

The regional dynamic of faster income growth in the Northeast, North, and Central-West goes hand in hand with faster income growth in the higher income classes than in the D/E class, according to the Tendências Consultoria study. This is because the economic recovery tends to benefit the richest, who also benefit from returns on investments, rents, and corporate profits.

For 2024, the consultancy predicts an increase of 2.9% in the country’s total wages. While in classes D/E this variation is 1.4%, the pace is over 3% in the other classes: A (3.2%), B (3.4%), and C (3.6%). Between 2023 and 2027, the average annual growth in classes D/E is 2.2%, half of the 4.4% of class A. Since there are no official criteria in the country for defining income classes, Tendências uses the following parameters: class A (monthly household income of more than R$24,200), B (between R$7,800 and R$24,200), C (between R$3,200 and R$7,800) and classes D/E (up to R$3,200).

In the analysis of class A, Mr. Assis said that there is an impact both from the increase in the average income of this group and from the increase in the number of households at the top of the pyramid, reflecting migration from other classes. At the other end of the spectrum, classes D/E, no major change in income transfer programs is expected to affect the ability of the total wages to expand. “In the long run, the higher income classes should still lead this income growth. There is an expected migration of households from the lower classes to the higher ones, but it’s still a very slow process,” said Mr. Assis.

Mr. Assis highlighted the difference between now and the 2000s, when there was a rapid rise of the poorest and an increase in the middle class. “This last decade in Brazil has been marked by two negative shocks: the recession of 2015/2016, and the pandemic. So, this growth in the next few years is a positive scenario compared to the last decade, but it’s different from the 2000s,” he said.

*Por Lucianne Carneiro — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Venture capital faces another challenging year after 39% decline in 2023

KPMG Report: $111 billion awaits capital calls from global management companies, recovery likely postponed to 2025

01/16/2024

Daniel Malandrin — Foto: Rogerio Vieira/Valor

Daniel Malandrin — Foto: Rogerio Vieira/Valor

In 2023, high-interest rates and macroeconomic uncertainties severely affected the venture capital sector, leading to a consecutive annual decline in Brazil’s startup investments. A survey commissioned by Valor and conducted by Sling Hub, a data intelligence platform for the sector, revealed a 39% decrease in investments last year, a decline slightly less than the 41% experienced across Latin America.

A KPMG report reveals that investors have committed $111 billion globally to management companies, pending allocation to startups. Daniel Malandrin, KPMG’s lead venture capital and innovation partner, attributes the move to increased risk aversion, leading to greater selectivity among asset managers and investors who now favor larger, profit-generating companies. He forecasts a challenging 2024, with many startups struggling and investors remaining cautious.

Mr. Malandrin predicts a continued rise in startup failures due to funding challenges in 2024. The start of monetary easing in the United States, a key driver for the market, remains uncertain.

In December, Distrito, an innovation platform, reported that 60% of venture capital fund managers do not anticipate a return to pre-crisis activity levels in the sector for over 18 months.

Oscar Decotelli, CEO of DXA Invest, which manages R$1 billion in “growth equity” funds—a blend of venture capital and private equity—noted that companies that weathered 2023 have emerged stronger into 2024, having slashed costs and enhanced efficiency. He also noted a significant reduction in financial needs, with companies now requiring only R$0.30 for every real they needed at the beginning of last year. However, Mr. Decotelli anticipates that investor interest in both startups and established companies will only pick up in the latter half of the year.

Mr. Decotelli points to uncertainties in both international and domestic markets as major influences on investment decisions. In the United States, the anticipated decline in inflation due to rising interest rates has been offset by signs of a resilient economy, delaying expectations of rate cuts. In Brazil, initial concerns over fiscal policy have eased following government measures. Despite high-interest rates in 2022, which saw a robust influx of startups, Mr. Decotelli describes 2023 as a “double negative” year, where companies struggled to sell products or raise capital for operations, marking it the most challenging year in the past decade.

Additionally, the early 2023 credit crisis, influenced by Americanas and Light, led to costlier financing and significant declines in funding through capital markets and bank lending. Mr. Decotelli highlights the plight of small companies with innovative products, which started the year hopeful for capital to grow or maintain operations but failed to secure funding.

The Distrito survey reveals that 35.7% of asset managers experienced negative impacts on their operations during the crisis. In comparison, 11.1% seized opportunities, such as purchasing assets at reduced prices. Mr. Malandrin from KPMG remarks, “Managers who have successfully raised funds in the past two years are now ideally positioned for negotiating with promising startups in need of growth capital.” He emphasized the need for investors to recognize the adequacy of the risk premium in venture capital for the sector’s recovery.

The KPMG executive highlights that the recent widespread increase in interest rates marks a major macroeconomic shift unprecedented in a decade of venture capital. “Until 2022, the remarkable productivity gains of startups didn’t impede investments due to the surplus of capital. The focus was on growth at any cost, followed by profitability.” However, he notes, there is a heightened demand for results due to competition with U.S. interest rates. Previously, venture capital investments were estimated to yield a 12% annual return in dollars; that has now decreased to a 7% differential with the U.S. prime rate at 5%.

Data from the Brazilian Private Equity and Venture Capital Association (ABVCAP) indicates a partial recovery in the third quarter of 2023. Venture capital funds invested R$1.9 billion across 62 rounds, a 19% increase from the R$1.6 billion invested between April and June of the same year. However, the number of deals decreased by 16%. Compared to the third quarter of 2022, there was a 29.6% reduction in the invested amount and a 66% decrease in the total number of transactions.

Mr. Malandrin from KPMG explains that the current trend of investing more money in fewer startups, particularly larger ones on the path to profitability, is due to increased selectivity. He emphasizes that this trend is not a structural but a cyclical change, likening it to a temporary memory that might fade with new technologies and managerial approaches. “Nevertheless, it represents a significant learning opportunity for the entire industry,” he added.

Globally, KPMG data indicates that the volume of transactions fell to its lowest since the fourth quarter of 2018. In the second quarter of 2023, the volume was $81.4 billion across 9,563 transactions, which decreased to $77.05 billion in 7,434 transactions in the third quarter. That represents a 5.35% drop in value and a 23% decrease in the number of deals.

In Brazil, fintechs garnered the most investment in 2023. The Sling Hub survey reports that 54% of the country’s transactions involved fintech companies, up from 43% in 2021 and 45% in 2022. João Ventura, founder and CEO of Sling Hub, attributes the increase to large funding rounds during the year.

Mr. Ventura highlights significant transactions such as fintech Meutudo’s announcement of a new R$2 billion FIDC—a fixed-income investment backed by receivables such as trade assets, checks, and car loans—managed and administered by BTG Pactual Asset, focusing on social security (INSS) payroll loans. Another notable investment was Citi’s $466 million infusion into Mercado Pago, which was aimed at expanding its credit operations in Brazil and Mexico. “We haven’t seen operations of this magnitude for quite some time,” Mr. Ventura remarked. According to KPMG, Brazil currently boasts 13,300 active startups, with fintechs constituting 11% of these enterprises.

*Por Liane Thedim — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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