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Chinese Electric Vehicle Manufacturer BYD’s Image Hurt by Scandal Involving Dealer’s Suicide

China’s largest electric vehicle manufacturer, BYD Auto Co., is under intense scrutiny following the death of a Nanjing auto dealer who accused the company of bilking a government subsidy program and a Caixin probe suggesting the charge may have legs.

The uproar began on March 9, when media outlets in the eastern city reported the suicide of 53-year-old Liu Peng, General Manager of two BYD dealerships: Shangdi Automobile Trade and Service Co. and Sushunya Automobile Trade and Service Co.

Liu reportedly hanged himself in his office.

An apparent suicide note obtained by Caixin from Liu’s relatives said the businesses were heavily in debt and that BYD, through Liu’s dealerships, had obtained government subsidy payments for electric cars it never produced.

Electric car and other alternative-energy vehicle subsidy programs sponsored by central, provincial, and local governments across China have doled out hundreds of billions of yuan since 2009.

A BYD statement posted on March 10 on Sina Weibo, China’s version of Twitter, denied the charges in the note. The company “strictly abides by government laws and has never done anything fraudulent through the subsidy program,” it said.

The statement also noted that BYD filed a lawsuit against Liu’s Sushunya dealership in November for alleged failure to repay BYD some 30 million yuan, including 10 million yuan borrowed for vehicle purchases and nearly 20 million yuan in subsidy payments the company received from governments on behalf of BYD. The suit was filed in Shenzhen and a hearing is pending.

The note claimed BYD received 32.4 million yuan in government cash for electric cars sold through Liu’s companies, but that the dealer kept 18.4 million yuan as a sales bonus and to cover marketing expenses.

The charges of BYD wrongdoing parallel a central government probe launched in January into participation in subsidy programs by auto companies and local governments. Working together on the probe are the Ministry of Industry and Information Technology, Ministry of Finance, Ministry of Science and Technology, and the National Development and Reform Commission.

Government inspectors have been looking at auto parts purchases, production schedules, and sales data nationwide to determine whether subsidy funds were misappropriated, according to the finance ministry.

Sources close to the probe said inspectors have already looked into Liu’s allegations, which point fingers at the city of Nanjing and BYD officials. A BYD employee who asked not to be named said the company is assisting investigators.

On March 28, BYD reported 2.8 billion yuan in profits from its auto and battery businesses, up 551 percent from the previous year. The Shenzhen-based company also forecast a 495 to 644 percent increase in net profits for the January-March period based on expectations that subsidies and tax incentives would drive a sales boom.

Coincidentally, Nanjing was honored at the U.N. Climate Change Conference in Paris last December for promoting use of alternative energy vehicles.

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Buses and Taxis

The apparent suicide note claimed BYD fraudulently registered 600 electric buses with the city government to qualify for central and local government subsidies in 2014. Each electric bus that was sold could qualify for 1 million yuan in combined subsidies from the central and local government. A single bus sold for about 2 million yuan.

However, the note claimed, the company delivered only a few dozen buses to the city of Nanjing in the first half 2014.

According to the note, Liu worked with city government vehicle management officials to register non-existent buses, using fake documents provided by BYD.

But an official at the management office who asked to remain anonymous denied the claim. A BYD employee who also asked not to be named said “all vehicles” were built “before they were registered.”

The employee said most vehicles were made at a BYD plant in the central city of Changsha, although in order to improve chances of qualifying for the subsidies, the contract signed with the Nanjing government said they were built at BYD’s Nanjing factory.

The note also claimed BYD defrauded the government in connection with sales of 240 electric taxis in December 2014. The company got the money, it said, but the taxis were never delivered.

“The whereabouts of these cars remains unclear,” the note said.

On March 23, a Caixin reporter spoke with a BYD executive at a company warehouse in Shenzhen who said the 240 taxis built for and sold to Nanjing Bus Group have been stored at the facility since December 2014. He said the cars were in storage due to an ongoing taxi glut in Nanjing that started in 2014.

Why Nanjing Bus ordered the BYD taxis but apparently never took delivery is unclear. A bus company executive said the order originated with the city transportation bureau. But a bureau official said higher-ups in the city government, not his agency, made the decision.

Each taxi sold for 300,000 yuan, according to BYD sales contracts obtained by Caixin, while combined central and local government subsidies equaled 117,000 yuan per vehicle.

