When renowned investment sage Warren Buffett decided to invest in little-known Chinese battery producer BYD there were many eyebrows raised and much scratching of heads. While there is no doubt that Warren Buffett, via his Berkshire Hathaway Inc investment vehicle, has a nose for successful investing this is certainly not his normal style of business. So what did Warren Buffett see that few others were able to recognise?
Some background on Warren Buffett
Warren Buffett is a 78-year-old investment guru who is estimated to be worth in the region of $37 billion and is often referred to as the "Oracle of Omaha" or "Sage of Omaha". He has a history, via his Berkshire Hathaway investment vehicle, or investing in traditional businesses which have long-term value and a strong brand name. He famously avoided the 1990s dot-com bubble which saw technology shares multiply in a very short space of time only to collapse, leaving many investors destitute and penniless.
This is a man who believes in investing in long-term viable businesses which ultimately "a fool could run" because ultimately "one day a fool will run the business". Warren Buffett is a private man who rarely gives interviews even though his name is regularly splashed across the worldwide financial press. So what did he see in the electric vehicle market and why did he invest in BYD?
Background on BYD
BYD is in operation which is run by a Chinese entrepreneur by the name of Wang Chuan-Fu who has been described by Buffet’s close friend and colleague Charlie Munger as a cross between Thomas Ellis and Jack Welch, serious names in the world of business and investment. So what exactly is the BYD operation and what are the prospects for the future?
The BYD (a shortened version of the company's full Chinese name) is predominantly a manufacturer and retailer of rechargeable batteries, handset components and of late automobile products. The company has specialist knowledge of nickel cadmium batteries and lithium ion batteries as well as emerging battery technologies. The company, which few people have heard, is actually the second largest manufacturer of mobile phone rechargeable batteries in the world. While this particular business has done very well in the past it is the potential for the electric car subsidiary which appears to have caught the eye of Warren Buffett.
The BYD F3DM
While something of a rather bizarre name the BYD F3DM is the world's first mass production plug-in hybrid sedan (retailing at around $22,000) which actually went on sale on 15 December 2008 to Chinese government agencies and various corporations. Originally unveiled at the 2008 Geneva motor show the vehicle is set to go on sale in Europe in 2010 and the USA in 2011. The company produced 170,000 vehicles in 2008 rising to 350,000 in 2009 and expects to increase output significantly in 2010 and 2011 when new markets are brought online.
So what is so special about the BYD F3DM?
In simple terms, the vehicle uses the latest lithium iron phosphate batteries which are said to be the safest in the world because of their chemical make-up, even though they contain slightly less energy than more traditional lithium ion batteries. The most recent version of the BYD F3DM is said to have an all electric journey range of 62 miles (100 km) although there is a gasoline fuelled power supply inbuilt enabling the driver to switch between electric and traditional fuel power.
One of the most amazing aspects about the BYD F3DM is the fact that the running costs for the vehicle are between $1.44 and $2.72 per hundred kilometres based upon an electric price range of between 9c and 17c per kilowatt. This type of efficiency is something which few companies can match and is perhaps one of the reasons why Warren Buffett sees so much potential in the group.
Warren Buffett’s investment in BYD
In September 2008 Warren Buffett invested $230 million for a 10% stake in BYD which surprised many who follow the so-called "Sage of Omaha". He appears to have broken one of his core investment rules by investing in a business which he does not fully understand, however, on the flipside of the coin his trusted colleagues appear to be more up-to-date with the various attractions of BYD.
Having started back in 1995 as a rechargeable battery manufacturer BYD has expanded quickly and now employs around 130,000 people via 11 factories around the world, 8 of which are in China. The US operation is fairly small at the moment although there are plans to increase this as and when the BYD F3DM is introduced to the US market. There are many aspects of the business which seem to have attracted Warren Buffett, including the electric vehicle division, the man behind the business and ultimately the fact that he refused Buffett's initial request of a 25% stake!
There are few people in the world who would readily turned down an investment in their company from Warren Buffett and manage to negotiate him down to a much lower equity stake. This appears to have been taken as a reflection of the confidence that Wang Chuan-Fu has in his own ability and in his company. The revenue split for BYD in 2008 of was $1.7 billion cellphones and components, $900,000 batteries, $1.3 billion automobile and others accounted for $300,000 although it is fully expected that the automobile operation, which is fundamentally electric cars and hybrid vehicles, will significantly surpass all other areas of the business in the future.
While BYD may not be one of the electric vehicle companies that is grabbing the headlines of late it is an operation which is very focused, has a proven track record in rechargeable battery technology and is run by an entrepreneur who had the confidence to turn down a 25% equity investment from Warren Buffett, ultimately agreeing upon a 10% equity stake.
Even though in many ways the Far East has been left behind in the electric vehicle market in recent times, when Warren Buffett invests in a company which is relatively unknown it may well be time to sit up and take notice. The launch of the BYD F3DM hybrid vehicle in Europe and the USA is expected to increase the profile of BYD and could ultimately catapult the operation into a total different stratosphere. This is certainly one company and one investment to keep an eye on!