Sometime in the middle of last year, BYD did the unthinkable: it overtook Tesla in global electric vehicle sales. For many on the outside, it wasn’t supposed to play out this way.

Tesla, a Silicon Valley product and brainchild of the world’s greatest entrepreneur, Elon Musk, hit a valuation of more than a trillion dollars back in 2021. That made it more valuable than Toyota, Volkswagen, General Motors, Ford, BMW and Daimler combined. That year, the American automaker nearly doubled its battery electric vehicle (BEV) deliveries, rising from 500,000 in 2020 to 936,000. For his crowning achievement, Musk was named TIME’s 2021 Person of the Year.

And while Tesla was shipping nearly a million BEVs, the Chinese battery and automaker BYD was nowhere close. Yet, just four years later, it’s BYD who’s firmly in the industry’s driver’s seat.

Even removing Elon’s recent social and political antics, it was almost certain that the BYD would overtake Tesla. Thanks to decades of strategic positioning, research and development, the Chinese automaker has laid the foundation for decades of success ahead.

So how did this electric vehicle startup turn into one of the world’s leading automakers and what can we learn from China’s approach to modern industrialization? Let’s plug in and see what’s under the hood.

Build your dreams

At the heart of the story is BYD founder Wang Chuanfu. Born into a poor family of eight children in the inland Chinese province of Anhui, Wang propelled himself and his business through education and relentless hard work. Being a member of the Chinese Communist Party probably didn’t hurt.

After earning both a bachelor’s degree and master’s degree in metallurgy and briefly managing a small battery company, Wang launched his own battery startup at just 29 years old using a $300,000 loan from his cousin. Given his humble upbringing, Wang named his company, appropriately, Build Your Dreams, abbreviated to simply BYD.

The start: Chinese engineers are remarkably talented at reverse-engineering technology, then mastering its production. In this way, Wang is cut from the Chinese cloth. Starting with just 20 employees, BYD studied Japanese-made batteries from Sony and Sanyo, then found ways to improve their designs and cut cost.

The Japanese batteries mimicked by BYD early on were nickel-cadmium batteries, which were used heavily for cell phones and cordless devices at the time. In the late 1990s, the company expanded into nickel-metal hydride and lithium-ion chemistries for higher energy density uses, like hybrid vehicles. And in the early 2000s, the company dove headlong into lithium iron phosphate (LFP), a wager that would turn out rather handsomely.

China produces two-thirds of batteries worldwide

Global battery production share, H1 2024

By the early 2000s, BYD had grown into China’s largest producer of rechargeable batteries, supplying power packs for cell phones and laptops around the world.

Getting into cars

For a company with a history of battery making that currently sits atop the global electric vehicle world, its foray into the automobile industry started, surprisingly, by buying a small gas-powered-car company. In 2003, BYD bought Qinchuan Automobile, a struggling state-owned automaker. While lacking both brand and sales, Qinchuan did come with some assets of real value: an auto assembly plant, a mold-making factory and an R&D division. These would be put to good use.

Copy and localize: It’ll come as no surprise that BYD’s early models were eerily similar to Japanese cars. The company’s first vehicle developed in-house, the BYD F3 sedan, looked remarkably like a Toyota Corolla when it came out in 2005. The compact vehicle sold more than a million units, going on to be a hit with Chinese consumers and validating the company’s copy and localize approach.

But Wang’s dream was never to be a battery expert with a masters in metallurgy pumping out cheap Japanese knockoffs; his vision was electrification.

In 2008, BYD made global headlines by unveiling the F3DM, the world’s first mass-produced plug-in hybrid sedan. The vehicle could run on battery power alone and had a small gasoline engine as a backup. The F3DM wasn’t a huge commercial success but it did beat competitors like Toyota and GM to market with a plug-in hybrid, proving the company could do more than just copy.

BYD has overtaken Tesla in BEVs sold

Quarterly passenger battery electric vehicle (BEV) sales

It’s about this time that prominent international investors started to take notice of BYD.

*Warren Buffett enters the chat*

It was Charlie Munger, the business partner of Warren Buffett, who first heard about BYD. He had been introduced to the company by Li Lu, the founder of Himalaya Capital, an early founder in the Chinese automaker.

Charlie was impressed, not only by what BYD had already accomplished, but particularly by Wang. Fans of Berkshire Hathaway will know how much value Warren and Charlie put in the abilities of the leaders they invest in.

