Who’s got it right on EVs: Musk or Buffett?

Over a decade ago, Elon Musk scoffed at the idea that China's BYD Co. was a legitimate competitor. Oh, how the mighty have fallen.

Now, Warren Buffett-backed BYD is set to wash out its closest rival in China, Tesla Inc. Last week, a BYD executive said that his company was "preparing to supply batteries to Tesla very soon." The potential deal will catapult BYD to become one of the world's most prominent and largest EV and battery manufacturers.

It's a smart move. BYD has upped its game over the past two years with a range of EVs and higher-technology lithium iron phosphate batteries, allowing it to grab global market share. The company plans to sell 1.5 million units this year, pushing it to almost a third of the China EV market by the end of 2022. 

In April, BYD ranked among the top electric vehicle makers by sales and became the third-largest carmaker by market value in the world. The same month, it sold over 46,000 EVs — compared to Tesla's 1,728 — and announced it had stopped making fuel combusting vehicles, a first by any manufacturer. In May, even with Shanghai locked down, its EV sales rose 250% from a year earlier.

BYD's arrangement with Tesla hasn't been outlined clearly yet, but the Chinese company is likely to supply Teslas with its Blade battery — an innovative take on the decades-old lithium-iron-phosphate formulation. It has focused on this chemistry, instead of the nickel-cobalt-manganese variety used by several peers, because it is more efficient in terms of space, energy density and range. It's safer, too, with a newly introduced cell-to-body structure. 

Meanwhile, the EV and battery maker has largely been able to circumvent supply chain issues because of its tight relationship with suppliers and has consistently rolled out a line of cars. As part of its vertically integrated business model, BYD has been actively looking to secure resources like lithium.  

BYD is doing what Tesla wants to do: make batteries and secure resources up and down the supply chain. It's also already achieved its rival's goal of becoming one of the biggest EV makers in the world. Musk's firm has had a tough time getting its in-house 4680 battery off the ground and is still scouting out locations across the world. While that's prescient, BYD is further ahead. Sure, its cars may not be as snazzy as Tesla's yet, but they are selling. Now their batteries are in Teslas, too.

For Tesla, it's about ensuring its cars are powered and that it avoids getting caught up in China's supply chain snarls, especially after enduring a tough lockdown in Shanghai. Diversifying its supplier base makes sense, even though one of its existing partners is the world's largest battery maker, Contemporary Amperex Technology Co., or CATL.

Between its carmaking capacity and its batteries, BYD is set to corner the world's largest auto market. For now, the only thing standing in its way is CATL, which has charged ahead in NCM and LFP technology. 

BYD could fall behind if CATL and South Korean manufacturers manage to boost adoption of the higher energy density batteries. The Chinese company continues to expand its customer base, supplying the likes of BMW AG with cylindrical battery cells — the same as the ones used by Tesla — veering away from the square-type cells it has typically focused on.

Even with CATL closing in, BYD benefits from a farsighted and well-executed strategy. That's what will keep it ahead of Tesla.

Anjani Trivedi. Sketch: TBS

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

Disclaimer: This article first appeared on Bloomberg and is published by special syndication arrangement.