BYD and why we can’t help but be skeptical of Chinese companies “going global”

For one well-known Chinese electric vehicle maker, two recent PR crises reflect a deeper dilemma playing out all over the world. After a string of high-profile, highly-leveraged overseas corporate expansions in recent years, many investors, consumers, and employees both in China and overseas have been left with only broken promises and unpaid bills. Even for those who seem credible, the specter of recently failed expansions now haunts all globalizing Chinese firms, regardless of whether or not they have done anything to deserve it.

The company in the middle of these crises is BYD, the Chinese automaker backed famously by Warren Buffet’s Berkshire Hathaway.

Fraud, football, and a lot of questions

The most recent case has raised eyebrows among many observers and involves accusations from the Shenzhen-based company that an individual had fraudulently conducted business on their behalf.

The alleged fraud involves complications around a marketing deal with London football club Arsenal.

The would-be partnership between Arsenal and BYD was announced in April of this year, with the club publicly celebrating the deal to cooperate with “the world’s best-selling electric vehicle manufacturer”.

In an announcement on the club’s official site, the deal would have provided BYD with a broad range of marketing rights including pitch-side LED signage and branding on dugout seats at Emirates Stadium. BYD would have also had access to Arsenal legends for promotional events in China.

BYD announced in a statement last week, however, that a woman by name of Li Juan, also known as Liki Li, posing as an employee at its Shanghai branch, had signed multiple contracts with advertising agencies to promote the company, using a forged company seal.

“BYD has informed Arsenal that they believe they have been the victim of a fraud in relation to various advertising agreements,” said Arsenal in a brief statement on their Chinese company web site. Neither side has released any additional information as to the future of the partnership, aside from that they are “investigating the situation.”

Details of the case had many observers publicly expressing skepticism of BYD’s claims, as BYD executives were clearly involved with the deal early on, but now seem to be claiming that they did not in fact officially authorize certain aspects of it. Reports suggest that the alleged fraudster and her firm had worked for years as a known representative and vendor for BYD, and had conducted transactions on their behalf, although BYD fervently denies any relationship.

Some are speculating that this is an attempt for BYD to back out of the deal.

“With senior officials from BYD clearly involved in the partnership with Arsenal, including being present at the signing ceremony and launch event, it would be disingenuous for them to claim that the entire deal was fraudulent,” says Mark Dreyer, a China sports media veteran and founder of China Sports Insider. “In addition, how has it taken them two or three months to say anything about it? It is far more likely that they are having second thoughts about the deal, and are looking for a way out.”

As both Arsenal and BYD have offered limited information, it is difficult to come to any conclusion at this current time as to BYD’s intent, or as to their relationship with the accused.

What is worth taking note of, however, is that this is just one case among a broader trend of odd instances that, at the very least, merit a closer look. Some are directly related to BYD’s business dealings. For others, BYD may be an innocent casualty, simply by association, of a string of highly-publicized failed global expansions in recent years by Chinese firms.

BYD’s LA electric bus deal: Overpromising, underdelivering, and a little corruption

Meanwhile, an ocean away, BYD has been dealing with another PR mess.

BYD, in English, stands for “Build Your Dreams,” which is fitting, as the company certainly had lofty dreams of its own. It aims to be a global leader in electric vehicles, and in recent years, the firm has been in the midst of an aggressive global expansion. One early step in their globalization journey was the success of a 2008 bid to provide electric public buses for the Los Angeles metropolitan area. With the prospect of local job creation and cleaner air, local politicians were quick to get on board with the proposal.

A decade into the deal, however, the results have been less-than-stellar.

An investigation by the Los Angeles Times, published in May of this year, found that the fleet of BYD buses was contending with a record of poor performance and mechanical problems. Buses were known to stall on hills and required service much more frequently than older buses. They also reportedly had unpredictable driving ranges which were less than the advertised distances and were impaired by the heat, the cold, or the way drivers braked.