When pitching BYD to Warren, Charlie sang Wang’s praises, describing him as “a combination of Thomas Edison and Jack Welch — something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.”

During a tour of BYD’s operations, determined to highlight to the potential investors how clean his batteries were, Wang famously took a sip of battery fluid. The showmanship paid off.

Funded: In 2008, Berkshire invested $230 million for a 10% stake in the company. This was less than the 25% initially offered by Warren and Charlie, as Wang was reluctant to part with such a large share of the company. It was nonetheless an investment that paid off for all. Berkshire’s share today is estimated at $2.5 billion, a warm and fuzzy 11x return that continues to grow.

At the time the deal was announced, perhaps showcasing some ignorance of the changes taking place in the world, CNBC then described BYD as a “Chinese Company Developing ‘Green’ Cars.” But with his eponymous soothsaying, the Oracle of Omaha predicted at the time that “BYD Auto will one day become the world’s largest automaker in an inevitably electric future.” BYD is currently sixth, by number of vehicles sold, and climbing quickly.

China’s industrial strategy

Westerners often view the success of companies in China like BYD as the result of Beijing handpicking winners and kneecapping losers. This could not be further from the truth.

China’s modern industrial approach is often described using the Chinese political slogan “let a thousand flowers bloom.” It starts out with the government deciding on strategic industries to foster, sowing many seeds and watering them with subsidies, including tax breaks and cheap debt. Hundreds or thousands of companies often spring up as a result. At one point in 2018, following incentives to support the nascent electric vehicle industry, there were more than 500 EV startups registered in the country.

This is when the free market takes over, euphemistically called “weeding the garden.” Authorities impose stricter safety and performance standards. Low-interest loans disappear. Credit tightens. Poorly run firms either go bankrupt or are “replanted,” getting absorbed by more successful ones. And the companies left are the cream of the crop for both management and performance.

This state-funded capitalism model has resulted in many incredible companies, including Huawei, CATL and, of course, BYD, able to challenge American rivals like Tesla.

BYD versus Tesla

Despite being the two leading global electric vehicle makers, the two companies in many ways could not be more different.

Tesla, crafted by Elon Musk with a Silicon Valley ethos, makes software-defined vehicles with a focus on autonomy, chic branding and a huge ecosystem (like its Supercharger network). Tesla is regularly described as a “technology company that happens to make cars.”

By contrast, BYD was built by Wang, a man more akin to a Lord of the Rings elven forgelord than Iron Man (clearly Elon). As a result, BYD’s foundation is its batteries. And if there’s one factor that has led to BYD’s success more than anything else, it’s battery technology.

BYD’s early commitment to developing lithium iron phosphate chemistries allowed the company to spend decades innovating and ultimately produce its low-cost Blade Battery that competes with traditional lithium-ion batteries on both range and performance. Earlier this year, BYD announced its world-leading batteries can now charge in just five minutes. All of this contained in a well-developed, vertically integrated supply chain owned top to bottom by BYD. Truly brilliant industrial positioning.

Meanwhile, Tesla is still highly dependent on a range of suppliers for batteries (including BYD!) as it tries to develop its own supply chains and copy the Chinese automaker’s strategy. BYD, the great mimicker, is now the one being mimicked.

Zoom out

The story of BYD carries many lessons for the West.

For one, strategic industries take decades to build up. BYD has been mastering battery technology for three decades, time and investments that have paid off with world-leading batteries with chemistries like LFP that use cheaper and more abundant minerals. This is doubly important in a world of critical mineral geopolitics.

For another, China understands early losses are just a part of the process. In 2012, BYD’s profits fell 94% as the market stagnated. To survive, sales shifted to government, including electric vehicles and buses, which bought time for BYD to refocus and re-invest in research and development. This is in a stark contrast to the West’s great hope in the industry, Swedish battery maker Northvolt, which filed for bankruptcy in March.

And there needs to be a strong alignment between strategic goals and policy. China is a world leader in state-guided capitalism with its Thousand Flowers Bloom strategy. While the US demonstrated concern about China’s battery dominance by maintaining subsidies for batteries in the Big Beautiful Bill, the legislation also weakened the demand signal by eliminating tax credits for electric vehicles. The right hand not knowing what the left is doing.

Bottom: Both the right and left hands need to be on the steering wheel and veering in the same direction to match what Chinese companies are capable of. The talent and capital are here; we just need to support our own forgelords.