In 2009 MidAmerican Energy, a Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) subsidiary, purchased 225 million shares (a 10% interest) in Chinese electric car and battery company BYD (Build Your Dreams). Thus far, the investment has paid off for Berkshire. BYD’s F3 model was the No. 1 selling electric car in China in the first half of 2010, with 154,000 units sold. But the company has had many twists and turns in recent months that have adversely affected its stock price, causing it to fall 65% over the last year.
Berkshire originally paid about HK8 dollars per share for BYD, and when the stock reached its peak at around HK80 dollars per share, Berkshire had a paper return of about 900%. As of Wednesday, the stock is at HK21.74 dollars, giving Berkshire a 171% return.
The decision to invest in the technologically advanced company required Buffett to refine one of his cardinal rules, “Don’t invest in a business you don’t understand.” He said he didn’t really understand the business but, “I’m investing in the man [founder and chairman Wang Chan-Fu].” Indeed, electric vehicles are an emerging and game-changing sector of the economy that few understand.
The most significant setback for BYD occurred when its fourth-quarter 2010 earnings dropped 94% and it canceled its dividend. "The decrease in gross profit margin was mainly due to intense market competition and the change in product mix,” the company said in a statement in March. There were at least 20 electric car models on display at the 2010 Beijing Motor Show and 10 are slated for mass production.
In the first quarter BYD’s car sales fell 27.5%. The company has stated that reduced sales was due to limited production capacity, according to China Daily. But its balance sheet shows that inventory is backing up, from CNY4.4 billion in 2009 to CNY6.5 billion in 2010.
The unpredictable Chinese government has also presented obstacles to its growth. In the fall of 2010, it confiscated seven of BYD’s factories in Xi’an and forced it to pay a fine of 2.95 million yuan ($443,000), according to the Ministry of Land and Resources.
The company’s sales slumped in part due to the ending of the Chinese government’s subsidies of up to 50,000 yuan (approximately US$7,320) for plug-in hybrids. The incentives may have helped artificially inflate China’s car sales increase of 32% in 2010.
These subsidies were a part of the Chinese Automotive Industry Plan which set a national goal of creating capacity to produce 500,000 new energy vehicles. The country wants new-energy car sales to reach 5% of its passenger vehicle sales. To increase sales after the loss of the government subsidy, BYD has cut prices up to 19%.
BYD’s most recent disappointment came when the IPO of its A shares in June raised 1.4 billion yuan ($219.4 million), which fell short of its expected 2.19 billion yuan. The company wanted to use proceeds from the PO to fund a lithium-ion battery project, an R&D center, and a product line expansion, it said in a statement.
In spite of the difficulties, the company has major expansion plans, particularly outside of China. It plans to introduce its all-electric, long-range eBuses in Frankfurt, Germany, and it is working with officials in Chile to introduce all-electric public transportation there. Chairman Chuanfu told Reuters in January that expansion into the United States was a serious possibility as well.
Charlie Munger views recent developments in the company with a positive perspective and defended it at the Berkshire shareholder meeting. “The price is still way higher than the price BRK paid so it is not as cheap as it was then,” he said. “Any company moving as fast as BYD is will have delays. They are having trouble in auto distribution because they have been trying to double their sales each year for the last six years and it worked for the last five years.”
The talents of owner Wang Chan-Fu have also instilled long-term confidence in Munger. In a 2009 interview with Fortune Munger called him “a combination of Thomas Edison and Jack Welch.”
Berkshire originally paid about HK8 dollars per share for BYD, and when the stock reached its peak at around HK80 dollars per share, Berkshire had a paper return of about 900%. As of Wednesday, the stock is at HK21.74 dollars, giving Berkshire a 171% return.
The decision to invest in the technologically advanced company required Buffett to refine one of his cardinal rules, “Don’t invest in a business you don’t understand.” He said he didn’t really understand the business but, “I’m investing in the man [founder and chairman Wang Chan-Fu].” Indeed, electric vehicles are an emerging and game-changing sector of the economy that few understand.
The most significant setback for BYD occurred when its fourth-quarter 2010 earnings dropped 94% and it canceled its dividend. "The decrease in gross profit margin was mainly due to intense market competition and the change in product mix,” the company said in a statement in March. There were at least 20 electric car models on display at the 2010 Beijing Motor Show and 10 are slated for mass production.
In the first quarter BYD’s car sales fell 27.5%. The company has stated that reduced sales was due to limited production capacity, according to China Daily. But its balance sheet shows that inventory is backing up, from CNY4.4 billion in 2009 to CNY6.5 billion in 2010.
The unpredictable Chinese government has also presented obstacles to its growth. In the fall of 2010, it confiscated seven of BYD’s factories in Xi’an and forced it to pay a fine of 2.95 million yuan ($443,000), according to the Ministry of Land and Resources.
The company’s sales slumped in part due to the ending of the Chinese government’s subsidies of up to 50,000 yuan (approximately US$7,320) for plug-in hybrids. The incentives may have helped artificially inflate China’s car sales increase of 32% in 2010.
These subsidies were a part of the Chinese Automotive Industry Plan which set a national goal of creating capacity to produce 500,000 new energy vehicles. The country wants new-energy car sales to reach 5% of its passenger vehicle sales. To increase sales after the loss of the government subsidy, BYD has cut prices up to 19%.
BYD’s most recent disappointment came when the IPO of its A shares in June raised 1.4 billion yuan ($219.4 million), which fell short of its expected 2.19 billion yuan. The company wanted to use proceeds from the PO to fund a lithium-ion battery project, an R&D center, and a product line expansion, it said in a statement.
In spite of the difficulties, the company has major expansion plans, particularly outside of China. It plans to introduce its all-electric, long-range eBuses in Frankfurt, Germany, and it is working with officials in Chile to introduce all-electric public transportation there. Chairman Chuanfu told Reuters in January that expansion into the United States was a serious possibility as well.
Charlie Munger views recent developments in the company with a positive perspective and defended it at the Berkshire shareholder meeting. “The price is still way higher than the price BRK paid so it is not as cheap as it was then,” he said. “Any company moving as fast as BYD is will have delays. They are having trouble in auto distribution because they have been trying to double their sales each year for the last six years and it worked for the last five years.”
The talents of owner Wang Chan-Fu have also instilled long-term confidence in Munger. In a 2009 interview with Fortune Munger called him “a combination of Thomas Edison and Jack Welch.”