Despite claims from BYD executives that they have received overwhelmingly positive feedback on the vehicles, Times reporters found that government emails and bus inspection records showed multiple agencies had confronted the company regarding their quality and range issues. In response, BYD executives directed blame to outside forces, including drivers braking too hard, and a negative publicity campaign by labor activists pushing to unionize BYD’s workforce. They also cast blame on some transit authority officials for being “insufficiently committed” to transitioning to electric vehicles.

A response that seemed particularly tone-deaf from BYD was a claim that, despite receiving hundreds of millions of taxpayer dollars with insufficient results, they should be “lauded for providing an important public service.”

“If you want to find the problem for the new technology, you always can try to,” said Stella Li, president of BYD Motors Inc, BYD’s US-based subsidiary responsible for the buses. “If you want success,” she said, “everything is positive.”

But…. There are many ways to look at this case

Reading the detailed, well-researched takedown from the LA Times, one may be alarmed by the case. It would be very easy, perhaps natural, to adopt this narrative:

This Chinese company uses corrupt, backdoor channels to ensure lucrative deals from dirty politicians at the cost of the local taxpayer.  They consistently lied about the capabilities of their buses and how many workers they could employ. They violated local laws, underpaying their workers while treating them poorly, all while their executives got rich. When confronted with their misdeeds, they refused to accept responsibility and pointed fingers at others, expressing self-righteousness and disdain for the good, hardworking local people.

While the words used in that description may be a bit sensational, many, if not all of them do seem to be factually true, at least to my knowledge. However, someone could also adopt this narrative:

BYD is a forward-thinking company that is bringing environmentally-friendly transportation to the Los Angeles metropolitan area, and jobs to the town of Lancaster. Their buses are competitively-priced and comparable in quality to their competitors. Electric vehicles are different than diesel-powered ones, and in a relatively new industry. Therefore, it can be expected that there may be some problems along the way. Sure, they may have overestimated the distance that the batteries could last and the people they would employ, but at the time of the proposal, they chose a number at the high end of their estimated range. After all, they wanted to win the bid, and it is not unheard of to slightly exaggerating one’s capabilities a little in those circumstances.

That narrative seems plausible. But which story will most people choose to accept, and why? That could be determined by whether an individual tends to be more trusting or more skeptical, or by prejudices based on racism or nationalism. It could also be influenced by someone’s experiences with local government, corporations, or labor unions in general.

Ultimately, though, an individual’s decision to offer the benefit of the doubt comes from whether or not they have trust in priorities and intent, whether or not they feel as though they understand what is in someone else’s heart. It is this issue which, I believe, is a question being increasingly asked regarding Chinese firms. Recent events also indicate that it is for good reason.

China’s global corporate spending spree, and its many ripple effects

BYD is not the only Chinese company to be caught in awkward financial entanglements with a European football club.  After a surprise acquisition of AC Milan in 2017 by mysterious Chinese billionaire Li Yonghong, the club now seems to be getting taken over by infamous US “vulture capital” fund Elliott, after Li has been unable to provide them with the funds he had promised.

While he is undeniably entertaining, Aston Villa’s eccentric owner Tony Xia now seems to be driving the club into financial ruin after two years of mismanagement, failing to qualify for the Premier League, and what seems to be an inability on Xia’s part to supply the necessary funds from China.

These cases are littered throughout professional football but are hardly limited to sports. Anbang, HNA, and Wanda are just a few of the most recognizable names on a long list of Chinese firms that in the past few years have frantically purchased overseas company after overseas company, only to suffer from a cash crunch, unable to come up with the funds to follow through on their commitments.

Many of these have resulted in dramatic stories of a number of larger-than-life business tycoons, rapidly ascending to glorious heights, followed by dramatic, tragic downfalls. But in all of the focus on the money and the power and the drama, the people most affected usually get overlooked.

For over a year in total in 2016 and 2017, I worked in some capacity or another for a firm that went through one of these “global expansion supernovas.” The company was a well-known local internet and entertainment firm in China, with an ambitious and intelligent CEO, who had plans to build a global technology empire the scale of which the world had never seen. They opened sizable offices in high-profile locations in major global hubs of technology, entertainment, and finance. They put on elaborate events and aggressively recruited top talent with lucrative compensation packages.