A Nanjing transportation bureau official said city and provincial agencies had distributed 2.3 billion yuan in subsidies from 2010 to 2015 for alternative-energy vehicles, including buses and taxis.

The city’s contribution to the subsidy payments—1.4 billion yuan—was “the biggest in the nation,” said the official.

According to the China Association of Automobile Manufacturers, BYD produced 20,840 hybrid and electric vehicles in 2014, more than any other domestic automaker. Also that year, Nanjing was the largest buyer of BYD e-cars.

Forging Partnerships

People familiar with Liu said he got into the auto sales business in 2003. He then launched the Shangdi and Sushunya dealerships for sales of BYD vehicles in 2008 and 2009, respectively.

Liu’s interest in BYD was partly linked to a 2009 central government plan to use financial incentives to promote the use of alternative energy vehicles by urban public transportation systems.

Nanjing started participating in the program in 2010, mainly focusing on promoting natural gas-powered vehicles, a decision based on cost factors and the city’s lack of battery-charging facilities. But in 2013, the city government switched its preference to electric vehicles.

That same year, BYD announced plans to invest 3 billion yuan in a new electric bus production plant in Nanjing. The city, pleased by the investment, promised to buy vehicles and offered BYD land for the plant, which was to have a production capacity of 6,000 units by 2016.

In early 2014, the city bought 1,058 electric buses for the public transportation network, up from only a few dozen the previous year. The purchases accounted for 42 percent of the buses bought by the city in 2014. BYD sold 650 of those units, more than any other supplier.

The city also bought 400 electric taxi cars from BYD that year.

A manager at Nanjing Golden Dragon Bus Manufacturing Co., which also makes electric vehicles in the city, said it’s unclear why the local government changed its preference.

“We don’t know how BYD persuaded the government” to buy its buses, said the manager, who asked not to be named. “But as a result of the BYD [deals], electric buses have been widely adopted in Nanjing.”

The BYD employee said reasons for his company’s success in Nanjing should be obvious: The firm invested in a factory, and then cultivated good business relations.

The sales deals were cut “by BYD’s team, not an individual or a single dealer,” said the source. “Liu Peng helped by, for example, introducing us to some people.”

Soured Relationship

But while BYD sales in Nanjing were growing, Liu’s business was losing money. His relatives blame the automaker for forcing Liu and other dealers to increase electric car inventories even though sales were slow.

They showed Caixin what they said was Liu’s diary. One entry said that in 2014, Nanjing’s bus companies bought 540 BYD buses through Sushunya.

And BYD authorized Liu’s companies to serve as the only after-sales service provider in Nanjing for its electric buses and taxis. The Nanjing Jiangnan Electric Taxi Co., for example, paid Sushunya 400,000 yuan every month of 2014 to maintain 400 BYD taxis, according to a contract obtained by Caixin.

The BYD employee said the lucrative vehicle service business “is profitable, and was BYD’s reward to Liu for his previous efforts.”

But a diary entry said BYD’s high sales targets forced Liu’s companies to maintain high inventories, which in turn strained cash flow. The dealerships had 400 units on hand at the end of 2013, and reported a loss of 2 million yuan that year. A 2013 diary entry said “the companies are at risk.”

Sources close to Liu said he invested 5 million yuan in vehicle storage and maintenance facilities. Of that amount, 4.4 million yuan was borrowed from Nanjing Ningtai Micro-Loan Co. and the Bank of China.

To clear excess inventory, the dealerships launched an unusual sales campaign in September 2014 that made matters even worse. Buyers from outside Nanjing were offered help getting temporary residence documents so they could qualify for city government subsidies for residents who bought BYD Qin models. But in the end, authorities refused to reward non-Nanjing buyers.

An employee of Sushunya said of the more than 500 Qin models sold, only 100 were bought by Nanjing residents. That forced the dealership to refund about 400 buyers who could not qualify for subsidies.

In early 2015, the dealerships started asking BYD to provide sales rebates of 20,000 yuan per bus and 12,000 yuan per taxi. Liu claimed BYD had promised these rebates, but the automaker denied signing such an agreement.

“BYD doesn’t need to promote sales through sales rebate offers,” said the company source. “Liu didn’t play a big role in BYD’s partnership with Nanjing, and his demand was not reasonable.”

Rewritten by Han Wei.