Answer:
A. BYD, short for 'Build Your Dream', was founded in Shenzhen, Guangdong Province, in 1995. It began as a rechargeable-battery factory, competing in the Chinese market against Japanese imports. Within ten years, BYD captured more than half the world's mobile-phone
battery market and became the largest Chinese manufacturer (and in the top four worldwide) of all types of rechargeable batteries. (Fishman, 2006) BYD Auto was formed in 2003 when BYD purchased Tsinchuan Automobile Company. BYD obtained RMB 55 Billion in revenue in 2014
in total, and Figure 1 shows the contribution of each category of products to BYD’s total turnover in 2013 and in 2014 respectively. BYD built on its battery expertise to produce some of China’s most innovative automobiles. In 2010, Business Week ranked BYD the 8th most innovative company in the world, ahead of Ford, Volkswagen and BMW. (Einhorn and Arndt, 2010)
B. At firm level, one study on Apple's products (iPod and iphone) value-added at different stages from different vendors shows that Chinese manufacturers are only able to claim less than 2% of the entire gross margin (Dedrick, Kraemer, Linden, 2010; Dedrick 2012), which indicates
a low level of technology of those manufacturers. Meanwhile, although the number of R&D labs established in China by multinational corporations grew at an astoundingly high speed expanded over 10 times since the late 1990's, relatively low value added modules of R&D are still conducted in China to prevent intellectual property right leakage and correspond to a lack to comprehensive R&D talents in China.
C. The industry environment in China at the time lacked specialized suppliers in the market that firms like BYD can collaborate with. This helped lead to BYD’s vertical integration strategy due to the nonexistence of a complete spectrum of specialist suppliers, or incapability of suppliers to provide as high quality components as customers need. BYD’s vertical integration in mobile phone manufacturing as discussed earlier well illustrated the issue.
The concept of vertical integration was first proposed for its customer Siemens, then applied to Nokia and Motorola. According to Qing Gong, the Director of BYD’s Central Research Institute, “[with vertical integration] we were able to save our customers 20%-30% of their
manufacturing costs, which they used to spend on communications with various suppliers.”