Being at the same time excited and taken aback by what seemed to me as an effort to defy the fundamental “laws of physics” that govern business and finance, I consulted with knowledgeable experts on the topic to try to get the full picture before joining the company. I ended up taking the job, but hedged my bets, hoping for the best, but knowing that I would be fine if the worst were to happen as well. I admired the CEO and what he was attempting to do, but I know that I could not really count on any promise I was given, and so I positioned my life situation with an understanding of that knowledge.

I still hear stories here and there, of employees still owed significant amounts of money by the company, or whose long-term romantic relationships were unable to withstand the pressure brought home every day from the office. Some have suffered far worse fates.

For each of these people who I know to have suffered the most, both in China and overseas, there was a theme: They believed what the company, what their managers, what the CEO told them. Things were fine for me and others largely because we didn’t. In other words, they suffered because they were better employees. Skepticism reaped benefits, while trust brought about pain.

How much can we assume?

When asking around about these Chinese corporate tragedies, different reasons are offered by different people, in different circumstances. Some blame the ambition and ego of the leaders of these companies, aiming too high and becoming detached from reality. Others point to China’s financial and economic situation, in which getting money out of the country is growing increasingly difficult, credit is tightening, and the regulatory environment is uncertain. And yet others claim that corruption is the culprit, that these expansions, no matter how reckless, offer a way for ill-gotten gains to be transferred out of the country.

To be clear, I have no evidence or knowledge that would justify making any claim as to BYD’s finances. What I do know is that they are a Chinese company that has been undergoing a global expansion. I also know that for those both Chinese and foreign who I have seen take globalizing Chinese firms at their word, they seem to have paid a price for it.

There is also no shortage of poor behavior from the large companies of other countries as well. For any of the misdeeds a Chinese firm may make, a foreign company has probably done a similar act already, at least in one way or another. However, Chinese firms are relatively new to the global stage. Compared with other major international firms, they also tend to have far less transparent corporate governance structures. The Chinese financial system is also quite opaque, as is its legal system. I study, work in, and write about this country’s business world for a living, and every day, I feel like I understand it less.

How then, should any overseas investor, government official, consumer, or employee know what to expect when a Chinese firm sets up shop in their town?

BYD, by all accounts, seems to be imperfect. However, they seem to be a serious, legitimate business, making a product that is useful and beneficial. There is a reason that a conservative investor like Warren Buffet is willing to support them. But the stories and attention directed at globalizing Chinese firms over the last few years have not gone to the imperfect, modest successes, but to the loud, brash, messy failures that leave in their wake nothing but unpaid debts and unanswered questions.

Foreigners’ concerns about the transparency of Chinese systems and organizations is nothing new. It is a theme that has existed for centuries. After all, if there were one topic most frequently discussed China’s economic and diplomatic relations with the rest of the world, it would likely be “opening up.”

It is certainly possible to be trusted without being transparent. After all, Japanese corporate cultures are notoriously impossible to understand but represent some of the world’s most trusted products and brands. But the world generally knows how Japanese manufacturing methods work. After all, Toyota’s model has been adopted as standard practice throughout the automotive industry. Japanese corporate culture tends to adhere strictly to detailed processes, and their companies are less likely to try new or risky things.

But most importantly, the world has used their products for decades, and have come to know that they can be relied on. They may not be open to the world, but they are consistent. Their mysterious global misadventures in recent years seem to indicate that for many Chinese organizations, neither is true.

I would like to believe that a company like BYD is worth trusting, but the harsh reality for any Chinese firm going global at this moment is that they now must dig themselves out of a hole of skepticism, even if they deserve better. Can BYD and others earn the benefit of the doubt of a skeptical world? Possibly, but only if they are seriously committed to honesty and transparency. I personally am not convinced that they are, but would welcome the opportunity to be persuaded otherwise.